Plus CA Change - Caton’s Corner Financial News - August 2010

Has the world turned a corner and are the developed nations now back on the road to recovery? Chief economist Chris Caton shares his insights.
By: BT Financial Group
 
Aug. 25, 2010 - PRLog -- I have spent most of the past month in the US and UK in my relentless search for new economic information, and in my partner’s equally relentless search for new shoes. It would be wrong to call it a fact-finding trip. It doesn’t help just to be in a country if one is largely cut off from one’s primary sources of information.

We all know that the world has gone wireless, but I was unaware that the internet café has gone the way of the dinosaur in both the US and the UK. The only one I found was in the bucolic town of Caton, just outside Lancaster. (Been there, done that, but the Tourism Office was closed, so no T-shirt!). And there are few if any cables in hotel rooms. Accordingly, if one works for an organisation that does not permit access to OP’s wireless networks, one’s work laptop just becomes extra weight in one’s carry-on luggage.

Nevertheless, in my quest for knowledge, I did take the time to scour Wall Street from one end.

When I left Australia, the major issues vexing markets included government debt, exemplified most prominently by concerns about Greece, a possible slowdown in China and a possible “double dip” in the US economy in particular, and in the world economy in general. None of these fears has been realised, and none of them has dissipated, although Greece seems to have been put on the backburner, at least for a while.
None of this should be surprising.

Slowdowns in China and double dips in the US have one thing in common; they are frequently forecast (or perhaps just feared) and they almost never happen. There have, for example, been twelve recessions in the US in the post-war period. There has been just one double dip (1980-82) and one prolonged slow recovery (early 2000s).

In the case of China, there is concern that the tightening of policy there may be overdone. It is worthwhile reminding ourselves that China’s economy has a huge amount of momentum, and that the tightening measures in place are very targeted, primarily at the overheated residential property sector.

Those who bet against Chinese slowdowns are not always right, but they generally finish in the money.

It is not hard to see where the continued concern that the US and world economic recoveries will falter comes from. There are still problems. And much of the impetus to date has come from policy stimulus and the inventory cycle.

Looking forward, the influences of these must fade. But this is a reason to expect a slow recovery, rather than none whatsoever. And even slow recoveries generate earnings growth, the lifeblood of share markets.

As this note goes to press, the US has just received its official growth figures for the June quarter. To cut a long story short, these figures show that growth in the past year has been the highest in five years. Revisions to history also show that the recession was even deeper than previously estimated.

Despite the lingering problems, markets did fairly well in July. After a poor start, the US share market rose by almost 7%, while the Australian market had its first positive month in four, rising by 4.5%. I continue to believe that there are more (unsteady) gains ahead.

Some good news on the inflation front
In case you missed it, Australia got some good inflation news for the recent June quarter.

Despite the big increase in tobacco taxes, the overall CPI rose by just 0.6% in the quarter, and both it and so-called “underlying” inflation are now within the Reserve Bank’s target range. Accordingly, there is no reason for the RBA to hurry to raise rates further. The Bank may still need to increase the cash rate eventually, but November now looks like the earliest plausible month.

By Chris Caton
Chief Economist, BT Financial Group, Australia
www.bt.com.au

The views expressed in this piece are the author’s alone. They should not be otherwise attributed.

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BT has been helping Australians create, manage and protect their wealth since 1969 and today, is one of Australia’s leading providers of superannuation, investment and insurance products. We are owned by the BT Financial Group (BTFG), the wealth management arm of The Westpac Group. Visit http://www.bt.com.au.
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Source:BT Financial Group
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