Global Economic Update April 2012

Even after 2011 and its series of natural disasters, one would imagine that the world is looking to be in a better state of play than it was last year.

What remains though is the ongoing bank and sovereign debt issues throughout Europe, recession is possible

in the Euro zone and world oil prices have risen and continue to rise. Paying $1.60 plus at the pump is not anyone’s cup of tea. Looking at the brighter side of life, what is considered to be the world’s biggest two economies the US and China have positive signs of growth.

Australian equities lag the US

With the S&P 500 index breaching 1,400 in April, a 25% rise from August 2011, the ASX 200 continues to lag in comparison. Australian commodity prices such as coal and iron ore have dropped in price off their peaks and yet continue to retain a premium. Seeing the uncertainty of the European debt crisis the RBA continues to remain conservative with unchanged interest rates. Although opposing this, the banks have increased their rates, suggesting a continued higher cost of funding.

Australian economic factors

As for the local Australian economy, it seems to be surviving if somewhat patchy in some areas, it’s the solid performance of the resource sector that is backing it, which is also attracting and generating continued business investment.

A strong resources sector is a warning that inflation may increase due to the high Australian dollar with continued pressure from a lack of consumer spending. All of this is not helping even though inflation remains a steady 3 per cent according to recent RBA figures.

Although unemployment remains within the 5 to 6 per cent range, some of economic variables are showing significant changes, which is leading to an increase in unemployment in some sectors of the economy. In particular the sustained high Australian dollar has hurt export competitiveness and dampened the tourism sector.

Where will the global economy go from here?

Europe will continue to remain in the spotlight for the remainder of 2012. While there have been some signs of stabilisation and recent business confidence surveys have revealed greater optimism, there is continued weakness in the labour market and little freedom for government spending.

The US has seen positive economic data in the labour market and the significantly weak housing market has shown signs of recovery.

The Australian economies resilience will continue to hinge upon the strength of its trading partners in the Asia region. Particularly the Chinese economy will be a big focal point. Significant weakness has been seen in the Chinese property market and Asian equities continue to underperform their US and European counterparts.