With the latest departures of prime ministers in Greece and Italy, it is fair to say that conditions in Europe right now are extremely volatile.
Markets certainly think so. In its latest issue of 12-month treasury bills (short term debt), the Italian government paid an average of 6.087% – more than at any other time since the inception of the euro and way up on the 3.57% it paid during the previous auction for bonds of similar maturity as recently as mid-October. In France, the risk premium charged on French bonds compared with German ones is at record levels. Bottom line: investors see French and Italian debt as being increasingly risky.
Granted, the panic has eased off a little now that the Italian parliament has approved a series of austerity measures and leaders of a new coalition of three parties in Athens finalised details of a national unity government for Greece. Still, the Euro-zone mess has no quick fixes, so investors will remain on edge for some time.
Medium term, European governments must bring their fiscal situation under control without jeopardising their economies. That just got a lot tougher. In its latest economic forecast, the European Commission (EC) downgraded its forecast for Eurozone growth next year to just 0.6% – down from an expected 1.6% this year and well off its previous forecast for 2012 of 1.9%. In the current and coming quarters, the EC expects no growth at all.
“All main indicators point to a stalled recovery with considerable downside risks” the commission warns.
Back home in Australia, however, things look much brighter. On average, economists expect our economy to grow by 2.8% and 3.5% in the current financial year and in 2012/13, according to median predictions in the Economic Growth Forecasts – November 2011 Survey published in The Weekend Australian. Although ‘headline CPI’ is expected to remain above three percent this year and next, ‘underline CPI’, which strips out typically volatile items, is expected to come in at 2.6% in calendar 2011 and 3.0% in 2012. Unemployment is expected to average 5.4% over the coming year – up from 5.2% now.
All this means that growth should remain at moderate but respectable levels; inflation will remain high but not out of control; and unemployment should edge up but remain low.
In addition, the latest economic news has generally been encouraging. In a positive sign for the retail sector, consumer confidence surged by 6.3% in November, according to the Westpac Consumer Confidence Survey. Business conditions deteriorated slightly in October, according to the latest NAB data, but business confidence rose.
In reasonably encouraging news for construction, the Performance of Construction Index (PCI), a commonly used measure of construction activity, ticked up slightly in October – though at 34.7, the index remains clearly in negative territory.
Aussie drops back
The Australian dollar continues to drop back as global financial uncertainty continues to intensify. Our dollar is currently trading at $USD1.016, JPY78.81, EUR0.746 and GPB0.638.
In the immediate future, much attention will focus on any hints about further interest rate cuts in minutes to the Reserve Bank’s November board meeting. Upcoming data on the Westpac Leading Index will also be important.
Commodities ease back
After a strong run, prices for key building commodities such as copper and zinc have eased back (see chart).
Inventory levels for both metals, however, continue to fall, indicating that supply remains tight. Stocks of copper have plummeted from around 480,000 megatons (MT) around the start of the month to just 410,000 MT now, according to MetalPrices.com. Those for zinc now stand at around 760,000 MT, well off mid-year peaks of almost 900,000 MT.
As we reported last week, steel prices plummeted in October as a result of high levels of inventory at Chinese Steel Mills. Price pressures on the metal however, may be trending upward thanks to tightening supply of iron ore.