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World Risk Developments: mid-year report

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The Export Finance and Insurance Corporation (EFIC) reflects on the state of global finance, and looks ahead to the next six months, in its latest newsletter. Looking back on the past six months, the World Risk Developments newsletter has noted Australia’s accelerating economic growth in the face of weak global growth. According to EFIC chief economist Roger Donnelly, "this glass half-full, half-empty contrast" has been the most striking feature of the past six months. The first half of the year was also marked by disappointment, Donnelly said. "Confidence at the start of the year has been replaced by concern. The euro crisis was our chief concern, but we also looked at climbing oil prices and political risk in China, PNG and Egypt," he explained. The newsletter sums up the present situation with "slowing and below-trend world growth", as emerging economies begin to undergo sharp slowdowns. Hopes for a policy reboot were high after a European summit on June 28-29, with plans to mutualise debt problems through greater fiscal and banking unions. However, markets quickly retreated after realising that such steps would depend upon prior changes to national laws, constitutions and European treaties. "In these circumstances, it would be unwise to rule out the need for a full sovereign bailout in Spain,"  says Donnelly. Chinese growth has also been relatively weak in the first half of 2012, and India is battling persistently high inflation, according to EFIC senior economist Dougal Crawford. As for the American economy, it has been slowing through the first half of 2012, and is moving towards a ‘fiscal cliff’. This refers to a fiscal tightening of four percent of GDP, which will occur if spending programs and tax cuts scheduled to end on 31 December are not extended. If tightening does occur, as legislated, GDP growth will slow in 2013. "The worse things get, the more likely policymakers are to mount decisive and effective responses," says Donnelly. But his predictions aren’t entirely negative, saying that the US and China could do better than expected. The situation also appears safe for Australia and its resource investment pipeline.  "Fortunately, the pipeline is so bulging - at $500 billion - that even if ‘less advanced’ projects without committed financiers and overseas customers go into hibernation or die, 'advanced' projects will still propel investment," says Donnelly. "The global recovery is likely to be a fragile one in the next six months. But in our base case at least, commodity prices remain well above-trend and the resource investment boom on track," he added.

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