Sometimes change is gradual and we have time to adapt. At other times the change is dramatic – consider the economic upheavals in 1940-50s after the war. In a few years economies were destroyed and rebuilt, once leading economies lost their lustre and new leaders arose.

The developed economies of the USA and much of Europe are facing years of struggle to pay off significant debts and re-establish growth. Japan has been in the doldrums since the early 1990’s.  These countries will have to re-engineer themselves or fall behind. It will be a painful exercise for those who borrowed too much and for those who have to foot the bill.

The six major developed economies – USA, Germany, France, UK, Italy and Japan – have yet to regain the level of output achieved in 2008. They are caught to varying degrees in a vicious circle.  High levels of debt and weak asset prices are depressing demand. And slower expected growth means banks are more reluctant to lend and businesses more wary of investing.

Governments of the developed nations have realised there is no magic bullet to solve these complex issues. While some countries are trying to keep the lid on growth and inflation others have the opposite problem – how to stop sliding backwards. This has led to disagreements, political standoffs and uncertainty. This uncertainty is playing on investors and especially on short term traders which is causing high volatility as each new piece of news is analysed to speculate on the next short term direction. 

In Australia our output has continued to grow.  Our situation is better than other developed countries and one response by companies and individuals has been to pay down debt and save instead of spend. Reserve Bank figures show Australians are now saving over 10% of their income. Deutsche Bank research shows company gearing levels are about 27% of total equity compared to a long term average of about 50%.

A lot of money is sitting on the sidelines. Core Data estimates $1 trillion is held in cash by superannuation funds, businesses and individuals. Self managed Super Funds alone are estimated to be holding $113 billion in cash. Obviously many investors are waiting for more certainty before they use some of these cash funds to make further investments.

Trying to predict the future is difficult but demographic change is likely to play a significant part.  In the developing economies like China, India, Brazil, and others in SE Asian and South America, the growing middle classes are demanding higher standards of living. In the developed countries, the ageing of population is expected to reduce economic output with debt ridden Governments struggling to fund the pension promises made to their citizens. One way or another migration is likely to play a significant part in resolving these dilemmas.

The pressing issues in Australia are the patchwork nature of economic prosperity, the high A$, comparatively high interest rates, demand for labour in new areas and demand for new skills. Notwithstanding the Reserve bank is standing by its growth forecast of 3.25% in 2011.

The structural changes globally and domestically pose both a threat and an opportunity.  There will be some pain but new business models will emerge. Remember the oil price shocks of the 1970s or the property crash in the early 1990s. It seemed as if the world would end but it didn’t – we reallocated investment, people and resources to better use and prospered again.

September 2011