The Year That Will Be

Andrew Pegler – 7 January 2011

Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

The peace and prosperity we’ve enjoyed since the Berlin Wall fell in 1989 (and arguably since the end of WWII) is unparalleled. But like air, you’ll only notice when it’s gone. Having world-leading powers – Germany, Japan and the U.S. – all bonded by the mutual assurance of prosperity and peace will come to be seen as an historical oddity.

The future won’t be so agreeable. China, India and Brazil will want to do it their way. (And keep your eye on Mexico; it’ll be a force if it can control the drug cartels.) Within a decade we’ll be sentimental for the days when the U.S. was economic superpower and global stabiliser.

Julia Gillard has declared 2011 her year of action. A big part of that will be putting a price on carbon. I’ve explained an ETS here. Dragging the nation into such huge change will be bigger than, but similar to, the introduction of the GST. Prices will rise and politicians will spend taxpayer money to compensate those with the most clout at the ballot box in 2012.

Interest rates? After sacrificing the goat and trawling through the entrails, then reading the tea leaves as reflected through a crystal ball made in China, I reckon the only way is up. Barring unforeseen invasions by time travelling dinosaurs with thermonuclear lasers for eyes, the cash rate will end the year at about 5.5%. ‘Nuff said.

The U.S. now lags China, Japan, India and South Korea as a destination for Aussie exports. Rapid growth in Asia, led by China and India, will continue to drive Aussie growth in 2011. In other words, we no longer catch a cold when the U.S. sneezes.

The banking competition debate will heat up as Wayne tries to construct the 5th pillar. Burned by Kevin’s crash-or-crash-through approach to the mining super profits tax, he’ll proceed slowly, get punters onside and try take the sting out of the Big Four’s inevitable PR counter attack. By the end of the year the banking landscape will be altered, by the people for the people.

The Australian economy will remain the envy of developed nations thanks to farming and mining driven by the deluge of rain and the torrent of demand, respectively. Inflation will be contained by three key factors: a high AUD subduing prices, sluggish domestic demand and the quirks of a multi-speed economy.

The AUD in 2011? The Chinese will probably succeed in slowing their growth to around 8%, which is still very good. This will see us grow about 3%, which is also very good. Add in low unemployment and massive demand for our dirt and rocks, and the AUD will fluctuate between .96c and $1.10. Mind you, this could all unravel if global growth weakens, another sovereign debt crisis unfolds, U.S. interest rates rise, and Australia’s and/or China’s property bubbles burst.

Stay gold people, and keep silly this safe season.