The Count Report - No. 108

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Market Update

An economic update
The big three… What have been the major economic events of the past few months?

Stephen Halmarick
Head of Investment Markets Research, Colonial First State

1. Changing concerns in Europe

The largest sovereign debt restructuring in history was finally announced, with Greece receiving 95.7% participation among investors after it received approvals from bond holders and made changes to bond contracts to ensure the restructure. This restructure largely removed Greece as a near-term risk for markets, with ongoing focus to remain on the implementation of austerity measures, the upcoming election in early May and the economic growth outlook.

Markets become more concerned about Spain, with the government having to renegotiate its budget deficit forecasts for 2013, with 5.3% of GDP set for 2013, from the original plan of 4.4%, although these targets remain at risk. Economic data continues to deteriorate in Spain, with the unemployment rate reaching 22.85% in Q4 2011.

2. The weather effect on the US

In the US, momentum continued although question marks remain about the impact of a warm winter on activity levels. The most likely sectors to have benefited include the labour market, housing, construction and retail. The US labour market continues to heal with the unemployment rate now at 8.2%. This has taken the total number of jobs added to the US economy to over 2 million in the past 12 months.

One area of focus for the US economy has been concerns over the oil price which has a direct impact on the consumer. Gasoline prices have been elevated in recent months.

The recovery in the US housing market remains problematic, with a stabilisation of activity at best. US existing home sales, new home sales and housing starts have all suffered from some weakness in recent months. There is the expectation that the mild winter brought activity in the housing market forward to December and January. The test for the US economic momentum will be in coming months where warmer weather is the norm.

3. China dominates economic headlines

The annual National People’s Congress conference released details about the upcoming economic objectives. The GDP growth target for 2012 has been lowered to 7.5%, down from 8% in previous years. This is in line with the government target to average 7% growth during the 12th Five-Year Plan (2011-2015). This surprised some observers and comes with the continual aim to rebalance China’s growth to higher quality domestic consumption, driven by technology and human capital.

In Australia

In Australia, Q4 2011 GDP data was released showing growth at a below-trend pace of +0.4% for the quarter and 2.3% for the year. Growth in the quarter was driven by an increase in household spending, inventory build-up and net exports. In contrast to the past 12 months, the income side of the economy was soft, driven by the first fall in the terms of trade (ie. the ratio of total export revenue to total import expense) since Q3 2010 and the largest fall since Q2 2009.

The labour market remains on the softer side with the unemployment rate remaining at 5.2% but employment growth at very weak levels. This once again suggests the non-mining part of the Australian economy is at a belowtrend pace.

If you have any questions or concerns, please speak to your Count Financial Adviser.