The author has been described by News Ltd as an "iconoclast", "Svengali", a pollie's "economist muse", and "pungently accurate". Fairfax says he is a "Renaissance man" and "one of Australia’s most respected analysts." Stephen Koukoulas concludes that he is "85% right", and "would make a great Opposition leader." Terry McCrann claims the author thinks "‘nuance’ is a trendy village in the south of France", but can be "scintillating" when he thinks "clearly". The ACTU reckons he’s "an enigma wrapped in a Bloomberg terminal, wrapped in some apparently well-honed abs."

Monday, August 22, 2011

How does volatility affect economic activity?

A nice little summary from CBA's Richard Grace:

"There are a number of ways that volatility in global financial markets can affect real economic activity: (1) volatility impacts business and consumer confidence, generating a delay in investment and consumption; (2) volatility generates risk aversion, which can increase global funding costs for some banks and/or economies that carry some external funding requirements; (3) volatility that results in rapid falls in global sharemarkets tends to generate negative wealth effects, which can impact consumer and business behaviour.

Fortunately, volatility can ease relatively quickly. The VIX volatility index re‑traced half of the gains that occurred between 21 July and 8 August, but has recently spiked again (chart 1). But global sharemarkets remain lower and there is a notable strain on short‑term cross‑border funding between Europe and the US as evidenced by the widening of the three‑month EUR basis swap, to its largest levels since the Eurozone sovereign crisis began (chart 2). Global overnight index swap (OIS) markets remain distorted by the flood of precautionary cash into the front‑end of the curve.

However, it does take quite a savage spike in volatility, and quite a large fall in global sharemarkets to result in a significant shaving of global growth. Downward revisions to the last three years of GDP data by the US Bureau of Economic Analysis (BEA) will impact 2011 US GDP growth estimates, and this revision alone will be enough to shave global growth somewhat. As detailed in our US economic section, it is inevitable that the Fed will revised down 2011 GDP growth from 2.8%, to something close to 1.8%. And Fed forecasts for 2012 calendar year GDP growth will also be revised lower (chart 3)."