Leaning towards America's seat on the seesaw

In a way the IMF’s playing catch-up with stock market attitudes to US and China growth. And Australia’s stuck between the two countries, tilting a little towards America.

Last night on the ABC News I had a chart of the US, Chinese and Australian share indexes this year that showed Australia is smack in the middle of the both, leaning a bit towards the Wall Street (it can be found here).

That about sums up where we are: stuck in the fulcrum of the America/China seesaw, in more ways than one, perhaps.

This morning the IMF has dropped its forecasts for China’s growth in 2014 from 8.3 to 7.7 per cent and for America’s from 2.9 to 2.7 per cent, partly because of the impact of slower than expected growth in emerging economies like China and partly because of cuts in government spending.

World output in 2014 is now expected to grow 3.8 per cent in 2014, not 4 per cent as previously thought.

In a way, the IMF is just catching with the share markets, which adjusted their outlook in May and June and are now back in optimism mode. Last night, for example, Wall Street stocks ignored the IMF’s forecast adjustment and went up another 0.7 per cent.

The S&P 500 has now rallied 5 per cent in three weeks, the Vix index of volatility has collapsed again after its annual mid-year spike and the Australian dollar touched US92 cents again last night (although it probably hasn’t stopped falling just yet).

So who’s right, the markets or the IMF? Well, share traders tend to forecast about three out of every two economic recoveries and two out of every three recessions. Economists go the other way around (economics is not called the dismal science for nothing).

And although the IMF has lowered its forecasts, it’s still forecasting reasonable growth next year, in China (7.7 per cent), the US (2.7 per cent) and the world (3.8 per cent).

Australia, as usual, will be somewhere in the middle. As discussed last week, this country goes into 2014 with the lowest interest rates in 50 years (probably even lower by then) and a 12 per cent currency depreciation, so far.

As Reserve Bank Governor Glenn Stevens pointed out in a speech last week, non-mining business investment looks poised to pick up, as does housing investment, after being low for “an unusually long period”.

In general, his speech was a bit of a pep talk, in his usual understated way: “we have a better starting point going into this episode than we might have had, or than we have had on other occasions.” The main reasons for that are low inflation, low debt and no asset price boom – some of which is due to the strength of the Australian dollar.

Yesterday’s big fall in the NAB business conditions survey for June – back to 2009 levels – was surprising considering that the dollar had been falling since early April which should be flowing through to improved conditions by now.

But business confidence improved slightly, and Roy Morgan’s measure of consumer confidence improved a lot.

As Glenn Stevens said last week: “much depends on ‘confidence’ – that intangible thing that is hard to measure and very hard to increase. We are talking here about confidence that the future will be characterised by growth, that there will be customers for products, that innovations are worth a try, and so on. That confidence seems pretty subdued right now.”

According to the Roy Morgan surveys, which interview a lot more people than the NAB one, both business and consumer confidence have dipped between April and June this year but looked at over the longer term – from mid-2011 – they are both gradually trending higher.

Looking ahead, this Christmas seems likely to be characterised by low interest rates, lower currency, a definite election result rather than a hung parliament (hopefully) and a stronger housing market. Europe seems to have bottomed, the US economy is coming back and so is Japan’s, thanks in both cases to extraordinary monetary stimulus.

Against that the news out of China could be troubling, as that country grapples with its high debt, economic imbalances and slower growth.

And Australia? Well to quote Gerry Rafferty: “Clowns to the left, jokers to the right – here I am, stuck in the middle with you.”

Alan Kohler will be debating Malcolm Turnbull on Coalition NBN policy at a business lunch at the Sheraton Wentworth in Sydney on August 1. To book a ticket click  here.

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