The Australian economy – The Australian economy – Staying afloat in the global stormStaying afloat in the global storm
David GruenDavid GruenTuesday, 26 May 2009Tuesday, 26 May 2009
Setting the scene:Setting the scene:Longer term trendsLonger term trends
Real GDP growthReal GDP growth
-3
-2
-1
0
1
2
3
4
5
6
1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08 2012-13
-3
-2
-1
0
1
2
3
4
5
6Per cent Per cent
Forward estimates
Source: ABS Catalogue Number 5206.0 and Treasury.
Unemployment rateUnemployment rate
Source: ABS Catalogue Number 6202.0 and Treasury.
2
4
6
8
10
12
Jun-78 Jun-81 Jun-84 Jun-87 Jun-90 Jun-93 Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11
2
4
6
8
10
12Per cent Per cent
Fo
reca
sts
Employment shares by industryEmployment shares by industry
Source: ABS Catalogue Number 6291.0.55.003.
6
8
10
12
14
16
18
20
Feb-85 Feb-88 Feb-91 Feb-94 Feb-97 Feb-00 Feb-03 Feb-06 Feb-09
66
68
70
72
74
76
78
80
Manufacturing (LHS)
Mining and Construction (LHS)
Services (RHS)
Per cent Per cent
Participation ratesParticipation rates(Population aged 15 and over)(Population aged 15 and over)
40
50
60
70
80
90
Apr-79 Apr-84 Apr-89 Apr-94 Apr-99 Apr-04 Apr-09
40
50
60
70
80
90Per cent Per cent
Male
Female
Source: ABS Catalogue Number 6202.0.
Employment sharesEmployment shares
0
15
30
45
60
75
90
Apr-79 Apr-84 Apr-89 Apr-94 Apr-99 Apr-04 Apr-09
0
15
30
45
60
75
90Per cent Per cent
Full-time
Part-time
Source: ABS Catalogue Number 6202.0.
Exports and importsExports and imports(Values)(Values)
Source: ABS Catalogue Numbers 5206.0 and 5302.0.
11
14
17
20
23
26
29
Dec-78 Dec-84 Dec-90 Dec-96 Dec-02 Dec-0811
14
17
20
23
26
29
Imports
Exports
Per cent of GDP Per cent of GDP
Asia’s share of Australia’s Asia’s share of Australia’s merchandise imports and exportsmerchandise imports and exports
(Values)(Values)
Note: Asia defined as ASEAN, China, Japan, South Korea, Taiwan and Hong Kong.Source: ABS Catalogue Number 5368.0.
30
35
40
45
50
55
60
65
1989-90 1992-93 1995-96 1998-99 2001-02 2004-05 2007-08
30
35
40
45
50
55
60
65Per cent Per cent
Exports
Imports
Terms of tradeTerms of trade(Ratio of export prices to import prices)(Ratio of export prices to import prices)
Note: From September quarter 1959, quarterly data from ABS National Accounts, Catalogue Number 5302.0; prior to September quarter 1959, M W Butlin (1977) ‘A Preliminary Annual Database 1900-01 to 1973-74’, RBA Discussion Paper 7701. Source: ABS Catalogue Number 5302.0, Reserve Bank of Australia and Treasury.
40
60
80
100
120
140
160
1941 1964 1973 1982 1991 2001 2010
40
60
80
100
120
140
160
1950-51
Mar 1974
Sep 2008
Index (2006-07=100) Index (2006-07=100)
Mar 1989
(f)
Investment, savings and the current accountInvestment, savings and the current account
Source: ABS Catalogue Numbers 5206.0, 5302.0 and Treasury.
-10
0
10
20
30
40
1960-61 1970-71 1980-81 1990-91 2000-01 2010-11
-10
0
10
20
30
40
Current account balance
Gross savings
Gross investment
(f)
Per cent of GDP Per cent of GDP
Foreign liabilities and assetsForeign liabilities and assets
Source: ABS Catalogue Numbers 5206.0 and 5302.0.
0
50
100
150
200
Dec-88 Jun-91 Dec-93 Jun-96 Dec-98 Jun-01 Dec-03 Jun-06 Dec-08
0
50
100
150
200
Gross foreign liabilities
Gross foreign assets
Per cent of GDP Per cent of GDP
Net foreign liabilities
Net foreign debt
Household debt and assetsHousehold debt and assets
Source: ABS Catalogue Number 5232.0, Reserve Bank of Australia and Treasury.
0
40
80
120
160
200
Dec-89 Sep-94 Jun-99 Mar-04 Dec-08
0
200
400
600
800
1000Per centPer cent
Debt-to-income ratio (LHS)(Households only)
Assets-to-income ratio (RHS)
Net wealth-to-incomeratio (RHS)
Global financial crisisGlobal financial crisis
Causes of the global financial crisisCauses of the global financial crisis
Proximate causes in the US:Proximate causes in the US:
Long-term public sponsorship of home ownership for Long-term public sponsorship of home ownership for groups that could not afford itgroups that could not afford it
Incoherent financial regulation in the mortgage marketIncoherent financial regulation in the mortgage market
‘‘Originate to distribute’ model for mortgagesOriginate to distribute’ model for mortgages
– Mortgages bundled up and ‘securitised’Mortgages bundled up and ‘securitised’
– Given inappropriate AAA credit ratings and sold to final Given inappropriate AAA credit ratings and sold to final investorsinvestors
Risk was supposed to be spread to those most able to Risk was supposed to be spread to those most able to bear itbear it
In fact, it was spread to those least able to understand itIn fact, it was spread to those least able to understand it
Causes of the global financial crisisCauses of the global financial crisis
Wider causes:Wider causes:
Global imbalances implied huge flow of funds from Global imbalances implied huge flow of funds from developing countries (particularly Asia) to developed developing countries (particularly Asia) to developed countries (particularly US)countries (particularly US)
Low global interest rates, both structural and monetary Low global interest rates, both structural and monetary policy related, led to strongly rising asset pricespolicy related, led to strongly rising asset prices
Causes of the global financial crisisCauses of the global financial crisis
Wider causes:Wider causes:
Large banks, mainly in US, UK, and Europe, gradually Large banks, mainly in US, UK, and Europe, gradually became more highly leveraged (more loans for each became more highly leveraged (more loans for each dollar of bank assets). They did this because dollar of bank assets). They did this because
–– repeal of the US Glass-Steagall Act in 1999 allowed repeal of the US Glass-Steagall Act in 1999 allowed commercial banks to run large investment banking commercial banks to run large investment banking businessesbusinesses
–– regulatory frameworks encouraged banks to shift loans ‘off regulatory frameworks encouraged banks to shift loans ‘off balance sheet’balance sheet’
–– times were goodtimes were good
–– it was it was veryvery profitable: “while the music is playing, you have profitable: “while the music is playing, you have to get up and dance”to get up and dance”
Causes of the global financial crisisCauses of the global financial crisis
–– low global interest rates combined with investors low global interest rates combined with investors continuing expectation of high returns encouraged a continuing expectation of high returns encouraged a ‘search for yield’ ‘search for yield’
–– banks thought they had a better understanding of financial banks thought they had a better understanding of financial risks than ever before, based on sophisticated models of risks than ever before, based on sophisticated models of risk and returnrisk and return
:: the models were sophisticated but, as it turned out, also the models were sophisticated but, as it turned out, also fatally flawedfatally flawed
Inappropriate incentives in financial markets – too much Inappropriate incentives in financial markets – too much pay for short-term returns, not enough downside for pay for short-term returns, not enough downside for losseslosses
– incentive to take risks which generated good returns most incentive to take risks which generated good returns most of the time, but with a small probability of disasterof the time, but with a small probability of disaster
3-month LIBOR over OIS spreads3-month LIBOR over OIS spreads
Source: Thomson Reuters – Ecowin Database.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
05-Jan-07 27-Jun-07 17-Dec-07 07-Jun-08 27-Nov-08 19-May-09
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
US$
Euro
UK£
A$
Per cent per annum Per cent per annum
European Government bond spreadsEuropean Government bond spreads(To 10-year German bunds)(To 10-year German bunds)
Source: Thomson Reuters.
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
May-99 May-00 May-01 May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Greece France Spain Ireland Netherlands Portugal Italy
Per cent per annum Per cent per annum
IMF forecasts of 2009 GDP growthIMF forecasts of 2009 GDP growth
Note: March 2009 forecast is lower bound of IMF estimates. No G7 forecast was provided in the March update, so G3 forecast is used. Source: IMF.
G7 World
-4
-3
-2
-1
0
1
2
3
4
Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Mar-09 Apr-09
-4
-3
-2
-1
0
1
2
3
4Per cent Per cent
-4
-3
-2
-1
0
1
2
3
4
Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Mar-09 Apr-09
-4
-3
-2
-1
0
1
2
3
4Per cent Per cent
US – Housing indicatorsUS – Housing indicatorsHousing starts Total number of homes for sale
Source: US Census Bureau and National Association of Realtors.
0.0
0.5
1.0
1.5
2.0
2.5
Apr-89 Apr-94 Apr-99 Apr-04 Apr-09
0.0
0.5
1.0
1.5
2.0
2.5Millions Millions
1
2
3
4
5
6
Mar-89 Mar-94 Mar-99 Mar-04 Mar-09
1
2
3
4
5
6Millions Millions
`
US House pricesUS House prices
Source: S&P/Case-Shiller.
50
75
100
125
150
175
200
225
250
Feb-87 Feb-89 Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09
50
75
100
125
150
175
200
225
250Index (Feb-00=100) Index (Feb-00=100)
Case-Shiller 10-city index
United States – Unemployment rateUnited States – Unemployment rate
Source: Bureau of Labor Statistics.
2
4
6
8
10
12
Apr-80 Feb-85 Dec-89 Oct-94 Aug-99 Jun-04 Apr-09
2
4
6
8
10
12Per cent Per cent
Japan – Industrial production and exportsJapan – Industrial production and exportsIndustrial production Export volumes
Note: Industrial production is seasonally adjusted.Source: Ecowin and Treasury.
70
80
90
100
110
120
130
Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09
70
80
90
100
110
120
130Index (Mar-89=100) Index (Mar-89=100)
60
100
140
180
220
260
300
Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09
60
100
140
180
220
260
300Index (Mar-89=100) Index (Mar-89=100)
China – GDP growthChina – GDP growth
Note: Quarterly figures are Treasury estimates. GDP is on a production basis. Through-the-year data are in original terms.Source: CEIC China database and Treasury.
0
3
6
9
12
15
Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09
0
3
6
9
12
15
Through the year
Quarterly
Per cent Per cent
OECD output gapOECD output gap
Note: Estimates of potential output have not been revised and therefore do not incorporate the reduction in supply implied by the downturn. Not all countries had reported their December quarter 2008 GDP at the time of calculation.Source: OECD.
-10
-8
-6
-4
-2
0
2
4
6
Dec-70 Dec-75 Dec-80 Dec-85 Dec-90 Dec-95 Dec-00 Dec-05 Dec-10
-10
-8
-6
-4
-2
0
2
4
6Percentage of potential output Percentage of potential output
(f)
Global equity marketsGlobal equity markets
Source: Standard and Poor’s, Stoxx Ltd and ASX.
30
40
50
60
70
80
90
100
110
01-Jan-08 11-Apr-08 21-Jul-08 30-Oct-08 08-Feb-09 20-May-09
30
40
50
60
70
80
90
100
110
S&P 500 Eurostoxx 50 ASX 200
Index (1 Jan 08 = 100) Index (1 Jan 08 = 100)
World’s largest banks by credit ratingWorld’s largest banks by credit rating
10
100
1,000
10,000
AAA AA AA- A+ A A-
10
100
1,000
10,000
Australia's four largest banks
Total assets, $US billion, log scale Total assets, $US billion, log scale
Note: Data refer to bank ratings as at 1 May 2009 and assets as at late 2007 (latest available data).Source: Bloomberg and The Banker.
Banks: Market capitalisationBanks: Market capitalisation($US Billions)($US Billions)
Market value as at June Quarter 2007
Market value as at 19 May 2009
Source: JPMorgan and Bloomberg L.P.
Morgan Stanley Credit Suisse Deutsche Bank Barclays Goldman Sachs UBS
Santander RBS JP Morgan HSBC Citigroup
Thirty largest banks in the WorldThirty largest banks in the World
Note: Thirty largest banks by market capitalisation (excluding Chinese State Owned Entities e.g. ICBC). RBS is included for illustrative purposes, despite no longer being one of the top 30 largest banks globally. Market capitalisation is translated into U.S. dollars using relevant exchange rate as at 13-Feb-09.Source: Reuters (as at 13-Feb-09).
HS
BC
JPM
org
an
Wel
ls F
arg
o
San
tan
der
Cre
dit
Su
isse
Mit
sub
ish
i UF
J
Go
ldm
an S
ach
s
UB
S
Inte
sa S
anp
aolo
Wes
tpac
BN
P P
arib
as
Co
mm
on
wea
lth
Ban
k
RB
C
Ban
co B
rad
esco
Ban
k o
f A
mer
ica
Ban
k o
f N
ew Y
ork
Su
mit
om
o M
itsu
i
Miz
uh
o F
inan
cial
Mo
rgan
Sta
nle
y
Nat
ion
al A
ust
ralia
Un
icre
dit
To
ron
to-D
om
inio
n
U.S
.Ban
corp
Cre
dit
Ag
rico
le
Cit
igro
up
So
ciet
e G
ener
ale
AN
Z
Deu
tsch
e B
ank
Bar
clay
s
RB
S
100
90
80
70
60
50
40
30
20
10
0
MA
RK
ET
CA
PIT
AL
ISA
TIO
N (
US
$m)
Banks’ share pricesBanks’ share prices
Source: Bloomberg.
0
20
40
60
80
100
120
02 Jul 07 21 Dec 07 10 Jun 08 29 Nov 08 20 May 09
0
20
40
60
80
100
120Index (2 Jul 07=100) Index (2 Jul 07=100)
0
20
40
60
80
100
120
02 Jul 07 21 Dec 07 10 Jun 08 29 Nov 08 20 May 09
0
20
40
60
80
100
120
Australia
US
JapanUK
Index (2 Jul 07=100) Index (2 Jul 07=100)
House pricesHouse prices
Source: S&P/Case-Shiller, Australian Property Monitors and Treasury.
80
120
160
200
240
280
320
Mar-95 Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09
80
120
160
200
240
280
320Index (Mar-95=100) Index (Mar-95=100)
Australia(6 capital city weighted average)
United States(Case-Shiller 10-city index)
Bulk commodity pricesBulk commodity pricesIron ore Thermal coal
(Newcastle)
Note: Iron ore spot price is CFR for India/China imports.Source: Bloomberg, Global Coal and ABARE.
20
50
80
110
140
170
200
230
May-05 May-06 May-07 May-08 May-09
20
50
80
110
140
170
200
230
Spot price Contract price
$US/t $US/t
20
50
80
110
140
170
200
230
Jan-04 May-05 Sep-06 Jan-08 May-09
20
50
80
110
140
170
200
230
Spot price Contract price
$US/t $US/t
RBA Cash rateRBA Cash rate
0
4
8
12
16
20
24
May-87 May-89 May-91 May-93 May-95 May-97 May-99 May-01 May-03 May-05 May-07 May-09
0
4
8
12
16
20
24Per cent Per cent
Note: Data to Dec-89 are the 11am call rate. Data from Jan-90 are the target cash rate.Source: Reserve Bank of Australia.
Australian Government fiscal stimulusAustralian Government fiscal stimulus
Source: Treasury.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2nd Half2008
1st Half2009
2nd Half2009
1st Half2010
2nd Half2010
1st Half2011
2nd Half2011
1st Half2012
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Transfers COAG reforms Investment
Per cent of annual GDP Per cent of annual GDP
Real GDPReal GDP(estimated effect of fiscal stimulus)(estimated effect of fiscal stimulus)
95
96
97
98
99
100
101
102
103
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11
95
96
97
98
99
100
101
102
103
Pre-stimulus
Post-stimulus
Forecasts
Index (Sep-08=100) Index (Sep-08=100)
Source: ABS Catalogue Number 5206.0 and Treasury.
Australian GovernmentAustralian Government
Source: Treasury.
Payments and receipts
Underlying cash balance
20
22
24
26
28
30
1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08 2012-13
20
22
24
26
28
30
Receipts
Payments (f) (p)
Per cent of GDP Per cent of GDP
-6
-4
-2
0
2
4
1977-78 1982-83 1987-88 1992-93 1997-98 2002-03 2007-08 2012-13
-6
-4
-2
0
2
4(f) (p)
Per cent of GDP Per cent of GDP
Government net debt position Government net debt position for selected countriesfor selected countries
Note: Data are general government net debt, except for Australia which are Australian Government debt. Data are as at end of calendar year, except for Australia and the UK where data refer to financial years beginning 2008-09. UK data for 2014 refer to financial year 2013-14.Source: IMF, HM Treasury and Treasury.
-20
0
20
40
60
80
100
120
140
Australia Canada UK US Advanced 25 Euro area Japan
-20
0
20
40
60
80
100
120
140
2008 2009 2010 2014
Per cent of GDP Per cent of GDP
Private consumptionPrivate consumption(Nominal)(Nominal)
Source: ABS Catalogue Number 5206.0, US Bureau of Economic Analysis and Office of National Statistics, UK.
50
55
60
65
70
75
Mar-79 Mar-82 Mar-85 Mar-88 Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Mar-06 Mar-09
50
55
60
65
70
75Per cent of GDP Per cent of GDP
US
UK
Australia
The Australian economy – The Australian economy – Staying afloat in the global stormStaying afloat in the global storm
David GruenDavid GruenTuesday, 26 May 2009Tuesday, 26 May 2009