There is a marked contrast in global economic activity which is growing almost daily.
The contrast that is, not the activity!
China, which is obviously now a key driver of global activity, has kept its policy options open while watching western economies struggling to come to unprecedented levels of debt.
The well-worn expression “When America sneezes, the world catches a cold” while probably true about the start the global downturn in 2008 won’t apply in the future. We will have to substitute China for America! Interestingly the expression was originally coined for France! Live and learn!
The fate of the Australian economy now sits firmly in the hands of the Chinese as probably does the rest of the world.
Today’s better than expected PMI Data from China, still below 50 but up to 49.1 from 47.9, together with better than expected domestic, data saw the AUD rally strongly from its lows. Elsewhere in Asia regional currencies are strengthening and a fair proportion of the blame for that (according to the ADB) lies with U.S. policy.
Both Hong Kong and Singapore have seen their currencies surging. The HKMA has been intervening to weaken their currency. Japan which is viewed outside of emerging Asia is gaining some relief as their currency weakens on expectation of further monetary easing.
Zero interest rate policy has been in place in Japan for nearly twenty years so they, like the West, have limited further initiatives to stimulate the economy.
It was always expected that Asia would recover from the global downturn quicker than the West but what is becoming a worrying trend is that there are Western economies that are still in recession and in those that are growing, primarily Germany and America, growth is both weak and fragile.
The austerity policies that have been forced upon a number of economies in Europe together with high levels of unemployment have raised Governments borrowing requirements as tax receipts have fallen and benefit payments risen. It is a vicious circle that will need to be broken is a sustainable recovery is to take hold. In the U.S. growth is patchy and economic data difficult to discern a trend from. With the election now less than two weeks away, irrespective of who is elected, the economy is clearly the no.1 priority for the President
Today’s major risk event is ECB President Draghi’s “testimony” before the Bundestag in Germany. It really shows the power Germany now wields in the Eurozone that an Official from an EU-wide institution feels it necessary to testify to a domestic Parliament.
On the data front, the IFO index of German economic activity is released later. It is expected to show a slight improvement from last month’s figure which was the weakest in more than 30 months. Sentiment indices are generally “bumping along the bottom” in Europe not showing any recovery but not weakening to any degree either.
In the U.K. the BoE Governor said in a speech that the MPC is prepared to stimulate the economy further should be fledgling recovery being seen there start to weaken. Sterling fell to six week lows yesterday but managed to find some support around 1.5900.