JUST WHEN confidence was returning to the Australian sharemarket, November turned out to be a bad month with the market giving up most of its earlier gains.

Uncertainty is now growing about prospects for next year due to international developments including the return of recession to Europe, Middle East conflicts and the fear that the ''fiscal cliff'' will damage the US recovery.

Domestically, the lower interest rates now prevailing have boosted consumer confidence but the retail and housing sectors are still pushing for further rate cuts. If these occur, the prospects for investors' returns in 2013 could be even worse if world sharemarkets stagnate or fall.

There is, however, one indication that the federal government could step in to help. This comes from a softening of the stance about seeking further budgetary savings to bring the 2012-13 budget back into surplus. Given that mining company tax collections could be even lower than the revised estimates, there's now less talk of the plan to attain a surplus and recognition of a possible unfavourable impact of recent overseas developments. The reality of our fiscal situation is that - unlike Japan, Europe and the US - it's not important that our budget be brought into surplus quickly. Even if there's a deficit this year, the 2012-13 budget will still have reduced the deficit by 2 per cent of GDP. The remaining deficit would be very small indeed.

In a situation where the world economy could weaken, allowing a small budget deficit would help consumer confidence and take the pressure off the Reserve Bank to reduce interest rates to previous crisis levels when the economy is still growing.

Until the US fiscal cliff political bargaining finishes and the outcome of the Middle East truce efforts are known, investors have good reason to be cautious. Conflict in the Middle East and disruption of oil supplies will impact more heavily on Europe than the US because of the shale and oil gas boom in North America, which has reduced the US reliance on supplies of Middle East oil. There are even suggestions that the US will be self-sufficient in energy within 20 years. Europe has no such good fortune and disruptions to oil supplies will add to problems faced by struggling economies.

Developments over the next few months will be crucial. At this stage, investors have less reason for concern than our overseas counterparts. We have a strong economy and it is by no means certain that commodity prices will fall to such an extent as to weaken our economy.

Daryl Dixon is Dixon Advisory's executive chairman