BlueScope economist Nick Scavarelli provides an overview of the current global financial situation and actions being taken to cushion negative impacts.
GOVERNMENTS and central banks across the world are searching for solutions to the global financial crisis, as it is now translating into significantly slower economic activity across most regions.
Falling equity markets, tighter credit and declining confidence has left companies and consumers either unable or unwilling to spend and invest. As a result, there has been a combined global effort from policy makers to simulate their economies to prevent a long period of recession. Australia’s Federal Government is no exception.
The US economy is most likely already in recession, or likely to fall into recession in the near future. The question is how long and deep the recession will last. The US authorities have taken drastic measures to stabilise their financial markets following the collapse of the Lehman Bank and subsequent freeze in financial assets.
A massive bailout scheme has been announced which aims to stabilise the global banking system, involving the US Treasury making direct purchases of bad assets from banks, totalling up to US$700bn. Another direct action has seen America’s Federal Reserve cut its policy interest rate by a further half point, to 1%, on 29 October.
The expectation that the EU economy could maintain growth in times when the US economy was slowing has proven optimistic, as the EU economy is now in recession. Several Eurozone economies suffered contraction in the third quarter, with Germany and Italy entering recession., .Governments in this region are taking measures to minimise the downturn, with the Bank of England recently lowering interest rates by 150 basis points, which was three times greater than most economic commentators expected.
Emerging economies
The emerging world economies are also taking actions to limit the fall out of the global financial crisis. Russia is spending US$220bn to shore up its financial system. South Korea has guaranteed US$100bn of its banks’ debt.
Elsewhere, Hungary has secured a US$6.6bn assistance program from the European Central Bank and is negotiating a loan from the International Monetary Fund (IMF), as is Ukraine. The IMF has unveiled a new emergency lending programme that will get money to well-run countries quickly and with almost no conditions attached if they are hit by financial volatility. The new liquidity facility is the culmination of a decade of attempts at the IMF, after the Asian financial crisis of 1997-98, to come up with a way of protecting emerging markets from financial problems.
China intends to inject US$586bn to avert a more serious slowdown in its economy. In addition, the People’s Bank of China (PBC) is closely monitoring the market situation to decide its next interest rate move. The governor of the PBC has also indicated that the bank will “actively work” with the International Monetary Fund to develop a plan to stabilise volatile financial markets. The governor expects the Chinese economy to expand between 8% and 9% in 2009.
Australian fiscal action
In recent weeks, the Australian Government and Reserve Bank of Australia have also acted swiftly to avoid a significant downturn in the domestic economy. The emergency action includes lower interest rates and a boost in public sector investment.
The Federal Government has announced a A$10.4bn stimulus package designed to boost spending and confidence, including changes to the first Homeowners Grant, pension reform and support payments for low and middle income families, bringing forward infrastructure projects and creating additional training places to support employment. It has also indicated it will instigate a massive injection of A$6bn to the automotive industry to ensure its long-term survival. In an effort to stabilise the domestic financial system, the Federal Government has also agreed to guarantee savings deposits up to A$1m, as well as loans used by Australian banks to raise capital on wholesale funding markets. It has also followed the US lead and decided to allocate A$8bn to purchase mortgage-backed securities in a bid to boost liquidity.
The Reserve Bank of Australia has also acted by slashing its benchmark interest rate by 75 basis points to 5.25 per cent, the third cut since September when the cash rate was 7.25 per cent. In making the cut, the Reserve Bank cited reduced Chinese growth and lower commodity prices as key factors.
Infrastructure and steel
As part of the government’s plan to boost infrastructure projects, it is working closely with the states to speed up the federal audit of the country’s infrastructure requirements. Infrastructure Australia will present its audit findings by the end of December this year.
The domestic steel industry is likely to experience positive spin-offs from the Government’s desire to speed up the public investment drive, which is designed to assist in both city and regional areas.
*Nick Scavarelli is a senior economist with BlueScope Steel. His economic analysis and advice is utilised by divisions such as BlueScope’s Industrial Markets.