Economic And Market Summary

The 11 March 2011 Japanese earthquake has resulted in a terrible loss of life as well as large economic ramifications for Japan. Global equity markets fell sharply immediately following the earthquake. However, most markets were ultimately resilient to this event, recovering the majority of this underperformance by the end of the month. Over the course of March, the S&P 500 was down 0.1% and the MSCI World Price Index was down 1.5% in local currency terms, while the ASX 200 increased marginally by 0.1%. Emerging market equities were the strongest performer during the month, increasing by more than 4% in Australian dollar terms.

The earthquake and associated tsunami have resulted in significant damage to infrastructure, homes and factories in Japan and the World Bank has estimated that the cost could be between 2% and 4.5% of the country’s GDP. In the short term, the Japanese economy is likely to be impacted by the shutdown of factories, supply chain disruptions and ongoing power disruptions. However, many expect GDP growth to be boosted by the reconstruction effort from the second half of this year. 

While markets have recovered much of their initial losses from the earthquake and associated tsunami, many uncertainties around the potential for further disruptions to economic activity remain. The nuclear crisis at the Fukushima power plant has recently been upgraded from a category 5 to a category 7 level of severity (on par with Chernobyl). If risks continue to emerge, market volatility is likely to increase and global growth could be impacted.

US employment continued to increase in March, with private companies adding 230,000 jobs. However, this was partly offset by the loss of 14,000 government jobs. With on going budgetary problems for state and local governments and increasing pressure for fiscal reform at the Federal level, public sector jobs may come under further pressure. This represents a key risk to the US jobs recovery.  The US ISM Manufacturing and Services growth indicators were both lower in March; however, they remain at levels consistent with a strong performing economy.

Inflation pressures are increasing in the US and across the globe, driven mainly by higher oil and food prices. Many emerging market economies are increasing interest rates in order to rein in escalating inflation pressures and the European Central Bank has recently increased interest rates for the first time since the global financial crisis. However, at this point markets do not expect the US Federal Reserve to lift interest rates in the near term.

European sovereign debt issues came back into the spotlight in March with Portugal becoming the latest peripheral European country to require bailout assistance. During the month, key European finance ministers signed an accord to establish the “European Stability Mechanism” which will act as a permanent bailout fund from 2013 and will be able to lend up to €500 billion (around A$690 billion). While substantial, a fund of this size would not be large enough to bail out the larger European economies, such as Spain, if ultimately required.

Despite the ongoing uncertainty around peripheral European economies, the broader European Union continues to perform solidly. The economic recovery of core European countries, such as Germany and France, continues to strengthen in contrast to the weakening in other nations such as Italy, Spain and Ireland.

The ‘two speed’ Australian economy continues to be evident as commodity and agricultural sectors are performing well while most other sectors continue to struggle with the high Australian dollar, relatively high interest rates and a cautious consumer. The RBA has not raised rates since the increase to 4.75% in November 2010. During the month, the Australian dollar reached new post float highs, appreciating by 1.4% against the US dollar to end the month at US$1.03. 

Source: Access Capital Advisers Pty Ltd.

This article provides general information only and may not be relied on as legal or financial advice.

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