Media Release, July 18 2012
The July bulletin of EFIC’s newsletter, World Risk Developments, looks back at the past six months and ahead to the next six.
It notes that Australia’s economic growth has been accelerating over the past six months as the world economy has been slowing.
‘Australia’s glass is at least half full’, said Reserve Bank governor Glenn Stevens last month, despite a ‘global environment of major uncertainty’. According to EFIC chief economist Roger Donnelly, ‘this glass half-full, half-empty contrast is the most striking feature of the past six months’.
‘Another feature is disappointment’, he says. ‘Confidence at the start of the year has been replaced by concern – about the euro area first and foremost, but also about the US and China.’
‘The euro crisis was our chief concern. But we also looked at climbing oil prices and political risk in China, PNG and Egypt.’
‘Slowing and below-trend world growth. Extreme risk aversion. Marked downside risks – from euro area, Chindia and US.’ That is how the newsletter sums up the present situation. Not only are the euro area and UK looking prone to double-dip recessions; emerging economies are also undergoing sharp slowdowns.
Fingers were crossed before a European summit on June 28-29 – the 19th so far on the crisis – that leaders would finally do a policy reboot. After the summit, markets rallied on news that member states would take action to mutualise their debt problems through greater fiscal and banking union and undertake ‘faster and more flexible’ intervention in stressed markets. Then they read the fine print. Such steps would depend upon prior changes to national laws and constitutions and European treaties – the work of years. Markets quickly retreated.
‘In these circumstances’, says Donnelly, ‘it would be unwise to rule out the need for a full sovereign bailout in Spain. Or in the (slightly?) longer run, the spread of the crisis to Italy. Or ultimately, the partial or full breakup of the monetary union.’
According to EFIC senior economist Dougal Crawford, ‘Chinese growth has also been relatively weak in the first half of 2012. And in the March quarter India grew at its slowest rate in nearly a decade and is battling persistently high inflation. Looking beyond Chindia to other BRICs, Brazil’s economy appears to have stalled.’
As for the American economy, it has been slowing through the first half of 2012, and is quickly moving towards a so-called fiscal cliff. This refers to a fiscal tightening of 4% of GDP that will occur if a large number of spending programs and tax cuts scheduled to end on December 31 are not extended. If tightening does occur as legislated, GDP growth will slow markedly in 2013. To make matters worse, Republican House Speaker John Boehner has again raised the prospect of not lifting the federal government debt ceiling – when it is reached sometime between September and December – and thus provoking a sovereign debt default.
Are any pleasant surprises in store? ‘The worse things get, the more likely policymakers are to mount decisive and effective responses’, says Donnelly. ‘True, it is hard to see a euro area policy reboot. But the US and China could do better than expected.’
Would another severe international downturn, brought on by the euro area, US or Chindia, set back many projects in Australia’s bulging resource investment pipeline, and thereby transmit the downturn here?
‘Fortunately’, says Donnelly, ‘the pipeline is so bulging – at $500 billion – that even if ‘less advanced’ projects without committed financiers and overseas customers go into hibernation or die, ‘advanced’ projects will still propel investment’.
‘The global recovery is likely to be a fragile one in the next six months. But in our base case at least, commodity prices remain well above-trend and the resource investment boom on track.’
For enquiries relating to this release, please contact:
Roger Donnelly
Chief Economist
Export Finance and Insurance Corporation
+61 2 8273 5499
rdonnelly@efic.gov.au
