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Global economies

Columnist
— 1 minute read
Globally, conditions have improved in recent months, largely driven by strong growth in Asia, which is particularly important for Australia.
In the emerging markets, economic conditions are strong and indeed the bigger threat now is that demand exceeds supply capacity and puts upward pressure on inflation. Commodity markets are already showing strong signs of growing inflationary problems, with food and energy prices rising significantly, partly due to loose monetary policy in Asia and western countries. There has also been a general reluctance among policy makers in emerging nations to lift interest rates significantly, as this would attract even greater capital inflows and put unwanted upward pressure on their currencies.

A key risk for 2011 is that policy makers are unable to adequately contain inflation, which could threaten to derail the global recovery sometime later in the year or in 2012.

There are also some recent signs of improvements in conditions in the western economies. Recent data suggest a double dip in the United States is unlikely, and while it looks as though the US recovery will continue to be a long slow grind, as household balance sheets are repaired, the outlook has generally become more positive. In particular, inflation expectations seem to be rising and US bond yields have increased in recent months in anticipation of better economic conditions.

Conditions in Europe have improved, driven by strength in Germany, and exports in particular. A strong outlook for demand for capital goods from the emerging world is expected to see Germany continue to grow more quickly than the eurozone, which should also support demand for intermediate goods from other smaller European nations. Of course, there remains significant risk that the sovereign debt issue in some of the peripheral countries once again rears its ugly head.

In sum, we are faced with a world that is growing at two speeds. Asia is going great guns while the western world is plodding along. Inflation has picked up in Asia and authorities are trying to slow it down, while in contrast growth has been anaemic in the western countries and authorities have been doing what they can to boost it. For Australia, the Asian story is the one having the most effect on local conditions. The Australian economy is already operating at close to capacity, the outlook for mining investment is very strong, and the high level of commodity prices is boosting incomes substantially. Indeed, with inflation starting the next upswing in the middle of the target band - not below the band, as might be preferred - interest rates will probably need to rise to keep inflation in check. We expect the Reserve Bank of Australia to lift the cash rate by a further 75 basis points over 2011 in order to contain inflationary pressures.

 HSBC Australia and New Zealand chief economist Paul Bloxham

 

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