07 April 2011

Dear Investor,

Economic Challenges for 2011

In previous editions of Investment News we have discussed how Australia is uniquely positioned to benefit from the rise of developing economies in Asia in the twenty first century. But our prosperity is not guaranteed by this fortunate circumstance. As outstanding as the opportunities are, they will only result in sustained prosperity for Australians if we manage the considerable economic challenges that we face.

In this edition of Investment News we consider some of the most important economic challenges facing Australia.

Conflicting economic objectives

To achieve low unemployment, a nation like Australia strives to achieve sustained and vigorous economic activity, which creates new jobs. However, higher economic activity leads to increased inflationary pressures. And inflation can cause significant problems for an economy, as the population struggles to keep up with the rising cost of living.

In Australia's case, the challenge posed by inflationary threats is compounded by the fact that so much of the demand for our goods and services comes from overseas and is concentrated in one sector of our economy (mining and resources). This means that, first, we are at the mercy of events in nations over which we have no control. Secondly, we risk having the mining and resources sector absorb much of Australia's available workforce and investment capital. This diverts resources from other sectors in the economy and has the potential to make Australia overly reliant on the mining and resources sector.

Other sectors in the economy are also affected by the rise of the mining and resources sector:

  1. The activity generated by the resource sector puts additional pressure on inflation. This leads to increased interest rates, which places other, struggling sectors under significant additional pressure.
  2. The demand for Australian resources (and Australian dollars in which to pay for them) results in a sustained increase in Australia's exchange rate. Although this makes importing goods and services into Australia cheaper, it also makes our exports more expensive for the rest of the world and so make them less competitive.

The challenges of international trade

The demand of developing economies (particularly China and India) for Australia's resources has been well documented. Of course, this is positive news for our resources companies and for the economy generally. But developing nations are frequently more volatile than developed nations, so we can expect many more pronounced 'boom and bust' cycles than would be the case had we been exporting to, say, Western Europe (notwithstanding the events of recent years).

Furthermore, we source many of our consumer goods from these developing nations. For the last decade or so, this has been a blessing for the standard of living of ordinary Australians. Along with the inexpensive televisions and stereo systems, we have effectively been importing low inflation and our economy has prospered because of it. However, our trading partners are now beginning to feel the stress caused by their success in the form of rising inflation (including the cost of labour). This will inevitably affect the price of their exported goods and services. In the short to medium term, we are likely to begin effectively importing their inflation into Australia. This will of course adversely affect our own inflation rates. The impact of this could even be intensified if our exchange rate drops from its current position (which has been described by the Reserve Bank as 'very high').

Domestic policy challenges

On the domestic policy front, we face a number of additional challenges. These include:

  1. Re-energising productivity growth, which has been below average over the last five years.
  2. Maintaining sufficient labour market flexibility and an adequate (and adequately skilled) labour supply pool to meet future demand.
  3. Dealing with likely future price shocks to key resources like oil as global demand continues to surge.
  4. Managing what is likely to be a more volatile global economic environment than that which has prevailed over the last generation. Already Reserve Bank Board member, Professor Warwick McKibbin, is warning of a new global bubble arising as a result of expansionary US monetary policy.

Make no mistake, Australians have every reason to be optimistic about our economic future. Equally, however, prosperity does not arrive of its own accord and when it does come, it brings a whole new set of challenges. Our continued economic strength will depend on our ability to identify the challenges and manage them.

Best regards,
Chris Andrews


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Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.

La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

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