Why you should be cautiously optimistic about 2009: Bartholomeusz

Could 2009 possibly be worse than 2008? The year just ended was the worst in not one but several generations, probably the worst in three quarters of a century.

Stephen Bartholomeusz

It is difficult, given the apocalyptic environment of 2008, to be optimistic about the outlook for 2009. Optimism is, however, a relative concept.

Could 2009 possibly be worse than 2008? The year just ended was the worst in not one but several generations, probably the worst in three quarters of a century.

It was the year the global financial system almost, but not quite, imploded. The aftershocks are with us still. Debt markets are still malfunctioning. The flow of credit has been choked. Even the most creditworthy are fretting about access to funding. For the less creditworthy, those still functioning are in jeopardy.

Households and businesses have become abruptly risk-averse. The US, Britain, most of Europe and parts of Asia are already in recession. China has slowed to the point where its growth rate is perilously close to the levels that threaten social stability. The world has become introspective and fearful and the markets reflect the overwhelming imbalance between fear and greed.

But can it get any worse? In the US, Britain and parts of Europe, the answer is probably yes. The same might be true of parts of Asia. The damage to their financial systems and real economies has been severe.

Here? The damage to the Australian financial system has been slight by comparison with other developed economies. Our banks are in a relatively strong state. Governments, other than NSW, have good and flexible fiscal positions. The Reserve Bank, despite reducing rates by 300 basis points, still has significant firepower.

Nevertheless, confronted with a global recession, the lingering effects of the financial crisis, and the sheer impact of the meltdown in financial markets on household wealth and consumer and business confidence, that provides only a modicum of shelter rather than a safe haven.

There is little doubt that 2009 will see a continuation of global deleveraging, a necessary and inevitable response to the bursting of the credit bubble.

The global banking system has probably only worked its way through about two-thirds of the mountain of losses it has sustained from the credit crisis. There are more losses, more capital raisings, more government bailouts and more credit-rationing to come, as the global system restructures and repositions itself for a more conservative era.

The Australian banks – still reliant on offshore debt markets for funding, still desperate to retain their relative rankings as among the strongest of the international banks, and still struggling to absorb the demands on their balance sheets created by the demise of the non-bank sector – will remain cautious and focused on their capital adequacy in 2009.

Australian households, with their investment holdings decimated, worried about the value of their houses and increasingly concerned about job security, will be focused on rebuilding their savings after more than a decade of credit-driven profligacy.

But will it get any worse than what we’ve experienced in 2008? It will probably at least feel worse, as the impact of the credit crisis on real economies continues to show up in slowing economic growth, increasing business failure and rising unemployment.

The first half of 2009 looks bleak. The delayed and cumulative effects of the rate cuts (with more to come), the opening of the fiscal spigots by the Rudd Government and those state governments with the capacity to spend, and the steep fall in oil prices will, however, provide some kind of cushion in this economy. The most dire of predictions from respectable sources (so far) for this economy is a relatively mild and brief recession.

For most of the rest of the world, the outlook is more desperate. The US and British governments, and others, will own even larger slices of their financial and industrial complexes before the year is out. China will throw even more of its resources at maintaining GDP growth at around the 8% minimum level needed to manage the migration of its population from rural areas to the cities, and to avoid social and political dislocations. Japan is fearful of another bout of deflation.

However, the trillions of dollars now being committed to blunting and truncating the deterioration in the global economy, and shoring up the global financial system, will have some effect. The psychological impact of the inauguration of Barack Obama also shouldn’t be discounted. He embodies optimism.

It wouldn’t be in the least surprising if, towards the latter part of the second half of 2009, markets (supposedly forward-looking) were signalling a weak conviction that the worst is behind us and that 2010 will see a return to growth. The markets, and then the real economies, will eventually stabilise and turn.

It is probable that 2009 will be a better year for the markets than 2008 and that by its end it might be possible to say that a recovery in real economies is also underway, or at least in sight.

These things are, of course, all relative. Relative to 2008, it is possible to be optimistic about the outlook for 2009. Relative to the decade-and-a-half of prosperity that led up to the credit crisis, 2009 isn’t likely to be a good year at all.

This article first appeared on Business Spectator