macro economic update
By David Marshall, Chief Financial Officer

Two offshore themes unsettled global markets over the past month: sovereign debt in Europe and a policy tightening in China. The combination of these events caused a ‘flight to quality’ as investors piled into safe haven US Treasury bonds and closed off risky ‘carry trades’.

The resultant capital flow caused a sharp appreciation of the US dollar notably against, the Euro and UK Stirling. However, by early March, both Greece and Portugal had announced stringent austerity packages with the objective of meeting EU budget deficit targets of 3% of GDP and Germany and France offered implicit support, reducing fears of sovereign defaults.

Asia
A number of economists appear to expect monetary policy tightening to continue in China through 2010 and many growth forecasts for China remain in excessive of 9%. According to NAB, monetary policy remains highly accommodative and there is scope for further fiscal expansion, enabling further stimulus this year if required. Lending and mortgage rates remain historically low. In Japan, GDP increased by 1.1% in the December quarter, and the economy has expanded by around 2.5% since March 2009. However deflationary pressures persist and underlying domestic demand remains weak. Australian Markets Monthly anticipates growth of 2.25% in 2010 and 2.5% in 2011.

New Zealand
While the NZ economy is still on the right track, February data called into question the strength of the recovery. For one, Q4 labour market data suggested more spare capacity and less wage pressure in the economy than many expected. Indeed, NZ’s unemployment rate spiked to 7.3% in Q4 (from 6.5% a quarter earlier), the highest reading since June 1999. The February NBNZ business survey revealed businesses to be even more upbeat than at the end of the year, underpinning what many commentators believe will be a story of strengthening GDP recovery this year.

Europe
The economic scene in Europe over the past month has been dominated by sovereign debt concerns in Greece, and the potential for problems to spread to Spain, Portugal and Ireland. Partial data for some of the larger economies in the region suggest that tepid economic conditions continued into Q1. For instance, in Germany, the widely followed IFO survey fell on both the business conditions and the current assessment measures in February, while the headline ZEW investor sentiment index fell from 47.2 to 45.1, the fifth successive month of decline.

The disappointing Q4 outcome and apparent soft start to 2010 has seen NAB downgrade their growth forecast slightly in 2010 to 0.9% (1.2% previously). Beyond that, they still expect only a modest acceleration in the pace of economic growth, to 1.5% in 2011, with the combination of still high unemployment and the need to reset both monetary and fiscal policy settings to act as headwinds to a faster bounce back. Indeed, the associated problem of potential sovereign risk has further clouded the outlook.

United Kingdom
The second release of Q4 GDP was something of a mixed bag. Growth in the fourth quarter was revised up to 0.3%, from the initial 0.1%, meaning the economy left recession at a faster pace. But offsetting that to some extent was a 0.1pp downward revision to growth in Q3, now estimated to be -0.3%. The source of the upward revision in Q4 mainly reflected service sector data covering December, replacing ONS estimates.

The expenditure breakdown showed a 0.4% rise in household consumption in the fourth quarter. This is the first rise since 2008 Q1. There seems to be little in recent UK data today to change economists’ view that the economy with emerge only slowly from the recession. It appears that the underlying position of private sector demand remains weak.

Source: Australian Markets Monthly, March 2010, National Australia Bank