Deeper, darker sub-prime threat: economy round-up

A senior figure in one of the world’s biggest private equity forms, the US based Blackstone Group, has sounded an ominous warning about the depth of the sub-prime crisis and its likely effect on the global economy.

“The sub-prime black hole is appearing deeper, darker and scarier than they [the banks] thought,” Blackstone chief operating officer Tony James said at the company’s quarterly result meeting on Monday.

Although Blackstone itself has made money during the sub-prime crunch – its hedge fund business saw revenues rise 88% in the September 2007 quarter, and the business reported an overall quarterly profit of US$234 million – James warned that the banking sector was struggling to come to grips with the current volatility.

“They are now looking at new reserves and my sense… is they don’t have a clear picture of how this will play out and confidence is low,” James reportedly said.

But it’s not all bad news from the US – retail giant Walmart yesterday announced a 7.9% increase in net income for the September 2007 quarter to US$2.86 billion, up from US$2.86 billion this time last year.

The result exceeded market expectations, which had been relatively pessimistic in the context of crumbling US housing markets, and suggests US consumer sentiment remains relatively strong.

And in a chilling prediction of the kind of economic circumstances Australia could face if things don’t go to the government’s plan, new data from UK shows housing prices there fell at the fastest rate since 2005.

The RICS house price balance for the September quarter fell to negative 22.2 points, a long way from stability and even further from price growth.

According to a Citigroup analysis, UK house price falls could continue through next year. But it is the reason for the fall that should have some resonance for Australian home owners: a “toxic mix” of higher interest rates, unwarranted price increases in the past and record household debt levels.

New economic data released today hints at just how this kind of toxic mix might come about in Australia.

Wages data released again illustrates just how tight Australia’s job market is. Wages rose 1% in the September quarter, a result that is close to or slightly higher than market expectations. Wages have now increased 4.2% over the last 12 months, a figure that won’t change anyone’s mind that the Reserve Bank of Australia will have to lift rates again in the near future.

But even as rising wages suggest further rate hikes may be required, the two rate raises we’ve already had are already having an impact on consumer confidence. The Westpac-Melbourne Institute Consumer Sentiment Index fell by 4.2% in November to a still relatively strong 110.5. The fall was mainly due to the interest rate rise announced earlier this month – a point illustrated by the fact the confidence among mortgage holders fell 8.3%, almost twice as much.

For the moment there is no comparison between the US or UK and Australia – our close ties to the Chinese economy is the key differentiator. But the trends in other countries point to a possible future and highlight why responsible economic management continues to be important, election campaign or not.

On the markets today, a lift in the US Dow Jones Index overnight – largely thanks to those Walmart results – has filtered through to the S&P/ASX 200, which by 12.50 pm is up a strong 1.2% on yesterday’s close to 6590.8. At the same time The Australian dollar is trading at us89.99c, up from  yesterday’s US88.77c close.