THE BIG PICTURE: The hurdles facing the global economy

This year is an Olympic year, so it is quite appropriate that this year is all about hurdling. Financial market participants are understandably jittery given the Global Financial Crisis and European Debt Crisis that have dominated attention since 2007.

The good news is that so far in 2012 the hurdles have been cleared. Private sector creditors to Greece needed to agree to a debt deal and that hurdle was successfully cleared. The Greek Parliament also needed to agree to the debt deal and then the EU and IMF had to sign off on the deal before committing to the €130 billion bail-out package.

Fresh stress tests were applied to European and US banks and the good news is that the majority passed, allowing a number of US banks to pay out dividends to shareholders. In addition, US economic data has generally printed in line, or above, expectations. This has allayed market fears and under-pinned upward momentum on equity markets.

In China, monetary authorities have largely been successful in engineering a slowdown of the economy with activity growing at a sustainable pace and inflation under control. The only concern in recent times is whether growth has slowed too much, but the recent solid result for the official performance of manufacturing gauge has allayed fears.

In coming months, economic data readings, new issuance of debt securities in Europe, debt maturities and a raft of elections will test financial markets. The US profit reporting season also kicks off next Tuesday.

The first major election is the first round of the French Presidential elections on April 22. Parliamentary elections are also scheduled in Greece and South Korea over April. In terms of economic data, in the US the March quarter economic growth figures are due on April 27 – a major test about whether the recovery is on track.

The second round of Presidential elections in France is due on May 6 while Parliamentary elections are set for Syria – the recent source of major instability – on May 7. In Egypt, the first round of Presidential elections is set for May 23 with an Irish referendum on May 31. Legislative elections in France are due on June 10 and 17 with the second round of Presidential elections in Egypt on June 16. There are also internal leadership elections in left parties in Germany in June. And that takes us up to mid-year.

Clearly, there are a lot of hurdles to clear.

The week ahead

The Australian economy appears to be just treading water at present. But that view will be tested with another half a dozen key indicators to be released over the week. In the US, the main focus over the week is inflation with both producer and consumer prices data due for release.

On Tuesday the NAB business survey is released alongside the ANZ job advertisement series. Both business conditions and confidence remain below longer-term averages. But if the Reserve Bank is to cut rates in coming months, inflation must also be contained, so the data on wages and selling prices will also be watched closely.

Job advertisements are a key leading indicator. If employers are advertising for staff they are probably witnessing a lift in sales, and, more importantly, expect stronger activity to be maintained. Job ads have lifted 3.3% in February after a 7.5% gain in January. So the March data will be a key test of the theory that the economy is only marking time.

On Wednesday a survey of consumer confidence is released alongside data on home loans. Aussie consumers are certainly not gloomy, but they are far from cheery. The problem is that consumers are more likely to sit on their hands and not spend. The data on home loans is another test about where the economy is headed. New lending slipped by 1.2% in January and data from the Bankers Association suggests that lending fell another 4% in February.

On Thursday the March jobs report is issued. While employers haven’t been actively hiring, they also haven’t been significantly shedding jobs either. In February, employment fell by just over 15,000 but we expect that jobs partially rebounded by 7,000 in March. But jobs need to rise by around 10,000-15,000 to prevent the jobless rate rising. As a result, we expect a modest lift in unemployment from 5.2% to 5.3%. But apart from the jobs and jobless figures, the number of hours worked will also come under scrutiny.

In the US, the week kicks off with the Chicago Midwest index on Monday together with the Employment index. Neither are market-moving indicators, but they are important in painting a picture of the economy.

On Tuesday weekly retail sales data is released together with data on wholesale sales and inventories. Economists tip a solid 0.7% lift in sales in February after the slight 0.1% in January.

On Wednesday the Federal Reserve Beige Book is released – a qualitative assessment on the state of the economy across Federal Reserve district banks. On the same day, the monthly federal budget figures are released together with data on export and import prices and the weekly mortgage index.

On Thursday the February trade figures are issued alongside data on producer prices (business inflation) and the weekly figures on claims for unemployment insurance. Economists expect only a slight improvement in the trade deficit to $52 billion while the core measure of producer prices (excludes food and energy) probably rose 0.2% in March. If prices are lifting, businesses are no doubt witnessing firmer activity and they are becoming more confident.

And on Friday data on consumer prices are released together with consumer sentiment. The core measure of consumer prices is tipped to have risen by 0.2% in March with the annual rate unchanged at 2.2%.

Overall the US data is expected to show a consolidation of the economic recovery, adding support to the upward trajectory for the sharemarket.

Sharemarket, interest rates, currencies and commodities

The December quarter financial accounts were released in late March.

Given that this is the most comprehensive data on where money is allocated across the economy it is amazing that it doesn’t garner more attention. And what stood out in the latest figures is the conservatism of Australian investors. The largest share of financial assets is held by cash and deposits (24.3%) followed by bonds (21.9%), unlisted equities (20.2%) and listed equities (16.2%) with bills of exchange, derivatives, accounts receivable and one-name paper accounting for the remainder.

Amazingly on average over the past decade the biggest share of assets was unlisted equities, closed followed by cash and deposits and listed equities but it is clear first the global financial crisis, then the European debt crisis have spooked investors. If the share of assets devoted to listed equities rose to the decade average, roughly an extra $250 billion would be put to work in the sharemarket.

Commonwealth Bank currency strategists are sticking with the view that the Aussie dollar will lift to US108 cents by June and to US109 cents by December. The strategists assume that the Chinese economy will rebound from the recent soft patch, that the Reserve Bank may only cut rates once more in the current cycle and that the US Federal Reserve will keep rates near zero until at least 2013. The main risk to the forecasts at present is that the US economy proves to be stronger than currently assumed, raising doubts about how long interest rates are kept at super-low levels.

The US earnings (profit-reporting) season begins in the coming week. As is customary, Alcoa is the first major company to issue results on Tuesday with Infosys, JP Morgan Chase and Wells Fargo to follow on Friday.


Craig James is chief economist at CommSec


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