Australian financial markets were hit by fresh concerns about the global economic outlook yesterday after cautious comments from the US Federal Reserve added to uncertainty about the effects of a slowdown in China and commodity price falls.
The Australian dollar was approaching a six-year low near US72c last night after China’s Shanghai Composite index fell 3.4 per cent amid ongoing jitters about the world’s second-biggest economy after it abruptly devalued its exchange rate last week.
Earlier, Australia’s benchmark S&P/ASX 200 share index closed down 1.7 per cent at a fresh seven-month low of 5288.69, led by steep falls in the energy, materials and financial sectors after crude oil and copper prices hit new six-year lows.
Santos shares dived 7.1 per cent before its first-half results today, and Origin plunged 13 per cent after flagging an extra $550 million of spending on its Australia Pacific LNG project.
BHP Billiton fell 3 per cent after a disappointing earnings report from its international rival Glencore, and key industrial commodities remained weak. And Qantas shares crashed 6.1 per cent after initially surging to a fresh eight-year high following news of an unexpected capital return to shareholders.
Underscoring the concerns about the global economic growth outlook amid potential US interest rate rises and a slowdown in China, Citigroup cut its global GDP forecasts yesterday. The US investment bank lowered its 2016 GDP forecast to 3.1 per cent from 3.3 per cent — its third consecutive downgrade — after acknowledging uncertainties over China’s economy had escalated following its currency devaluation.
“Risks to our 2016 growth forecasts probably remain to the downside, especially reflecting China worries,” Citi economists said in a global economic strategy report. The economists also marked down the growth prospects for China, Japan and Korea — three of Australia’s biggest trading partners — and were unconvinced China’s weaker currency would offset the country’s falling growth rate. Citi’s 2016 growth rate for China was lowered from 6.7 per cent to 6.3 per cent, far below the Chinese government’s official — and increasingly implausible — target of 7 per cent.
Joshua Williamson, a senior Citi economist in Sydney, said China’s slowdown was having ripple effects throughout the region, especially in countries such as Japan and Korea that were highly integrated into China’s supply chain.
“Part of the reason for China’s depreciation was to lift its export competitiveness, but it is also placing at a competitive disadvantage regional economies that compete with it,” Mr Williamson said.
Japan’s growth forecast was cut by 0.5 percentage points to 1.3 per cent and Korea’s by 0.1 percentage points to 3 per cent.
“Other central banks are already tolerating some depreciation of their exchange rates,” Mr Williamson said, pointing to the Vietnamese and Kazakhstan central banks’ decisions this week to facilitate weaker exchange rates.
The People’s Bank of China lowered the mid-point trading rate of the yuan last week prompting a 4 per cent slide against the US dollar that fuelled concerns about the state of China’s economy. “We think there’s another 6 per cent to go,” Mr Williamson said. “It’s a zero sum game in the end, but it’s a game that economies are likely to play for shorter-term gain.”
The hit to Chinese buying power will undermine even further China’s demand for Australian iron ore and coal — priced in US dollars — which would worsen Australia’s terms of trade and lift the risk of another official rate cut.
Minutes from the US Federal Reserve’s recent board meeting indicated the Fed was close to lifting interest rates for the first time since the GFC, yet some officials expressed concern about risks of further downward pressure on inflation from international developments.
While most economists expect the Reserve Bank to make no further changes in official rates this year, Citi expects a 0.25 percentage-point cut in November. Mr Williamson said continuing uncertainty over when the Fed would begin its well-telegraphed lifting of US rates was making forecasting Australian policy difficult.
The Fed’s indecision was frustrating chief economist of Betashares, David Bassanese.
“The Fed is fighting the wrong war, with misplaced concern over persistently low US inflation and insufficient regard to the build-up of financial risk associated with keeping interest rates so low,” he said yesterday.
