Australia & the world on two pages – December 2012

Although interest rates are historically low in the advanced economies and central banks have stepped up liquidity injections, their pace of economic growth remains very weak. The big emerging economies are driving global growth, and it looks as if their economies are stabilising.

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Global: Although interest rates are historically low in the advanced economies and central banks have stepped up their liquidity injections, their pace of economic growth is still very weak. The latest crop of business surveys as well as the hard data on trade and output do not suggest that the business environment is about to improve and there are well known risks in the US and Euro-zone that are depressing confidence. Global economic growth is largely being driven by the big emerging economies and here, at least, it looks as if their economies are stabilising. We have made a few changes in our country growth forecasts but they largely offset each other in terms of their impact on bottom line global growth, which should remain a sub-trend 3% or so this year and next.

  • Although recent data suggest that the world economy is slowing, equity and commodity markets have been quite buoyant because of the impact of central bank operations in the big advanced economies. Their injection of large amounts of liquidity in “quantitative easing” schemes is said to have increased the amount of money in the system chasing a profitable home. Yields and premiums on bonds have fallen and investors are gradually being pushed to consider a riskier range of assets where higher potential returns seem to be on offer – such as equities and commodity funds.
  • The lack of momentum in the global economy is evident in the recent data on trade and industrial output. The volume of world exports fell by 0.7% in the September quarter according to the CPB, and global industrial output has started to turn down, though it remains marginally above year-earlier levels. The levelling out in global trade and industry reflect the particularly weak performance of the big advanced economies since their post-financial crisis recessions.
  • Growth has slowed markedly in the big advanced economies through the past year from an annualised rate of around 2% in the latter half of 2011 to around 1% annualised in the September quarter. There is a marked difference between the big economies in terms of their recent growth performance. The US and UK have seen an acceleration in their growth, boosted by holiday effects and the Olympics in the latter case, while Japan and the Euro-zone have recorded falling output. Fourth quarter GDP could well fall in the UK, Euro-zone and Japan and US growth could slow.
  • Growth in the emerging market economies has slowed through the last year but there is now a good prospect that the situation has stabilised. Brazil experienced the sharpest slowing with growth slipping to 1% yoy or less through the first three quarters of 2012 but policy has eased and the pace of expansion should pick up next year. India has also seen a marked slowing in growth – which was down to 5¼% yoy in the September quarter – and the central bank has been wary of cutting interest rates as inflation is still high. Eventually, Indian monetary policy should be loosened and that should boost domestic demand but fiscal policy will have to be tightened and that should mean that the economy does not return to the rapid growth seen before 2010. The Chinese economic indicators also point to a modest acceleration in the pace of growth but the authorities will be anxious that the property market does not overheat again.
  • The slowing in activity has also been marked outside the three biggest emerging market economies. Recent data for exports and industrial output show that they are weakening across both Latin America and the East Asian “Tiger” economies.
  • We are expecting only a modest recovery in the pace of growth next year with global GDP set to expand by 3.2% yoy after this year’s predicted 3.1%. The persistence of sub-trend global GDP growth should hold down the pace of expansion in world trade. Global growth is still being mainly driven by the emerging economies. China, on its own, is expected to continue contributing around 1 percentage point of global growth while India’s contribution is roughly a third as big. Industrial output in the advanced economies is well below its early 2008 level while it has risen by a third in the emerging economies. The weakness of the advanced economy upturn after 2010, after an initially solid looking recovery in that year, is the main drag on global growth.

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