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An economic update
The big three… What have been the major economic events of the past few months?
Head of Investment Markets Research, Colonial First State
1. One step forward, two steps back in Europe
Europe continues to make news, with further initiatives by European Union (EU) leaders, however this was not enough to stop credit rating downgrades by Standard and Poor’s.
EU leaders announced two major initiatives to help stabilise EU sovereign debt markets: a new ‘fiscal compact’; and measures to enhance the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM).
The ‘fiscal compact’ aims to strengthen the fiscal and governance regime surrounding the euro area and imposes a new fiscal rule on Member States. As a result it is expected that general government budgets shall be balanced or in surplus – this is when the annual structural deficit does not exceed 0.5% of nominal GDP – otherwise automatic sanctions will be imposed. No specific details are available as yet.
The permanent bailout fund – the ESM – will be brought forward to July 2012 and, together with the EFSF, will have a combined limit of €500 billion. Additional funding of €150 billion by the EU has provisionally been committed for the International Monetary Fund (IMF). While these measures are a further step in the right direction there is not, as yet, a comprehensive solution to the debt and economic problems in Europe.
However these measures were not enough to stop Standard and Poor’s downgrading nine EU countries. Importantly France and Austria were downgraded to AA+ from AAA and the EFSF also lost its AAA credit rating. While these moves were largely expected by financial markets it does raise the possibility of higher funding costs for these countries and signals the large amount of work still to be done to stabilise the delicate situation in Europe.
2. US data improves
In the US, political negotiations also took centre stage, with the focus on the extension of payroll tax holiday and long-term unemployment benefits. Only a two-month extension was agreed to, with negotiations due to resume early in 2012 for a full-year extension.
Otherwise, US economic data continued to surprise on the upside, particularly labour market and manufacturing data. Initial unemployment claims reached the lowest level since July 2008 and the unemployment rate fell to 8.6%. Employment creation remains weak, however, and will be a focus for financial markets in 2012 to signal that a stronger economic recovery is underway.
3. Easing monetary policy in China with a slowdown in growth
In China, monetary policy was eased through a lowering of the reserve requirement ratio for banks from 21.5% to 20.0%. This was the first easing since October 2008. It is expected any easing in policy in 2012 from China will be gradual, with the policy focus based on the Central Economic Work Conference to be ‘proactive fiscal and prudent monetary policies’, indicating ‘growth stabilisation’ policies rather than control over inflation. Inflation in China has continued to ease, down to 4.1% pa to December. GDP growth has also slowed, down to 8.9% pa from 9.1% pa. It is expected these themes will continue in 2012 and allow for a gradual easing of policy.
In Australia, GDP data for the September 2011 quarter was released with growth of 1.0% over the quarter and 2.5% over the year. The dominant source of growth during the September quarter was capital expenditure and household consumption. The mining and construction industries recorded growth of 5.0% and 3.7% over the quarter, respectively. Employment data continued to show signs of weakness with 6,300 jobs lost in November and the unemployment rate rose to 5.3% from 5.2%. Consumer confidence fell by 8.3% in December on offshore news, while business confidence remained flat over the month.