A collapse in world trade, particularly in the Asia-Pacific region, and a sharp drop in economic growth for China have significantly heightened the downside risk to Australia’s outlook, according to a new report released by credit reporting and business intelligence firm Dun & Bradstreet (D&B).
The quarterly Global Economic & Risk Outlook Report states that recent months have seen an outright collapse in world trade, particularly in the emerging markets of East Asia. This has resulted in a further downgrading of world economic growth for 2009 to -1.2% led in large part by further deterioration in China and Japan.
Those economies are now forecast by D&B to post growth of 3.5% and -3.8% respectively for 2009.
Australia’s growth for 2009 is now forecast by D&B at -0.2%.
As a consequence of these challenges 70 countries have had their risk rating downgraded over the last 6 months and more are expected to suffer the same fate as 2009 progresses. The number of risk downgrades peaked in November, before dropping off over following months, but have begun to rise again in February and March 2009.
One of the key challenges for the world economy over coming months will be protectionist tendencies as governments seek to manage the political consequences of recession.
The most obvious of these is the ‘Buy American’ clause pushed by many members of Congress in President Obama’s USD787bn stimulus plan. However, there are a number of other less obvious examples such as the support for ‘domestic’ car industries, which in turn raises the risk that other countries may also be tempted to apply explicit nationalist provisions to the support they provide to domestic industries.
Of even greater concern than these more traditional forms of protectionism is the potential rise of ‘financial mercantilism’. These policies aimed at shoring up domestic banks can lead to restrictions on international capital flows, exacerbating financing problems in the affected countries and prolonging the downturn as banks retreat into domestic lending and financial markets. The regions most exposed to this risk at this stage is Central and Eastern Europe
which are witnessing capital outflows creating potential funding problems moving forward.
For Australia, the slump in world trade is a double whammy as exporters contend with a decline in demand for both finished and raw products. Since the September 2008 quarter some of Australia’s key trading partners in the region – including China, South Korea, Hong Kong and Vietnam – have suffered risk downgrades largely due to the impact on manufacturing supply chains. This has contributed to D&B lowering its growth forecast for Australia in 2009 from 0.5% to -0.2%.
While there are a number of concerns for Australia, the most significant will be the decline in forecast economic growth for China, which has fuelled much of Australia’s growth over the last decade. D&B is forecasting economic growth for China for 2009 of 3.5% in spite of a rally in stocks since late 2008 and a strong hike in new bank lending in January 2009. D&B believes the share market rebound represents a ‘bear market rally’ and that while the new lending was a 101% rise year on year, it is highly likely that much of this money found its way into the share market or term deposits rather into working or investment capital. This means the rise in bona fide new loans may have been just 19% year-on-year.
Change in risk ratings
Meanwhile, while the upward trend in the Baltic Dry Index over recent weeks reflects a recovery in iron-ore imports, but other measures of industrial activity remain deep in negative territory.
Electricity production fell 12.3% year on year in January and goods exports nationwide fell 17.5% year on year. Critically for Australia, Chinese imports plummeted 43.1% year on year in January. It remains unclear how mass staff lay-offs will impact the political and social environment.
Beyond the Asia Pacific region another clear example of the slump in world trade is Europe where its largest economy, Germany which remains highly export orientated, posted its worst performance since 1990. D&B is forecasting -2.4% growth for Euroland in 2009.
Dun & Bradstreet CEO Christine Christian believes the deteriorating global outlook reinforces the data coming from D&B’s domestic Business Expectations Survey and Trade Payments Analysis.
“Clearly the worst is yet to come and Australian executives have recognised this in the expectations for declining sales and revenue in the June quarter”, said Ms Christian.
“The mass country risk downgrades, slump in world trade and forecast decline in growth for many of our key trading partners all point to a deteriorating outlook. This requires a unique balancing act from the Australian Government. They need to continue to stimulate the Australian economy but do so in a way that avoids contributing to protectionist trends, both manufacturing and financial, around the world.
“The question is not whether the government’s stimulus package can stop Australia sliding into recession but rather how much worse would it be without government intervention?
“For Australian businesses the only way to survive this environment is to focus on the fundamentals. Effectively assess and monitor risk, tightly manage cash flow and market to those customers who represent the best risk.”
Country risk outlook
United States: A number of key policy announcements and decisions were made in February. In terms of economic policy, President Barack Obama signed his stimulus package into law on 17 February, three days after Congress agreed the final, USD787bn version of the bill. Of these funds, 36% will be tax cuts for households and businesses, and 64% spent on infrastructure, healthcare, education and other social priorities.
United Kingdom: The UK’s economic risk outlook has worsened significantly since mid- 008. As a major trading nation with an open economy, the UK is highly vulnerable to any downturn in world trade. As a result, the collapse in global trade levels in the final months of 2008 will deeply affect the UK, despite some competitive advantage conferred by a drop in the value of sterling (which makes UK exports cheaper in local currencies).
China: The outlook for China remains negative, in spite of a rally in stocks since late 2008 and a surprisingly strong hike in new bank lending in January 2009. In D&B’s view, the underlying picture for exports and output is still extremely negative. The CNY4trn (USD585bn) government stimulus package is the only real guarantee against an outright recession in 2009 and D&B continues to believe that if the economy manages to grow in 2009, this will have been a remarkable achievement.
Japan: D&B downgraded Japan’s rating to DB2b from DB2a in February 2009, and the data already support our assertion that the country is facing its most intense recession since the first oil shock in the mid-1970s. The GDP data for Q4 2008 showed that the economy contracted by 3.3% in seasonally-adjusted terms from Q3. This amounts to a 12.7% decline in annualised terms, the worst performance since Q1 1974. The main culprits have been investment and exports; private consumption had yet to be seriously affected in late 2008.
India: In the October-December 2008 quarter, the Indian economy grew by just 4.5% year on year (y/y), its slowest pace in over five years. The slowdown has been more rapid than anticipated, given the Indian economy’s relative reliance on domestic demand vis-a-vis exports.
Flagging investment and the sizeable trade deficit cemented the slowdown, despite a boom in government consumption, which soared by nearly 25% y/y.
Vietnam: Investment in Vietnam’s export-oriented industrial sector has been a crucial driver in the country’s fast rate of economic growth over the past decade. In 2008, capital investment accounted for 43% of GDP. Nearly one third of this investment was funded through FDI (USD11.5bn). However, in the final months of the year, foreign investors’ interest began to wane, and, in January 2009, new FDI pledges collapsed, falling by 88% year on year (y/y) to just USD200m; disbursement of FDI funds was also down in y/y terms (by an undisclosed amount).
New Zealand: Recent data continue to underline the economy’s loss of momentum. Unemployment rose to a five-year high of 4.6% in Q4 2008, from 4.2% in Q3. At the same time, there is more evidence that the formerly buoyant construction sector continues to shrink. New housing construction consents issued in December totalled just 1,127 (the lowest level since January 1987). Moreover, while there was a 20% year-on-year (y/y) fall in residential construction permits, non-residential permits were still up 7.7% y/y, pointing to the potential for even greater weakness in the building sector once business spending slows.