On any measure, news regarding the world economy over the past week has not been encouraging.
First, there was the latest World Economic Outlook report from the International Monetary Fund (IMF). The IMF said that its expectations for global growth have been adjusted downward from 4.5% in both 2011 and 2012 to 4.0% in each year. Whilst that may not sound so bad, the report makes clear that this number is being propped up by emerging markets. In 2011, the fund says that developed countries will manage growth of just 1.6%.
Then, there was the latest statement from the US Federal Reserve. On September 21, the bank indicated that whilst it expects the pace of an anticipated recovery in the American economy to pick up over coming quarters, the unemployment rate would fall only gradually and there were “significant downside risks to the economic outlook”.
Finally, the latest signals coming out of China are not good. The HSBC Chinese Purchasing Managers Index, a widely used gauge for manufacturing activity in China, fell from 49.9 in August to 49.4 in September – the third straight month for which the index has fallen.
(On a positive note, however, the IMF still expects China to grow by 9.5% and 9.0% this year and next.)
What about Australia?
Down under, the news is mixed. On the negative side, whilst the IMF does forecast apparently healthy growth of 3.3% for Australia in 2012 (up from 1.8% this year), this forecast is well short of expectations of the Reserve Bank of Australia (RBA), which expects our economy to grow by 4.0% next year. Furthermore, the IMF expects inflation to remain above the RBA’s comfort level of three per cent in both years, making it difficult for the central bank to stimulus growth by reducing interest rates.
That said, there was plenty of silver lining. Even with the IMF bleaker assessment of our economy relative to that of the RBA, the Australian economy is still expected to perform much better than that of the rest of the developed world. Moreover, prospects for Asia in general – where Australia’s four biggest export destinations are located (China, Japan, South Korea and India) remain good – albeit with Asian growth expected to cool slightly.
Further, though expectations of sluggish growth in Europe and America serves to further heighten financial uncertainty in those countries, even this may have some silver lining for Australia by reducing upward pressure on inflation and interest rates.
Interest rates on hold
On that note, the general tone of minutes to the Reserve Bank of Australia’s (RBA) meeting earlier this month seemed to indicate that interest rates are likely to remain on hold for the immediate future.
Compared with previous months, the bank’s assessment of the economy was downbeat. It noted that the international outlook had become “more clouded”, global financial markets had been ‘very unsettled’ and that the domestic economy was going through a period of ‘considerable structural change’, which was causing difficulties in a number of industries.
Nevertheless, the bank remains concerned about inflation, and is reluctant to ease monetary policy settings until it has solid evidence of an easing in medium term inflation pressures.
Dollar and Commodity Prices Tumble
The weak economic outlook continues to put downward pressure on the Australian dollar and on commodity prices. With China being our largest trading partner, the weak Chinese manufacturing data referred to above is particularly significant in this regard.
The Australian dollar closed just above parity with the US dollar on September 22 at USD1.0027. The dollar stands at JPY76.96 and EUR0.7393.
Prices for copper and zinc are now at one year lows (see chart below).
