God knows, it’s no easy job putting that lot together but let’s unpack a couple of assumptions. US growth projected at 2.9%, hmmm…well, maybe. The first quarter of this year was 1.8% and the economy has slowed since then. ABARE own description of the state fo the US economy says it all:
This easing of economic growth in the reflects slow growth in private sector demand and the effect of a withdrawal of fiscal stimulus.
The slow recovery of private sector demand, particularly consumer spending, reflects largely subdued consumer confidence and weakness in the labour market. The unemployment rate was at 9.1 per cent in
Improvement in housing activity has been slow, with new home construction at an annualised pace of 523 000 units in April 2011, compared with 478 000 units in April 2009 at the height of the global financial crisis.
Inventory rebuilding and exports, supported by a sharply weaker supporting economic activity. Industrial production expanded at a year-on-year rate of 5 per cent in April 2011, following growth of 5.3 per cent in
Although growth in the manufacturing sector has been robust, it has not been sufficient to significantly improve the labour market. In the first five months of 2011, only 16 per cent of the 783 000 jobs created were in manufacturing.
On ABARE’s own description, the 2.9% GDP projection for 2012 looks heroic.
Next is China:
Economic growth in China remained strong in early 2011, with real gross domestic product expanding at a year-on-year rate of 9.7 per cent in the March quarter 2011, following growth of 9.8 per cent in the December quarter 2010.
Domestic demand was the main driver of economic growth in recent months, while strong external demand also made a significant contribution. Growth in consumer and business spending remains solid, albeit at a rate marginally slower than that achieved in 2010. Retail sales rose at a year-on-year rate of 16.9 per cent in May and 17.1 per cent in April 2011. Growth in fixed asset investment increased by 25 per cent year-onyear in the March quarter 2011, compared with growth of 26.4 per cent for the same period a year earlier. Exports continue to grow strongly, rising at a year-on-year rate of 30 per cent in April and 36 per cent in March 2011.
In the face of continued strong economic growth, the monthly consumer price index has risen year-on-year by more than 5 per cent since February. In particular, food prices have risen markedly since early 2011, with year-on-year increases of 11.7 per cent in May and 11.5 per cent in April 2011.
The sharp rises of food prices have led the Chinese Government to implement a number of measures to ease inflationary pressures. Since August 2010, interest rates have been raised four times, to 6.31 per cent in late May 2011, and bank reserve ratio requirements have been increased five times
Judging by 2012’s projected 9% growth, we’re in for a soft-landing. Fact is, though, that the only way I can see US growth returning to trend levels is through further stimulus measures. If they be monetary, then China will be wrestling with a lot more rate hikes and the soft-landing looks problematic, though we will hit higher commodity prices before it blows up. If US stimulus is fiscal, then perhaps the ABARE scenario is more plausible. If there is none, then that will drag down world growth via insipid US demand and a long term equity bear market.
The Japanese recovery looks fair at 2.2% growth. And a decelerating Europe also is also sensible, with the exception of the UK, which is somehow going to ride austerity to an accelerated 2.1% growth rate.
You can’t, of course, forecast on the basis of oncoming crises. So, I can’t blame ABARE for assuming there’ll be no European accident. But if there is, these forecasts will go out the window.
All things being equal, however, Europe isn’t going to matter all that much for commodity forecasts.
So, let’s take a look at those:
One word pretty much covers it: Up. The big gains in iron ore and coal are not as aggressive as they appear. For iron ore, the growth in large part arises from a full year of contract prices around current levels. For coal, it’s the same, but without a big dent arising from floods.
Even so, in my view, without some new round of US stimulus, we will not hit these projections.