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Economic Risks Mount Around the Globe

Thursday, 23 June 2011 07:17 AM Current | Bio | Archive

I don’t think it’s an overstatement to say that major economic blocs are struggling with fiscal austerity and the growth-sapping impact of elevated commodity prices.

There’s an indisputable risk out there to growth projections slowing as already signaled on June 14 by the OECD composite leading indicators (CLIs).

If confirmed, for investors it’s important to take notice that this could feed back into a second leg down for commodity prices following their already sharp retracement in early May.

Interestingly, Bloomberg reports refined-copper imports by China tumbled to the lowest since level November 2008 as the world’s biggest consumer of the metal continued destocking, lowering local prices and making it largely unprofitable to buy from overseas. Inbound shipments dropped 47 percent from a year ago, according to Bloomberg News calculations based on data provided by the Chinese General Administration of Customs.

For now, it is a fact that the still-developing Greek “contagion” is infecting more entities and places.

Here’s what’s going on with some key players that could easily impact negatively the commodity markets in the near term:

• The Greek government may well have taken a step further in securing the funding that it so desperately needs, but the fact remains that the proposed new midterm plan that includes 6.5 billion euro ($9.4 billion) in fiscal consolidation for 2011, almost doubles the existing austerity measures that have so far proved to be self-defeating.

Investors shouldn’t forget that Greece has, after all, a relatively small economy and the government has no monopoly of economic strife.

Seemingly, the decision-makers in Brussels, Athens, Frankfurt, Paris, etc., didn’t remember Albert Einstein said: “We can't solve problems by using the same kind of thinking we used when we created them.”

• The IMF states that Spain faces considerable risks to its recovery in the near term and financial conditions could deteriorate further, reflecting rising concerns about sovereign risks in the euro area, which could put additional pressure on sovereign and bank-funding costs for Spain, which in turn could feed back to the real economy.

• In Ireland, there are also clear indications that the EU/IMF-prescribed austerity isn't delivering the expected economic results in this country either, with no appreciable growth expected this year.

• On June 17, Moody’s threatened a downgrade of Italian debt citing “challenges to growth emerging from structural weaknesses and a possible raise in interest rates.”

• The German economy has remained somewhat “aloof” from the trouble that surrounds it, especially in the PIIGS (Portugal, Ireland, Italy, Greece and Spain) countries. But now in Belgium, output and new order growth are both slowing sharply. From its side, Capital Economics forecasts a mere 1.5 percent growth for the German economy in 2012.

• The ECB has stated on June 9 that “… risks to the outlook for price stability are on the upside. Accordingly, strong vigilance is warranted…” hereby signaling the markets that another eurozone rate hike is on the way.

• Finally, on this other side of the Atlantic, the United States is currently experiencing a period of soft growth with industrial production and retail sales surprising to the downside in May and although core inflation remains relatively muted, it has been on the rise with headline inflation now at 3.6 percent.

Besides, U.S. unemployment remains stubbornly high and a report from the U.S. Conference of Mayors concludes that (only) by December 2014 over half of metro areas will have returned to their previous peak employment level. Keep in mind that the report’s forecasts are based on assumptions Congress will extend the debt ceiling without any disruptions to the national and global systems.

I’d like to say it must be hoped that U.S. headline inflation, at 3.6 percent, doesn’t drag up core prices to the point where the FOMC must “prematurely” convey its plans for monetary policy normalization.

I have already commented here before on the rather dark medium-term picture that zooms in on possible outcomes from the commodity price boom, in particular drawing a number of comparisons with 2008.

Although the Thomson Reuters/Jefferies CRB Index (TR/J CRB), commonly called the CRB commodity price index, has bounced back over the past couple of days, it still is 9 percent off its April highs hereby reflecting, at least in my opinion, the inability of many commodities to recover lost ground.

As things stand on the economic front across many, but not all, of the world’s major economies, it would seem that the prospects of their doing so may be diminishing steadily as the year progresses.

Besides all that, and because uncertainties abound all over the place, with the eurozone taking the first place, I think it could be a prudent idea to sell into any euro rebound and prepare for the greater issues that loom ahead. Anyway, it’s everybody’s choice, but I, from my side, remain “risk off.”

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I don t think it s an overstatement to say that major economic blocs are struggling with fiscal austerity and the growth-sapping impact of elevated commodity prices. There s an indisputable risk out there to growth projections slowing as already signaled on June 14 by the...
Thursday, 23 June 2011 07:17 AM
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