Global economic outlook shaky as world shifts from government to private demand

More than 60 countries around the world are expected to record lower output in real terms in 2010 than in 2008 and even Australia, which is expected to experience a relatively robust rebound in domestic demand, will face challenges as 37,500 firms face potential financial stress in the New Year.
 
A new report – Risk 2010 – released by Dun & Bradstreet (D&B) states that the complex recovery that has begun to take hold will persist in 2010 as the world economy continues to depend on various emergency supports. Consequently, the recovery will surprise with its strength in some areas while in others new pockets of weakness will appear.
 
D&B’s forecasts indicate that almost half of the 132 economies examined will record lower output in real terms in 2010 than in 2008 and even this is dependent on a relatively positive scenario where the US and emerging markets recover solidly.
 
Australia is one of the countries forecast to record lower growth, with a real GDP growth forecast of 1.8 percent as compared to the 2.5 percent growth recorded two years earlier. In addition, recessions are forecast in 13 economies in 2010 and a further four economies are not expected to grow (zero real GDP growth is forecast).
 
Real GDP Growth (actual and forecasts)
 
On the local front, improved consumer and business confidence point to the likelihood of a relatively robust rebound in domestic demand over the next 12-18 months. Accordingly, D&B is forecasting real GDP growth for Australia of 1.8 percent in 2010 and 2.6 in 2011.
 
Like many other countries around the world, unemployment is expected to rise in 2010 (to 6.1 percent) before dropping back slightly in 2011 (to 6.0 percent).
 
Meanwhile, inflation is forecast to remain within or below the Reserve Bank of Australia’s target zone of 2-3 percent. Australia is expected to record annual average inflation of 1.7 percent in 2010 before rising to 2.3 percent in 2011.
 
According to Christine Christian, D&B’s CEO, 2010 looks significantly more positive than 2009 however, risk will remain prevalent as the recovery continues to unfold.
 
“Australia has fared relatively well throughout the past two years, a time when many other nations felt the full brunt of the global crisis," said Ms Christian.
 
"Over recent months we have seen signs that the economic recovery is underway – this has increased the confidence levels of executives as we head towards the New Year.
 
"However, risk is still prevalent. This means that if Australian firms are to deliver on this confidence, they must maintain a vigilant focus on the fundamentals of sound business management. Otherwise, businesses could find themselves as another statistic on the failed business register."
 
The D&B report warns that businesses remain vulnerable to financial stress and failure in the early years of economic recovery following a downturn. Business failures in Australia jumped 20.5 percent as the economy returned to positive growth in the 2001 financial year following the Dot Com bust. This was followed by business bankruptcies increasing a further 5.1 percent in the 2002 financial year. Failures did not begin to decline until the third year of recovery.
 
The potential risk to business in the year ahead is also highlighted by D&B’s risk ratings, which show that more than 37,500 firms are classified as a high risk of experiencing financial distress or failure in 2010. This finding comes on the back of the latest trade payments data which confirms that Australian firms are forcing each other to wait an additional three weeks (past standard terms) to receive payment for their goods. Forty four percent of firms have indicated that this lag in payments is negatively impacting their operations.
 
The importance of this data is highlighted by figures which reveal that 36 percent of firms rely more on trade credit than bank credit to manage their operations and a further 26 percent split their funding relatively evenly between the two sources. Even the firms that rely heavily on bank funding to finance their operations will face challenges in the year ahead as credit providers continue their focus on risk aversion. Already 38 percent of firms indicate they are experiencing difficulties as a result of tighter lending standards.
 
“The credit crisis and its resulting cash crunch have made the value of free flowing cash very clear,” said Ms Christian.
 
“As banks tightened their lending books firms were forced to squeeze more cash from their day-today operations. A strong focus on cash flow and risk management must be a key priority for Australian firms in 2010 as it will allow executives to free up funds for business investment and to pay down debt or rely less on borrowed funds.”
 
The Risk 2010 report also states that most economies will not see unemployment peak until the New Year, which means private consumption will remain under pressure. The recovery in OECD private consumption has been largely due to short term boosts from tax cuts and subsidies and the expiry of such measures will inhibit any strong recoveries in 2010. Consumer de-leveraging (as saving rises) will also weigh on private consumption.
 
However, central banks will have leeway to keep their policy rates at extremely low levels in 2010 and the systemic risk perceptions that were inhibiting inter-bank lending in early 2009 have dissipated. This will help businesses considerably.
 
The situation differs in Australia where businesses and consumers face the prospect of further interest rate rises in the New Year. The Reserve Bank has begun to increase rates from emergency lows, implementing three consecutive rises between October and December – further increases could occur in 2010 if the economy continues to improve as expected.
 
A continuation of improving economic conditions would bode well for the nation’s reputation as one of the safest countries in which to invest.
 
Dun & Bradstreet’s Country Risk Indicator places Australia in the top four safest countries, with a ranking in line with Canada, Norway and Switzerland. The latest rankings have Australia, Canada, Norway and Switzerland rated a DB1d, the fourth highest possible rating – no countries currently have a higher rating.
 
“Australia is a low risk environment for business investment. However, as the rest of the developed world recovers global competition will intensify. Therefore, Australia’s regulators will need to ensure that their focus on reform and strong economic management continue,” said Ms Christian.
MREC HERE

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