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Economic Outlook Summary-
December 2011
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THE GLOBAL ECONOMY
The global economy has managed to sustain a solid rate of expansion over the past year and appears set
to maintain good growth this year, although there are some risks to this positive outlook.
While global growth has been highly imbalanced between the advanced and the developing worlds (with the latter
growing much more strongly), there have also been widely differing growth rates within the more developed world.
Countries such as Spain and Ireland remain in recession.
Since the advent of global recession in late 2008, many countries have been looking for ways to protect their
export sectors. In the current international trade environment, the simplest form of protectionism has been currency
manipulation and what has been dubbed ‘the currency wars’ has become a focus of economic competition.
China and India have continued to grow strongly. However, in both cases rising inflation has become a concern,
although its effect on growth is likely to be slight.
Inflation is certainly not a problem for most advanced economies, as this has been squeezed out of the financial
system by zealous central banks. However, the financial crisis that was partly the result of restrictive monetary
policy (put in place in order to keep inflation low) led to overly expansionary fiscal policy and in turn to the current
crisis in sovereign debt levels. Government spending now has to be urgently wound down in many countries.
The outlook for the global economy for the coming year remains broadly positive, although risks remain.
‘Currency war’ (or currency manipulation) is under way in some jurisdictions, while government debt has to be reduced in many countries.
REGIONAL ECONOMIES
The US economy appeared to pick up some speed in the September quarter, after slowing in the June quarter, although deeper analysis of the
headline data indicates that much of the pick up was due to inventory re-building and some on-going fiscal stimulus. The US central bank (the ‘Fed’)
is aware that recovery remains too weak and has embarked on a program of monetary stimulus that will run at least until mid-2011. This program is
similar to that introduced during the height of the global financial crisis but is significantly smaller in scale. Even so, it has attracted criticism
from other countries concerned about the (downward) effect it could have on the $US, as well as from some domestic inflation hawks, who appear to be
overly focused on the risks posed by a rising general level of prices.
Investment in plant and equipment has continued to rise strongly, while inventory building has also been contributing significantly to growth. However,
household spending could continue to remain constrained for some time, given a persistently high level of unemployment and under-employment.
The Chinese economy has been becoming steadily more important for the rest of the world, especially in its effect on export sectors in other economies.
However, the Chinese Government continues to pursue mercantilist policies, reflected in its pursuit of an under-valued exchange rate. This has been attracting
increasingly less subtle criticism from a wide range of major economic institutions. Nevertheless, it is by no means certain that the Chinese will alter course
and there is some danger that this could engender a protectionist backlash from other economies.
The Japanese economy has been affected by an appreciating exchange rate, while exports from Germany, the UK and Sweden have been boosted by relatively low values
for their currencies.
AUSTRALIAN ECONOMY
The Australian economy is running at two quite separate speeds, with the mining sector continuing to enjoy boom-time conditions, while the rest of the economy is
in near-recession. Several states recorded negative growth in the September quarter, affected by interest rates that are too high for most sectors, other than mining.
On the other hand, so strong have commodity exports been that quarterly trade surpluses have reached the highest levels seen in 40 years, while the terms of trade are
at their highest since around 1950. More broadly though, the domestic economy is being hurt by expansionary fiscal policy that is running up against an increasingly
tight monetary policy.
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