The media came out last week with the dirty word that Australia was going into a recession.
Thank you Captain Obvious, it has been clear since 2008 that Australia would at some point fall into a recession. It would have been sooner if not for the stimulus packages the government kept throwing at us. Remember the $1,000 for cyclone Yasi.
Back in late 2008 our large companies started to recapitalize. The funds were used to pay down debt and unwind all of the financial engineering, which went on for the past decade.
Next they reduced their dividends to make sure that their expenditure matched their cash flow.
Now in 2012, companies are cutting expenses. The largest expense and the easiest to cut are wages. We now expect to see 7,000 jobs lost in the finance sector alone; manufacturing sector is also cutting jobs. The retail sector will also be cutting jobs as households slow down in their spending.
It should be no surprise that the average person is also now looking to reduce spending. Which means retail sales are down, housing is down and travel is down.
Unfortunately the average person was not paying attention at the height of the GFC. I had many people tell me that the GFC did not affect them. They were not looking far enough into the future.
The Bad News
The next three years are going to be tough for the average household as they adjust to new spending habits.
Unemployment will go up and house prices may fall further, for those coming out of University getting a job will be tougher and you can expect lower pays.
The Good News
The major companies in Australia have done most of the hard work and are now looking to obtain greater efficiencies over the coming 2-3 years. This will provide better results, producing higher income and dividends.
We can expect to see the markets start to head back to fair value.
I expect 2012 to still be ordinary which is why I am still chasing income stocks but 2013 should be a much better year for growth.