The April edition of World Risk Developments from Export Finance and Insurance Corporation (EFIC) observes that bullish sentiment about the world economy since the start of the year has begun to wane over the past month as downside data replaces the positives.
Recent trends include a renewed widening of peripheral bond yields in the eurozone, a weak March payroll report in the US and a soft-ish March quarter GDP number in China. The spike in eurozone sovereign bond yields is the most worrying of the three trends, serving to emphasise that the eurozone debt crisis is far from over.
Most immediately, it signals a growing danger that Spain may be forced to seek a bailout from the EU-ECB-IMF troika, joining Greece, Ireland and Portugal.
In its latest world economic outlook, the IMF actually upgrades its forecasts a touch from January, while also emphasising the predominance of downside risks.
Prof Eswar Prasad of the Brookings Institution terms the global recovery as 'sputtering’, with his widely-watched TIGER index showing that the economic weakness extends across the Group of 20 leading economies, though advanced economies have deteriorated more than developing ones.
According to the Reserve Bank of Australia, 'recent information is consistent with the expectation that the world economy will grow at a below-trend pace this year'. Below-trend growth in the North Atlantic may not impact Australia much since 70% of its exports now go to Asia.
The Chinese slowdown however, is cause for concern as it impacts commodity export prices, commodity export volumes and Australian resource investment.
EFIC’s World Risk Developments newsletter concludes that there will certainly be effects at the margin, but it is premature to call an end to the boom.
While the RBA’s A$ commodity price index has retreated 10% from its August 2011 peak, this takes it back to only January 2011 levels and remains well above long run averages. Besides, Australian exporters have been selling more volume even as they have been receiving lower prices.
Finally, this situation of falling prices, but rising volumes and values is expected to continue, according to the Bureau of Resources & Energy Economics.
The Chinese slowdown could also undermine the resource investment boom now underway, but it would require the slowdown to be far sharper to have any impact. Current and forecast prices are well above operating costs for most existing coal and iron ore mines and gas fields, and above operating and capital costs for most planned projects.
EFIC is the Australian Government’s export credit agency, providing finance and insurance solutions to Australian exporters.