Global economy

The U.S Federal Reserve left interest rates unchanged in June and suggested they would be prepared to raise rates should elevated inflationary expectations become entrenched. This was despite the unemployment rate unexpectedly surging to 5.5 per cent, the largest monthly increase for more thant two decades. In early July the collapse of Indymac and the troubles surrounding Fannie May and Freddie Mac, the largest two mortgage lenders in the country, continued to cast doubt in the U.S. economy in the short to medium term. Interest rates and inflation were also the theme in Europe with the European Central Bank increasing rates by 0.25 per cent while the U.K. left rates unchanged due to falling house prices, which would have otherwise warranted a rate cut, but the need to keep inflation in check left them little room to move.

Domestic economy

The Australian economy grew by 3.6 per cent in the year's first quarter, with continued strength in the mining and resource sector being the major contributor. Reserve Bank of Australia (RBA) Governor, Glenn Stevens noted that ‘the mining boom will add substantially to national income and the ability to spend, even with the slowing in global growth'. The RBA is still concerned about inflation although they believe that it should slowly decline if demand continues to evolve as expected.

Investment markets

Most markets produced negative returns to 31 December and since then have continued to fall with a technical correction (a fall of more than 10%) occurring in early January. Results were:

World markets produced similar results with General Motors (GM) stock falling to a 50 year low as it continues to struggle with the rising oil price and consumers sudden shift to small and more environmentally friendly vehicles. In 12 months GM has seen its market value drop from $21.5bn (USD) to just under $6bn (USD) as its market share and sales continue to decline.

Despite these poor returns and the continued declines at the start of the current financial year, looking at the performance in perspective is important as it is very easy to forget that we have just come off a sustained bull run where we saw Australian shares return over 20 per cent in each of the past four years prior to 2008.

The rising price of oil, higher costs of credit, falling property prices, declining stock markets and central banks fighting inflation are all contributing to a rather gloomy outlook for the 2009 financial year. With continued volatility expected we should brace ourselves for a bumpy ride.