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Mar 21

My 5 Minute Economic Update

Whilst many have declared the global financial crisis over, lingering side effects are still prevalent in numerous forms throughout the world. The financial crisis started as a credit crisis amongst the banks but has now moved to credit concerns amongst some of the governments of the world. Recent financial news has centred on the debt problems of Greece, however there are broader debt concerns across Europe and it is focused on a group of countries with an unfortunate acronym, PIGS, Portugal, Ireland, Greece (stil), and Spain. Germany and France have indicated they will not let Greece fall, but for each of the PIGS there are still government debt problems to sort out but with an unfortunate solution. Simplistically, because they all have the same currency, the Euro, they cannot easily attract foreign investment due to an inability to depreciate this shared currency. Unfortunately for the PIGS, they may be looking at years of price deflation to become competitive again and this will most likely result in continued recession.

In the US, the central bank has continued to leave their cash rates close to zero percent indicating strong economic growth is still some way off and this is supported by mixed economic data shows little direction for the economy. Unemployment remains close to 10% and with talk of Obama winding down some of the stimulus measures; it is difficult to see where US economic growth will be coming from.

On the positive side, the Australian economy continues its forward march and the December quarter’s economic growth figures indicated growth at around 0.60%. Unemployment continues to drop and is currently at 5.3%. These positive results along with a buoyant property market and continued strength of one of Australia’s largest trading partners, China, also resulted in another increase to the Cash Rate to 4% on March 2. The Reserve Bank continued to warn there may be more increases to come.

After some poor sharemarket performance in January, primarily due to the Greek debt concerns, local sharemarkets provided a positive return of 2.2% for the month of February. Global sharemarkets were mixed with February returns being positive in both the US (+2.9%) and UK (+3.2%) and negative in wider Europe (-1.7%) and Japan (-0.7%).

Moving forward, the likely growth drivers of the Australian economy will continue to come from China, and the primary risks will relate to the sovereign debt issues of Europe, rising interest rates locally, and unwinding existing fiscal stimulus too quickly. Unfortunately the song remains the same and whilst the worst of the global financial crisis may be behind us, numerous significant risks remain.

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