economic & financial market outlook...2 australian economic & financial market outlook- 2014...
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“
Engineering Conference
Gladstone, Qld
Economic & Financial Market Outlook
John Peters
Director, Economics
+(612) 9117 0112
20 June 2014
1
Important Information
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the Bank’s New York Branch. The information contained herein is not intended to be an exhaustive discussion of the
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2
Australian Economic & Financial Market Outlook- 2014 & 2015
Direction of Risks
Global Growth Global economic growth of 3½-4% in 2014 & 2015.
Domestic Growth Economy to grow by about 3-3½% pa in 2014 & 2015.
Monetary Policy RBA has cut rates to 2½%. We think this will be
cyclical low. We see a 0.25% RBA rate hike in QIV ’14.
Underlying CPI CPI at 2.9% in QI 2014. Upside risks in 2014/15 as
tradables inflation (ie import prices) lifts
due to weaker AUD. QI Core CPI was 2.7%pa.
Unemployment Unemployment rate has peaked at 6% for cycle. We
see unemployment rate tracking lower in 2014 & 2015
May unemployment at 5.8% - 3rd month in a row.
AUD Outlook Trade mainly in US$0.90-99 zone in 2014 & 2015.
3 3
RBA Policy : Next Move a 0.25% lift in cash rate in QIV 2014.
Direction of Risks
THE KEY CHART
KEY CHARTS
-2
0
2
4
6
-2
0
2
4
6
1980 1986 1992 1998 2004 2010
World GDP growth
Average GDP growth since 1980 (3.3%)
%WORLD GDP GROWTH
%
DIRECTION OF RISK OVER NEXT 12 MONTH s
Monetary policy:
Short end:
Long end:
AUD:
.
.
.
2.0
2.5
3.0
3.5
2.0
2.5
3.0
3.5
Jan 13 Apr 13 Jul 13 Oct 13 Feb 14 May 14
%
3 months ahead
12 monthsahead
Source: Reuters
RBA CASH RATE PRICING%
Cashrate
4
CBA Interest Rate Forecasts - Steeper Curve
■ Interest & swap (or fixed) rates expected to rise through 2014, with some dips.
Long end rising by more.
■ 5 year swap rates expected to rise to 4.15% in late 2014 & to 4.55% by late 2015.
■ Risks remain in EU & US………..with occasional “bursts of pessimism” likely.
5
Australian Economic & Financial Market Outlook
Australia’s stellar performance since 2008 in wake of GFC
Australia emerged from the GFC (Global Financial Crisis) with:
Low unemployment
Solid economic growth
A stable and profitable financial system; and
Low levels of government debt
Australia’s performance is unique among the advanced economies.
For instance, 36 million jobs were shed globally after the GFC WHILE
Australia has created over 1 million new jobs. Australia’s unemployment
stood at 5.8% in May.
.
6
-30
0
30
60
90
120
2007 2012 2017 2022 2027
% of GDP
2012
Advanced economies
Australian Commonwealth
Australia’s Government debt a “mole hill” not a “mountain”.
High debt in advanced economies constrains growth as well as credit quality.
Special General government debt
7
Australia has miniscule levels of public debt - despite “shock jock” hype.
Debt
Mountains
Debt Molehill
8
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Damage to the advanced economies/regions persists and some are yet to regain pre-
Lehman’s output levels.
The US is in better shape.
Australian economy has continued to outperform other advanced economies.
The Big Picture
Six years after Lehman’s collapse
90
95
100
105
110
115
90
95
100
105
110
115
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
REAL GDP(Sep'08= 100)Index Index
Japan
US
Australia
Eurozone
UK
NZLehman collapse
0
4
8
12
0
4
8
12
Jan 05 Jan 07 Jan 09 Jan 11 Jan 13
%%
UK
Eurozone
Source: CEIC
UNEMPLOYMENT RATE
US
Japan
Australia
9
% GDP Growth since 2008
Outperforming & overachieving!
Australia In Perspective
10
Australian Economic & Financial Market Outlook
The real issues facing Australia today
The emergence of Asia as the global centre of economic gravity
- Australia’s strong economic links to emerging economies.
The structural shift up in AUD – which has resulted in significant structural
change across sectors of Australia’s economy.
Born again savers – consumers are now saving 10-12% of income for first
time since early 1980s.
- Bad news for retailers & domestic tourism used to consumers spending
more than their incomes (as they have in past 20 years or so).
- Also State governments suffering due to sharply lower GST revenues.
Labour market structural issues – skill shortages, productivity issues,
population growth and imminent retirement of boomer generation ( ie 30%of
current workforce).
11
Australian Economy Outperforms Advanced Economies - post GFC
12
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
CBA global growth forecasts
envisage a shift back towards
trend in 2014 as the advanced
economies strengthen.
China expected to do a bit better
than the consensus. Japan a bit
worse.
CBA Global Economic Forecasts
CBA Global Growth Forecasts
2012 (a)
2013 (a)
2014 (f)
2015 (f)
World 3.2 3.0 3.4 3.9
United
States 2.8 1.9 2.7 3.2
Japan 1.4 1.5 0.5 1.2
Eurozone -0.7 -0.5 1.1 1.4
United
Kingdom 0.3 1.8 2.9 2.4
Canada 1.7 2.0 2.4 2.5
China 7.7 7.7 7.5 7.6
India 4.7 4.2 4.7 4.9
13
The US Economy is picking up after GFC near death experience
Leading indicators of US housing activity have turned up – prices are rising.
Housing activity now adding to growth rather than dragging on it.
US housing adding to growth
-2
-1
0
1
2
-2
-1
0
1
2
Mar-87 Mar-92 Mar-97 Mar-02 Mar-07 Mar-12
US HOUSING & GDP(contribution to annual growth)% %
0
700
1,400
2,100
2,800
0
25
50
75
100
Jan-95 Jan-00 Jan-05 Jan-10
US HOME STARTS
NAHBfuture sales(6mth lead,
lhs)
US housing starts (rhs)
Pts '000
14
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
The US labour market has hit key Fed targets – but targets are now qualitative guidelines
and the inflation target constraint unlikely to be triggered.
Initial jobless claims consistent with +200k payrolls and lower unemployment.
The Transition To “Normal” Policy Settings
Labour market the key
0
3
6
9
12
0
200
400
600
800
Jan 96 Jan 00 Jan 04 Jan 08 Jan 12
%'000
Initialclaims(lhs)
Unemploymentrate(rhs)
US LABOUR INDICATORS
4.0
5.8
7.5
9.3
11.0
4.0
5.8
7.5
9.3
11.0
Mar-07 Apr-09 May-11 Jun-13 Jul-15
US UNEMPLOYMENT PROJECTIONS(FOMC projections)
Actual
Dec'13 Forecast
FOMC's Unemployment Rate threshold ("well past" 6.5%)
15
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Asia has slowed – but looks to be picking up momentum again in 2014.
Global growth is also strengthening.
Asian Economy picking up momentum
16
Sustained higher terms of trade (Price exports/price imports)
.
Source: ABS Catalogue Number 5206.0, RBA and Treasury
It’s a Brand New Day!
17
Source: The Conference Board Total Economy Database, Maddison (2010), IMF World Economic Outlook Database and Treasury.
Global Reweighting Underway
It’s a Brand New Day!
18
Australia definitely living in the right neighbourhood.
19
A Fourth Boom?
China dominates early-mid cycle commodities (iron ore, steel, coal) but consumption
mix changes as incomes rise.
Advanced economies more important for mid-late cycle commodities (zinc, nickel,
copper, LNG). Australian LNG well placed as Chinese incomes rise.
The 4th
boom & commodities – the importance of mid-late cycle commodities
0
25
50
75
100
Iron ore Steel Aluminium Copper Nickel Zinc Coking Thermal Oil Natural Gas LNG Uranium
%Other India US Eurozone Japan China
GLOBAL COMMODITY CONSUMPTION(% of total)
20
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2009 2020 2030
North America Europe Asia Pacific Central and South America Africa and Middle East
Billions (persons) Billions (persons)
Projection of the global middle class by region, persons
Asia Pacific Growth Outlook
3¼ billion
middle
class folks
21
Asia Pacific Growth Outlook
Areas of Great Potential for Australia in coming years and decades
Mining will remain robust as Asia continues to develop/industrialise/urbanise
New waves of strong growth/prosperity in the following areas:
Agribusiness;
Gas;
Tourism;
International Education;
Wealth Management
Health Services;
Transport Services
5
7
9
11
13
15
5
7
9
11
13
15
1994 1999 2004 2009 2014
CHINA GDP GROWTH & TARGET(annual % change) %%
RealGDP
5-Year Average Outcome
Five Year PlanTarget
22
The middle income group in the Asia-
Pacific region is expected to treble to
1½bn by 2020.
Middle income populations want:
– larger and better quality housing;
– more and better quality food;
– more consumer durables;
– more financial & health services;
– more education services;
– more holidays.
Australia is already more than just a quarry and a farm
Australia in the Box Seat as Asian Growth Explodes!
0 25 50
Iron oreCoal
TourismGold
EducationNatural gas
Crude petroleumProf, tech & business…
WheatCopper ores
Aluminium oresBeef
AluminiumBusiness travel
CopperMedicaments
Refined petroleumCotton
WoolMeat (excl beef)
Insur, pension & fin…Alcoholic beverages
AUSTRALIAN TRADE(top export categories, 2011/12)
$bn
*Source: DFAT/ABS
23
Australia has fared less worse than
other advanced economies.
Even with sub-trend growth, Australia is
set to complete 23 years of
uninterrupted economic growth.
Public finances and the financial system
remain in good shape.
Policy makers still have some firepower
if needed.
The generational benefits of the
resources boom and the Asian
emergence continue.
….There is still much to like
Australia In Perspective
-3
0
3
6
-3
0
3
6
1960 1968 1976 1984 1992 2000 2008
% %
AUSTRALIA: ECONOMIC GROWTH(annual % change)
22 years
24
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
The economy moved ahead despite
some significant headwinds in 2013:
– public spending fell for the first time in
more than fifty years and reduced
GDP growth by 0.5ppts;
– businesses decided to meet demand
through inventories and the run down
in stocks reduced GDP growth by
0.5ppts.
Australia In Perspective
Powerful headwinds
-1
0
1
2
-1
0
1
2
1960 1968 1976 1984 1992 2000 2008
% %
PUBLIC SPENDING(contribution to GDP growth)
Average(0.8ppts)
25
Australian Economy: GDP to grow by 3-3½% in 2014 & 2015
.
STRONGEST GROWTH OUTLOOK o LNG projects, construction & exports. Iron ore exports.
o Mining operation, related equipment & services.
o Infrastructure – roads, rail, water, power, utilities.
o related construction, engineering & services.
o Outbound tourism & internet buying, imported car sales.
o Cafes, restaurants, education & health services.
MODERATE TO LOW GROWTH OUTLOOK o Staples – groceries, food, hardware, communications
o Defence.
o Commercial construction, rentals (?) & fit-outs
o Discretionary retail – clothing/shoes, cosmetics, a/visual.
o Manufacturing – mining, metals & wood related.
o Housing construction, alts & adds.
o Domestic & Inbound tourism. Some tertiary education.
SECTORS WITH DOWNSIDE RISK o Coal & iron ore mining –construction & exploration.
o Retail exposed to internet-based alternatives.
o Manufacturing – local car industry, textiles & food groups.
-8
0
8
16
24
-8
0
8
16
24
1988 1992 1996 2000 2004 2008 2012
%%
Mining
Non-mining
Source: CBA
THE TWO SPEED ECONOMY(annual % change)
0
2
4
6
0
2
4
6
Sep-98 Sep-01 Sep-04 Sep-07 Sep-10 Sep-13
REAL GDP(annual % change)% %
Trend
26
Resource construction activity is
slowing.
The non-mining economy will have to
make a larger contribution.
Household spending (inc residential
construction) and non-mining business
capex potential domestic drivers
Other opportunities lie with the older
middle income Asian consumer in
agriculture, education, tourism,
manufacturing, health and financial
services.
Some of these transitions are underway.
Finding new sources of growth
What Needs to Go Right? The Growth Transition Needs To Succeed
-8
0
8
16
24
-8
0
8
16
24
1988 1992 1996 2000 2004 2008 2012
%%
Mining
Non-mining
Source: CBA
THE TWO SPEED ECONOMY(annual % change)
27
The resources boom is transitioning
from the construction phase to the
production and export phase.
We expect resource export volumes to
grow at 8-10%pa over the next two
years:
– sufficient to contribute 1¼ppts per
annum to GDP growth.
For the export boom to work, our main
export markets need to be strong
enough to absorb the extra supply and
pay a decent price.
The export boom – what’s happening, what’s needed?
Export Boom Under Way
0
25
50
75
100
0
250
500
750
1000
1989 93 97 01 05 09 13 17 2021
KEY RESOURCE EXPORTSMt Mt
Ironore(lhs)
CBA(f)
LNG(rhs)
28
Asia is Australia’s major trading partner (two-thirds of trade).
Commodities dominate Australian exports (≈60% of the total).
Asian exposure intensifies
The Three Booms
0
10
20
30
40
0
10
20
30
40
Jan-00 Apr-02 Jul-04 Oct-06 Jan-09 Apr-11 Jul-13
EXPORT SHARES(% share of annual exports)
% %
Japan
China
ASEAN
North America
EU
29
The Three Booms
CBA commodity price forecasts
Stronger global growth limits
downside to Australian commodity
prices but rising supply and higher
USD to weigh.
CBA USD Commodity Price Index to
move lower in USD terms but trend
higher in AUD terms.
0
100
200
300
400
500
0
100
200
300
400
500
Sep 98 Sep 02 Sep 06 Sep 10 Sep 14
IndexIndex
USDindex
AUDindex
Source: CBA
CBA COMMODITY PRICE INDEX
CBA(f)
30
The resources boom is the defining
feature of the Australian economic
landscape over the past ten years:
– the income phase associated with the
step up in commodity prices is over;
– the mining investment phase triggered
by high prices is ending; but
– the production and export phase is just
beginning.
For the export boom to work, our main
export markets need to be strong enough
to absorb the extra supply and pay a
decent price.
Overlapping booms …
The Three Booms
0
110
220
330
440
90
120
150
180
210
2002/03 2006/07 2010/11 2014/15
IndexIndex
Resourceexports
(lhs)
Commodityprices
(RBA USD)(rhs)
THREE BOOMS(start=100)
Miningcapex(rhs)
31
The Australian economy is running at a
below trend pace (sub 3%).
Implications:
– below trend growth means rising
unemployment;
– below trend growth means inflation
remains low.
Reality: sub trend growth …
Australia In Perspective
-4
0
4
8
12
-4
0
4
8
12
Sep-90 Sep-94 Sep-98 Sep-02 Sep-06 Sep-10
OUTPUT & UNEMPLOYMENT%
Non-farmGDP (%pa)
%
Unemployment(%)
32
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
The pipeline of resource projects is being
used up at a faster rate than new projects
are being added .
Previous mining capex booms have
typically peaked at 2-4% of GDP. Those
peaks proved to be “inverted V’s” and
involved rapid retracements to more
normal levels.
The peak is near 8% of GDP this time.
RBA is projecting mining investment,
relative to GDP to decline by around 3
percentage points over the next 2½ years (see RBA Statement on Monetary Policy, Nov’13).
The Growth Transition Needs To Succeed
Gravity wins eventually
0
2
4
6
0
2
4
6
1861 1881 1901 1921 1941 1961 1981 2001
%
RBA(f)
Source: RBA/CBA
MINING INVESTMENT(% of GDP) %
Previousbooms
2013
33
Residential construction – smart policy – supportive demographics
Population growth lifting again.
Migrant intake still skewed towards (cashed up) skilled workers – typically bring 5x
the funds of other migrants.
The Growth Transition Needs To Succeed
0
70
140
210
0
70
140
210
1991/92 1996/97 2001/02 2006/07 2011/12
MIGRATION PROGRAM'000 '000
Total
Skilled 457visa
Planningtargets
0
150
300
450
0
150
300
450
1990/91 1995/96 2000/01 2005/06 2010/11
POPULATION DRIVERS'000 '000
Netmigration
Naturalincrease
34
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Demographic trends and have
boosted demand. Competition
with mining and infrastructure has
limited supply.
Underlying demand for housing
has run ahead of new supply.
So there is an excess demand and
a pent-up demand for housing.
The Growth Transition Needs To Succeed
Residential construction – smart policy – pent up demand
-100
0
100
200
-100
0
100
200
Sep-90 Sep-96 Sep-02 Sep-08
Demand
Supply
'000
Pent-updemand
Excesssupply
CBA: HOUSING DEMAND & SUPPLY'000
35
CBA Forecasts
Construction lending is up and
building approvals are rising.
Dwelling commencements are the next
step in the chain.
CBA dwelling starts forecasts:
– 2013: 165k
– 2014: 180k
The Growth Transition Needs To Succeed
130
150
170
190
130
150
170
190
1998 2002 2006 2010 2014
'000
Th
ou
san
ds
'000
Th
ou
san
ds
Average 2005-12 (ex 2010 stimulus
boost)
Boosted by government
stimulus package
DWELLING COMMENCEMENTS
CBA(f)
36
Rising house prices is one of the
transmission paths for monetary policy.
Rising house prices boosts wealth,
encourages construction activity and
lifts sentiment.
Consumer spending is typically a
beneficiary.
The transmission to the consumer
The Growth Transition Needs To Succeed
-3
0
3
6
9
-40
-20
0
20
40
Sep-98 Sep-02 Sep-06 Sep-10
Dwelling prices(lhs)
Dwelling investment
(lhs)
%%HOUSING & THE CONSUMER
(annual % change)
Consumerspending
(rhs)
37
AUD rising again over 2014 AUD expected to be in USD0.90-0.99
range in 2014 and be trading at USD
0.97 in December 14, lifting to USD
0.99 by March 15.
Euro to remain weak with Euro growth
& interest rates near zero.
AUD/EUR to rise to EUR 0.71 by
March 15.
JPY/AUD to lift to JPY107 by March 15
Some AUD fundamentals still very
supportive:
high Asian & commodity exposure;
positive interest rate differential with
RBA rate hike likely in QIV 2014;
AAA rating and sound financial
system.
The AUD
38
-30
0
30
60
90
120
2007 2012 2017 2022 2027
% of GDP
2012
Advanced economies
Australian Commonwealth
Australia’s Government debt a “mole hill” not a “mountain”.
High debt in advanced economies constrains growth as well as credit quality.
Special General government debt
39
Economic Background : Australia’s Superfunds Pool 3rd Largest in World
Source: Australian Trade Commission: Australia Benchmark Report - June 2013
40 40
Australia’s Superannuation Pool to grow exponentially in decades ahead
Australia’s Superannuation Pool is expected to grow to around $7¼ trn by 2035
(ie 180% of GDP)
41 41
Australian Economy: Top Notch
42
Offshore Perspective of Australia’s Economic Performance
AAA Rated Economies
Australia
Germany
Finland
Norway
Singapore
Sweden
Canada
Switzerland
Hong Kong
Netherlands
Denmark
Australia one of only eleven AAA rated
economies by all three Ratings Agencies
43
Relativities still matter
Global investment decisions depend on a range of factors.
New government set to remove the mining tax, which has been seen as a
disincentive for Australian projects.
Table on
location drivers
RANKING OF COUNTRIES FOR MINING INVESTMENT BY KEY DECISION CRITERIA: 2012 (highest ranking for each category is 10 so maximum score is 70) Source: Behre Dolbear Mining Survey
RANK COUNTRY ECONOMIC
SYSTEM
POLITICAL
SYSTEM
SOCIAL
ISSUES
PERMITTING
DELAYS
CORRUPTION
CURRENCY
STABILITY
TAX
REGIME
TOTAL
POINTS
1 Australia 9 8 8 8 10 9 5 57
2 Canada 9 9 4 4 10 9 7 52
3 Chile 9 9 7 6 8 8 4 51
4 Brazil 7 8 5 5 5 9 6 45
5 Mexico 7 7 3 7 6 6 7 43
6 USA 8 8 3 2 9 7 4 41
7 Colombia 6 7 6 6 5 5 4 39
8 Botswana 6 5 5 5 5 5 6 37
9 Peru 6 6 4 4 5 6 5 36
↕
25 Russia 1 1 3 3 1 2 5 16
The Growth Transition Needs To Succeed
44
Labour Market: Showing signs of life after recent slowdown.
Jobs growth softened in HII 2013; picking up in 2014 & 2015!
In May, employment eased by 4.8k but 22.2k full-time jobs
were created. Since the beginning of 2014, full-time
employment has lifted by 95k.
Unemployment was steady at 5.8% (3rd month in a row)
from 6.1% in February (likely cyclical peak)). Despite the
weaker jobs growth in past 18 months the unemployment
rate has held around 5¾-6.1%.
Over the year to May 2014, there were 98.8k jobs created,
with over half of those jobs created over the past three
months. Unemployment rate has been in tight 5.0-6.1%
range since mid 2011 (ie past 3 years).
Low by global standards: US 6.3%; UK 7.0%; Euroland
12.2%; Germany 6.9%; Ireland 15%; Spain & Greece 27%.
Commercial construction, retail & manufacturing weak.
Mining, gov’t & other services rising.
-60
-30
0
30
- 6
- 3
0
3
Jul 01 Jul 04 Jul 07 Jul 10 Jul 13
EMPLOYMENT & VACANCIES(annual % change)
Employment(lhs)
ANZ all jobvacancies
(rhs)
% %
ABS vacancies
(rhs)
Skilledvacancies
(rhs)
-50
0
50
100
150
3.8
4.4
4.9
5.5
6.0
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
AUST. LABOUR MARKET
Employmentgrowth (rhs)
Unemployment rate (lhs)
% '000
45
-200 -100 0 100 200 300 400 500
Health
Construct
Prof serv
Education
Mining
Retail
Gov admin
Accomm
Transp
Fin & insur
Wholesale
Admin
Utilities
Culture/Rec
Rental
Personal
Communic
Agri
Manufact
A DECADE OF JOBS(change 2002-13, '000s)
Extra jobsadded from 2002 to 2013= 2.4 million
or 27% rise to 11.7 million
'000s
Jobs Growth By Sector : 11 years August 2013
Services sector jobs growth dominant over past decade
46
Australia: Jobs by Industry.
Health and retail are 23% of all jobs. Manufacturing is 8%. Mining is 2.5%.
Health looks set to rise to 14% of workforce via Disability Care and ageing issues.
0 2 4 6 8 10 12
Health
Retail
Construct
Manufact
Education
Prof serv
Accomm
Gov admin
Transp
Pers
Fin & insur
Wholesale
Admin
Agri
Mining
Cult
Communic
Rental
EGW
AUST JOBS BY SECTOR(% of total)
%
Total jobs11.49 million
inFebruary 2014
Full-time
Part-time
-100 -50 0 50 100
Health
Pers
Manufact
Gov admin
Agri
Construct
EGW
Education
Fin & insur
Cult
Retail
Mining
Rental
Communic
Admin
Transp
Prof serv
Accomm
Wholesale
Year toFebruary
2014+68k
'000s
AUST JOBS CHG BY SECTOR(change over year to Feb. 2014, Original)
47
Economic Background
48
Domestic inflation is mainly about
services – so labour costs are a key
driver of domestic inflation.
The RBA believes that wages growth
will slow on the back of a soft labour
market:
– RBA did not publish a wage forecast
in the May SMP but did suggest it
was “a little lower” than the sub 3%
projection released in November.
Wages growth has slowed as expected
over the past year to around 2½%.
An Inflation Transition Needed As Well
Mission accomplished?
1
2
3
4
5
1
2
3
4
5
Sep-01 Sep-04 Sep-07 Sep-10 Sep-13
WAGE PRICE INDEX(annual % change)
RBA"expectation"
(SMP Nov '13)
% %
Post-GSTslump /
"tech wreck"
Globalfinancial
crisis
2
3
4
5
6
7
2
3
4
5
6
7
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
WAGES COST INDEX(annual % chg)
% %
Utilities
Mining
Total
Construction
49
Asia Pacific Growth Outlook
Education and Tourism - Big winners from rapidly expanding Asian middle class!
50
Consumers using credit cards less…..but using phones, debit cards more.
Higher cash deposits shows precautionary savings rising.
Saving ratio at 10%, highest since 1980s.
Consumer Caution – Deposits To $710bn, Up 8% pa.
-5
0
5
10
15
20
-5
0
5
10
15
20
Sep-72 Sep-80 Sep-88 Sep-96 Sep-04
SAVING RATIO% %
100
300
500
700
900
500
1500
2500
3500
4500
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10
HOUSEHOLD ASSETS
Dwellings,lhs
Deposits,rhs
$bn $bn
RBA -3
0
3
6
9
12
-3
0
3
6
9
12
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
CREDIT CARD ACTIVITY(%pa, smthd)
Balances
Avge balanceper card
Total Accounts
source RBA
%pa %pa
51
Retail Trade : Looking better!
Growth in the big non-mining states is picking up
Retail trade rose by 0.2% in April to be up by
5.7%pa.
The annual growth rate has not been near 6%
since November 2009.
Spending was driven by a lift in discretionary
spending – in particular, spending at
department stores and cafes and restaurants.
The robust lift in retail trade in the past six
months annualises out at a healthy 9.4%pa.
Year on year retail trade growth was very strong
in NSW (+8.1%) in April. Australia’s largest State
had the biggest annual sales growth, in line
with the largest house price appreciation.
For the other States, the YoY increases in April
were: Tas (+10.2%), Vic (+7.2%),Qld (+4.0%)
SA (3.4%), and WA (+1.4%). -3.0
0.0
3.0
6.0
9.0
-1.5
0.0
1.5
3.0
4.5
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
RETAIL TRADE(% change) %%
Annual (rhs)
Monthly(lhs)
52
On-Line Retail – Up 16%pa to $15bn annual.
Online retailing continues its rapid growth in Australia, but domestic retailers are now outpacing
international retailers. There is a strong impact on transport, postal & logistics groups.
Spending increased 16% to $15.0b in year to February 2013, based on CBA credit card turnover.
Domestic spending increased 16%, representing 61% of total online spending
International spending increased by 9%, representing 39% of total online spending
Online spending now represents 5.7% (or $15bn) of total retail spending (ie $260bn) in Australia.
Online retail growth is slowing and domestic retailers are outperforming. In our previous major report
(12 months to July 12), the overall growth rate was 30% and the split was 60%/40%.
Monthly online spending, indexed to 100 in February 2013
Jan-09 Aug-09 Mar-10 Oct-10 May-11 Dec-11 Jul-12 Feb-13
Ind
ex
Domestic online spending International online spending
100
0
53
National Credit Growth Weak – Post GFC
Cautious consumers remain cautious in terms of borrowing & spending
Private sector credit grew by 0.4% in April, to be up a tepid 4.4% pa.
Housing credit lifted by 0.5% to be up 5.9%pa. Housing credit growth rate currently at lowest levels
since series began in 1977.
Business credit rose by 0.2%, with annual growth a still lacklustre 2.6%;
Other personal lending shrank by 0.1%, to be up a paltry 0.4% on a year ago.
Confirms “born again saver” & “fiscal prudence” mentality of consumers/business still reigns.
-10
0
10
20
30
-10
0
10
20
30
Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
RBA CREDIT AGGREGATES(annual % change)% %
Housingcredit
Personalcredit
Businesscredit
54
Education and Tourism - Big winners from rapidly expanding Asian middle class!
Asia Pacific Growth Outlook
0
150
300
450
0
150
300
450
Jan 02 Jan 05 Jan 08 Jan 11
IndexIndex
China
India
SHORT TERM OVERSEAS ARRIVALS(rolling annual total, Jan'02=100)
NewZealand
Japan
UK
Total
0
100
200
300
'000
China
India
Other East Asia
Other countries
STUDENT VISAS GRANTED(2010/11)
Source: DIMIA
55
Relativities still matter
Global investment decisions depend on a range of factors.
New government set to remove the mining tax, which has been seen as a
disincentive for Australian projects.
Table on
location drivers
RANKING OF COUNTRIES FOR MINING INVESTMENT BY KEY DECISION CRITERIA: 2012 (highest ranking for each category is 10 so maximum score is 70) Source: Behre Dolbear Mining Survey
RANK COUNTRY ECONOMIC
SYSTEM
POLITICAL
SYSTEM
SOCIAL
ISSUES
PERMITTING
DELAYS
CORRUPTION
CURRENCY
STABILITY
TAX
REGIME
TOTAL
POINTS
1 Australia 9 8 8 8 10 9 5 57
2 Canada 9 9 4 4 10 9 7 52
3 Chile 9 9 7 6 8 8 4 51
4 Brazil 7 8 5 5 5 9 6 45
5 Mexico 7 7 3 7 6 6 7 43
6 USA 8 8 3 2 9 7 4 41
7 Colombia 6 7 6 6 5 5 4 39
8 Botswana 6 5 5 5 5 5 6 37
9 Peru 6 6 4 4 5 6 5 36
↕
25 Russia 1 1 3 3 1 2 5 16
The Growth Transition Needs To Succeed
56
Permanently larger mining sector
Note: Shares are the total gross value added. MMRF estimates after 2010 are spliced onto historical ABS.
Source: Strong Growth, low pollution report (2011), ABS and Treasury estimates from MMRF.
Significant Structural Change Under Way “Down Under”
57
Excess demand for housing
Demographics suggest underlying
housing demand of 170k pa – lower
than recent years but still well ahead
of new construction.
An excess demand and a pent-up
demand for new dwellings should
limit price downside.
Financial intermediaries willing to
finance housing activity.
The Housing Market
-100
0
100
200
-100
0
100
200
Sep-90 Sep-96 Sep-02 Sep-08
Demand
Supply
'000
Pent-updemand
Excesssupply
CBA: HOUSING DEMAND & SUPPLY'000
58
Housing sector picking up
Housing waxing on pent up
demand, strong population
growth and record low interest
rates.
Dwelling investment likely to
add to GDP growth over 2014 &
2015
59
Price gains are concentrated in Sydney
(where real prices were little changed
from 2004) and Perth (where population
growth is still strong).
Prices in Melbourne (where excess
demand pressures are weaker) have just
surpassed previous peaks.
Price trends in other capitals and
regional areas are more restrained.
Prices in perspective
Avoiding A Housing Bubble
250
400
550
700
250
400
550
700
Jan-06 Jan-09 Jan-12
DWELLING PRICESIndexIndex
Sydney
Brisbane
IndexIndex
Source: RP Data-Rismark
Melbourne
Perth
Adelaide Regional
60
Residential construction – smart policy – supportive demographics
Population growth lifting again.
Migrant intake still skewed towards (cashed up) skilled workers – typically bring 5x
the funds of other migrants.
The Growth Transition Needs To Succeed
0
70
140
210
0
70
140
210
1991/92 1996/97 2001/02 2006/07 2011/12
MIGRATION PROGRAM'000 '000
Total
Skilled 457visa
Planningtargets
0
150
300
450
0
150
300
450
1990/91 1995/96 2000/01 2005/06 2010/11
POPULATION DRIVERS'000 '000
Netmigration
Naturalincrease
61
CBA Forecasts
The main drivers of the residential
construction cycle are government
policy or external shocks.
Excluding these events, the
construction cycle had been remarkably
muted over the past fifteen years –
averaging around 150k per annum.
NSW, Vic, SA and Tas have schemes
designed to favour new construction.
CBA dwelling starts forecasts:
– 2014: 190k
– 2015: 182k
The Growth Transition Needs To Succeed
20
30
40
50
20
30
40
50
Sep-89 Sep-93 Sep-97 Sep-01 Sep-05 Sep-09
'000
1997-11average
'000
PostGST
slump
GFCslump
FHOBFHOG
Pre GSTpullforward
DWELLING COMMENCEMENTS
0.5
1.5
2.5
3.5
4.5
0.5
1.5
2.5
3.5
4.5
Jan-01 Jan-04 Jan-07 Jan-10 Jan-13
$bn $bn
BUILDING APPROVALS(3mth moving average)
Non-residential
Residential
62
For a bubble, rising dwelling prices need
to be accompanied by:
– rapid growth in housing credit over short
periods;
– easing lending standards; and
– expectations of ongoing price gains.
Is it a bubble?
Avoiding A Housing Bubble
?
0
30
60
90
-15
-5
5
15
Sep-92 Sep-98 Sep-04 Sep-10
%%pa
Housingcredit
momentum(lhs)
HOUSING BUBBLE INDICATORS
House price expectations
(net % expecting higher prices, rhs)
New home loans with LVR>80%(% of total, rhs)
Low doc loans(% of total, rhs)
63
Price gains are concentrated in Sydney
(where real prices were little changed
from 2004) and Perth (where population
growth is still strong).
Prices in Melbourne (where excess
demand pressures are weaker) remain
below previous peaks.
Price trends in other capitals and
regional areas are more restrained.
Prices in perspective
Housing
64
Housing Outlook
Issues & Drivers of Domestic Property Markets in 2014/15
■ Economic Growth + Positive for Property
■ Monetary Policy + + Low rates positive for Property
■ Underlying CPI + In check for now - bottom line positive
■ Unemployment + + To head down towards 5% or lower in 2014/15
**Big Positive
■ AUD Outlook + - Mixed – given patchy impact on economy
■ Population growth + Strong growth via immigration – unequivocal positive
■ Demand Supply Gap + + Yawning gap unlikely to close – big positive for housing
65
Housing Outlook
No sign of a Housing Bubble or Bust
■ Household Leverage has not increased: Household credit growth (5.6%pa) has
accelerated only modestly and household’s aggregate debt-to-income ratio has been stable
for several years.
■ Households have significant mortgage buffers: many households are ahead on their
repayments and balances in mortgage offset and redraw facilities are equivalent to over 20
months of scheduled repayments (at current interest rates).
■ Loan-to-value ratios (LTVs) remain modest and stable: the average LTV on the stock of
outstanding mortgages is 50%; and the share of new loans approved with relatively high
LTVs has been stable in recent years.
■ Asset quality remains sound: only 0.7% of Australian banks’ mortgage portfolios are
classified as non-performing, and around 75% of these are well covered by the value of
collateral.
66
Australia In Perspective
Reality: well positioned financial system
67
Australia In Perspective
Reality: well positioned financial system
68
Australia In Perspective
Reality: less property stress
Housing Outlook: Still positive
Commonwealth Bank of Australia / Presentation Title / Confidential
70
Australia In Perspective
Reality: room to move
-25
0
25
50
75
100
-25
0
25
50
75
100
2006 2008 2010 2012 2014 2016 2018
%%
Australia
Source: IMF Fiscal Monitor
GENERAL GOVERNMENT NET DEBT(% of GDP)
EmergingG-20
AdvancedG-20
0
2
4
6
8
0
2
4
6
8
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
OFFICIAL INTEREST RATES% %
Canada
US
UK
Euro
Japan
NZ
Australia
71
Inflation Outlook: Tame Pricestion Outlook: Comatose Prices
Inflation: core measures rising but still well behaved
■ Underlying inflation (the RBA target) was
running at 2.7%pa in QI 2014;
■ Headline inflation) was running at 2.9%pa in
QI 2014.
■ weak productivity is boosting unit labour
costs.
■ the fully-employed economy still has to
absorb strong income growth and a mining
boom.
■ structural inflation pressures remain.
■ A lower AUD would pressure tradables
inflation higher over time.
0
2
4
0
2
4
Sep-98 Sep-01 Sep-04 Sep-07 Sep-10 Sep-13
CONSUMER PRICES(annual % change)% %
Headlineinflation
(exc GST)
Underlyinginflation
-3
0
3
6
9
-3
0
3
6
9
Sep-98 Sep-01 Sep-04 Sep-07 Sep-10 Sep-13
INFLATION(annual % change) %
Tradables(imported inflation)
Non-tradables
(domestic inflation)
%
72
An Inflation Transition Needed As Well
Domestic inflation: how strong is the link with labour costs?
Domestic inflation is yet to respond in
any significant fashion to slower
wages growth.
1.0
3.0
5.0
7.0
2.5
3.5
4.5
5.5
Sep-03 Sep-06 Sep-09 Sep-12
% %
Wage PriceIndex(lhs)
Non-tradables
prices(rhs)
WAGES & NON-TRADABLES PRICES(annual % change)
73
Inflation: structural issues
A set of structural factors at work to
boost inflation:
demographics pressuring rents and
housing costs;
aging population and rising costs
driving health costs;
demand driving education charges;
infrastructure pressures boosting
utilities and other government
taxes and charges;
natural disasters pressuring
insurance levies.
Structural drivers account for 60% of
domestic inflation and 38% of the
overall CPI.
An Inflation Transition Needed As Well
0
25
50
75
100
%
DOMESTIC INFLATION(% of total)
Beer & selected foods
Rents
New dwelling purchase
Property rates & utilities
Medical, dental & hospital
Insurance & financial services
Education & childcare
Other
S
t
r
u
c
t
u
r
a
l
74
CBA view Market View: Sees 5% chance of cash down to
2¼% by the end of 2014.
CBA view:
– Current 2½% cash rate will ultimately be the
low point for cash rate in current cycle.
– We see RBA lifting rates by 0.25% to 2¾% by
the end of 2014.
The RBA & Monetary Policy
2.0
2.5
3.0
3.5
2.0
2.5
3.0
3.5
Jan 13 Apr 13 Jul 13 Oct 13 Feb 14 May 14
%
3 months ahead
12 monthsahead
Source: Reuters
RBA CASH RATE PRICING%
Cashrate
0
2
4
6
8
0
2
4
6
8
Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
OFFICIAL INTEREST RATES% %
Canada
US
UK
Euro
Japan
NZ
Australia
75
The AUD
“Fair value”
AUD a little above “fair value” and RBA
says AUD still “high”.
CBA fair value estimates:
– USD: 0.89
– TWI: 68
Many of the factors that explained the
overvaluation of the past two years are
still in play to varying degrees.
These factors included:
– the AAA rating and pursuit of yield;
– the desire for reserves diversification;
– QE policies pursued by the other major
central banks; and
– the capital inflow associated with the
mining construction boom.
-40
-20
0
20
-40
-20
0
20
Sep-86 Sep-91 Sep-96 Sep-01 Sep-06 Sep-11
THE AUD(deviation from fair value)
TWI
USD
% %
Source: CBA estimates
76
The AUD is a reserve currency
The AUD
Requirements Australian position
Widely accepted AUD/USD is the fourth most
traded currency pair
Supported by global trade
flows
Australia is in the top group in
terms of exports per capita
Liquid bond market offering a
rate of return
Australia has the highest yields of
all the AAA markets
Supported by strong
underlying economic
structures
Australia regularly top-3 in surveys
based on its resilience to
economic shocks
Providing a “safe haven” or
highly rated by international
ratings agencies
AUD not a safe-haven but is highly
rated. Possibility of current a/c
surplus over medium term. ?
77
Testing the fundamentals ■ AUD medium-term fundamentals
supportive:
commodity exposure;
terms-of-trade at 140-year highs;
Asian exposure;
interest rate differential;
exceptional fiscal position;
AAA rating and sound financial
system.
■ But the cycle is not dead. AUD will
fluctuate around a higher average.
The AUD
0.60
0.75
0.90
1.05
1.20
50
60
70
80
90
Jul 05 Jul 07 Jul 09 Jul 11 Jul 13
USDIndex
TWI(lhs)
AUD/USD(rhs)
THE AUD
40
63
87
110
80
120
160
200
Sep-83 Sep-89 Sep-95 Sep-01 Sep-07 Sep-13
THE AUDIndex Index
*Source: RBA
Terms of trade
(rhs)
RealTWI*(lhs)
78
Structural change and the long run
The AUD
Part of the increase in Australia’s terms-of-trade is a permanent adjustment.
Asia is a new source of capital inflow.
0%
7%
14%
21%
28%
35%
0%
7%
14%
21%
28%
35%
2001 2003 2005 2007 2009 2011
UK(23.0%)
US (28.2%)
FOREIGN INVESTMENT(% of total)
China (1.0%)
EU (ex. UK) (7.1%)
Total Asia (13.5%)(incl. China)
40
63
87
110
80
120
160
200
Sep-83 Sep-89 Sep-95 Sep-01 Sep-07 Sep-13
THE AUDIndex Index
*Source: RBA
Terms of trade
(rhs)
RealTWI*(lhs)
79
The fundamentals
The traditional fundamentals are moving in a way that favours the AUD:
– pick-up in global growth should limit downside to commodity prices
– current account deficit is trending lower
– RBA to move ahead of the Fed – a positive for interest-rate differentials.
The AUD
-25
-20
-15
-10
-5
0
5
-25
-20
-15
-10
-5
0
5
Sep-97 Sep-01 Sep-05 Sep-09 Sep-13
CURRENT ACCOUNT$bn $bn
0.60
0.73
0.85
0.98
1.10
0
2
3
5
6
Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14
AUD(rhs)
AUS-US2-yr bond
spread (lhs)
% AUD
AUD AND 2-YEAR RATE SPREAD
Lehman Collapse
Greekdebt
0.60
0.73
0.85
0.98
1.10
45
68
90
113
135
Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14
AUD & COMMODITY PRICESIndex AUD
AUD(rhs)
Journal of Commerce Industrial
Commodity Price Index
(lhs)
80
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12
USD USD
The AUD cycles 1983 - 2014
AUD floats 12 Dec83 at USD0.9090
5 March 1983:
Labor Party wins election.
8 March 1983:
AUD devalued
10% to USD 0.8549
6-8 February 1985:
MX Missile Crisis
14 May 1986
Keating “Banana
Republic”
comment on radio
Commodity prices
at record lows
28 July 1986:
Keating changes
foreign investment
rules and RBA raises
rediscount rate to
16%. AUD hits record
low of USD 0.5712
during day and
closes at USD0.6155
20 October 1987:
Stockmarket crash
in Australia
Rising interest
rates and
higher commodity
prices
14 February 1989:
Keating comments
talk down AUD
Kuwait
invaded
by Iraq
Aug 90
19 December 1991:
Keating becomes
Prime Minister
August 1991:
Failed Russian
coup
26 February 1992:
One Nation
Statement
Interest rates cut
15 times from
Jan 1990 to Dec 1993,
from 18% to 4.75%
October 1993:
Metals prices reach
record lows. AUD low
of USD 0.6410
RBA lifts rates 3 times
from 4.75% to 7.5%,
from July to Dec 1994.
Commodity
prices rising
September 1986 :
First downgrade of Australian
sovereign debt rating
October 1989 :
Second downgrade
of
Sovereign debt
rating
AUD peaks at USD0.9653
on 16 March 1984
Strong USD & AUD
falls Oil
prices
spike in
Gulf War
I
July 1998:
Metals prices reach
record lows. AUD low
of USD 0.5815
Interest rates cut
5 times from
July 1996 to July 1997,
from 7.5% to 5.0%
June 1997:
Asia crisis begins,
THB floats
Commodity prics
falling from June 97
IMF packages for Asia:
Markets rally, Jan 98
Japan in recession:
JPY & AUD weaken
March 1996
Howard
Gov’t
elected
Federal election dates: 5 March
1983
1 Dec 1984
11 July 1987
24 March 1990
13 March 1993
16 March 1996
3 Oct 1998
10 Nov 2001
9 Oct 2004
24 Nov 2007
21 August 2010
7 September 2013
Average Annual Trading Range
AUD/USD, 1983 - 2012: 13USc
Russian debt crisis
Ruble devalued
Gold falls to USD273/oz
AUD low of USD0.5530
on 28 Aug ‘99.
LTCM on 23 Sept 98
Commoditie
s
recover
April 99
May 1999
S&P Upgrade
Y2K related
selling
Oct 99
RBA lifts
rates: Nov
1999,
Feb, April,
May &
August
2000
AUD falls to USD0.5075
as USD rises.
US stockmarkets fall.
Oil hits $37/bbl
AUD low of USD0.4775
on 2 April 2001
RBA cash rate
changes
7 Nov 6.75
5 Feb 08 7.0
5 Mar 7.25
3 Sep 08 7.0
8 Oct 6.0
5 Nov 5.25
3 Dec 4.25
4 Feb 09 3.25
8 Apr 3.0
7 Oct 09 3.25
4 Nov 3.5
2 Dec 3.75
3 Mar 10 4.0
7 Apr 10 4.25
3 May 10 4.5
3 Nov 10 4.75
1 Nov 11 4.50
6 Dec 11 4.25
2 May 12 3.75
6 June 3.50
2 Oct 3.25
4 Dec 3.0
May ‘13 2.75
6 Aug 2.50
RBA lifts
rates in
May & June
‘02
WTC 11 Sep
01 AUD dip,
0.4840
USD
weakens
as US
shares
fall
Oct ‘02
Moody’s upgrades
Australia to Aaa
Uridashis
lift AUD
March ‘03
S&P
upgrades
Australia
to AAA
Oil prices
spike until
Gulf War 2
ends 10
April 2003
S&P Sovereign Debt
Rating changes
AA+ 6 Dec 86
AA 24 Oct 89
AA+ 17 May 99
AAA 17 Feb 03
RBA lifts
rates 5 Nov ‘03
& 3 Dec.’ 03
Commodity
prices rising
12 December 1983:
AUD floats at
USD0.9090
9 Oct ‘04
Howard Gov’t
re-elected
Oil prices
hit
$75/bbl
Aug 07
Mineral
commodity
prices at
50yr highs
AUD at 30
year high of
1.108,
27 July 2011.
US sub-prime
Problems
Aug 07 on
USD weaker
Fed cuts
rates
24 Nov 07
Rudd Gov’t
elected
Oil prices hit
$142/bbl
AUD collapses
as USD rises on
Sub-prime crisis
RBA cuts
rates
3 Sep 08,
to 8 Apr 09
Commodity
prices
slump.
AUD low of
USD0.6010
on 27 Oct 08
Sep 08
Lehman
Bros
collapse, US
Fed cuts to
zero, Dec 08.
USD falls as
Fed does
Quantitative
Easing, Mar
09
Commodities
& shares
recover
strongly
RBA lifts
rates
Oct 09 to Nov 10
Updated April 2014
World bond
markets sell-off
on US inflation
fears
USD rises as
US growth lifts,
Iron ore prices
firm. US Fed to
taper QE in
2014.
RBA cuts
in 2011
and into
August
2013.
Sept 2013
Abbott
Gov’t
elected
81 2
4
6
8
10
12
14
16
18
20
22
2
4
6
8
10
12
14
16
18
20
22
Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Cash
90 day bills
10yr bonds
% %
-2
10
12
14
16
18
Q1 84
Interest rate cycles 1980-2014
Updated January 2014
Inflation hits 12.5%
and begins to decline
Inflation bottoms
out at 2.5% then
begins to increase
Current
account
deficit
at A$1.5bn
Higher than
expected
CPI outcome
Treasurer Keating
delivers 1986/87
budget
Fed increases rates
& signs of Australian
growth picking up,
markets push up
interest rates on
speculation the RBA
will raise official
rates
Moody’s downgrades,
for second time, Aug ‘89
Official cash
rates cut from
17.5% to 4.75%
Jan‘90 to Dec ‘93
Low inflation figure for
September 1990 catches
attention of markets.
Bonds begin to price in
lower inflation
RBA rate cut
speculation,
bills and bond yields
fall
May 99 -S&P
upgrade
Australia to Aa+
August ‘98 -
Russian debt
default
Federal election
dates:
5 March 1983
1 Dec 1984
11 July 1987
24 March 1990
13 March 1993
16 March 1996
3 Oct 1998
10 Nov 2001
9 Oct 2004
24 Nov 2007
21 August 2010
7 September 2013
RBA lifts rates
Nov 99, Feb,
April, May
& August
2000
RBA cuts
to 4.25%
in Dec
2001.
Curve
steepens
WTC on 11 Sep
‘01
All rates fall
World bond
market sell-
off
1994. RBA
lifts rates Nov
‘94
RBA lifts
rates in
May & June
02
March
2003
S&Ps
upgrades
to AAA
Averages*: 1992 to 2010
Cash: 5.5%
90 Day Bills: 5.7%
10 Yr Bonds: 6.5%
Oil prices to $77/bbl
in Jul 06,
then to $90/bbl in
Oct 07, peaks at
$140
RBA lifts
rates
5 Nov 03
& 3 Dec
9 Oct ‘04
Howard Gov’t
re-elected
Asian
crisis
May 97 to
late 98
LTCM
23 Sept 98
RBA rate rises
May, Aug & Nov 06,
Aug & Nov 07,
Feb & Mar 08
*RBA adopted
2-3%pa inflation
target in Feb
1992.
US sub-prime
problems, Fed cuts
to 2.0%
24 Nov 07
Rudd Gov’t
elected
*RBA adopted
2-3%pa inflation
target in Feb
1992.
S&P Sovereign Debt
Rating changes
AA+ 6 Dec 86
AA 24 Oct 89
AA+ 17 May 99
AAA 17 Feb 03
RBA Cash:
5 Sep 4.75
3 Oct 4.50
5 Dec 4.25
8 May 02 4.50
5 Jun 02 4.75
5 Nov 03 5.0
3 Dec 5.25
2 Mar 05 5.50
3 May 06 5.75
2 Aug 6.0
6 Nov 6.25
8 Aug 07 6 .50
7 Nov 6.75
5 Feb 08 7.0
5 Mar 7.25
3 Sep 08 7.0
8 Oct 6.0
5 Nov 5.25
3 Dec 4.25
4 Feb 09 3.25
8 Apr 3.0
7 Oct 09 3.25
4 Nov 3.5
2 Dec 3.75
3 Mar 10 4.0
7 Apr 10 4.25
3 May 10 4.50
3 Nov 10 4.75
1 Nov 11 4.50
6 Dec 11 4.25
2 May 12 3.75
6 June 3.50
2 Oct 3.25
4 Dec 3.0
9 May ‘13 2.75
6 Aug 2.50
RBA cuts rates
3 Sep 08, to 8 Apr
09
Commodity prices recover
in ’09/10.
EU sovereign debt
issues depress markets
Lehmans
Sept 08 RBA lifts
rates
Oct 09 to
Nov. 2010
Markets
pricing in
recession
in EU, &
QFC2, in
2012
June 2012
China data softens
& Spain’s debt problems
drive lower bond yields.
Iron ore prices dip.
RBA cuts in Nov
& Dec 2011, in
2012 & Aug
2013.
US FOMC says
QE begins Jan
2014. Bond
yields rise.
USD up, AUD
down.
82
Budget Overview
Key numbers
Underlying cash deficit for 2014/15 put at
$29.8bn (1.8% of GDP) vs a deficit of
$49.9bn (3.1% of GDP) now expected in
2013/14.
Underlying cash deficit of only $2.8bn
(-0.2% of GDP) expected in 2017/18.
The headline deficit of $33.5bn expected
in 2014/15 vs a deficit of $53.7bn in
2013/14.
Net debt of $198bn (12.5% of GDP) in
2013/14 to peak at $261bn (14.6% of GDP)
in 2016/17.
Budget turnaround driven by outlay
control and higher taxation.
-6
-3
0
3
-6
-3
0
3
1996/97 2001/02 2006/07 2011/12 2016/17
FISCAL INDICATORS (deficit(-) / surplus(+))
% ofGDP
% ofGDP
Forecasts
Underlying cash balance
Fiscalbalance
'13/14e
83
Budget Overview
Persistent downgrades to growth
and income expectations have
weighed on Budget figuring.
Decreasing headline
deficits mean net debt
peak put at 14.6% of GDP
in 2016/17.
Implied starting point
for 2014/15 was a
deficit of $31.5bn.
Some fiscal jiggery pokery in
2013/14 as budget loaded up
with one-offs such as RBA
capital transfer.
Projected budget surpluses from
last year vanished into the ether.
Underlying Cash Balance ($bn)
2013/14 (e)
2014/15 (f)
2015/16 (f)
2016/17 (f)
2017/18 (f)
Aug’13 PEFO
(% of GDP)
-30.1
(-1.9)
-24.0
(-1.5)
-4.7
(-0.3)
4.1
(0.2)
~
(~)
Plus:
Parameter & oth ch
Policy decisions
-6.6
-10.3
-9.3
-0.7
-17.9
-1.5
-20.6
-1.3
~
~
Equals:
Dec’13 Review
(% of GDP)
-47.0
(-3.0)
-33.9
(-2.1)
-24.1
(-1.4)
-17.7
(-1.0)
~
~
Plus:
Parameter & oth ch
Policy decisions
-2.4
-0.5
2.4
1.7
1.1
5.9
-3.3
10.4
~
~
Equals:
May’14 Budget
(% of GDP)
-49.9
(-3.1)
-29.8
(-1.8)
-17.1
(-1.0)
-10.6
(-0.6)
-2.8
(-0.2)
Headline Balance
(% of GDP)
-53.7
(-3.4)
-33.5
(-2.1)
-26.6
(-1.6)
-22.7
(-1.3)
-11.4
(-0.6)
Budget initiatives in the 2014
Budget wisely back-end loaded.
84
Budget Overview
Growth outlook well below trend of 3¼pa & overly
pessimistic for next few years, given monetary
policy settings.
Household consumption also relatively weak, not
reflecting rising wealth effects.
Dwelling investment strong but may be higher.
Business investment contraction too large.
Public demand growth positive and in line with
general expectations.
Net exports positive but smaller than likely.
Inflation expected to stay very well-behaved.
Wages growth well above current trends.
Large terms of trade fall expected this year and
next look overly pessimistic.
Employment growth weak.
Unemployment expected to stay high and at odds
with trends in recent data.
CAD forecasts about twice as large as current.
Economic forecasts Key Economic Forecasts
2013/14 (e)
2014/15 (f)
2015/16 (f)
Real GDP (% ch) 2¾ 2½ 3
Of which:
H/hold consumption (% ch) 2½ 3 3¼
Dwelling Investment (% ch) 3½ 7½ 5½
Business Investment (% ch) -4 -5½ -3½
Public demand (% ch) 1¾ 1½ 2
GNE (% ch) 1¼ 1¾ 1¾
Net exports (contrib) 1¾ 1 1¼
CPI (% ch yr to June) 3¼ 2¼ 2½
WPI(% ch yr to June) 2¾ 3 3
Terms of trade (%ch) -5 -6¾ -1¾
Nominal GDP (% ch) 4 3 4¾
Employment (% ch) ¾ 1½ 1½
Unemployment (%, June) 6 6¼ 6¼
Current A/c def (% GDP) -3¼ -4 -3¾
85
Budget Overview
The global backdrop
Budget Global Growth Forecasts
2013 (a)
2014 (f)
2015 (f)
United States 1.9 2.75 3.0
Euro area -0.4 1.0 1.5
Japan 1.5 1.5 1.0
China 7.7 7.25 7.25
India 4.4 4.75 5.25
Other East Asia 4.0 4.5 4.5
Major trading
partners 4.6 4.75 4.75
World 3.0 3.5 3.75
Global growth is expected to pick up
over coming years. This is inline with
our view and the expectations of the IMF.
Improvement in the major advanced
economies looks set to lead the line.
The US and Eurozone should add to
global economic activity over the
forecast horizon.
Chinese economic growth is expected to
slow to a more sustainable 7.25% in
2014 and 2015. This is below our
projections. CBA forecasts China to
grow by 7.5% in 2015 and 7.6% in 2016.
Australia’s major trading partner growth
is forecast to accelerate slightly in 2014.
86
A Budget Emergency?
A demographic problem
The “baby boom” bulge in the population
structure is at the retirement frontier.
The proportion of the population aged
65+ is starting to rise rapidly:
– age-related spending will also grow
rapidly as a result (pensions, health,
pharmaceuticals, aged care, social
security).
Rising community expectations of
government services will drive other
spending:
– NDIS, education, childcare, parental
leave, “middle class welfare”. 10
12
14
16
18
10
12
14
16
18
1991 1995 1999 2003 2007 2011 2015 2019 2023
%%THE POPULATION
(% aged 65+)
Source: CBA/ABS
87
A Budget Emergency?
Without action, budget deficits would have
persisted in the medium term and
government debt would have risen further.
2014/15 Budget measures are estimated as
seeing the underlying budget deficit shrink
from an expected $20.8bn (1.8% of GDP) in
2014/15 to $2.8bn (0.2% of GDP) in 2017/18.
Medium term projections have budget
surpluses building to over 1% of GDP by
2024/25.
Net debt is now expected to peak at 14.6%
of GDP in 2016/17 thereafter declining to
0.7% of GDP by 2024/25.
A structural problem – ongoing deficits and rising government debt
2
6
10
14
18
-4
-2
0
2
4
2013/14 2016/17 2019/20 2022/23
%
%
Net debt(rhs)
BUSINESS AS USUAL(% of GDP)
Source: National Commission of Audiit
Budgetdeficit(lhs)
88
A Budget Emergency?
But public debt levels would remain low on any historical or global comparison.
A structural problem – not an emergency
0
30
60
90
Australia G20emerging
Euro area G20advanced
G7
%
GENERAL GOVERNMENT NET DEBT(in 2019, % of GDP)
Source: IMF
Business as usual
PUBLIC DEBT (% of GDP)
89
Fiscal Strategy
While a small budget surplus is likely by
2019/20, a surplus of around 1% of GDP is
unlikely before 2024/25, the projected fiscal
path represents a significant improvement
over that expected at the time of the mid-
year review in December.
If achieved, the projected small surplus in
2019/20 would be the first since 2007/08.
The 12 year timeframe compares
unfavourably with the 5-7 year cycles of
earlier consolidation episodes.
The path back to surplus
-6
-3
0
3
-6
-3
0
3
2005/06 2008/09 2011/12 2014/15
FISCAL POSITION(underlying balance, % of GDP)% %
May'09 Budget
May'12 Budget
May'13 Budget
May'14Budget
Dec'13MYEFO
90
Fiscal Strategy
Is the path back credible? – spending
Real Government spending falls in 2014/15.
But the fall is magnified by the impact of the
one-off grant provided to the RBA in
2013/14.
Notwithstanding, real spending growth is
forecast to slow to its lowest pace since the
1980s “banana republic” over the forward
estimates period.
Real spending growth of 1.7%pa between
2014/15 and 2017/18 compared with 1¾%pa
benchmark from Commission of Audit.
The challenge looks ambitious.
-8
-4
0
4
8
12
16
-8
-4
0
4
8
12
16
1979/80 1987/88 1995/96 2003/04 2011/12
%
REAL GOVERNMENT SPENDING(annual % change)%
"Bananarepublic"
Early CoalitionBudgets
Long-run average: 3.2%pa
1¾%pa
%
REAL GOVERNMENT SPENDING(annual % change)%
"Bananarepublic"
Early CoalitionBudgets
Long-run average: 3.2%pa
1¾%pa
91
The Budget & The Economy
Fiscal stance
The change in the budget balance is
typically seen as an approximate guide
to the fiscal impact on the economy.
From that perspective:
– Projected underlying deficit falls from
3.1% of GDP in 2013/14 to 1.0% in
2015/16. But, the fiscal impact of 2.1%
of GDP overstates the true impact.
– The 2013/14 figures were loaded up
with a range of one-off expenditures
such as the capital transfer to the RBA
worth 0.6% of GDP.
Adjusting for this, the fiscal impact is
more like 1.5% of GDP. About 0.4%
reflects policy decisions over the next
two years and the rest is parameter
variations.
-4
-2
0
2
-4
-2
0
2
1979/80 1987/88 1995/96 2003/04 2011/12 2019/20
FISCAL IMPACT(% of GDP)% %
Fiscalcontraction
Fiscalstimulus
92
Fiscal Strategy
Do we need a surplus? Most would agree with the need to balance the
budget over the course of the cycle and keep
government debt at manageable levels.
Fiscal sustainability requires this medium-
term outcome. The Budget puts fiscal policy
on this course.
The underlying budget deficit is forecast to
shrink from a around $29.8bn (1.8% of GDP) in
2014/15 to a $2.8bn deficit (0.2% of GDP) in
2017/18 and to a surplus of 1% of GDP by
2024/25.
Net debt is likely to peak at 14.6% of GDP in
2016/17 and decline to 0.7% of GDP by
2024/25.
The medium-term focus means fiscal policy is
generally not seen as a short-term demand
management tool. That role is left to monetary
policy.
-7
0
7
14
21
-7
0
7
14
21
1974/75 1984/85 1994/95 2004/05 2014/15
COMMONWEALTH BUDGET(% of GDP)% %
Budget(f)Net
Debt
Budgetbalance
93
The Budget & The Economy
Engels Law states that the share of spending on necessities (i.e. food, fuel, shelter
etc.) decreases with increasing spending capacity/income.
The corollary is that the share of spending on discretionary goods and services ( i.e.
theatre, restaurants, overseas travel, luxury cars, Italian suits etc. ) rises with
increasing spending capacity/income
Household spending on discretionary services varies with income. Discretionary
services spending accounts for:
– 16% of income in the highest income quintile (i.e. highest 20% of households);
– 11.5% of income for middle income households (middle quintile);
– 7.5% of income for the lowest income quintile (i.e. lowest 20%).
Equity impact
94
The Budget & The Economy
Applying Engels Law , most of the key measures announced in the Budget like the hike in petrol
excise and reinstatement of indexation, the $7 Medicare co-payment for standard GP, imaging and
pathology services and the automatic lift in the tobacco excise will have a much greater impact on low
income households than wealthy households.
Other Budget measures which will impact low income households much more than high income ones
include:
– From 1 January 2015, general patients will contribute $5 more per prescription for PBS-listed medicines.
Concessional patients, including pensioners and veterans, will pay 80 cents more;
– A smaller number of Primary Health Networks (PHNs ) will replace the 61 Medicare Locals (mainly bulk
billers) set up by the previous Labor Government. PHNs will start operating from 1 July 2015. Medicare
Locals will continue until then;
– Abolition of Schoolkids Bonus;
– Abolition of government contribution to superannuation funds of those earning $37,000 or less;
– Deregulation of university fees allowing providers to charge more for courses;
– Linking disability support payment and other pensions and welfare payments to inflation rather than
wages growth;
– Reintroduction of work for the dole and tightening of eligibility for Newstart and Youth Allowances etc;
and
– Ending of income support bonus paid twice a year to welfare recipients.
Equity impact – low end
95
The Budget & The Economy
Although low income households will take most of the hits and bumps in the Budget, high
and middle income households will not escape some “pain”.
The Deficit Tax/Levy on the 2 per cent of workers on incomes of $180,000 or more and more
stringent means testing of family tax benefits with payments under Family Tax Benefit Part
B (with payments cutting out at $100,000 household income levels and once the youngest
child in a family turns 6 years old ).
Other Budget measures which could have been implemented to spread the pain a little
further up the income chain and help fix the revenue side of the Budget - which was
undermined in the early 2000’s by eight rounds of personal tax cuts and the construction of
a large edifice of middle class, lightly means tested, welfare - include:
– Streamlining the lucrative superannuation tax breaks which overwhelmingly favour wealthier
households; (Costs budget $35bn a year)
– Abolishing the 25% capital gains discount;
– Abolishing negative gearing on rental properties;
– Putting a capital gains tax on the domestic or principal residence;
– Ending or means testing generous benefits to wealthy retirees ( like cheap subsidised
prescription fee caps etc.);
– Tax superannuation earnings for over 60s; and
– Abolish Diesel Fuel Rebate.
Equity impact – high end
96
Source: NATSEM: National Centre for Social and Economic Modelling, ANU
Budget: Low and middle-income earners bear brunt of Budget Cuts
97
■ .
Source: NATSEM: National Centre for Social
and Economic Modelling, ANU
Budget: Low and middle-income earners bear brunt of Budget Cuts
98
Budget measures impact low to middle income earners
■ .
99
Budget under fire from all sides
100
Low and middle-income earners bear brunt of Budget Cuts
The NATSEM analysis calculates the impact of the budget changes on household
finances over four years, incorporating reforms to welfare, pensions and taxation,
including abolishing the carbon and mining taxes.
It does not include, however, the cost of the $7 Medicare co-payment to families, roughly
estimated at between $200 and $300 per household each year.
The study also finds:
■ More than one third of the budget cuts - $6 billion - fall on the middle quintile of
households, earning $45,000 to $63,000.
■ Families with school-age children are the hardest hit. Across all income groups, they will
lose $15.9 billion over four years, more than 90 per cent of the total.
■ Low and middle-income sole parents suffer worst of all, losing between 10 and 15 per
cent of their annual income - $4000 to $6250 - on family earnings of less than $60,000 by
the time the changes to welfare take full effect in 2017-18.
■ The burden rises sharply for families with children over the four years of the budget. For
example, a sole parent earning $60,000 with children aged eight and 12 will lose $1808 in
annual income in 2014-15 and $6278 in 2017-18.
Source: NATSEM: National Centre for Social and Economic Modelling, ANU
101
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Low- and middle-income earners, especially those with school-age children, are hit
hardest as the family tax benefit for single-income families is abolished and indexation
is curbed.
Peter Whiteford, of the Australian National University's Crawford School of Public
Policy, said there had not been a budget that hit the poor so hard, at least since the
Fraser government.
Low and middle-income earners bear brunt of Budget Cuts
Source: NATSEM: National Centre for Social and Economic Modelling, ANU
102
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Australia In Perspective
Powerful headwinds LARGE TAX EXPENDITURES (IE TAX REVENUES LOST OR
FOREGONE)
Estimate $mn
Tax Expenditure 2014-15 2015-16 2016-17 2017-18
Capital Gains Tax - - discount 17,500 17,500 17,500 18,000
Superannuation - concessional tax of superannuation entity earnings 18,450 21,700 24,100 26,950
Superannuation - concessional tax of employer contributions 17,800 19,150 20,700 22,300
Capital Gains Tax - main residence exemption 14,000 14,000 14,500 14,500
GST - Food, uncooked, note prepared, not for consumption on premises 6,500 6,800 7,100 7,400
Capital Gains Tax discount for individuals and trusts 5,410 6,970 7,640 8,310
GST- Education 4,050 4,400 4,850 5,300
GST - Health, medical and health services 3,600 3,900 4,150 4,450
GST - Financial Supplies; input taxed treatment 3,450 3,650 3,850 4,050
Concessional taxation of non-superannuation termination benefits 1,800 1,750 1,750 1,750
Exemption of Family Tax Benefit, Parts A and B 2,180 2,240 2,290 2,350
Exemption from interest withholding tax on certain securities 1,820 1,820 1,820 1,820
Statutory effective life caps 1,795 1,780 1,705 1,605
Exemption of private health insurance rebate, including expense equivalent 1,510 1,600 1,650 1,690
Philanthropy: Exemption public and not-for-profit hospitals and ambulance services 1,500 1,600 1,700 1,800
Philanthropy: Exemption public benevolent institutions (excl public hospitals etc) 1,450 1,540 1,630 1,710
Exemption from Medicare Levy for residents with taxable income below threshold 1,790 1,960 2,040 2,120
Philanthropy - Deduction for gifts to deductible gift recipients 1,230 1,330 1,410 1,500
GST - Health, residential care, community care and other care 1,120 1,200 1,290 1,380
Concessional rate of excise levied on aviation gasoline and aviation turbine fuel 1,280 1,340 1,400 1,470
Total 108,235 116,230 123,075 130,455
Source: Budget Paper 2 – 2014/15 Federal Budget
103
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Australia In Perspective
Spending on education, Hospitals, and aged pension eclipsed by tax breaks (leakages)
Estimate $mn
Spending
2014-15 2015-16 2016-17 2017-18
Health Medicare Services 28,227 28,384 29,982 31,442
Public Hosp (States) 15,116 16,551 18,095 18,872
Aged Pension 42,085 44,658 47,583 49,665
Border Protection 4,172 ` ~
Education 29,553 30,206 31,843 32,788
Higher Ed 9,223 9,274 9,282 9,465
Schools 14,734 15,646 17,032 18,149
Source: Budget Paper 2 – 2014/15 Federal Budget
104
Federal Budget & Debt
Asset growth
Net debt peaks in 2015/16, when the
surpluses start.
Total borrowing grows a little faster
reflecting the impact of the growth in
cash and investments.
The long-term projections imply
negative net debt from 2021/22.
But the Govt. also plans to maintain
bonds on issue at 12-14% of GDP:
– That level is not in danger of being
breached until around 2020.
– Total borrowing is forecast to fall from
2016/17 until 2020, but would need
to rise thereafter to meet the required
proportion of GDP.
NET DEBT
-150
0
150
300
450
98/99 03/04 08/09 13/14 18/19
$bn
Borrowing
Cash & investments
Net
Debt
105
Economic Background : Australia’s Government Net Debt Levels Miniscule
Source: Australian Trade Commission: Australia Benchmark Report - June 2013
106
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