Are we on the road to financial recovery?
With the global economy in recession, economists are focused on 'leading economic indicators' or what are often being called, 'green shoots'. These 'green shoots' can provide us with insights into how the economy is tracking and whether a potential recovery is on the horizon.
The good news is that many economic indicators such as consumer confidence, the housing market, manufacturing orders and financial market conditions, all point towards an economic recovery.
Consumer confidence is slowly improving
Consumer confidence is a good indicator of the future path of consumer spending. If consumers are feeling more confident about future economic conditions and job prospects, they are more likely to spend. This is important as consumption growth helps to drive economic growth.
Consumer confidence suffered over 2008 as consumers were worried about job losses, falling wealth and bad economic data. But with falling interest rates and the introduction of various government spending packages, confidence has slowly improved in countries like Australia and the US. Although, consumer confidence could suffer later in the year as early indications suggest unemployment (a lagging indicator) may rise into 2010.
Recent lift in home sales and construction activity
The housing market is also a key indicator of recovery in the US and Australia. In the US, the housing market was the first sector of the economy to collapse with falling house prices, rising foreclosures, and sharp drops in both home sales and construction activity. The good news is that mortgage rates have fallen and housing affordability is on the rise - contributiong to a lift in new housing sales in recent months.
In Australia, the lift in the first home owners grant has seen a large increase in demand for housing by first home owners. In addition, a lift in demand for new homes has also led to an increase in construction activity and this is likely to help economic growth over time.
Global trade and manufacturing is improving
In late 2008 when the global financial crisis erupted, global trade and manufacturing ground to a halt. Banks stopped lending to each other and global demand suffered. However since April 2009, there has been a lift in new orders for machinery and other equipment across the globe - particularly in the US and China. This lift in new orders is another positive sign of a potential recovery.
In addition to seeing an improvement in various economic indicators, there is also evidence that financial markets are also improving with confidence returning to debt markets and the banking system.
Other signs of imporvement include the lift on the short selling ban for Australian financial companies on the Australian Stock Exchange. This suggests that the period of extreme market volatility, resulting in this ban, has passed. In addition, Australian banks have started to issue non-government guaranteed debt and this also suggests that confidence is being restored to the overall financial system. US banks have also found it somewhat easier to raise capital that indicates an improment in debt markets - which is critical for a global economic recovery.
This information was sourced from Coloinal First State Investments Limited, ABN 98 002 348 352, AFS Licence number 232468 as stated in the June 2009 e-iQ. This is general information only and does not take into account any individual's objectives, financial situation or needs. This information is no indication of future performance, and is provided as general commentary only.