Download Saul Eslake - Moir Group

The Australian and global economies the financial year ahead
Talk to a luncheon hosted by
the Moir Group
Institute of Chartered Accountants,
Sydney
Saul Eslake
20th June 2013
1
It’s easy for Australians to forget how traumatic the GFC
and its aftermath have been for other countries
Unemployment rate
Real gross domestic product
114
13 % of the labour force
Dec qtr 2007 = 100
Australia
112
110
Euro area
12
11
108
Canada 10
106
NZ
US
104
102
100
Japan
98
UK
9
UK
8
US
7
Canada
NZ
6
Euro area
96
Australia
5
94
4
92
Japan
3
90
08
09
10
11
12
13
08
09
10
11
12
13
Sources: Australian Bureau of Statistics; US Bureau of Economic Analysis; Japan Economic& Social Research Institute; Eurostat; UK Office of National
Statistics; Statistics Canada; US Bureau of Labor Statistics; Japan Home Ministry; Statistics New Zealand.
2
The euro zone is still in recession
Real GDP
1
Unemployment by country
% ch from previous quarter (not annualized)
30
0
Greece
28
Spain
26
-1
24
-2
22
-3
20
07
08
09
10
11
12
13
Portugal
18
16
Unemployment
13
Dec qtr 2007 = 100
Ireland
14
% of the labour force
Italy
12
12
France
Netherlands
10
11
8
10
6
9
Germany
4
8
2
7
07
08
09
10
11
12
13
08
09
10
11
12
13
Sources: Eurostat.; IMF.
3
With fiscal policy paralysed and interest rates close to zero
central banks have had to resort to ‘unorthodox’ policies
Major central bank policy interest rates
7
Major central bank balance sheets
40
% pa
% of GDP
Bank of Japan
European
Central Bank
35
6
BoE base rate
30
5
25
4
20
US
Federal
Reserve
3
15
2
1
10
ECB refi rate
US
Fed
funds
rate
BoJ call
money rate
0
07
08
09
10
11
12
Bank of
England
5
0
13
07
08
09
10
11
12
13
Sources: US Federal Reserve; Bank of Japan; European Central Bank; Bank of England.
4
The Fed is still some way from ‘tapering’ its program
of ‘quantitative easing’ (‘QE’)
Non-farm payroll employment
Unemployment
11
10
% of labour force
400
9
8
200
7
6
-200
Change from previous month('000)
0
-400
Fed 'target'
5
4
-600
-800
07
08
09
10
11
12
07
13
08
Employment-population ratio
65
64
63
62
61
60
59
58
57
09
10
11
12
13
‘Core’ inflation
% of civilian working age population
3.0
% change from year earlier
Fed 'target'
2.5
2.0
1.5
CPI
1.0
PCE deflator
0.5
80 83 86 89 92 95 98 01 04 07 10 13
0.0
07
08
09
10
11
12
13
Source: US Bureau of Labor Statistics; Bureau of Economic Analysis.
5
Fears that ‘QE’ will lead to hyper-inflation are based on a
misreading of German (and other countries’) history
Currency in circulation and inflation in Weimar Germany
Reichsbank notes in circulation
1,000,000
100,000
Consumer prices
100,000,000,000
Bn Reichsmarks
(log scale)
(log scale)
10,000,000,000
10,000
1,000,000,000
1,000
100,000,000
100
10,000,000
10
1,000,000
1
100,000
0
10,000
0
1,000
0
100
0
10
0
1
20
% change from year earlier
21
22
23
21
22
23
24
25
Sources: The Economist; Global Financial Data.
6
The US Federal Reserve is not ‘printing money’ in the same
sense as 1920s Germany or 1990s Zimbabwe …
US Federal Reserve’s balance sheet
Assets
3.5
Liabilities
3.0
US$ trn
3.0
US$ trn
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
07
08
09
Treasury securities
M ortgage-backed securities
Lending & liquidity facilities
Other assets
10
11
12
13
Agency (FNM A, FHLM C) securities
Foreign central bank liquidity swaps
Support to Bear Sterns & AIG
07
08
Currency in circulation
09
10
11
Banks' reserve balances
12
13
Other liabilities
Source: US Federal Reserve.
7
Broad US money growth has remained quite stable
US base money and M2
3.5
US$ trn
3.0
US$ trn
M2 (right scale)
The ‘money multiplier’
12.0
10.0
x
9.0
10.0
8.0
2.5
8.0
7.0
2.0
6.0
1.5
Money base
(left scale)
6.0
5.0
Ratio of M2
to base money
4.0
1.0
4.0
2.0
0.5
0.0
0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
3.0
2.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Source: US Federal Reserve.
8
The ECB isn’t “printing money” either – although it is doing
very different things with its ‘QE’ than the Fed
European Central Bank’s balance sheet
Assets
3.5
Liabilities
€trn
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
07
08
09
10
11
12
13
€trn
07
08
09
10
11
12
13
Lending to banks
Holdings of securities
Currency in circulation
Euro area bank deposits with ECB
Gold & foreign exchange
All other
Other Euro area residents deposits
All other
Source: European Central Bank
9
In no major economy has ‘currency in circulation’ grown
more rapidly since the financial crisis than it was before
Currency in circulation
United States
1300
Japan
US$bn (seas adj)
9000
1200
¥bn
8500
1100
1000
8000
900
7500
800
7000
700
600
6500
07
08
09
10
11
12
13
07
08
Euro area
1000
09
10
11
12
13
United Kingdom
€bn
65
£bn
60
900
55
800
50
700
45
600
40
500
35
400
30
07
08
09
10
11
12
13
07
08
09
10
11
12
13
Sources: US Federal Reserve; Bank of Japan; European Central Bank; Bank of England.
10
Inflation is falling, not rising, in all of the major advanced
economies
Consumer price inflation in major advanced economies
Euro area
United States
6
% change from year earlier
5
4
'Headline'
4
% change from year earlier
'Headline'
3
2
2
'Core'
0
1
'Core'
0
-2
-1
07
08
09
10
11
12
13
07
08
Japan
3
09
10
11
12
13
United Kingdom
% change from year earlier
6
2
% change from year earlier
5
'Headline'
1
'Headline'
4
0
3
-1
2
'Core'
-2
'Core'
1
-3
0
07
08
09
10
11
12
13
07
08
09
10
11
12
13
Sources: US Bureau of Labor Statistics; Japan Home Ministry; Eurostat; UK Office of National Statistics.
11
US banks are starting to lend again, but European banks
aren’t
United States
Euro area
Banks tightening lending standards
90
75
60
45
30
15
0
-15
-30
Banks tightening lending standards
Net balance of banks tightening
40
lending standards (%)
Net balance of banks tightening
lending standards (%)
30
Mortgages
Loans to enterprises
20
10
0
Commercial & industrial loans
03 04 05 06 07
Mortgages
-10
08 09 10 11 12 13
03 04 05 06 07
Bank lending
15
08 09 10 11 12 13
Bank lending
% change from year earlier
15
10
% change from year earlier
10
5
5
0
-5
0
-10
-5
03
04 05
06 07
08
09 10
11 12
13
03
04
05
06
07
08
09
10
11
12
13
Sources: US Federal Reserve; European Central Bank.
12
Can ‘Abenomics’ revive the Japanese economy?
Consumer confidence
55
%
 Thus far ‘Abenomics’ has included the
second-largest supplementary budget in
decades, a successful attempt to ‘talk down’
the yen, and a new mandate and new
leadership for the Bank of Japan
50
45
40
35
30
25
01 02 03 04 05 06 07 08 09 10 11 12 13
Shokochukin small business survey
55
50
45
40
35
30
25
20
 Shinzo Abe led the LDP back into Government
late last year with a mandate to end
deflation and revive the Japanese economy
%
 The BoJ now has a 2% inflation target, which
the new BoJ Governor has pledged to attain
it in two years – including through more
wholehearted ‘quantitative easing’
 The BoJ will double to the size of its balance
sheet over the next two years – purchasing ¥6
trn a month of JGBs and other securities
(equivalent to US$65bn per month cf. US$85
bn a month by the US Fed in an economy
three times the size of Japan’s)
 All of these measures do seem to have had a
noticeable positive impact on business and
consumer confidence
01 02 03 04 05 06 07 08 09 10 11 12 13
Sources: Japan Economic & Social Research Institute, Cabinet Office;
Shokochukin Bank.
 But so far the structural reform agenda has
fallen short of what was expected – and what
is needed
13
The BoJ’s “QE” will could end more ‘messily’ than the
Fed’s, given their different inflation objectives
Japanese bond yields and
inflation
2.5
9.0
%
2.0
1.5
US bond yields
and inflation
8.0
10-year JGB yield
7.0
1.0
6.0
0.5
5.0
0.0
4.0
-0.5
3.0
-1.0
2.0
-1.5
%
Annual 'core' inflation rate
-2.0
10-year UST yield
1.0
Annual 'core' inflation rate
0.0
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06
07 08 09 10 11 12 13
Sources: Japan Home Ministry; US Bureau of Labor Statistics; Thomson Reuters Datastream.
14
China’s economic slowdown appears to have resumed
Chinese economy
Real GDP
16
Merchandise exports
% change from year earlier
60
14
40
12
20
10
0
8
-20
6
-40
07
08
09
10
11
12
% change from year earlier
Monthly data
3-mth centred moving average
07
13
Industrial production
25
Monthly data
15
10
5
3-mth centred moving average
0
07
08
09
10
11
09
10
11
12
13
Property construction
% change from year earlier
20
08
12
13
50
40
30
20
10
0
-10
-20
% change from year earlier
07
08
09
10
11
12
13
Sources: China National Bureau of Statistics; UBS.
15
Demographic factors are working to slow China’s
sustainable growth rate
Growth rate of China’s workingage population
3.5
% pa
China’s population growth rate
3 % pa
One Child policy introduced
2
3.0
1
2.5
0
2.0
Mao's "Great Leap Forward"
-1
50
1.5
55
60
65
70
75
80
85
90
95
00
05
10
Employment as a pc of population
1.0
60 %
0.5
55
0.0
50
-0.5
45
-1.0
1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Five years ended
40
50
55
60
65
70
75
80
85
90
95
00
05
10
Sources: United Nations; The Conference Board Total Economy Database January 2013.
16
China is trying to reduce its dependence on investmentled growth – which is bound to affect overall growth
Fixed capital investment
as a pc of China’s GDP
50
Pc point contribution to
annual growth in real GDP
16
% pa
% pts
14
12
45
10
40
8
6
35
4
2
30
0
-2
25
-4
-6
20
1981
1986
1991
1996
2001
2006
2011
Net exports
Investment
Consumption
(Q1)
00 01 02 03 04 05 06 07 08 09 10 11 12 13*
Sources: CEIC; China National Bureau of Statistics.
17
7% growth in China now contributes more to global GDP
growth than 10% a decade ago
China’s real GDP growth rate and contribution to global GDP growth
35
% of total
%
China's share of change in world GDP (left scale)
30
16
14
China's real GDP growth rate (right scale)
12
25
10
20
8
15
6
10
4
5
2
0
0
00
01
02
03
04
05
06
07
08
09
10
11
12
13 (f)
Note: Contribution to global GDP growth is derived from IMF estimates of Chinese and global GDP in current international dollars based on PPP valuations of
GDP. 2009 figure is not meaningful given that global fell 2.1% in 2009 while Chinese GDP rose.
Source: IMF World Economic Outlook database (April 2013). Forecasts are IMF WEO forecasts
18
Resources export prices peaked over 18 months ago, and
resources investment is approaching its peak
Minerals and energy export
commodity prices
120
Index - 2011-12 = 100
Mining investment
as a pc of GDP
7
%
6
100
5
80
4
60
3
40
2
20
1
0
0
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Sources: RBA; ABS.
19
Two pieces of evidence that the resources investment
boom is peaking
Engineering construction work –
oil & gas fields and mines
120
7.0
$bn
Construction work
yet to be done
100
Unemployment rate in
Western Australia
% of labour force
6.5
6.0
5.5
80
Trend
5.0
4.5
60
4.0
40
3.5
Commencements (4-qtr
rolling total)
20
3.0
2.5
Seas. adj.
2.0
0
02 03 04 05 06 07 08 09 10 11 12 13
02 03 04 05 06 07 08 09 10 11 12 13
Source: ABS.
20
Resources investment will remain at high levels for
another two years but then fall off sharply
Two alternative scenarios for resources and energy investment
‘Likely’ scenario
‘Possible’ scenario
Source: Bureau of Resources and Energy Economics. Resources and Major Energy Projects (April 2013).
21
LNG exports will rise sharply when the big projects are
finished, but employment will fall
Employment directly associated
with major LNG projects
Australian LNG exports
100
Mt
2012-13 $ bn
60
12
50
10
'000s
90
80
Volume (left scale)
Value (right scale)
70
Capex phase
40
8
30
6
20
4
Opex phase
60
50
40
30
20
10
2
10
0
0
2011 2012 2013 2014 2015 2016 2017 2018
Financial years ended 30 June
0
Gorgon
Ichthys
Wheatstone
A-PLNG Qld Curtis
GLNG
Project
Source: Bureau of Resources & Energy Economics.
22
To forestall a significant slowing in overall growth, other
domestic demand components will have to grow faster
Private sector residential
building approvals
220
'000 (annual rate)
Non-mining business investment as
a pc of GDP
6.0
200
%
5.5
Seas. adj.
180
5.0
160
4.5
140
4.0
Trend
120
3.5
100
3.0
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Source: ABS.
23
Households and businesses are proving very cautious about
borrowing, even at very low rates
Interest rates
11.0
10.0
Credit growth
% pa
25
Weighted average
rate paid by
9.0
% change from year earlier
20
small businesses
15
8.0
10
7.0
6.0
Standard variable
mortgage rate
5.0
Housing
5
0
4.0
-5
3.0
Business
RBA cash rate
2.0
-10
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Note: Dotted lines indicate 15-year average of each interest rate shown.
Source: RBA.
24
The recovery in housing has been unusually sluggish, and
overly reliant on investors
Housing finance commitments
to investors
First-time buyers as a pc of total
housing finance commitments
$bn per month
9
8
45
40
Seas. adj.
7
% of total
35
6
5
Trend
30
4
25
3
20
2
15
01
02
03 04
05 06
07
08 09
10 11
12
13
01 02 03 04 05 06 07 08 09 10 11 12 13
Housing finance commitments
to owner-occupiers
13
12
11
10
9
8
7
6
5
4
Lending for new housing as a pc of
total, by borrower
$bn per month
25
Seas. adj.
% of total
20
15
Owner-occupiers
Trend
10
Investors
5
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Source: ABS.
25
From late 2011 until early May this year, the A$ diverged
markedly from its traditional ‘fundamentals’
Commodity prices
and the A$
120
2011-12 = 100
Interest rate differentials
and the A$
US$
1.10
500
A$ vs US$
110
450
(right scale)
1.00
100
90
0.90
US$
Australia-US 2 yr bond
yield spread (left scale)
1.10
1.00
400
350
0.90
300
80
0.80
70
0.80
250
200
60
0.70
50
40
30
Basis points
RBA commodity price index
0.60
100
A$ vs US$
(right scale)
0.60
50
(inverted, left scale)
0.50
20
0.70
150
01 02 03 04 05 06 07 08 09 10 11 12 13
0.50
0
01 02 03 04 05 06 07 08 09 10 11 12 13
Note: RBA commodity price index is in US$. Sources: Datastream; Bloomberg; RBA.
26
… which has been one of a number of factors weighing on
business confidence and investment intentions …
Business capex intentions – NAB
survey
Business confidence
Net balance (%)
20
Trend
10
40
Net balance planning increase (%)
30
20
0
10
-10
Seas. adj.
0
-20
-10
-30
-20
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
SMEs approval of Federal
government
40
Net balance positive (%)
Business capex intentions – Sensis
survey (SMEs)
10
Net balance planning increase (%)
5
20
0
0
-5
-20
-10
-15
-40
-20
-60
-25
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Sources: NAB monthly and quarterly business surveys; Sensis SME survey.
27
… and encouraging businesses to focus on lifting productivity
and cutting costs – with adverse effects on employment
Labour productivity growth
3.0
% pa (5-year rolling average)
20
2.5
'Market' sector
2.0
Business employment intentions
Net balance (%)
Trend
10
0
1.5
-10
1.0
0.5
Whole economy
0.0
Seas. adj.
-20
-30
90 92 94 96 98 00 02 04 06 08 10 12
01 02 03 04 05 06 07 08 09 10 11 12 13
‘Multi-factor’ productivity growth
3.0
% pa (5-year rolling average)
2.5
2.0
Unemployment rate
8
% of the labour force
Trend
7
'Market' sector
1.5
1.0
6
5
0.5
0.0
Seas. adj.
4
-0.5
-1.0
3
90 92 94 96 98 00 02 04 06 08 10 12
01
02
03 04
05 06
07
08 09
10 11
12
13
Sources: ABS; NAB.
28
This has been one of a number of things detracting from
consumer confidence and spending
Consumer confidence
130
Retail sales
Ratio of optimists to pessimists (%)
12
% change from year earlier
125
10
120
Trend
115
8
*
*
110
105
Government
'cash splashes'
6
*
100
*
4
95
90
2
85
Seas. adj.
80
Trend
Seas. adj.
0
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Sources: Westpac-Melbourne Institute; ABS.
29
Households are unlikely to lower saving and spend more,
given employment fears and falling asset prices
Unemployment expectations
and household saving
% of HDI
Ratio of pessimists to optimists (%)
200
180
Household net worth and
household saving
Households expecting higher
unemployment (left scale)
14
12
400
10
450
8
160
350
6
140
% of HDI
% of HDI
12
Net worth (left
scale, inverted)
10
Saving rate
(right scale)
8
500
6
550
4
4
600
2
2
120
0
100
-2
14
650
0
700
-2
750
-4
Saving rate (right scale)
-4
80
90
92
94
96
98
00
02
04
06
08
10
12
90 92
94 96 98
00 02 04
06 08 10
12
Sources: Westpac-Melbourne Institute; RBA; ABS.
30
Manufacturers and wholesalers seem to be carrying a lot
of inventories
Inventory-sales ratios for large inventory-holding sectors
Manufacturing
58
46
44
42
40
38
36
34
32
30
%
56
54
52
50
48
46
95
Retailing
%
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Wholesaling
Mining
%
90
40
%
35
85
30
80
25
75
70
20
01 02 03 04 05 06 07 08 09 10 11 12 13
01 02 03 04 05 06 07 08 09 10 11 12 13
Source: ABS.
31
Fiscal policy could be used to cushion the post-mining
boom slowdown – but probably won’t be
AAA-rated sovereigns – net
public debt to GDP ratios
40
10-year Australian
Government bond yields
18
% of GDP, 2012
% pa
16
20
14
0
12
-20
10
-40
8
-60
6
-80
-165.5%
-100
4
ay
rw
No
*
ore
gap
Sin
d
l an
Fin
en
ed
Sw
ark
nm
De
da
na
a
ali
str
Au
d
an
erl
ti z
Sw
Ca
2
0
45 50 55 60 65 70 75 80 85 90 96 00 05 10
Sources: IMF World Economic Outlook database; S&P; Global Financial Data; RBA.
32
Some concluding thoughts
 The global economy presents a decidedly mixed picture at the moment
―
―
―
―
the US economy does seem poised for sustainable growth
but Europe still looks dire
China’s maximum sustainable rate of growth is now slowing
Japan’s aggressive new policy stance may work, but the exit from it will be problematic
 Australia’s economy has performed much better than other ‘advanced’ economies over
the past six years
―
through a combination of good luck and good management
―
―
the ‘resources investment boom’ has probably passed its peak
and although resources exports will rise strongly as projects come on-stream, a those
exports won’t create much employment, and a lot of the income from them will flow
overseas
and the required transition to other sources of growth may not be as smooth as the RBA
and the Government hope
 However this period of relative out-performance may be drawing to a close
―
 The decline in the A$ that is now under way, if sustained, will assist this transition – but

its effects will be felt less promptly than during similar episodes in the past
Nor will lower interest rates stimulate increased domestic demand as efficaciously as
they have in the past
―
and there’s much less room to cut rates in the event of a further downturn than there has
been prior to previous downturns
 Fiscal policy could play a useful role in sustaining growth, if appropriately targeted
towards worthwhile infrastructure projects
―
but, for political reasons, it probably won’t be allowed to play that role
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