Australia & the World on two pages – September 2013

Recent business surveys show a solid and synchronised lift in business confidence across the advanced economies whose annualised 3-month industrial growth now exceeds that of the emerging economies.

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Global: Recent business surveys show a solid and synchronised lift in business confidence across the advanced economies whose annualised 3-month industrial growth now exceeds that of the emerging economies. This shift in the composition of global economic expansion back to the advanced economies has long been forecast and reflects the impact of their stimulative economic policy and the passing of recession in Western Europe. Big emerging market economies have been hit by financial market volatility as money moves back to the US in anticipation of better returns with impending Fed policy changes. Growth expectations revised down for India, emerging Asia and Brazil as their monetary policy will have to be tighter than would have been the case if there had been a more gradual market adjustment to the Fed’s planned moves.

  • Global financial markets remain focussed on policy actions of the big central banks. We expect the US Federal Reserve to soon start cutting back on its asset purchases and end them in mid-2014 before beginning to lift interest rates in the second half of 2015. Other central banks in the UK, Euro-zone and Japan have signalled that they are likely to keep their policy running along its current lines for quite some time, so the Fed is leading the way in cutting back on the stimulus it is giving its economy. The biggest market consequence of the Fed’s expected policy changes have been felt in the emerging economies where share markets and currencies have come under pressure in India, SE Asia and Latin America as money moves back to the US.
  • Although annual data still show the pace of growth in GDP and industrial output in the emerging market economies clearly exceeding that in the big advanced economies, the latest industrial data suggest that the long forecast switch in the composition of global growth toward advanced economies is under way. The 3-month annualised data for industrial output show expansion in the advanced economies outpacing that of emerging markets. Global growth remains sub-trend with the big advanced economies, despite their recently much brighter business surveys, still only growing modestly. This helps explain why global measures of trade and industrial output show growth running under 2% yoy in mid-2013.
  • Mid-2013 finally saw a synchronised upturn across almost all of the big advanced economies. Output expanded in the US, Euro-zone, UK, Japan and Canada and the main areas of weakness remained in the peripheral Euro-zone nations (Italy, Spain). The pace of G7 growth also gained some momentum with June quarter annualised growth reaching over 2%. While advanced economy growth is now quite broadly based, the last five years have been a lost period for economic growth in many key economies. The level of output is still below its early 2008 level across the UK, Japan and the Euro-zone. By contrast, GDP in the US and Canada is around 6% above its pre-GFC level. This protracted period of sub-par economic performance means that there should be plenty of idle resources around the advanced economies that can be pulled back into production (8½% jobless rate, 20% unused industrial capacity).
  • Several of the key emerging market economies have been experiencing difficulties in recent months. Financial market pressure and political difficulties have either seen policy tightened or likely interest rate cuts postponed in India, Brazil and Indonesia. Recent GDP numbers for India  and a range of East Asian emerging markets have been disappointing with Indian growth falling below 5% and downward revisions to growth prospects across ASEAN. Fortunately, Chinese growth has held up, with the latest crop of monthly data showing domestic demand and industrial growth stabilising, exports remaining the area of weakness but credit growth slowing. Exports and industrial output remain weak in emerging Asia.
  • Business surveys in the big advanced economies suggest that firms are expecting the upturn to continue. Results from the US, Germany, Japan and the UK are consistent with ongoing growth while the French results point to a slower rate of decline in activity. It is this acceleration in advanced economy growth that underpins the pick-up in global economic expansion anticipated next year. The world economy should expand by just under 3% this year before rising to a slightly below trend 3½% next year. Growth in the emerging market economies is expected to remain around 5% in both 2013 and 2014. Given Australia’s trade dependence on the emerging markets, growth in our major trading partners forecast for 2014 is 4.2%, compared with 4.0% for 2013.

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