Year in Review. Year in Preview.

• The US-originated Global Financial Crisis (GFC) dominated over 2008, sending major economies into recession and sharemarkets sliding.
• After recording its longest stretch of double-digit gains on record, the Australian sharemarket posted its biggest annual fall on record in 2008, with the All Ordinaries index sliding 43.0 per cent.
• The USD hit record lows in April 2008, but recovered. Oil prices hit record highs in July, then slumped to four-year lows and gold soared to over US$1,000 an ounce in March before retreating.
• The Australian economy has so far avoided recession, but 2009 will remain a difficult year.

The year 2008 will be remembered for many things, but it certainly wont be remembered with fondness. Major economies went into recession; interest rates fell to record lows; and a raft of commodity prices soared to record highs before crashing down to earth again.   While 2009 will again be a testing year, it will present the usual array of opportunities for investors as well as threats. It will be the companies and individual investors that embrace the opportunities that will ride out 2009 in best shape.

Review of 2008

It's easy to forget now, but the key issue at the start of 2008 was working out how to prevent the economy from overheating. Businesses were operating near full capacity and labour markets were tight.  It's no surprise that the Reserve Bank was fretting about inflation.

The Reserve Bank hiked cash rates in both February and March 2008, taking interest rates to 13-year highs. Interestingly, however, the year that began with the central bank trying to slow down the pace of the economy, ended with the same central bank trying to keep the economy from sliding backwards into recession. The Reserve Bank cut official rates in each of the last four months of the year, lopping three percentage points off the cash rate. It was the most aggressive easing of monetary policy in 25 years.  The cash rate stands at 4.25 per cent after starting the year at 6.75 per cent.  Note - the cash rate was similarly at 4.25 per cent from December 2001 to May 2002 but the cash rate hasn't been lower since May 1973.

The year ended with the economy starting to respond to a raft of monetary stimulus measures, retail discounting and cheaper fuel prices. The Australian economy looks set to avoid recession, but it will go close given the sheer number of global economies in, or approaching, a recession. The economy grew by just 0.1 per cent in the September quarter to be up 1.9 per cent for the year.

The Australian share-markets needs to be judged against the strength of previous gains. From 2003-2007 the Australian supermarket recorded its longest ever period of double-digit gains.   In 2008, total returns on the All Ordinaries fell by 40.4 per cent after rising by 163.8 per cent over the previous five years.

Also over 2008, the ASX 200 index lost 41.3 per cent

The latest data from the Real Estate Institute shows that residential property returns posted modest growth over the past year. Across the eight capital cities, returns on 3 bedroom houses grew by 5.4 per cent in the year to September. Best returns were in Adelaide (up 15.4 per cent) while worst was Perth (down 3.4 per cent). Over the past five years, returns on 3 bedroom houses have grown on average by 14.1 per cent.

Outlook for 2009

With all major developed economies experiencing recessions, everything will need to go right at home to prevent Australia going down the same path. Still, the Reserve Bank has slashed interest rates and has plenty of room to cut rates further. The Reserve Bank is expected to cut rates by 50 basis points in February and another 50bp in April, taking the cash rate to 3.25 per cent. 

The last time that cash rates were as low as 3.25 per cent was in February 1964, so stimulus of this magnitude has no equal in the modern era. Still, given that the economic risks are wholly offshore, the Reserve Bank will need to be wary about over-stimulating the economy. Not only is the interest rate structure already historically low, the Government is well placed to provide more fiscal stimulus, the first home owners grant will be stimulating the housing sector in 2009 and massive spending on infrastructure projects will be commencing shortly.

Overall, the Australian economy is tipped to grow by around 1.5 per cent in 2009, similar to the slowdown that was last experienced in 2001 when the US last went into recession. Unemployment will rise over 2009 in line with slower activity, lifting to around 6 or 7 per cent. But with businesses still finding it hard to attract skilled staff, and continuing to look offshore, the increase in the unemployment rate should be limited. Inflation will also ease sharply over 2009 from 5 per cent currently to 2.2 per cent by mid year.

Confidence will play a major role in economic recoveries across the globe in 2009 just as it did with the sharp downturns experienced over the second half of 2008.  Recessions will give way to recoveries in the major economies over the second half of 2009. In the US, the focus will be on stabilisation of both employment and housing markets. Once job-shedding by major companies is completed, consumers will have greater confidence to spend and borrow, and start reducing the high levels of housing inventories. If sharemarkets stabilise with a new US administration and infrastructure-focused stimulus plan, consumers and businesses will have added confidence to embrace the low interest rates on offer.

China is a key wildcard factor in 2009. If authorities are successful in boosting domestic consumption and investment then this will support demand for commodities and thus global economic growth. Chinese authorities have indicated that they will do what it takes to keep the economy growing at a 7-8 per cent annual pace.

Housing Markets

The Australian housing market is well positioned for stronger construction, increased purchases of established dwellings and modestly firmer prices in 2009. Unlike other parts of the globe, Australia has an under-supply of housing. Not only has new construction been patchy across states and territories, it has failed to keep pace with population growth at 20-year highs. Overall, national housing prices are tipped to grow by 3-5 per cent over 2009 with major variations across regions.

So in summary; there are testing times ahead.  However as always for the astute buyer or seller, there are always opportunities worth considering.  Looking at the 'Typical Property Cycle' and it can be said that we are tipped to begin recovery, albeit at a slower pace than previously.

Information compiled from sources at Commsec / Real Estate Institute of Australia / Vanguard / Dean Bailey.