Tuesday, 3 January 2012

Gloom versus Boom versus The Middle

In the last week or so, there have been some encouragingly solid data releases around important parts of the world. The US economy just might be responding to more than 3 years of zero interest rates, trillions of dollars of quantitative easing and fiscal stimulus and the effective nationalisation of the banking and insurance sectors.

That said, in the US there remains a massive overhang of wealth destruction from the housing crash, a massive fiscal problem which will be exacerbated by the upcoming Presidential election and then there is the problem of any exit strategy from these emergency policy settings. I don’t envy the economic policy makers in the US with the size of the problem they confront, a problem made worst by the structure and composition of Congress.

The Eurozone remains stuck in a fiscal and economic quagmire that for the world’s largest economic zone, is certain to act as a drag on global activity. The recession in the Eurozone is still unfolding and any economic upswing through 2012 will is likely to be patchy and erratic.

The obvious slowing in China is still developing with GDP and inflation on a sharp downward trajectory. But as shown during the GFC, Chinese policy makers react with speed and a whatever-it-takes approach to sustaining growth if the slowdown appears to be too dramatic. We are already seeing some policy easing in China in reaction to the slowdown. There will be more easing if the economy remains soft.

A week of good economic data doesn’t make a trend. But it makes for good reading and a few noisy perma-bulls will no doubt shout loudly for a while. This better economic news will engender a hint of optimism for markets and confidence more generally, but it would be wrong to assume that a few snippets of some good news means the global economy is set for a sustained and meaningful recovery. It might, but it is way too early to tell. Let’s hope there is a recovery.

A true recovery will only be apparent once we get the likes of the US Fed, the ECB, the BoE and central banks of other zombie economies starting interest rate hiking cycles. That looks to be a year or two away – at the earliest.

For Australia, it looks like the economy is entering 2012 with growth a little below trend and inflation set to fall sharply. Even a mildly positive lead from the global economy through the next 6 months should see Australian growth pick up through the course of 2012 and it would be no surprise to see GDP hitting a 4% pace by year end which means 2013 could be the more challenging year for policy makers.

1 comment:

  1. Could you please explain what you mean by America's "... effective nationalisation of the banking and insurance sectors" - are you referring to TARP? If so, did the equity placements taken by the government in the banks actually constitute anything approaching majority voting rights? As I understand it, these positions were unwound fairly quickly (and profitably).