It is conceivable that at some stage in the next few months I will write a positive column about prospects for world growth, writes Tony Alexander.
It is also conceivable that the need for such a column will be absent because alien invaders will have enslaved us all. Things do not look good overseas and one does not have to spend too much time reading news from overseas to see why.
The best indicator of how rough things are comes from the yield on Spanish 10-year government bonds. It is back above 7 per cent – the level generally agreed as signalling the need for a funding bailout. The jump in yield from just over 6 per cent a week or so earlier comes about because in less than two weeks hopes about the seemingly positive outcome of the June 28 European leaders' summit have evaporated.
As many of us pointed out after the meeting, its focus was on the development of a long-term plan for European banking sector supervision and not measures to stimulate short-term growth in Europe or assuage the worries of investors. Greece was not discussed at all and Greek leaders are still hoping they can persuade the poor souls lending them more money to give them a two-year window in which they can backtrack on reforms they already agreed to in exchange for funding.
The story of Europe for the past two-and-a-bit years has been the eruption of investor worries, application of some sort of poultice, calm, then another eruption.
Usually the gap between investor sentiment eruptions has been months. This time the good period did not last even two weeks.
But wait – there's more. In Japan, factory orders have just fallen by more than 14 per cent in one month. In the United States, job growth was only 80,000 in June and that means four months in a row of minimal job creation. That implies consumer spending weakness, damage to corporate profits, and a renewed risk of a new recession. This is especially so as the ability of the Federal Government or Federal Reserve to do anything to stimulate the US economy is poor.
And then there is worse. In China, the recent monthly numbers have largely been poor and this week we learnt that inflation has slowed to just 2.2 per cent in June from 3 per cent in May and 6.5 per cent a year ago. The Chinese central bank has eased monetary policy again but worries are growing about deflation and additional weakness in exports because of the European mess.
Collectively these developments signal that risks for global growth and our export commodity prices lie on the downside and normally that would mean a potentially sharp fall in the NZ dollar.
When investors look around the planet at places to park their money they find that for all the major economies and currencies prospects look bad. Hence money flows into NZ and Australian dollars.
Times remain very uncertain overseas and in sharp contrast to the situation in 2008-09, this time governments and central banks do not have much dry gunpowder to fight any new shock scenario. This uncertainty will tend to suppress growth in our economy as businesses hold off investing and hiring to some extent – though clearly the rebuilding of Christchurch and period of catch-up house building in Auckland will give our economy some strong insulation, thank goodness.
- The Southland Times