The key to Australia’s economic performance and the direction of the stockmarket next year will be driven by Asia and especially China.
The Australian Bureau of Agricultural and Resource Economics and Sciences this week forecast that growth in Asia outside Japan and South Korea would be around 8% next year, down from the 2010 estimated growth rate of 9.3%.
And Chinese growth is estimated to be around 9% next year, against the estimated 10.2% for the year to December.
And in China the biggest single influence on Australia will be the health of the steel industry.
There, a significant slowdown is forecast.
ABARES says, "In 2011, China’s steel consumption is forecast to increase by 5 per cent to 647 million tonnes."
Production so far this year (to November) is up 10% from the first 11 months of 2009.
More importantly, steel output has plateaued in China in the past six months.
"The slower rate of growth compared with 2010 reflects the assumption that policies aimed at slowing China’s economic growth will continue into 2011,"ABARES said this week.
Iron ore prices will rise in the March quarter, but then ease, but coking coal prices will remain solid, with the recent rain in Queensland boosting short term pricing into 23011, according to the industry’s most recent comments.
Two other recent forecasts confirm that while growth in Asia will slow next year, it will still lead the world, which again will be good for Australia.
The Asian Development Bank (ADB) says East Asia’s emerging economies will grow 8.8% in 2010, before slowing to 7.3%.
The forecast for this year is still below the 9.6% expansion for the region in 2007.
A "robust recovery" was the norm across most emerging East Asian economies this year, with many of the region’s stock markets bouncing back sharply, the ADB said in the December edition of its twice-annual Asia Economic Monitor.
Growth will be slightly stronger than in its September Outlook where the ADB had predicted growth of 8.4% for the region this year after a 5.2% expansion in 2009.
The 2010 upgrade was in large part due to the faster-than-expected growth in the China, which ADB now sees at 10.1% this year.
That is higher than its previous forecast of 9.6% in September.
The ADB still expects the Chinese economy to grow by around 9.1% in 2011.
The ADB said the 45 developing countries of Central Asia, East Asia, South Asia, Southeast Asia and the Pacific would grow by 8.6% this year (8.2% in the September forecast) but slow to an unchanged 7.3% in 2011.
The ADB still expects the economies of South Asia to expand 7.8% in 2010, with the Indian economy set to grow 8.5%.
Southeast Asia will grow 7.5% in 2010, up from the 7.4% forecast in September.
"Robust third quarter expansion in gross domestic product (GDP) reaffirms the view that the region is leading the world in the recovery from the recent economic crisis," the ADB commented.
Also looking for another year of solid Chinese growth next year is Bank of America Merrill Lynch.
"The Chinese economic growth is forecast to slow to 9.1 percent in 2011, from an estimate of 10.3 percent this year, and the 9 percent growth is expected to be a new normal for China in the post-crisis period," Bank of America Merrill Lynch said in a regional economic outlook report released on Tuesday.
After fluctuations since late 2008, China’s gross domestic product (GDP) growth has stabilized at about 9% in both year on year and sequential terms, in comparison with the average 11% growth in years before the crisis, the report said.
Investment will probably slow in 2011, but remain supported by government expenditure on housing and public projects.
Fixed asset investment is also expected to fall on slower growth of private investment demand as a result of the government’s property tightening measures and a lower loan growth, said the report.
A fall in export growth, owing to a higher comparative base and weak recovery in some major developed economies, would lead to the Chinese economic slowdown, it said.
Bank of America Merrill Lynch also said in the report China’s consumer price index is likely to rise to 4.5% next year, from 3.3% forecast for this year.
It said CPI inflation may range between 4.5% and 5.5% in the first half of 2011, and soften to an average of 4% in the back half of next year, before easing to around 3.6% in 2012.
And that’s the factor to watch closely in China.
Unchecked inflation could be very damaging and trigger a crunch if the government is forced to lift interest rates rapidly to slow the economy.
Bank lending could also be a bit hard to keep a handle on next year.
There’s talk of a new target of 7 trillion Yuan being set, not much lower than the 7.5 trillion for this year (but which will be surpassed by the end of this month).
But the banking regulators have told Chinese banks to bring onto their balance sheets an estimated one trillion or more of loans made to local and provincial government investment vehicles, which will have to absorbed in the new maximum limit.
In other words, the real level of lending could be 1.5 trillion or more down on this year, or less than 6 trillion overall, which wou
