Australia | Jun 18 2013
– US shaky, but still ok
– More sideways trends in Europe
– China to pick back up, slowly
– Australia may be headed towards recession
By Andrew Nelson
In this day and age it’s hard to start a discussion about the global economy and its recovery prospects without roping in the big three: the US, Europe and China. Economists at Danish financial house Danske Bank have put out its latest barometer read for these three key economies, their current directions and the prospects for any sort of assistance in a global economic recovery.
As far as the US goes, an increasingly tight federal fiscal policy is now starting to bite, jobs growth is slowing and consumer spending is moderating. We are also starting to see re-emerging weakness in the manufacturing sector, with the US purchasing managers' index (PMI) dropping to 49 in May.
On the other hand, the bank also sees some signs of hope just around the corner, predicting the current run of fiscally generated softness will begin to fade towards the end of the year. In the meantime, businesses have been running on low costs and slim inventories, so leverage to a recovery is high. The fundamental backdrop also remains supportive, with bank credit, household debt levels, housing market balances and interest rates all expected to remain supportive.
The one big possible speed hump seen by the broker is that drop in the PMI number, which could be an early warning of things to come. Other manufacturing indicators are sitting in much firmer positions, while the NAHB index for housing and the NFIB small business confidence all improved in May, which feeds the hope the soft patch may already be easing.
Another possible speed hump is the Sword of Damocles that is the Fed and its easing policy. Most expect the tapering off to start towards the end of this year. Dankse thinks maybe as soon as September given positive jobs growth expectations. In the meantime, we will likely see volatile markets that duck and dodge on every other word. But the trend is up.
Danske’s view on Europe has remained static for a while now, the bank expecting negative 0.6% GDP growth in 2013 and 1% in 2014. If anything, the bank sees risks being skewed to the upside for quarterly numbers from here on out.
Purchasing manufacturers indices across Europe showed improvement in May, especially within the manufacturing sector. The bank sees this trend continuing. Danske also sees signs Spain is getting better much more quickly than expected, but then Italy isn’t. Germany already looks like it is back on track, with industrial production up for three straight months and motor vehicle sales also improving.
The Europeans are also blessed, in a perverse way, with less fiscal meddling, which presents less of a future overhang. Moves towards growth and away from austerity are already being made. The biggest move was allowing Spain and France two extra years to bring budget deficits under control and into compliance with Maastricht. Portugal, the Netherlands and Belgium were given one extra year.
Danske’s outlook is for the ECB to keep rates unchanged for a long time. That is unless there is another downturn in the economy. Mario Draghi is already playing down expectations of an instrument for SMEs at the June Governing Council meeting. Too complicated for the short-term, he says. There isn’t much forward guidance coming from the ECB, but they do keep saying that rates will stay low for as long as needed.
China seems to be slowly headed the other way, at least over the past few months. Growth is subdued, but not dead, although the bank’s GDP growth forecast is trimmed to 7.9% for 2013, with a slight rise to 8.0% growth in 2014. It looks as if the Chinese government is happy enough with the current state of affairs, with lower growth levels seen as a part of the longer-term rebalancing.
Thus, no policy easing to lift activity is expected. Sure, PMI and industrial production reads have been soft of late, but longer leading indicators like money and credit growth are still pointing to gradual improvement. Danske expects to see minor improvement in the 2H, although there are still some downside risks.
The biggest risk is there could be a substantial negative impact on investment demand on the back of recent regulatory tightening aimed at controlling local government debt and shadow financing. Private consumption and construction investment are expected to improve, a little bit at a time, and this should help support a slow and steady recovery. And with inflation falling far below the government’s target of 3.5%, price pressures are moderating and thus China has plenty of room to ease policy if needed.
It’s a slightly different story for Australia now that the resources investment boom has well and truly passed its peak. BA-Merrill Lynch thinks that resources investment will remain at high levels for at least another two years or so, but it will now likely detract from overall growth, not add to it. What’s worse is there is no growth from anywhere else sufficient to plug the gap.
Thus, there will be no smooth transition from a mining-driven economy to a something else-driven economy. The broker’s best case scenario, for which if gives a 75% chance, is that Australian real GDP growth slows from around 2.75%pa in 2013 and 2014 to just under 2% in 2015 and 1.5% in 2016.
There is also a 25% chance that Australia falls into recession from the second half of 2015, with real GDP growth averaging 1% in 2015 and minus 0.1% in 2016.
One of the reasons recession is a real chance is that the arsenal has been depleted and policy makers have little ammo of any sort left to fend it off. The Government’s bank book isn’t what it once was and interest rates are already low. The RBA will likely cut them further, possibly as low as 1%, and if things get really bad we may get some QE of our own. At least that’s what BA-Merrill Lynch thinks.
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