It’s early Autumn in the northern hemisphere and we are on the cusp of the forecast season. Europe and Washington are back in harness after the summer break, finance ministers are again caucusing, Spain and Greece are threatening (again), and the big late-year meetings of the IMF, World Bank and other talkfests are approaching. So spreadsheets are being updated, data getting crunched, soothsayers have been consulted and the runes cast.
From the IMF, the World Bank, the Asian Development Bank etc, new prognostications appear for the rest of the current year and for the next year — and if we are very lucky, for the one after that. Private firms and ratings agencies also give their crystal balls a buff and issue their outlooks.
And economic analysts, governments and the whole gamut of enthusiasts in the media, markets and elsewhere then swoon or swoop on the black letter figures in the reports and turn them into fact, rather than the hazy estimates they really are.
IMF head Christine Lagarde indicated this week that the Fund’s forecasts would be trimmed when the final chapters of the latest World Economic Outlook were released on October 9. That’s the second lowering of forecasts in six months, which says a lot about their worth. In the July downgrade, the IMF projected the global economic growth rate at 3.5% for 2012 and 3.9% for 2013, down from 3.7% and 4.1% respectively in January.
“[G]lobal growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months,” Lagarde said on Monday night. That was dutifully reported, with minimal acknowledgement that the IMF is starting to sound like a broken record on the forecasting front. What’s the bet that with the eurozone sliding, China slowing and the US staggering fitfully towards an election and a fiscal cliff, that the forthcoming IMF estimates will again become redundant?
Standard & Poor’s also revised its forecasts, predicting a deepening in the rate of contraction for the eurozone in 2012, and no growth for next year: it now expects a 0.8% contraction in the eurozone this year and no growth in 2013, compared with previous projections of -0.7% and +0.3%. Spain’s economy is now expected to contract by 1.4%, more than double the previous forecast. The agency also forecasts “another year of very weak growth in 2013 in France and the UK, and further declines in output in Italy and Spain … Recent economic indicators continue to paint a bleak picture for Europe. The data are confirming our view that the region is entering a new period of recession …”
In the Asia-Pacific, S&P’s forecasts slowing growth in all major economies, cutting its base case forecasts of 2012 real GDP growth by about half a percentage point for China to 7.5%; Japan to 2.0%; Korea to 2.5%; Singapore to 2.1%; and Taiwan to 1.9%. We’re marginally down to 3.0% from 3.2%. The forecasts for other Asian economies remain unchanged except for the Philippines, which went to 4.9% from 4.3%, reflecting the ongoing strength of that domestic economy.
“Our lower forecast for China recognises that the central government had elected not to inject an economic stimulus of a size and speed necessary for an 8% growth rate,” S&P said. “It appears that the approach by the Chinese authorities remains influenced by the unpleasant experience of the inflationary effect, particularly on real estate prices, of the stimulus they initiated in late 2008-2009.”
The China slowdown will have a flow-on effect to the export-oriented Asian economies of Japan, Korea and Taiwan, and the trading port cities of Hong Kong and Singapore.
It’s a matter of perspective, though: China’s dip to 7.5% isn’t the 8%-plus growth that some forecasted earlier in the year, but it sure ain’t a contraction, as we are seeing in the eurozone, or tepid growth like sub-2% growth we’re seeing in the US (the third estimate of June quarter growth is out tomorrow night, our time).
That provides some context for a speech in Melbourne last night by RBA Assistant Governor, Guy Debelle (who oversees the country’s financial markets), who discussed his fears that the way back for the global banking and financial system “will be a long one” because it will take a considerable time to rebuilt the trust in the financial system.
“Without trust, the process of intermediation and credit provision will be greatly curtailed. In turn, this will impede the path to global economic recovery with costs to all,” Dr Debelle said. That means Australia and our financial system faces more pressures and risks from offshore, as the RBA laid out in its second financial stability report for 2012 yesterday:
“Along with the weaker near-term outlook for global growth, the euro area problems will continue to pose heightened risks to global financial stability in the period ahead.”
The new Spanish budget, deep spending cuts (and riots) and a coming report on Friday night on Spain’s weak banks and the amount of aid needed to bail them out will underline the RBA and Dr Debelle’s points about the health of banks being crucial to the outlook for the eurozone, Europe as a whole and the rest of the global economy.
Weak banks or recovering banks mean not just calls for taxpayer bailouts, but less lending, tighter criteria and lower levels of economic activity. The bottom line from Dr Debelle’s speech is that without strong banks, which are trusted by markets and by customers and depositors, economic growth is hard to achieve and maintain.
And while Dr Debelle’s comments on bank profitability received media attention, he also flagged a separate issue:
“Given the role that the financial sector plays in the economy, there is a form of social contract between it and the general public. As I have mentioned earlier, the financial sector enjoys a level of support that is not present for other sectors of the economy, because of the crucial role it plays. But leverage implies financial institutions are more vulnerable. We need to consider what the safe degree of leverage is. That is a debate that is being had currently.”
Perhaps not enough: our politicians have defaulted into a bizarre game in which they alternate between defending and bashing banks. More complex issues, like the way a bank like ANZ continues to pursue offshore ventures of the kind that have come a cropper for previous generations of bank executives, knowing that taxpayers will be there to bail it out come what may, attract little attention, certainly in the political arena. Maybe that will change if and when Joe Hockey becomes treasurer and implements his commitment to hold a full inquiry into the financial system.
More broadly, the speech was a message for all those gloomsters in this country about the banks, our debt, the health of the financial system, China’s outlook etc. From US hedge funds who short China and Australia, to the likes of former Future Fund head, David Murray, critics of of our banks (and some senior board members and executives), the message from the latest forecasts is that you can’t have solid, sustainable growth without solid, trusted banks.