Possible signs of economic recovery

Posted on April 14, 2009 by peter 
Filed under Australia Mortgage and Finance News · Tagged: , , , , ,

Australia: Analysts believe promising signs are starting to emerge suggesting a recovery, but it is very early days.

Are we really seeing green shoots of recovery? Yes and no, it seems.

Many of the crucial bits of economic performance, which matter most, are looking better.

Bank stocks in the United States have made record climbs out of the ground-zero territory they occupied before.

China’s economy could be bottoming out already, says the World Bank.

Our own stockmarket, after a period of the most extraordinary decline and volatility (40 days with price movements of plus or minus 3 per cent during 2008 – against 14 in 1987), has also kept a steady climb through March and into April.

As unemployment, the critical indicator for most people generally peaks 12 months after the stockmarket has troughed, then perhaps it is not exactly the beginning of the end of the recession, but at least the end of the beginning. A pathway out is in sight, even if it’s a very rocky one.

Nonetheless, the global economy and Australia’s too are still very fragile. Markets are perhaps most of all responding to a lack of bad news, rather than any great surfeit of good news.

And so much bad news has already been factored in already that the bar for a market recovery has been set very low. But there are still things that could make it worse.

Even though stimulus packages are taking hold in China, the World Bank forecasts growth at 6.5 per cent, or below the 8 per cent level needed to stay on top of unemployment – in a country where unemployment also means the threat of social instability.

Take out China’s performance from the rest of Asia and the picture for the region is truly horrible. The integration of the Asian economies into enormous supply chains feeding the developed world was a huge trade and jobs multiplier in the region when times were good, but unravelled at a rate no one foresaw at the end of last year.

The most shocking has been Japan, where industrial production fell by 38 per cent, and where observers of the economy say that not enough people outside the country understand the size of the hit it has taken.

Japan has now borne the weight of the world recession twice. The exports kept it going through a decade-and-a-half of poor growth have been hit savagely as consumers everywhere else recoil from spending. And as the world’s biggest creditor nation, its currency has soared as the Japanese bring their currency home – giving everyone else the free kick of an effective devaluation against the yen.

The danger is that if Japan decides the pain is so great it has no choice but a devaluation of its own, then that could set off a chain of competitive devaluations around the main manufacturing and exporting nations – especially in China.

It was China’s competitive devaluation of the yuan in 1994 that helped sow the seeds of the 1997 Asian financial crisis, so the huge impact of these moves by governments should never be underestimated.

Japan is still Australia’s biggest trading partner in both dollar value and the spread of mineral and rural exports, and whatever happens there affects us profoundly. Japan is also one of the places that could send the world economy off on another nasty skid. There is still plenty of room for miss-stepping before those green shoots really start to grow.

Australian Bank goes into administration

Posted on March 16, 2009 by peter 
Filed under Australia Mortgage and Finance News · Tagged: ,

Babcock & Brown – Australia’s second largest investment bank, has gone into administration after it was unable to deal with its massive debt levels. The former private equity powerhouse, had struggled for more than a year.

Babcock’s downfall was blamed on taking on too much debt – and then being unable to cope in the credit crunch.

At its peak, shares were worth 37 Australian dollars (£17.40; US$24.20) but when suspended about three months ago, were worth just 32.5 cents.

Efforts to avoid administration failed when a group of shareholders rejected a proposed debt restructuring, with Deloitte being appointed as administrators.

Like with Chapter 11 bankruptcy laws in the US, firms entering voluntary administration in Australia can attempt to trade out of financial difficulties.

But administrator David Lombe told the Australian Broadcasting Corporation that it was too early to say whether Babcock could avoid collapse.

While administrators will run the company on behalf of creditors, Babcock said that it would focus on “ensuring that the value of assets and business platforms is preserved during this process and all assets and businesses continue to be managed appropriately”.

Its satellite investment funds, Babcock & Brown Infrastructure – which owns UK port firm PD Ports – said it was unaffected by the administration.

Babcock had been hailed a success, likened to a mini-version of Australia’s most dominant investment bank Macquarie.

Last November, Macquarie announced a sharp fall in profits but said it did not need to raise cash.