Chinese Premier Wen Jiabao’s absurd over-confidence, and his failure to announce new stimulus measures yesterday, is a bad omen for the Australian economy and currency.
The Australian dollar already looks overvalued relative to commodity prices; it rallied yesterday in expectation of a new Chinese stimulus package – as did global sharemarkets – and has now lost those gains after Wen failed to deliver.
And so has Wall Street this morning, with the S&P500 down more than 4% in its disappointment about China (not helped by Citigroup’s share price tanking to below a dollar for the first time, giving it a measly $US6 billion in capitalisation).
Australian firms and investors should now prepare for a significant fall in the value of the currency, especially against the US dollar. Exchange rates are always difficult to predict, but a US55c Aussie doesn’t seem too hard.
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First we have Wen Jiabao doing a Neville Chamberlain and declaring “8% growth in our time”.
Second, the Bank for International Settlements explained yesterday why there is such a shortage of US dollars in the world, and why that is not about to end in a hurry.
And third there will be more interest rate cuts in Australia, probably to 2% during 2009. This week’s decision to leave rates on hold was encouraging, but just a pause.
Actually, the Chinese Premier’s effort before the serried rows of Chinese “parliamentarians” was little different to most politicians this year. They are all whistling in the dark, trying to keep our spirits up (and theirs).
Australia’s political leaders were doing it again yesterday; Barack Obama is doing it; even the lugubrious Gordon Brown is doing it.
But the idea that Wen’s Government has now done enough and that China will grow at 8% this year is a good one. Global trade has already declined by 10% and the Korean economy, just around the corner from China, shrank 5.8% in the December quarter (not annualised, actual).
China clearly can, and should, do more. Its Government has deposits at the central bank equal to 9% of GDP and plenty of domestic liquidity, although it’s true that the IMF puts its stimulus, as announced so far, at the top end of the range.
China’s discretionary measures are estimated by the IMF at 2% of GDP in both 2009 and 2010 – less than the US in 2010, but more than the weighted average of the G20 countries (1.4% and 1.34% of GDP) and a lot more than Australia (0.8% and 0.3% of GDP in 2009 and 2010).
Nevertheless, yesterday’s speech by Premier Wen is a negative for commodities and therefore the Australian dollar.
Meanwhile the Bank of International Settlements calculates that European banks faced a $US2 trillion funding shortfall at the time of Lehman collapse in September, and although there is a lag in collecting the data, there is no doubt that a huge shortfall still exists.
The implication of this is clear: European banks funded themselves with dollars during the boom and the capital destruction of the past year has left them starved of dollars and scrambling to get them.
That’s why the US dollar has been so strong and why it seems likely to keep going up, despite the colossal mess in the US financial system.
And finally the Australian economy is on the edge. The purchasing managers index (PMI) for Australia is worse than the same index in the US, which indicates that our manufacturing recession is going to be deeper than America’s.
Stephen Koukoulas of TD Securities points out this morning that Australia’s GDP per capita (accounting for strong population growth) has fallen 1.4% over three quarters, or 0.5% for each quarter. In the US, GDP per capita has fallen 1.7% – not much more than ours.
Koukoulas reckons the Australian recession will be worse than America’s and that we are being protected by the lagged effect of higher terms of trade, but obviously the jury is still out on that.
Nevertheless, if he is even half right the currency is heading lower, and so is the Australian sharemarket, which has outperformed the world significantly during the latest leg down of the bear market since early January.
This article first appeared on Business Spectator.