CANBERRA—The federal coalition's repeated warnings that the global economy is fragile in the wake of the US sub-prime mortgage market collapse may not just be political rhetoric.
A new report from the Organisation for Economic Cooperation and Development (OECD) - while not specifically mentioning Australia and its political wrangling ahead of this weekend's election - says that the financial market turmoil seen a few months ago may only be a precursor to a more protracted correction.
The OECD's Financial Market Trends No. 93 released today says it is too soon to draw firm conclusions from the credit crunch generated by the impact of the financial market crisis from the sub-prime disaster.
The report was completed on November 11, and before concerns over some big US institutions like Citigroup began to hurt sentiment.
Liquidity in financial markets initially dried-up in reaction to the sub-prime meltdown as investors took flight, causing market borrowing rates for big business to soar.
"As adjustments have often occurred in waves, and as higher funding costs take typically several months to have their full impact on companies or consumers, it may well be that the recent correction is only a precursor of a more protracted downturn," the OECD says.
It says it is also unclear the extent the sub-prime crisis will affect the global macro economy.
"Previous assertions by forecasters that the sub-prime crisis would not have substantial effects on the US or even the global economy have by now been mostly withdrawn, and more recent economic news points towards a more protracted economic adjustment," the Paris-based institution says.
"Most forecasters have revised their estimate downwards, and a recession in the US is now seen as more likely than before by some observers."
However, the OECD says fortunately the sub-prime crisis has hit at a time when the global economy remains in a healthy state with non-financial corporate sector balance sheets strong, and earnings at high levels.
"But then again, above average earnings prompt observers to expect some weakening in the future, and with higher funding costs default rates are expected to increase," the OECD says.
It also says that growing wealth being generated in developing countries means that these economies are looking for higher yielding investment, generating another risk to the outlook.
"As global liquidity continues to slosh around the world economy, the danger is that asset price bubbles may be building up elsewhere or about to burst," it says.
At the same time it says investors from developed countries are also bidding up emerging market equities in search for higher returns, and a move that is being supported by interest rate cuts in the United States.
It says capital flows to emerging markets seem to be based on sound fundamentals with good economic growth prospects for Asian and Latin American economies.
"However, should the downturn of the US economy be stronger than expected, these markets could experience negative repercussions."
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