September 13, 2011
NEW data overnight from the Organisation for Economic Co-operation and Development has indicated that a sharp downturn in the global economy is under way, a fear that is already roiling global stockmarkets.
The OECD's so-called composite leading indicators (CLIs) are a new flashpoint for investors to absorb, indicating a downturn not just for most OECD countries, which are loosely the major Western economies, but also for the major non-member economies, including China.
The CLI for the OECD's 34 member nations fell by 0.5 of a point to 101.6 in July from 102.1 in June, the fourth consecutive monthly decline.
"Compared to last month's assessment, the CLIs for Canada, France, Germany, Italy, the United Kingdom, Brazil, China and India are pointing more strongly to a slowdown in economic activity," the OECD said.
"The CLIs for the US and Russia are now also pointing more clearly to a slowdown in economic activity than in last month's assessment."
The OECD's leading indicators are based on a wide variety of data sources and are designed to show the switch from expansion to slowdown of economic activity. Last week, OECD economists lowered growth forecasts for the Group of Seven leading economies and called on central banks to intervene to avoid recession.
European markets plummeted last night. Falls in France and Germany were particularly steep, down about 4.0 per cent and 3.0 per cent respectively. Despite the declines, senior business leaders called on Australian policymakers not to overreact.
Future Fund chairman David Murray urged Canberra and the Reserve Bank to hold their nerves and not take precipitous action as global sharemarkets tumbled amid concerns that a debt default by Greece could trigger a contagion that infects Australia.
With local equities suffering their second-worst one-day fall in the past two years, Mr Murray said the economy was still growing, but inflation was "not low". "There's not much of an excuse to lower interest rates; the economic settings are not there," he said.
"If it's about funding and liquidity, the central banks can deal with that, so I'd say it's time for a steady hand on the tiller. Then if there's a noticeable fall in growth, the RBA will have the capacity to act (on interest rates), because inflation will presumably have fallen."
The Future Fund chief's comments came after the S&P/ASX 200 index tumbled 156.2 points, or 3.72 per cent, to 4038.5.
The Australian dollar was also hammered, falling more than US3c to $US1.0307.
Last night, French banks BNP Paribas, Societe Generale and Credit Agricole were smashed by more than 7 per cent amid speculation that Moody's could slash their ratings this week because of a heavy exposure to Greek debt.
Five-year credit default swaps that insure Greek sovereign bonds indicate a 92 per cent probability that Greece will default.
Germany is reportedly preparing a plan to recapitalise its banks with a heavy exposure to Greek bonds if the default does occur.
Meanwhile, the big four Australian banks were marked down heavily yesterday due to fears of counter-party risk and a potential spike in funding costs from a convulsion in credit markets.
Westpac shed 93c, or 4.6 per cent, to $19.20 while the Commonwealth shed $1.96, or 4.13 per cent, to $45.45 and NAB slid 96c, or 4.12 per cent, to $22.36.
ANZ Bank, exposed to Asian liquidity pools through its super-regional strategy, was down 73c, or 3.66 per cent, to $19.21.
UBS strategist David Cassidy said the market was worried about a global financial crisis mark II, causing the financial system to seize up. "It's not my base case, but I think risk is going up. Ultimately, policymakers would respond, it's just the timeline that's worrying people."
Mr Cassidy agreed with the Future Fund's Mr Murray that the RBA had plenty of firepower in reserve if things were to turn nasty, with the cash rate high compared with other Western countries at 4.75 per cent.
But their sanguine view was by no means unanimous.
Former Merrill Lynch Australia chief executive Greg Bundy attributed the volatility to "some of the pain we have to go through for the market to hit the bottom". "We're getting pretty close," he said. "There's a window of opportunity here for the RBA to cut rates by 50 basis points in one hit, bring the Aussie dollar down to, say, US95c and set the table for a market recovery. With inflation down around 2.8 per cent, it's not a major worry right now."
Article by Richard Gluyas From:The Australian
Additional reporting: Andrew Main