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Stark economic data from the US, China and Germany leaves Australia exposed


Three red flags indicate that the global economy is in even worse shape than expected, making Australia highly visible.

In recent weeks, there has been widespread panic over the US debt ceiling crisis, with the world’s largest economy quickly running out of money.

Tense negotiations are currently underway in Congress over the US debt ceiling, which now stands at $31.4 trillion ($46.8 trillion).

Democrats want it raised immediately, while Republicans are pushing for a series of conditions, such as spending cuts, before agreeing to lift the self-imposed borrowing ceiling.

If a deal isn’t reached soon to raise the debt ceiling, America could default — for the first time ever — as early as June 1, Treasury Secretary Janet Yellen said, saying it would create “an economic catastrophe.” both in the US and in the United States. and all over the planet.

At the same time, the International Monetary Fund (IMF) revealed this week that economic powerhouse Germany will face subdued growth in the near term due to tighter monetary conditions and energy price shocks.

The IMF forecasts that Germany’s gross domestic product growth will remain around zero this year before gradually picking up in the coming years.

But there are also many challenges on the horizon thanks to the country’s aging population and likely no increase in productivity or labor on the table.

And some grim news has also come out of China this week, with data from April revealing weaker-than-expected growth in retail sales and industrial production from the world’s second-largest economy, alongside a fall in real estate investment. good and the average daily production of coal and aluminum and crude steel. .

“As disappointment sets in, we see an increasing risk of a downward spiral, resulting in weaker activity data, rising unemployment, continued disinflation, falling market interest rates and a weaker currency,” Nomura economists told Reuters.

IG Markets analyst Tony Sycamore told that the news out of the US was “interesting” as there have finally been signs of progress over the past 48 hours on the debt ceiling debacle.

“President Joe Biden’s announcement that he will cut short his trip to Asia is seen as a sign of his commitment to making a deal,” he said.

“The second was the decision to reduce the number of staff on the negotiating team, evidence that talks are at an advanced stage.”

But he said when it came to US economic data, things were “patchy”.

“Examples of economic resilience follow weaknesses. For example, revenues for the first quarter of 2023 were much better than expected. Last night, there was a lot of focus on the data on jobless claims that are expected to increase as more Americans apply for unemployment benefits,” he said.

“However, the number was better than expected… and at the same time there was an unexpected improvement in the Philly Fed Survey (-10.4 in May, versus -19.8 expected).

“All of this has contributed to the interest rate market now pricing in a 40 percent chance of a 25 basis point rate hike in June, as opposed to expectations a few weeks ago for a June Fed break.

“Another example is that the high-beta Nasdaq rose to an overnight high of 52 weeks after a gain of 3.71 percent this week.”

Mr Sycamore added that while European growth fared much better than expected last year, some cracks are starting to appear.

“This week, the German ZEW economic sentiment index fell to -10.7 in May, its lowest level in five months,” he said.

“While part of the decline can be explained by expectations about future interest rate hikes by the European Central Bank, economic uncertainty surrounding China’s recovery will also have played a role.”

And finally – and perhaps most worryingly for Aussies – Mr Sycamore noted that there have been signs of a “sharp slowdown” in China in recent weeks, and that “concern is mounting as China’s recovery falters” post-Covid.

“Last week data on imports, inflation and bank lending disappointed. This week (was) a similar story as industrial production, retail sales and fixed asset investment all missed the mark,” he said.

“Within that framework, investment in infrastructure, a key driver of jobs and growth, has slowed in both China and Australia, mainly due to rising financing pressures and as the stimulus frontloading eases in the first quarter.

“Manufacturing PMIs have fallen below 50, in contraction territory. If the housing market continues to fall and policymakers fail to act, the risk of a double-dip China slowdown increases.”

He said it was “bad news for China and worse news for Australia, which still relies on China as its biggest export market”.

“As a result of the dangerous state of the recovery, China’s currency, the yuan, is trading at its lowest level against the US dollar in five months at 7.03,” he continued.

“It has now returned all the profits it made and more after China reopened last December.”


Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.