Downturn could be worse than expected: Economy roundup

Economic woes in the US and around the world could be set to get much worse before they get better, the Bank of International Settlements in Switzerland has warned.

Economic woes in the US and around the world could be set to get much worse before they get better, the Bank of International Settlements in Switzerland has warned.

The BIS – known as the central banker’s central bank – says there is significant risk the US could go into recession, while the world could see enter its most serious economic crisis since World War II.

“In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation,” BIS says in its annual report.
“Their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect. At the same time, inflationary forces, particularly in emerging market economies, could also prove unexpectedly strong and persistent.”

The BIS warns the world’s central banks that they shouldn’t respond to the crisis by cutting rates, over-easy credit in previous years being one of the key causes of the trouble we find ourselves in now.

All that sounds a bit out of tune from an Australian perspective, of course, with today’s Reserve Bank of Australia meeting expected to devote much more time to the reasons for a rate hike than a cut.

While the market consensus is that the RBA will announce no change to rates at 2.30pm this afternoon, the key question for the future is when – or if – signs of a slowing economy are going to feed into a lower inflation rate.

A further significant pointer to the weakening economy has emerged today, with the Australian Industry Group-PricewaterhouseCoopers Australian Performance of Manufacturing index for June tumbling 4.2 points to 47, pulling it below the key 50 point line separating growth from contraction.

“Pressures on manufacturers from factors such as the high dollar and interest rates and the weaker global economy are being compounded on the ‘supply side’, by rapid increases in the costs of fuel and other key inputs such as steel and agricultural goods,” AIF chief executive Heather Ridout says.

And the SAI Global-Australian Chamber of Commerce and Industry investor confidence survey of more than 1200 business shows a strong decline in market conditions, with key measures such as sales, profits and investment levels all falling over the three months to June.

Businesses also reported declining confidence in the outlook, with most business saying the expect business conditions to weaken and sales and profits to fall.

On the markets today, the S&P/ASX200 has got off to a slow start for the new financial year, falling 0.3% on yesterday’s close to 5197.9 at 11.20am.

The Australian dollar has also fallen back a little from yesterday’s 25-year high of US96.68c to be trading at US95.77c at 11.20am.