The previous 24 months of turbulent economic conditions have never been witnessed before, not only for Australia, also globally. Many of the world’s super powers have been brought to their knees due to the financial & economic crisis. The deterioration of these countries’ economies may take years to recover and even longer to repay the sovereign debt that has been incurred. ’

The key strengths driving Australia’s continuing success to maintaining a stable economy; free of the recessionary gloom are 2 factors, i.e. the mining and housing boom. The vigour and spinoff of these sectors dissipate to the overall economy enabling Australia to sustain the employment levels at 94.5%. The challenge going forward will be how to manage our economy if either one of the sectors has a market correction.

We are currently the envy of some of our largest trading partners. To continue this achievement and ensure ongoing sustainability we require a thorough understanding of what has seen Australia glide through the last 24 months.

It is often mused ‘Economic forecasting: Is The science of explaining tomorrow why the predictions they made yesterday didn’t come true today!!

THE FACTS

The previous Government had virtually no sovereign debt with a budget surplus in excess of $26billion. Our Banking system is more regulated than most other countries allowing tighter controls on the mortgage and banking sectors, adding further confidence to our economy. The four major banks are now rated in the top 20 globally.

The US banking system has for a long time been nigh on unregulated with another 150 Community Banks expected to close in 2010. Strong US regulatory authority will need to enforced and adhered to by the Government if they are to avoid a repeat of the subprime mortgage market and the resultant securitization debacle that crippled the US and European banking systems over the previous 2 years.

The RBA increased interest rates by a further 25 points in May; a rise that in my opinion is unnecessary, highlighting that the RBA may be out of sync with the rest economy.

Business credit is still very difficult to source, as the number of Banks and Financiers has been dramatically depleted in the previous 2 years; leaving the SME business sector struggling with unsatisfied capital requirements; ultimately affecting small business growth and possible employment opportunities. The prospect of foreign Banks re-entering Australia will be limited for some time.

Property developers have also been affected for new projects, many are resorting to mezzanine debt blending with the low levels of senior debt that the banks offering, allowing their projects to be a workable proposition. The mezzanine costs are at around 23-25% p.a. and are proving to be a shining light for both developers and investors alike.

The Henry Tax Review outlined changes that needed to be addressed & made a number of recommendations, many of which the Government, unfortunately, have ignored. The Australian economy urgently requires tax reform, sound economic policies and nerves of steel to guide it from what could have been our worst recession in decades; by skilfully taking advantage of the mining boom, Australia can establish an enviable platform that cements our economic future.

This time last year the Government was battening down the hatches; trying to avoid following the rest of the world into recession. Twelve months later, we have dodged the bullet that still lingers in the US & Europe, as Australia is staring a mining and housing boom in the face. The next 24 months will be crucial and could determine our legacy for the next generation.

Local petrol prices have remained low, due mainly to the strength of the AUD. While AUD has weakened against the US in recent weeks, increases in US interest rates towards the end of 2010 & the relative value of the AUD decreases, petrol prices in Australia are certain to escalate.

THE STATS

The May 25 point interest rate increase is the sixth since mid 2009, adding a further $50 per month to the average mortgage of $300K; forcing home buyers to find an additional $300 per month of income to meet mortgage commitments since the increases commenced. The interest rate increases are now starting to affect housing clearance rates in all states.

The housing and mining sectors have been the key drivers of our economy, providing the opportunity of a generation, yet the Government imposes a tax on the mining sector at the same time the RBA increase interest rates on the housing sector. The political & economic fallout of both these decisions will unfold during 2010.

The mining “super tax” has met with strong opposition and is likely to be modified. The tax will affect the mining industry as well as have ramifications with the housing, building and other industries.

While WA and QLD will benefit from the resources boom, albeit with the uncertainly of the resources tax, it remains unclear how other states, especially VIC and NSW; where there is little or no mining activity, will fare going forward.

THE FUTURE

There are already signs that consumers are changing their spending habits to meet their rising mortgage payments, this recent rate increase will further reduce consumers spending power on non-housing items.

We are not out of the woods, although China is fuelling the boom, our mining sector is a non renewable resource used for recurrent expenditures which may continue for a number of years, however the US and Europe are very important trading partners. Future Governments have to adapt other strategies to in order to replace our dependence on the mining sector and China.

The RBA seems a lot more upbeat on the economy than a number of Australia’s larger retailers who are reporting slower sales and lowering forecasts as consumers take a breather. Perhaps the RBA should listen to the retailers more; after all they operate in the real world rather than the insulated confines of Canberra.

The Australian economy does not need a repeat of early 2008 when the Reserve Bank “used a sledge hammer to crack a nut” and slow the economy down.

With increasing petrol costs, the future of battery operated, smaller cars as well as fuel efficient smart cars will be growth industries and create opportunities for the Australian automotive industry, sadly lacking over the past decade. These options will not only have a long term positive effect on the environment, they will also assist consumer spending. A number of our fleet operators are reducing the size of their vehicles and in many situations converting to gas.

THE SILVER LINING...

Opportunities will emerge in the next 2-3 yrs. A recent consensus of our business clients has revealed that many see business opportunities materializing as a result of the economic & market upheavals of the past 2 years. As witnessed by the following examples of inventiveness following market corrections during economic downturns and/or recessions, astute businesses will flourish in situations where others will struggle.

Examples where previous market corrections have been the mother of invention.

• Aussie Home Loans evolved in the early 1990’s when the banks tightened credit following the collapse in the economy of the late 1980’s.
• Office Works is now the local stationer.
• The re-emergence of the previously frowned upon debtor factoring/invoice discounting as a finance source as a result of the smarter, sophisticated IT technology available.
• Local milk bars being replaced by 7/11 outlets
• The local hardware store is now Bunning’s
• Conglomerates such as Chadstone have become the local shopping centre
• The local service station as we knew it has gone forever.
• Automated car wash systems replacing the bucket & hose in the drive way.

THE ACTION PLAN...

A quick mortgage health check never hurts to make sure that the interest rate on your mortgage is market competitive

Please contact either Chris Vouk; cvouk@prattco.com.au or Michael Pratt; michael_pratt@prattco.com.au if you would like to check the current interest rates on your home mortgage.

When you are considering the purchase of new capital equipment, motor vehicles, construction and transport equipment etc we would appreciate the opportunity to see if we can be of assistance to you. It is prudent to source additional facilities and spread your risk.

For all business equipment & transport inquiries please contact:

Arthur Kalinchev - akalinchev@smecommercialfinance.com.au,

Len Fuller - lfuller@smecommercialfinance.com.au,

Ken Mclean – kmclean@smecommercialfinance.com.au or

Michael Pratt – michael_pratt@smecommercialfinance.com.au

Our contact phone numbers are 9827 4477 or 1300 ASK SME (1300 275 763)

We hope you find this information helpful and would be pleased to assist you further with any inquiries you may have. SME and Pratt & Co. pride ourselves on innovative financial solutions, we look forward to speaking with you when considering a mortgage, capital equipment, motor vehicle or other such purchase.