FYI | Jan 22 2009
By Andrew Nelson
Westpac Banking reports its global trade PMI reading, which is a composite of the import and export questions from various PMIs around the world, has been in retreat since Q108. However, the stakes have increased over the last few months, with the October read dipping to 43.1 and then continuing on to fall recording a record low of 37.9 in December. Just so you know, 50 is neutral.
In the US, the ISM manufacturing trade indicator collapsed below 40 in October, but the ISM non-manufacturing was still above 40 as late as November. Asian trade indexes hit record lows in November and actually improved in December while Europe’s fell off a cliff in December.
Westpac Senior Economist Justin Smirk notes the severe collapse in global trade is behind the downgrading of the bank’s growth forecasts for global growth. Westpac has revised down its forecasts for all major economies and now sees the G3 contracting 1.9%, while China’s growth has been revised down to 7.2% and East Asia ex-China is now seen growing at just 0.8%. These new numbers compare to previous forecasts of 1.3%, 8.3% and 1.8% respectively.
All up, the bank has global growth at only 0.5% in 2009, down from its earlier forecast of 1.3%. Smirk notes this is just a shade above zero and weaker than the 1991 recession year at 1.5% growth as well as both the 1982 and 1975 recessions. The latter two periods experienced growth levels around 0.9%. The bank expects the number to increase to only 3% in 2010, meaning we are looking at more than just a short trip down economic weakness lane.
Smirk says that what has caught him and just about everyone by surprise has been the collapse in global trade. He notes the drying up of trade finance saw global trade stall in October and November and so far, there are only modest signs that the rate of decline in Asian exports may have slowed. This is not just the case for China, but also Japan, East Asia and Europe, he says.
In Smirk’s words, “So far there are no reasons to be optimistic about an early recovery in global trade activity.”
In fact, Smirk believes that Asian exports have plummeted to the point where a deep recession in Japan, Taiwan, Korea and Singapore has become unavoidable.
On Westpac’s numbers, growth in Australia will moderate to 1.6% in 2009 and recover to 2.7% in FY10. This is fairly consistent with ANZ Banking Group’s belief that Australia will most certainly experience a mild recession in 2009. ANZ predicts dwelling construction and profits will be notably weak and an extended period of softness in consumption expenditure looks likely.
While ANZ points out it is not forecasting Australia to follow the lead of the US and UK and slide into what is looking more and more like the bringing of an economic depression, the bank nevertheless notes the risk that while the depth of the Australian downturn may be less than in the early 1990s, the duration may well be longer.
ANZ also points out that while Australia has a substantial dependency on global financial markets for the financing of economic activity, Australia’s banking system, while admittedly under considerable pressure, remains in a different position to the US and Europe.
Australia also has one big card up its sleeve, a very low government net debt position. ANZ advises that the general government gross debt is around 15% of GDP, well below levels in the US at 66% and the UK at 50%. So even if the Australian government is forced to become more active in the markets, it will have a strong balance sheet starting point.
The shape and timing of a recovery in Australia remains uncertain, but ANZ notes that “as well as the functioning of the financial system, the shape of the global recovery, the drivers of China’s recovery, the extent of local household balance sheet consolidation and likely changes to the regulatory framework, will all be crucial determinants of the outlook over 2010 and beyond.”
