There’s a strong message for Australia and investors from the latest half yearly review of the world economy from the Organisation for Economic Co-Operation and Development (OECD).
That message is; growth is still on track in our major export partners, with the understandable exception of Japan.
But while there are the usual caveats, such as inflation and the eurozone crisis, the outlook is quite bright for us.
So the outbreak of gloom and doom mongering we have seen in the past week should be looked at for what it is, mostly uninformed and designed to help win media headlines or market positions for clients, such as shorting hedge funds and the like.
That’s not to say that it is all rosy: far from it, the strains and pains in Europe are plain for everyone to see bar those who run the eurozone who know the immense dangers from a Greek default or restructuring that will happen sooner, rather than later if not properly managed, and there’s not much sign of that happening at the moment.
That, rather than a slowing in China, represents the single biggest threat to Australia (and the global economy).
The brief publicity given to Goldman Sachs’ cuts to its China growth forecasts have been shown up for what they were by the OECD, a move back to consensus by the firm after holding onto too bullish estimates for too long.
The OECD’s estimates for Australia track those of the recent Federal Budget and the RBA.
The growth outlook for Australia is strong, with forecast GDP of 2.9% in 2011, accelerating to 4.5% in 2012.
The OECD has a short-term money market rate of 5.6% by March 2012, 0.5 percentage points above the current rate and 0.85% above the cash rate now. That implies two rate rises.
Australian inflation should climb well above the Reserve Bank’s target band to 3.4% this year, before being brought back to 2.5% next year by higher interest rates and falling food prices(such as bananas).
Unemployment is also expected to remain far lower than the average of all OECD economies at around 4.5% next year.
The OECD sees global growth slowing to 4.2% in 2011 from 4.9% in 2010, still solid, but not brilliant.
China of course is our major market and the OECD had some advice for that country’s leadership, lift interest rates by another 0.50% to help bring the current high inflation under control.
Based on its assumption for more rate rises, the OECD forecasts China’s annual inflation to average 4.6% this year, before pulling back to 3.4% in 2012.
(China has a target rate of 4% for this year; inflation in the year to April was 5.3%).
The OECD’s call for further policy tightening also led it to predict that China’s economic growth will slow slightly to 9% this year, against 2011’s 10.3%.
It sees growth hitting 9.2% in 2012.
So much for the ‘China hard landing’ story that does the rounds of our markets once a month.
India is another major market and the OECD sees growth of 8.5% in 2011-12, down from the 9.6% in the year to last March.
The OECD is still above the Reserve Bank of India which forecasts growth this Indian financial year of 8%.
The OECD sees 2012-13 growth at 8.6%.
India’s problem is bringing high inflation at around 9%, under control without crashing the economy.
South Korea is another of our major markets that the OECD sees doing well, but like China, a rate rise or two is needed.
The OECD raised its economic growth forecast for South Korea for this year but cut the 2012 estimate.
In its latest economic outlook report, the OECD said it expects the South Korean economy to grow 4.6% this year, faster than the 4.3% expansion it forecast in November.
It also cut its growth forecast for next year to 4.5% from 4.8%.
And the reason for the rate rise call: like China and India, high inflation. The OECD says South Korea’s headline annual inflation will rise to 4.2% this year (3% last year), above the central bank’s target range, but slow to 3.5% in 2012.
Naturally Japan saw its estimated growth rate cut sharply because of the March 11 quake, tsunami and the impact of the Fukushima crisis and the power shortages.
The OECD cut its growth forecasts for Japan due to the earthquake and tsunami, saying it expects an 0.9% contraction this year, but a strong rebound of 2.2% in 2012.
The OECD had forecast 1.7% growth this year and 1.3% in 2012 in its previous semi-annual Economic Outlook report before the March 11 quake and tsunami that left 25,000 dead or missing.
Japan’s economy contracted by 0.9% (quarter on quarter) or 3.7% annual in the first estimate for the March quarter.
The OECD says that "by the latter half of 2012, as the level of reconstruction spending falls, growth is expected to soften, with public consumption and fixed investment both contracting as consolidation efforts strengthen".
It expects Japan to record 0.3% inflation this year following deflation in the past two years of around 0.2%.
So that’s a promising picture for some of our major economies for the next 18 months and a much stronger set of forecasts than some analysts would allow.
Elsewhere the OECD has cut its forecasts – sharply in some cases – for Greece, Italy and Portugal, as well as for Ireland, in 2011. Spain’s 0.9% is unchanged.
By contrast, the OECD is considerably more upbeat about the core countries, most notably Germany, whose economy it expects will grow by 3.4% this year.
The US has also had its GDP forecast revised upwards for 2011 – to 2.6% from 2.2% in November (and 3.1% next year).
It lowered its unemploymen
