Analysis: A silver lining around the gloom

It’s hard to be an optimist on the day BHP Billiton starts culling its WA iron ore workforce, and the International Monetary Fund publishes a downbeat outlook of the global economy, but as with all forecasts if you look closely a silver lining can be spotted.

The place to look for positive news is in the detail of the latest edition of the IMF’s World Economic Outlook because while the overall tenor is gloomy that is not necessarily the case in Australia’s backyard.

What the IMF report says is that hopes for a reasonable economic recovery next year are fading.

Global growth this year, which had been tipped to reach 3.5 per cent, is now expected to come in at 3.3 per cent, a shift which might not look a lot but that 0.2 per cent cut has come in the three months since the last IMF diagnosis of the way the world’s economy is functioning.

Next year’s growth forecast is now 3.6 per cent, a reduction of 0.3 per cent on the 3.9 per cent made in July.

It is the overall reductions in growth which catch the eye of a reader, especially a warning from the IMF that it could be a lot worse if things go really pear-shaped with there being a 17% chance of global growth falling below 2%, a situation regarded as a deep recession. In July the worst-case scenario had a 4% chance of occurring.

Most of the damage to growth is being done by the usual suspect, the U.S., Japan, and Europe where austerity measures and higher taxes introduced to help retire excess levels of debt are killing hope of a sustained recovery.

In the more developed economies growth next year will be anaemic, 2.1% in the U.S. (down 0.1% on the July forest), 0.2% in Europe (down a thumping 0.5% on July), and 1.2% in Japan (down 0.3%).

China, and the rest of “developing Asia” will also face economic headwinds, but growth in the region closest to Australia will be at a faster pace than anywhere else in the world.

IMF forecasters have trimmed China’s predicted growth rate by 0.2 per cent, but that should be seen in the context of Australia’s major trading partner increasing its pace of economic expansion from 7.8 per cent this year to 8.2 per cent next year.

India’s growth has taken a severe haircut this year (down 1.3 per cent to a forecast 4.9 per cent) but its economy is expected to grow by 6 per cent next year, less than the July forecast of 6.6 per cent, but substantial growth nevertheless.

The rest of developing Asia, a lump which includes most of the countries in South East Asia, is expected to grow at 6.7% this year and 7.2% next, forecasts which represent a modest haircut by the IMF on its July predictions of 0.4 per cent and 0.3 per cent respectively.

Impossible as it is to get away from the big picture of a world struggling to grow it is important to see that the countries which buy the bulk of Australia’s exports (near neighbours such as China and the rest of developing Asia) are maintaining relatively strong growth rates.

This news will, obviously, be cold comfort for the 1000 workers who lost their jobs at Fortescue Metals Group last month, or those likely to lose their jobs or be “redeployed” by BHP Billiton as it adjusts to lower iron ore prices and slower-than-expected demand.

It will also be a sobering wake-up call for the Australian and WA Governments that the cash cow they saw last year in the coal and iron ore industries will not deliver what they had budgeted for with the Australian Government in particular facing the prospect of an embarrassing admission that its target of a balanced budget is looking less likely than ever.

But, for WA and prudent managers who could see what’s been coming down the track for the past year, the outlook for 2013 is probably better than they had hoped for because growth in Asia, while not booming, is certainly not grinding to a halt as it is elsewhere.

What slower growth in Asia is most likely to mean is that prices for Australia’s raw material exports will not rise as some companies had hoped for, that profit margins will remain under pressure, and that new projects will struggle to get banking and investor support.

Next year in WA will be a long way short of a boom, but neither will it be a bust.

What it might be is something in the middle called normal, and when the rest of the world is struggling that’s not a bad outlook.