So What Is Really Happening In The Economy?

March 9, 2012, 12:55 pm David Koch Yahoo!7

After a whole host of figures were released recently, Kochie talks us through excactly what is going on with the economy, both at home and overseas.

So What Is Really Happening In The Economy?

We were bombarded with economic news last week – interest rates, economic growth and unemployment data were all released in quick succession. And that’s just on the domestic front. Abroad we had China revise its growth forecast down and Europe go very close to the flame with an eleventh hour Greek debt deal.

It’s easy to take this bombardment of economic information as it comes without stepping back to see what the overall picture looks like. When they’re all put together, last week’s numbers provide significant insight into where we’re at and where we’re heading.

The most spectacular of the week’s news came out of Europe on Friday where Greek bondholders agreed to take massive haircuts on their already discounted bonds. Without the participation of its creditors, Greece would not receive the next tranche of bailout funds required to avoid default.

In plain terms, the last minute deal avoided the very real possibility of a crippling financial crisis across Europe that would have sparked an economic disaster exceeding that of 2009. That’s not to say Europe is out of the woods yet. It’s going to be a long hard toil for those debt riddled and growth starved countries to pick themselves up. But for now we can breathe easy.

The other bit of news to swing share markets worldwide was China revising its 2012 growth forecast down to 7.5%. It’s widely believed that 8% growth is the minimum required to soak up all the new labour ready to help out each year. Anything below that could ignite social unrest in the 1.3 billion strong population.

While China’s growth revision seemed to catch everyone by surprise, it’s probably just a shrewd move by those in charge. Commodity prices are largely pegged to booming Chinese growth and for a long time have remained hugely inflated. News that the economy might be slowing has put downward pressure on commodity prices which is going to save the country a lot of money.

China should beat its 7.5% growth forecast in any case and social chaos will be avoided.

In domestic news last week economic growth numbers were reported for the fourth quarter of 2011 and came in at just half the rate expected by economists. The Australian economy grew just 0.4% in the last three months of 2011, signalling a significant slowing of our two speed economy. The second speed, comprising all non-resource industries, is clearly weighing on economic growth and is no longer being offset by the resources sector.

While it’s history now, there have been few signs to suggest the economy’s picked up much since the end of last year. This should provide further impetus for a rate cut over the coming months.

Confirming the continued softness in domestic demand were last month’s jobs numbers. No new jobs were created in February while 15,400 were lost. This increased the unemployment rate 0.1% to 5.2%. Making the result worse was a falling participation rate that if steady would have increased the unemployment rate further.

The jobs numbers are indicative of a soft market lacking the demand required to create new jobs. Unemployment is another key metric watched by the RBA so the spongy result points towards another rate cut to help demand on its way.

This takes us to the last bit of key economic news, the cash rate. The RBA held the cash rate steady last week with inflation in the middle of the 2-3% target band and economic growth expected to be close to trend over the next year.

We’re in a goldilocks economy; not too hot and not too cold, it’s just right. However the revelation last week of downside risks to jobs and growth could be the sign the economy’s getting a bit cool.

So what to make of all this? Europe’s stepped back from the flame for the time being and China’s playing games to get some relief on its resources bill. All the while the Australian economy’s plodding along alright and should get some rate help soon.

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