Tony Alexander

Economic Commentaries

World Worries Still There

Thursday June 7th 2012

One week I shall be writing here that things are looking better around the world and growth prospects are improving for our economy. But this is not that week and I don’t anticipate sounding overly optimistic for a number of months. This week we have seen a general movement in the world’s economic discussion toward gauging the extent of the negative impact which Europe’s worsening economic crisis is having on global growth. The news is bad. In India the economic growth rate has slipped to a far lower than expected 5.3%. In China the manufacturing index for May came in also much weaker than expected removing all hope that growth might slow only marginally this quarter. In Australia the Federal Treasury has admitted that it has been working on a contingency plan for handling a new crisis since before Christmas and the RBA has again had to cut interest rates. In the US jobs growth has all but stalled and the unemployment rate is rising again.

And of course in Europe itself the news is approaching dire. Senior people have used words like “unsustainable” and “disintegration”, there is a worsening run on Spanish banks, growth forecasts are being cut, the Greek leftist leader has promised to renege on bailout terms and is 6 points ahead of the conservatives in one poll, the group of Seven teleconference on Tuesday night produced zero proposals, and the economic data continue to get worse with unemployment hitting a record 11% in the Eurozone.

Locally we have learnt of another 4.2% fall in NZ average export prices in May so they are now down 18% from their peaks and further declines are virtually guaranteed as global debate soon turns to whether another world-wide recession is at hand. Having said that a 13.5% rise in milk powder prices at the fortnightly Global Dairy Trade auction was a positive surprise and this week’s data out of Australia were very strong.

Sorry to sound so astoundingly dismal since heading offshore to Europe a few weeks ago. But it is important to understand the gravity of what is happening there. The unity fostered by the Treaty of Rome is rapidly going out the window as voters veer to the political extremities and people call for stronger leaders. The Eurozone is heading into a possibly extended recession. People have started talking again of a double dip US recession – though that seems a low probability outcome. We will be affected however much weakness accrues because 2008 showed us that at times like this there is no decoupling of one part of the world from another. Thank goodness for the Christchurch rebuild.