EFIC World Risk Developments April 2012

24 Apr 12

Bullish sentiment about the world economy since the start of the year has begun to ebb over the past month.

Downside data surprises replace upside ones, according to the April edition of EFIC’s newsletter, World Risk Developments.

The news has been disappointing out of the US, the eurozone and China alike. In the eurozone, there has been a renewed widening of peripheral bond yields; in the US, a weak March payroll report; and in China, a soft-ish March quarter GDP number.

The most worrying of the three is the spike in eurozone sovereign bond yields. This serves to emphasise that the eurozone debt crisis is far from over. Most immediately, it signals a growing danger that Spain may be forced to seek a bailout from the EU-ECB-IMF troika, joining Greece, Ireland and Portugal.

Taking the earlier promising signs with the more recent disappointing ones, how is the world economic recovery tracking? In its latest world economic outlook, the IMF actually upgrades its forecasts a touch from January.

However, it also emphasises that downside risks still predominate. According to Prof Eswar Prasad of the Brookings Institution, the global recovery is 'sputtering’. His widely-watched TIGER index shows that economic weakness extends across the Group of 20 leading economies, though advanced economies have deteriorated more than developing ones.

The Reserve Bank of Australia says, 'recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year'.

According to the newsletter, below-trend growth in the North Atlantic mightn't signify much for Australia, since 70% of its exports now go to Asia.

But the Chinese slowdown is rattling many observers. They worry about the knock-on effect to three things: commodity export prices, commodity export volumes, and Australian resource investment.

There will certainly be effects at the margin, the newsletter concludes, but it is premature to call an end to the boom. It is true that the RBA’s A$ commodity price index has retreated 10% from its August 2011 peak. But this takes it back to only January 2011 levels and it remains well above long run averages. Besides, Australian exporters have been selling more volume even as they have been receiving lower prices.

Finally, this situation of falling prices, but rising volumes and values, is expected to continue, according to the Bureau of Resources & Energy Economics.

The final concern about the Chinese slowdown is that it could undermine the resource investment boom now underway. But for this to occur, the slowdown would have to be far sharper than currently foreseen. Current and forecast prices are well above operating costs for most existing coal and iron ore mines and gas fields, and above operating and capital costs for most planned projects.

Click Here to view EFIC's ManufactureLink showcase which includes contact details and a link to their website.