welcome to our nightmare year

Papers are steadily getting more negative in their forecasts:

Welcome to our nightmare year
13 January 2008 - Sunday Times - Perth

FOR hundreds of thousands of Australians, 2008 is shaping up to be a nightmare year.

Mortgage rate rises, rising petrol costs and soaring food prices are conspiring to stretch many ordinary household budgets to breaking point.

But if Australians are finding it tough, this week's economic data didn't show it.

Retail sales figures for November showed spending up a massive 8 per cent year-on-year, increasing the chances of a rate rise in the next couple of months as the Reserve Bank attempts to rein in inflation.

If December-quarter inflation figures due out later this month exceed an annualised rate of 3 per cent, it will probably force the RBA's hand to raise the cash rate 25 basis points to 7 per cent.

If that happens, it will have a crippling effect on hundreds of thousands of Australians already struggling to make ends meet.

The five interest rate rises of the past 18 months have already taken their toll. Home loan arrears have doubled in the past three years and are still rising. Reposessions are also rising.

In the eastern states, many homeowners are facing the heartache of watching their house values fall while their mortgage costs rise, raising the spectre of negative equity.

Further pain is likely from the fallout from the US sub-prime crisis, where hundreds of thousands of US borrowers are defaulting on loans. The higher interest rates being demanded by the lending institutions are already resulting in Australian banks raising rates independently of the RBA -- something that was deemed inconceivable a few months ago.

Despite a drubbing from Federal Treasurer Wayne Swan, who branded ANZ's leading 20-basis-point rise ``excessive'' and has warned the banks about raising rates too much to protect their huge profits, there could be more to come.

To be fair, all banks remain at the mercy of the wholesale money markets, where they source about half the money they lend to mortgage and business borrowers. But in an ominous tone, one top banking analyst said that the ``credit crisis'' was ``worse than people think'', and that the rises passed on by the bank's weren't nearly enough to recoup their increased funding costs.

True, banks are still forecast to make billions of dollars in profits this year, but not as much as they had anticipated -- and that news will hit their share prices. Given that millions of private investors and superannuation funds invest in these stocks, it looks like everybody will be hit one way or another, whether or not they have a mortgage.

If the US goes into recession, which seems increasingly likely, we could even see unemployment creep up in Australia as the health of the US impacts on our economic growth.

Investment bank Goldman Sachs has already downgraded Australia's economic growth forecasts for the next two years. Not because we sell much to the US (it only accounts for 6.5 per cent of our exports), but because of the big effect a US recession will have on Japan (still our biggest export market) and on other Asian countries, such as China, which depend on the US for their sales.

About 60 per cent of our exports go to Asian countries which, in turn, transform our raw materials into consumer goods for the US market. So, if US demand falls, that will be bad news for our exporters and resource stocks which have been the backbone of the seemingly bulletproof Australian economy.

And despite the magnitude and pace of growth, China's demand alone will not be enough to take up the slack.

Also complicating the picture are the $31 billion in tax cuts due to kick in this July, which could act as an unwelcome boost to spending. Do do not be surprised if much of what the Government gives away is clawed back through cutbacks in public spending.

The year has got off to a historic start as the price of oil breached the $US100-a-barrel barrier for the first time -- and that's bad news for petrol prices. According to Saul Eslake, chief economist at ANZ, if the price stays at $US100, we could be looking at pump prices of $A1.50 or more.

If global growth continues to slow, the price of oil should soften, too. But don't expect big savings at the pumps. As Mr Eslake said: ``The era of cheap petrol is over and if the price of petrol is going to move it will almost certainly be upwards.''

Not so the stock market. In recent days we've seen the All Ordinaries Index suffer its second ``correction'' of 10 per cent or more in the past six months, and is now sitting at about 10 per cent below last July's peak.

This year, the stock market outlook is more uncertain than at any time since 2001, when the world was still reeling from the technology crash and ensuing global turmoil.

Seven years and one hell of a bull market later, we have the US on the brink of recession, interest rates and inflation on the rise, increasing petrol prices, oil nudging $US100 a barrel and a global financial crisis, the extent of which is still uncertain.