The US budget and debt ceiling stalemates are slowly impacting markets around the world, with Wall Street suffering another day of nerves which saw a second successive sell off.
Our market will start sharply lower this morning with share price futures showing a nasty 37 point fall. That was after the big fall on Monday and a smaller, 11 point fall yesterday.
The International Monetary Fund has issued a stark warning of the damage the current US budget shutdown and debt ceiling brawl could do to the global economy, telling the world it could lead to a global recession.
President Obama again asked the Republican controlled House of Representatives to approve the budget and lift the debt ceiling without conditions. He warned of the dangers of a "very deep recession" if the stalemate worsened and the US defaulted.
The President said he was ready to talk to the Republicans, but only after they approved the budget and lifted the debt ceiling.
In its World Economic Outlook, issued overnight, the IMF said that while it expects the disputes to be resolved, a loss of confidence in US government debt could trigger the slowdown
”Reassessment of US sovereign risk could reduce global output by several percentage points of GDP,” the IMF says. Based on the Fund’s new forecasts, that would wipe out global growth.
The warning came on another bad day for global markets. Stocks in Europe were weaker and the US saw another triple digit drop in the Dow – 159 points or 1%,
The S&P 500 fell 1.2% and Nasdaq was off 2%. Gold fell $US5 an ounce, oil edged higher and short term US interest rates climbed.
The US dollar again eased, the Aussie dollar remained above 94 US cents and was looking solid.
President Obama revealed that US Treasury secretary, Jack Lew will be detailing tomorrow how the Government will be paying its bills in the event of a default. That news is likely to have a significant impact on the increasingly twitchy markets.
The IMF’s chief economist, Oliver Blanchard warned that if US politicians failed to resolve their arguments over the budget and public debt, the result would be “an extreme fiscal consolidation and [this would] almost surely derail the US recovery” with wider global disruption.
“If there was a problem lifting the debt ceiling, it could well be that what is now a recovery would turn into a recession or even worse,” he said in Washington.
The IMF’s warnings came as investors quickened the pace of their exit from short dated US treasuries, driven by a rising fear of the debt ceiling not being lifted later this month and default.
Yields on Treasury bills maturing later this month and in early November rose above 30 basis points overnight (they were around 0.12 – 0.15% last week).
They ended around 0.26% – key short term market rates are around 0.17%, meaning US and other banks can now borrow one month money more cheaply than the American government.
The IMF’s economic forecasts were as expected – marking down China (and Australia) and other emerging economies, plus the US, and marking up the UK and the eurozone.
It now expects the world economy will grow by just 2.9% this year and rise to 3.6% in 2014. In July it had forecast growth to be 3.2% this year and 3.8% next year.
Australia’s growth outlook has been downgraded by half a percentage point in each year since the April forecasts, to 2.5% in 2013 and 2.8% in 2014.
That is roughly in line with recent Treasury and Reserve Bank forecasts.
The IMF cut China’s growth (as the World Bank did this week) to 7.6% this year and 7.3 in 2014.
That’s well down on the 7.8% and 7.78% forecast a few months ago and the 9.3% growth rate recorded in 2011.
That the Fund said the slowing in China’s growth from the historical 10% annual rate to 7.5% (the new official target), would cut Australian annual growth by around 0.5%.
That means Australian economic growth will now be closer to 2.75% to 3% in a good year than 3.25% to 3.5%.
The IMF upgraded its forecasts of growth in the European Union to zero this year and 1.3% in 2014.
For the eurozone the IMF raised its forecast to a contraction of 0.4% this year compared with a 0.6% decline in July. It now expects an expansion of 1% next year instead of 0.9% three months ago.
While Italy and Spain are forecast to shrink this year, Spain’s forecast contraction of 1.3% is better than the 1.6% forecast earlier in the year.
