Australia & the world on two pages – October 2012

The latest business surveys suggest that conditions in the big advanced economies have stabilised after the softening in growth that took place since late 2011. Monthly trade and industrial indicators still point to a broad-based slowing across the emerging economie

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Global: The latest business surveys suggest that conditions in the big advanced economies have stabilised after the softening in growth that took place since late 2011. Monthly trade and industrial indicators still point to a broad-based slowing across the emerging economies that have been driving most global economic growth through the last few years. Central bank policy stimulus in the US, Euro-zone and Japan has helped to lift confidence in financial and commodity markets, reducing fears of Euro-zone collapse and continued slowing in the US. Our forecasts are for global growth to accelerate from this year’s 3% to a still sub-trend 3¼% in 2013. Those forecasts incorporate an assumption that the US averts its “fiscal cliff” and China manages a soft landing.

  • The ECB’s announcement of a new arrangement to purchase Euro-zone sovereign debt and the Fed’s decisions to implement a third round of quantitative easing have boosted markets. Neither the Fed nor the ECB have set explicit limits on these new programmes – the Fed’s QE3 will last until the outlook for the labour market “improves substantially” and the ECB’s Governor has said that “there are no ex-ante limits” on its new plan to buy Euro-member sovereign bonds. Following this, the Bank of Japan lifted its existing scheme to buy Government bills and bonds by another 10 trillion yen to 80 trillion yen.
  • The CPB’s monthly estimate of global industrial output and trade show the pace of growth slowing through the first 6 months of the year. The quarterly pace of growth in world industrial output slipped from 1.8% in the March quarter to zero in June but the preliminary numbers for July show it picking up slightly. The slowdown is broad-based with industrial growth close to zero in the emerging market economies and the big advanced economies moving into an industrial downturn. The pace of growth in world trade also slowed in Q2, and while not as marked as the slowing in industrial production, the latest trade numbers still look weak.
  • Industrial output in the advanced economies remains around 10% below its early 2008 level which would lead to the expectation that there is plenty of idle productive capacity that could be brought back into operation if demand were to increase. However there is a debate within certain countries, notably the UK, over the extent to which there is such spare capacity with business survey readings showing much less idle capacity than would be expected by looking at unemployment or pre-GFC output trends. This is not just a UK issue with the amount of unused output potential in the US, Canada and Germany also being lower than would be expected.
  • The annualised rate of economic growth in the G7 slowed from around 2% in the latter half of 2011 to 1¾% in March 2012 and ¾% in June – implying that the main advanced economies were close to stalling by mid-2012. Conditions were worst in Western Europe where the UK and Euro-zone fell back into recessions as private demand proved too weak to offset actual and foreshadowed public sector austerity. The Japanese upturn, which should be boosted by post tsunami rebuilding, also proved disappointing and the Bank of Japan says that the pick-up in activity has “come to a pause”. Against this uninspiring background, the latest business survey readings from the big advanced economies have been surprisingly good.
  • The slowing in economic growth has been broad-based with the biggest emerging market economies sharing in the cyclical softening. The pace of economic growth in China, India and Brazil(accounting for around one quarter of the world economy) has slowed from 8¾% yoy in mid-2011 to less than 6% yoy in mid-2012.
  • The very trade-dependant economies of East Asia have seen a sharp slowing in exports and industrial output growth.Indonesia, a closed economy heavily reliant on domestic demand, is the exception and activity in Thailand has been boosted by the recovery from last year’s floods. The softening in Latin America extends beyond Brazil with a region-wide slowing in activity.
  • While there are plenty of downside risks to the outlook, the latest business surveys hold out the hope that activity is stabilising in some of the major advanced economies. The Euro-zone looks set to remain in recession but growth in the US and UK should pick-up through the next year – provided that the US “fiscal cliff” can be averted. If it is not averted, the tightening in US fiscal policy would be substantial and has the potential to tip the US economy back into recession next year. Policy easing around the world underpins our forecast modest acceleration in forecast global growth from 3% this year to a still sub-trend 3¼% in 2013.

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