Wednesday, November 28, 2012

An Overview of the International Economic Situation With OECD Comments on Their Recently Lowered Growth Projections

What follows are the first five paragraphs from the latest Reserve Bank of Australia's minutes (italicized) with some additional commentary from me.

International economic news over the past month was, on balance, more positive than in recent months, though earlier weak data had led forecasters to expect further delay in a pick-up in global activity. 

For most of this year, the overall story line for the world economy has been remarkably stable: The EU was mired in its debt issues with little chance of a quick recovery, the US was growing slowing and China was trying to re-balance its economy from an export based model to a consumption based model.  It's almost as though the world economy is stuck in very deep mud and can't seem to pull free.

The pace of growth in China appeared to have stabilised in response to the earlier fiscal and monetary stimulus, with a pick-up in infrastructure construction. Timely measures of production and spending were mixed, but had generally been stronger in recent months. 

A story that has gotten remarkably little play over the last year is the change of power in China, which has occurred recently.  I think this has kept the Chinese government from making sure the economy did not crash nor allowing it to grow at strong rates, thereby allowing the change of power to occur at at time or relative calm.  The economy has slowed down from a 10%+ annual pace to a 7%+ pace, with more emphasis on internal consumption.   However, it's still too early to tell if this is a permanent situation or an anomaly lasting a few quarters.  I tend to think its the former, as most Australian raw materials companies are now slowing down their capital investment, indicating they think their biggest trading partner is permanently changing course.

Members observed that the US economy continued to expand at a moderate pace. Growth in GDP and consumption picked up a little in the September quarter, although business investment had weakened. Employment growth had improved in the past four months relative to earlier in the year, and housing prices and commencements continued to rise, albeit from low levels. While significant uncertainty remained over the extent and effect of fiscal consolidation from early 2013, members noted that a positive resolution of this matter could result in better growth prospects. 

The US economy is about where it's been for the last few years -- growing between 0% and 2%.  While PCEs have been fair, we have seen a decrease in investment over the last few quarters with the primary downside pressure coming from state and local government austerity.   On the good side, employment is still plodding forward and the housing market appears to to recovering.  NDD sees the same thing.

Economic activity in Europe remained weak. The PMIs and household and business sentiment remained at low levels across the region, including in France and Germany, which until recently had been more resilient. 

The overall economic situation in the EU is one of a recession which is now continent wide and growing.  These is literally no hope for a quick and thoroughly conceived resolution to their issues.  At this point, they are slowing moving into the "basket case" category. 

The Japanese economy had weakened in the September quarter, with falls in consumption and exports. Growth in the rest of east Asia was also relatively subdued in the quarter, partly reflecting weakness in consumption, especially for the higher-income economies. Exports and industrial production were soft, though more recent data generally showed a slight improvement. In response to weaker growth, monetary and fiscal policies had been eased a little over recent months in some countries in the region. 

Japan's problems continue.  They printed another quarter of negative GDP growth recently and have moved to parliamentary elections.  The government and the BOJ are feuding over who should do more to help the economy.  In short, it's an overall mess.  The rest of the region is acting in lock-step with the Chinese slowdown.  Growth is slowing, but not to recessionary levels.  Various central banks have lowered rates somewhat, but still have sufficient downside room in the event they need to add further stimulus. 

The OECD has release their lowered economic projections for 2013 and beyond, which can be read here.  Here are some salient points from the press release:

The global economy is expected to make a hesitant and uneven recovery over the coming two years. Decisive policy action is needed to ensure that stalemate over fiscal policy in the United States and continuing euroarea instability do not plunge the world back into recession, according to the OECD’s latest Economic Outlook.

“The world economy is far from being out of the woods,” OECD Secretary-General Angel Gurría said during the Economic Outlook launch in Paris. “The US ‘fiscal cliff’, if it materialises, could tip an already weak economy into recession, while failure to solve the euro area crisis could lead to a major financial shock and global downturn. Governments must act decisively, using all the tools at their disposal to turn confidence around and boost growth and jobs, in the United States, in Europe, and elsewhere,” Mr Gurría said.

GDP growth across the OECD is projected to match this year’s 1.4% in 2013, before gathering momentum to 2.3% for 2014, according to the Outlook.

In the United States, provided the “fiscal cliff” is avoided, GDP growth is projected at 2% in 2013 before rising to 2.8% in 2014. In Japan, GDP is expected to expand by 0.7% in 2013 and 0.8% in 2014. The euro area will remain in recession until early 2013, leading to a mild contraction in GDP of 0.1% next year, before growth picks up to 1.3% in 2014.

After softer-than-expected activity during 2012, growth has begun picking up in the emerging-market economies, with increasingly supportive monetary and fiscal policies offsetting the drag exerted by weak external demand. China is expected to grow at 8.5% in 2013 and 8.9% in 2014, while GDP is also expected to gather steam in the coming years in Brazil, India, Indonesia, Russia and South Africa.