It’s notable that the largest risks as perceived by North America and Europe arise from the impact of ‘fiscal imbalances’ and ‘systemic financial failure’ while Asia, North Africa and Latin America fear ‘water supply’ and ‘food shortage’ crises.

(62% of the survey respondents were drawn from North America and Europe – here - hence the headline figures for the survey are overweight these regions views…)

Looking first to the broadest of measures, the OECD plus six, while it remains above 100 and therefore signalling global expansion, the wind has clearly come out of the world’s economic sails. Turning to the rate of change in the leading indicator to get a sense of the momentum in growth, we see that it too is signalling that things are likely to get worse before they get better.  There are no signs of finding a floor as yet, rather if anything it the pace of the decline is accelerating.

A quick survey of the CLI’s for the US and the Eurozone shows that it is these regions that are leading the slowdown – with at least the Eurozone likely to tip into contraction before the end of 2011.

Perhaps more encouraging for commodity exporters, the composite leading indicator for China looks like it may be making small steps towards pushing higher with the rate of change in the indicator starting to claw its way back up. If 2010 is any guide, then perhaps the Chinese construction machine has returned to the building site once more.

In this, Phillip is having a stab at estimating the likely impact of a generalised downturn in house prices. His basic premise is that a negative wealth effect will drive consumption lower – leaving aside any impact on construction and finance sectors.

We’ll return to his calculations later, but as a departure point I thought it’d be interesting to have a look at how Australia’s GDP has fared through time – or more specifically, how particular sectors have performed since 1975 (the period over which we have data from the ABS). Following is a chart that illustrates the percentage share of the major industry sectors that go to make up Australia’s gross domestic product.

Granted it looks more like a geological map of the earth’s crust but if you click here (or on the chart itself), you can open an interactive version of the same on a more manageable scale. Try it out – you can drill down to see how each sector has changed as a percentage of GDP.

Some interesting conclusions from this:

1) The growth of the services sector at the expense of manufacturing has been the major enduring trend. This has been a common feature across the developed economies – not so surprising really given the developed world’s balance sheet has been progressively leveraged up since the 70′s.

2) Housing and Construction have been remarkably stable through the booms and busts. This lends weight to the idea that GDP tracks the housing cycle quite closely.

3) And interestingly Mining comprises a smaller part of GDP today than it did in 1996. Maybe the Professional Services sector has been the biggest beneficiary of the mining boom as measured by gross value added.

Composite leading indicators (CLIs)…point to a mild loss of growth momentum in most major economies for April 2011. A notable exception is the United States which continues expanding relative to trend, albeit more moderately than in last month’s assessment. The CLIs point to a stable pace of expansion in Germany and the United Kingdom, clear signs of slowdown in the pace of activity in France and Italy, and a likely moderation of growth towards its long-term trend in Canada. The CLI for China points to a possible moderation in economic activity. Other CLIs indicate a slowdown in Brazil and India and the first sign of a loss of growth momentum in Russia.

Looking to the individual charts – we can see the expansion ‘relative to trend’ in the US, but looking to the rate of change in the indicator, the portents suggest that the expansion has begun to take on water.

While in the Euro Area, the indicator has already peaked. The question now is whether growth will be replaced with an outright contraction – we won’t know the answer to this until the second half but with the ECB raising rates, the outlook is far from bright.

Looking to the bellweather for commodities – China – it is now decelerating at a pace only rivalled by that achieved in the GFC. Given the muddy waters around official statistics, perhaps the best we can say is that the measures to tighten liquidity are slowing things down a touch.

(Note that the OECD has adjusted the amplitude of this data series – making for larger swings in the indicators – still the trends in data remain the same.)

First to the good news – the absolute number of home loans was up in March, though it’ll take more than one month of buying to turn the now well established downtrend in volume.

Putting the change in loan size with recent house price data, it looks like the uptick in the number of loans is a response to lower prices. Note the change in average loan size for first home buyers has been falling since late 2010.

To put this in a wider context, the following chart illustrates just how rare this type of decline has been over the last 35 years. What we are seeing here is the breaking of the leveraged consumption trend that has been with most of us throughout our working lives. If it continues, as I suspect it will, then the ramifications for the Australian economy will be significant indeed.

The changing of the guard is being replicated in various measures of activity in the Australian economy.  With a shorter-period data set, it’s harder to make too much of New Motor Vehicle Sales.  Still looks suspiciously like we are yet to see the low in this most recent rollover in sales volumes…

In the US, growth was heading towards a cyclical high relative to trend, but again looks likely to peak over the next three months:

Interestingly growth out of China looks to be regaining some momentum

While in the Euro area, growth has already peaked and is likely to struggle on in the face of the ECB interest rate rise.

Finally, as a counterpoint to the OECD’s data, following is the latest JPMorgan Manufacturing PMI (from Markit here) that hints at the same sort of conclusion – that the global growth rate has peaked but remains in expansion mode.

According to Markit, the index (ex-Japan) is indicating an annualised growth rate of 2.5%-3.0%, versus a rate of 3.5% in the first quarter. (Including Japan, the rate was 1.5% – 2.0%.)

The next phase of the crisis, as it will be played out in capital markets at least, will unfold over a couple of weeks as the impact on individual actors become clearer. Given the enormity of the events, it is unlikely that we will see a return to the optimism of a week ago – bounces in risk assets will be sold into.

The response from global governments, if they stick to the same script, will be to once again turn to the stimulus levers. Given that these have been overused of recent times, fiscal policy options are now somewhat constrained. As a result, it’s likely that ‘unconventional monetary policy’ will remain a feature of the landscape. In the US, the liklihood of QE3 being pre-announced ahead of the closure of QE2 has just risen dramatically.

So while we can argue cause and effect, fears of further price rises in real goods may be amplified by the crisis in Japan. It’s in this context, that an update of the Billion Prices Project price index for the US is in order:

The CLIs for Germany, Japan, and the United States continue pointing to robust expansion relative to trend. Signs of regained growth momentum characterise the CLIs for France and Canada. The CLI for the United Kingdom points to a slow but stable pace of expansion. The CLI for Italy continues pointing to a moderate downturn.

The CLIs for other major economies are little changed from last month’s assessment. The CLI for China continues pointing to the possibility of a moderate downturn. The CLI for Brazil remains near its long-term potential. The CLI for India continues pointing to a slowdown relative to trend and the CLI for Russia continues pointing to expansion.

While the headline expansion continues apace in the US and Europe, the momentum of the indicators looks to be peaking.

While China has its nose pointed to the water:

Rolling it all into one, we get an expansion that looks sound but is waning in intensity.

These indicators are docile creatures that tend to be slow to move but, once started, are difficult to stop. Reading a turn into the developed world indicators might be premature but given the expected tightening in global money (ex-Japan) over the next six months has a reasonable basis. Think we can expect the aggregate indicator to roll over by June.

And even, the Euro area is taking heart – at least in aggregate:

But it’s the emerging markets that are struggling against the liquidity currents – China taking the lead in tightening money that, in the OECD’s soundings for November, was just beginning to work its magic:

Tighter credit is hanging albatross-like around China’s equity markets, yet largely being ignored by commodities. It seems unlikely that both price trends can be sustained, even given the supply constraints that will result from recent Australian floods.  Recent history would suggest emerging markets bounce from here – though ultimately, given a choice between higher consumer prices and lower equities, I’m guessing that the Chinese authorities wouldn’t give a damn about their banks.

Chinese equities led commodity markets to the bottom and back up again. The prevailing downtrend in relative prices does not auger well for commodity prices over 2011.

If China does slow appreciably, Australia will be wishing it had some of the newer fangled technologies to keep its economy afloat. Old world wet sails are a positive nightmare without the wind at your back.