Over the past few weeks most of the economic news from Australia’s major trading partners has been fairly good. As a result the Australian stock market has continued to rise along with markets in Europe, Asia and the United States. But before we get too carried away it is probably a good idea to look beyond stock prices in order to check how the global economy is really faring.
At the moment there is plenty of good news around. The U.S. economy appears to be crawling out of recession or at least near the bottom of one, U.K. housing prices have stopped falling, the Japanese economy is growing again and China is expecting it’s economy to grow at 9% this year.
In Australia the economy has so far avoided a technical recession, housing prices have not collapsed and although unemployment has crept higher, the labour market is showing signs of resilience.
But it is important to remember that all we are really seeing at the moment is evidence that the global economy has avoided a world wide depression. That is of course good news, but we need to appreciate that it will probably take some years before many nations recover from the 2008 credit crunch and even longer for them to get government debt under control.
As I have mentioned a few times before stock markets tend to look ahead, so the global rally we have since since the March lows has been driven by the belief that the worst of the global economic crisis is now behind us. Yes there will be challenges ahead, but for now the global economy appears to have dodge a bullet and so investors have been getting back into stocks.
So how is the global economy really doing at the moment? Well one way to get a “feel” for how the global economy is doing is to look at the Baltic Dry Index (BDI) which gives us a good insight into how global trade is holding up
Baltic Dry Index (BDI)5 Year Chart (September 2009)
This chart of the BDI not only highlights how global trade fell into a heap after September 2008, but also illustrates that trade has picked up again although the BDI is still a long way below the levels seen in 2007 & 2008.
There is always a danger that we can read too much into charts and so I would suggest that all the BDI indicates at this stage is that we have come off a low and it appears to be stabilising at around levels seen in 2006. In other words the global economy has avoided a major meltdown, there are signs of a recovery but it is too early to say long term growth has returned.
We can see this sort of activity reflected on another gauge of global economic health – the consumption of liquid fuels.
Again this chart demonstrates how the financial crisis of 2008 hit the real global economy. The drop in fuel consumption in the U.S. in 2008 & 2009 illustrates just how severe the recession has been and has resulted in oil prices remaining subdued. It is interesting to note that so far in 2009 China is the only major consumer of liquid fuels that saw a growth in consumption.
Next year however the U.S. Energy Information Agency (EIA) expects the consumption of liquid fuels to return to growth again and in fact demand is probably already creeping up now. Just like the BDI, the consumption of liquid fuels suggests a bottom has been reached and some growth is returning to the global economy..for now.
Finally a quick look at some exchange rates will give us some further global economic indicators to consider. As I mentioned back in Global market news – what is it telling us? I expected the Australian Dollar (AUD) to strengthen against the Japanese Yen (JPY) as investors appetite for risk slowly recovered. As you can see from the graph below this is what has been happening.
Australian Dollar (AUD) versus Japanese Yen (JPY)
The AUD/JPY is a very good currency pair to watch as it tracks investor confidence and fear very well. Recently when AUD has been weak against the yen this has coincided with a fall in investor confidence and then when investors become bullish again, the yen falls against the Australian dollar. I would expect at this stage that after September the Australian dollar will probably break through 80 JPY again and set a new high for the year.
Then we have the U.S. Dollar (USD) which seems to be in a free-fall against most other major currencies.
Australian Dollar (AUD) versus United States Dollar (USD)
I mainly keep an eye on the U.S. dollar so that I have some idea how Australian exporters may be faring. Generally speaking a stronger AUD against the USD reduces their earnings and so I would expect many Australian exporters or those will significant overseas operations would be feeling some pain from a strengthening AUD.
For investors tracking the gold price in USD they also need to factor in the strengthening AUD. Remember gold is creeping up in U.S dollars terms because the value of USD is sliding backwards, not because there is a gold rush. Gold in AUD terms is not doing nearly as well.
So my view of the global economic situation at the moment is that the worst is behind us this time around. For the next few quarters we will probably see continuing signs of economic recovery as hundreds of billions of dollars of government economic stimulus money is tossed around while governments across the OECD rack up enormous debts.
For now, I think we can breath a little easier, but some time in the not too distant future Australia and many other developed nations will need to cut back on economic stimulus spending and deal with a pile of debt, and that is when things will become really interesting.