With the benefit of hindsight, we can all look back and wonder how anyone got burnt by the tech wreck, and why nobody saw the GFC coming.
In reality, it wasn’t a matter of no one seeing the events coming. It was more a matter of investors simply not heeding the warning signs. In 2000 there were plenty of analysts and commentators who warned investors about tech stocks, and in 2007 there was no shortage of economists warning of the levels of exposure banks had to bad debt and derivatives.
Whether or not we’re going through GFC Mark II remains to be seen over the coming months, however there are plenty of warning signs that the outlook is darkening:
– The debt crisis in Europe is far from being resolved;
– The US crisis continues. Prominent economists like Nouriel Roubini – whose dire warnings leading up to the GFC gave him the nickname ‘Dr Doom’ – forecast a recession for the US in 2012;
– China is showing signs of slowing and economists globally are cutting China’s growth forecasts;
– Commodities prices have retreated. If prices continue to drop, in some cases mining projects will no longer be economically viable.
The November HSBC Chinese manufacturing PMI figures were extremely weak. Westpac’s Senior International Economist Huw McKay argues that the survey highlights that ‘the industrial sector is in a concerted slowdown phase that is more than a ‘soft patch’.’
McKay points out that both input and output prices collapsed, each sub-index losing approximately 10pts. ‘While this survey does not quite evoke a unidirectional unravelling…it certainly opens up a lively debate on the short term GDP profile for Australia’s major trading partner,’ he said in his weekly report released on Friday.
‘To our minds there is little hope that year-ended GDP growth will retain an 8-handle (i.e. above 8%) in the March quarter of 2012,’ he says, adding: ‘The path between today and the middle of next year will be a rocky one.’
In ‘The Resources Boom and Macroeconomic Policy in Australia’ by Bob Gregory and Peter Sheehan from the Centre for Strategic Economic Studies at Victoria University, the authors state that the outlook for the Australian economy is now much weaker. Real GDP has grown by 1.9% per annum over the last three years, and GDP growth for 2011-12 is now likely to be closer to that figure rather than the 4% forecast in the Budget papers.
The academics offer a simple explanation – the mining boom has peaked, and the yearly benefits to the broader economy from the mining boom are no longer rising.
The RBA’s previously bullish comments on the outlook for Australia are losing strength. In a recent speech RBA Governor Glenn Stevens discussed the “big forces” at work in the global and domestic economies. Stevens stated that offshore events are the biggest negative risk facing the Australian economy at present, with the greatest risk being the debt crisis in Europe.
Over at NAB, the economics team believes that the Eurozone will fall into recession before the end of the year. ‘We have also lowered Asian Tiger growth to take account of the floods in Thailand and softer trends in the region’s export-led economies,’ it said in a report released last week. ‘Overall, growth is expected to remain around 3.75% in 2012, near trend but very dependent on rapid growth in the big emerging economies.’
NAB also notes that sluggish global growth is weighing on commodity prices, while Australian business conditions remain lacklustre. ‘We still see mining and infrastructure-led rebound in the Australian economy in the medium term,’ it notes. ‘There are early signs that Queensland reconstruction is helping building.’
The case for further easing has increased in recent weeks; a sharper-than-expected drop in Chinese activity, weaker commodity prices and further pressure in credit markets points to interest rate cuts in the near term, according to Amber Rabinov, Senior Economist ANZ Research.
NAB agrees, arguing that softer core inflation points to further rate cuts on the horizon. ‘We tentatively expect another 25bp cut in February 2012, although this will be data dependent.’
With more rate cuts in the air, the Australian dollar will become less attractive to yield-seeking investors and could depreciate a touch.