Export Finance and Insurance Corporation (EFIC) takes a look at the world economy over the last six months in the latest issue of their newsletter, World Risk Developments. EFIC is the export credit agency of the Australian Government.
Some of the events that had an impact on the world economy included the Arab Spring and associated rise in oil prices, the Japanese earthquake and tsunami, the US government’s financial crisis and escalating Eurozone debt crisis.
EFIC chief economist Roger Donnelly says that the optimism is being dialled down since their last stocktake in December 2010 due to these setbacks and the prospect of further knocks over the next year.
Donnelly expects the new knocks to come from three sources: The Eurozone, the United States and Asia.
The Eurozone crisis has not only spread from Greece and Ireland to Portugal but has also begun to threaten Italy and Spain.
The EU will probably be able to manage an orderly workout of the problems with debt relief for the troubled governments, manageable repercussions for European banks holding their debt, and a restoration of market confidence.
Donnelly believes that the risk remains of a disorderly default that jolts markets and bank balance sheets, and leads to a renewed global credit tightening at a time when the North Atlantic economies are already very weak.
Expressing his views on the United States economy, Donnelly notes that it is close to stall speed and is confronting the possibility of a stern financial market reaction if the government can't pay its bills because Congress won't raise the statutory debt ceiling.
Though a last-minute solution will probably be found, the fact that the Democrats and Republicans may remain at loggerheads could impact the economy.
According to Donnelly, Asia is in a different category and not in danger of stalling, but of overheating. Central banks have begun to hike interest rates, but there’s the risk of inflation getting out of control, or alternatively that the authorities overreact to the inflationary threat and kill growth.
Additionally, if the North Atlantic were to go into another severe downturn, Asia would probably not be spared, given its export dependence.
Donnelly concludes by saying that the world economy needs to get out of its current soft patch in the second half of 2011, which would require several things to go right in the Eurozone, the US, Asia as well as the MENA (the Middle East & North Africa).