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The Australian economy –
Staying afloat in the global storm
David Gruen
Tuesday, 26 May 2009
Setting the scene:
Longer term trends
Real GDP growth
6
Per cent
Per cent
6
Forward
estimates
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
1977-78
1982-83
1987-88
1992-93
Source: ABS Catalogue Number 5206.0 and Treasury.
1997-98
2002-03
2007-08
-3
2012-13
Unemployment rate
Per cent
Per cent
12
Forecasts
12
10
10
8
8
6
6
4
4
2
Jun-78
Jun-81
Jun-84
Jun-87
Jun-90
Source: ABS Catalogue Number 6202.0 and Treasury.
Jun-93
Jun-96
Jun-99
Jun-02
Jun-05
Jun-08
2
Jun-11
Employment shares by industry
20
Per cent
Per cent
18
80
78
Services (RHS)
16
76
Manufacturing (LHS)
14
74
12
72
10
70
8
68
Mining and Construction (LHS)
6
Feb-85
Feb-88
Feb-91
Feb-94
Source: ABS Catalogue Number 6291.0.55.003.
Feb-97
Feb-00
Feb-03
Feb-06
66
Feb-09
Participation rates
(Population aged 15 and over)
90 Per cent
Per cent 90
80
80
Male
70
70
60
60
Female
50
50
40
Apr-79
Apr-84
Source: ABS Catalogue Number 6202.0.
Apr-89
Apr-94
Apr-99
Apr-04
40
Apr-09
Employment shares
90 Per cent
Per cent 90
75
75
Full-time
60
60
45
45
30
30
Part-time
15
15
0
Apr-79
Apr-84
Source: ABS Catalogue Number 6202.0.
Apr-89
Apr-94
Apr-99
Apr-04
0
Apr-09
Exports and imports
(Values)
29
Per cent of GDP
Per cent of GDP
29
26
26
23
23
Imports
20
20
17
17
Exports
14
14
11
Dec-78
Dec-84
Dec-90
Source: ABS Catalogue Numbers 5206.0 and 5302.0.
Dec-96
Dec-02
11
Dec-08
Asia’s share of Australia’s
merchandise imports and exports
65
(Values)
Per cent
Per cent
60
65
60
Exports
55
55
50
50
45
45
40
40
Imports
35
35
30
1989-90
1992-93
1995-96
1998-99
2001-02
Note: Asia defined as ASEAN, China, Japan, South Korea, Taiwan and Hong Kong.
Source: ABS Catalogue Number 5368.0.
2004-05
30
2007-08
Terms of trade
(Ratio of export prices to import prices)
160
Index (2006-07=100)
Index (2006-07=100)
160
(f)
140
140
1950-51
Sep 2008
120
100
120
100
Mar 1974
80
80
Mar 1989
60
60
40
1941
1964
1973
1982
1991
2001
40
2010
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.
Investment, savings and the current account
40
Per cent of GDP
Per cent of GDP
40
(f)
Gross investment
30
30
20
20
Gross savings
10
10
0
0
Current account balance
-10
1960-61
1970-71
1980-81
Source: ABS Catalogue Numbers 5206.0, 5302.0 and Treasury.
1990-91
2000-01
-10
2010-11
Foreign liabilities and assets
200
Per cent of GDP
Per cent of GDP
150
200
150
Gross foreign liabilities
100
100
Gross foreign assets
Net foreign liabilities
50
50
Net foreign debt
0
Dec-88
Jun-91
Dec-93
Jun-96
Source: ABS Catalogue Numbers 5206.0 and 5302.0.
Dec-98
Jun-01
Dec-03
Jun-06
0
Dec-08
Household debt and assets
200
Per cent
Per cent
1000
Assets-to-income ratio (RHS)
160
800
120
Net wealth-to-income
ratio (RHS)
80
600
400
Debt-to-income ratio (LHS)
(Households only)
40
200
0
Dec-89
Sep-94
Jun-99
Source: ABS Catalogue Number 5232.0, Reserve Bank of Australia and Treasury.
Mar-04
0
Dec-08
Global financial crisis
Causes of the global financial crisis
Proximate causes in the US:
 Long-term public sponsorship of home ownership for
groups that could not afford it
 Incoherent financial regulation in the mortgage market
 ‘Originate to distribute’ model for mortgages
– Mortgages bundled up and ‘securitised’
– Given inappropriate AAA credit ratings and sold to final
investors
 Risk was supposed to be spread to those most able to
bear it
 In fact, it was spread to those least able to understand it
Causes of the global financial crisis
Wider causes:
 Global imbalances implied huge flow of funds from
developing countries (particularly Asia) to developed
countries (particularly US)
 Low global interest rates, both structural and monetary
policy related, led to strongly rising asset prices
Causes of the global financial crisis
Wider causes:
 Large banks, mainly in US, UK, and Europe, gradually
became more highly leveraged (more loans for each
dollar of bank assets). They did this because
– repeal of the US Glass-Steagall Act in 1999 allowed
commercial banks to run large investment banking
businesses
– regulatory frameworks encouraged banks to shift loans ‘off
balance sheet’
– times were good
– it was very profitable: “while the music is playing, you have
to get up and dance”
Causes of the global financial crisis
– low global interest rates combined with investors
continuing expectation of high returns encouraged a
‘search for yield’
– banks thought they had a better understanding of financial
risks than ever before, based on sophisticated models of
risk and return
: the models were sophisticated but, as it turned out, also
fatally flawed
 Inappropriate incentives in financial markets – too much
pay for short-term returns, not enough downside for
losses
– incentive to take risks which generated good returns most
of the time, but with a small probability of disaster
3-month LIBOR over OIS spreads
4.0
Per cent per annum
Per cent per annum
4.0
3.5
3.5
3.0
3.0
2.5
2.5
2.0
2.0
1.5
1.5
UK£
1.0
1.0
US$
0.5
0.5
Euro
0.0
05-Jan-07
27-Jun-07
17-Dec-07
Source: Thomson Reuters – Ecowin Database.
A$
07-Jun-08
27-Nov-08
0.0
19-May-09
European Government bond spreads
(To 10-year German bunds)
3.0
Per cent per annum
Greece
Per cent per annum
France
Spain
Ireland
Netherlands
Portugal
3.0
Italy
2.5
2.5
2.0
2.0
1.5
1.5
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
May-99
May-00
May-01
Source: Thomson Reuters.
May-02
May-03
May-04
May-05
May-06
May-07
May-08
-0.5
May-09
IMF forecasts of 2009 GDP growth
G7
4
Per cent
World
Per cent
Per cent
Per cent
4
4
3
3
3
3
2
2
2
2
1
1
1
1
0
0
0
0
-1
-1
-1
-1
-2
-2
-2
-2
-3
-3
-3
-3
-4
-4
Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Mar-09 Apr-09
4
-4
-4
Apr-08 Jul-08 Oct-08 Nov-08 Jan-09 Mar-09 Apr-09
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.
US – Housing indicators
Housing starts
2.5
Millions
Total number of homes for sale
Millions
Millions
Millions
2.5
6
6
2.0
2.0
5
5
1.5
1.5
4
4
`
1.0
1.0
3
3
0.5
0.5
2
2
0.0
Apr-89
Apr-94
Apr-99
Apr-04
0.0
Apr-09
Source: US Census Bureau and National Association of Realtors.
1
Mar-89
Mar-94
Mar-99
Mar-04
1
Mar-09
US House prices
250
Index (Feb-00=100)
Index (Feb-00=100)
250
225
225
200
200
Case-Shiller 10-city index
175
175
150
150
125
125
100
100
75
75
50
Feb-87
Feb-89 Feb-91
Source: S&P/Case-Shiller.
Feb-93
Feb-95
Feb-97 Feb-99
Feb-01
Feb-03
Feb-05 Feb-07
50
Feb-09
United States – Unemployment rate
12
Per cent
Per cent
12
10
10
8
8
6
6
4
4
2
Apr-80
Feb-85
Source: Bureau of Labor Statistics.
Dec-89
Oct-94
Aug-99
Jun-04
2
Apr-09
Japan – Industrial production and exports
Industrial production
Index (Mar-89=100)
Index (Mar-89=100)
Export volumes
Index (Mar-89=100)
Index (Mar-89=100)
130
300
120
120
260
260
110
110
220
220
100
100
180
180
90
90
140
140
80
80
100
100
130
70
70
Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09
Note: Industrial production is seasonally adjusted.
Source: Ecowin and Treasury.
300
60
60
Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09
China – GDP growth
15
Per cent
Per cent
12
15
12
Through the year
9
9
6
6
Quarterly
3
3
0
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
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
Mar-09
OECD output gap
6
Percentage of potential output
Percentage of potential output
6
(f)
4
4
2
2
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
Dec-70
Dec-75
Dec-80
Dec-85
Dec-90
Dec-95
Dec-00
Dec-05
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
Dec-10
Global equity markets
110
Index (1 Jan 08 = 100)
Index (1 Jan 08 = 100)
110
100
100
90
90
80
80
70
70
60
60
50
50
40
40
S&P 500
30
01-Jan-08
11-Apr-08
Eurostoxx 50
21-Jul-08
Source: Standard and Poor’s, Stoxx Ltd and ASX.
ASX 200
30-Oct-08
08-Feb-09
30
20-May-09
World’s largest banks by credit rating
10,000
Total assets, $US billion, log scale
Total assets, $US billion, log scale
10,000
Australia's four largest banks
1,000
1,000
100
100
10
10
AAA
AA
AA-
A+
A
Note: Data refer to bank ratings as at 1 May 2009 and assets as at late 2007 (latest available data).
Source: Bloomberg and The Banker.
A-
Banks: Market capitalisation
($US Billions)
Morgan Stanley
Santander
Credit Suisse
Deutsche Bank
RBS
Market value as at June Quarter 2007
Market value as at 19 May 2009
Source: JPMorgan and Bloomberg L.P.
Barclays
JP Morgan
Goldman Sachs
HSBC
UBS
Citigroup
Thirty largest banks in the World
100
MARKET CAPITALISATION (US$m)
90
80
70
60
50
40
30
20
10
RBS
Barclays
Deutsche Bank
ANZ
Societe Generale
Citigroup
Credit Agricole
U.S.Bancorp
Toronto-Dominion
Unicredit
National Australia
MorganStanley
Mizuho Financial
Sumitomo Mitsui
Bank of New York
Bank of America
Banco Bradesco
RBC
Commonwealth Bank
Westpac
BNP Paribas
Intesa Sanpaolo
UBS
Goldman Sachs
Mitsubishi UFJ
Credit Suisse
Santander
Wells Fargo
JPMorgan
HSBC
0
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).
Banks’ share prices
120
Index (2 Jul 07=100)
Index (2 Jul 07=100)
100
120
120
100
100
Index (2 Jul 07=100)
Index (2 Jul 07=100)
120
100
Australia
80
80
80
80
60
60
60
US
60
Japan
UK
40
40
40
40
20
20
20
20
0
0
02 Jul 07 21 Dec 07 10 Jun 08 29 Nov 08 20 May 09
Source: Bloomberg.
0
0
02 Jul 07 21 Dec 07 10 Jun 08 29 Nov 08 20 May 09
House prices
320
Index (Mar-95=100)
Index (Mar-95=100)
280
320
280
Australia
(6 capital city weighted average)
240
240
200
200
United States
(Case-Shiller 10-city index)
160
160
120
120
80
Mar-95
Mar-97
Mar-99
Mar-01
Mar-03
Source: S&P/Case-Shiller, Australian Property Monitors and Treasury.
Mar-05
Mar-07
80
Mar-09
Bulk commodity prices
Iron ore
230
Thermal coal
$US/t
$US/t
Spot price
230
230
(Newcastle)
$US/t
Spot price
Contract price
$US/t
230
Contract price
200
200
200
200
170
170
170
170
140
140
140
140
110
110
110
110
80
80
80
80
50
50
50
50
20
May-05
May-06
May-07
May-08
20
May-09
Note: Iron ore spot price is CFR for India/China imports.
Source: Bloomberg, Global Coal and ABARE.
20
Jan-04
May-05
Sep-06
Jan-08
20
May-09
RBA Cash rate
24
Per cent
Per cent
24
20
20
16
16
12
12
8
8
4
4
0
May-87
May-89
May-91
May-93
May-95
May-97
May-99
May-01
Note: Data to Dec-89 are the 11am call rate. Data from Jan-90 are the target cash rate.
Source: Reserve Bank of Australia.
May-03
May-05
May-07
0
May-09
Australian Government fiscal stimulus
1.8
Per cent of annual GDP
Per cent of annual GDP
Transfers
COAG reforms
1.8
Investment
1.6
1.6
1.4
1.4
1.2
1.2
1.0
1.0
0.8
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
2nd Half
2008
Source: Treasury.
1st Half
2009
2nd Half
2009
1st Half
2010
2nd Half
2010
1st Half
2011
2nd Half
2011
1st Half
2012
Real GDP
(estimated effect of fiscal stimulus)
103
Index (Sep-08=100)
Index (Sep-08=100)
103
Forecasts
102
102
101
101
Post-stimulus
100
100
99
99
98
98
97
97
Pre-stimulus
96
96
95
Jun-07
Dec-07
Jun-08
Dec-08
Source: ABS Catalogue Number 5206.0 and Treasury.
Jun-09
Dec-09
Jun-10
Dec-10
95
Jun-11
Australian Government
Payments and receipts
30
Per cent of GDP
Per cent of GDP
(f)
Payments
28
30
(p)
28
26
26
24
24
Receipts
22
20
1977-78
1982-83
1987-88
1992-93
1997-98
22
2002-03
2007-08
20
2012-13
Underlying cash balance
4
Per cent of GDP
Per cent of GDP
(f)
4
(p)
2
2
0
0
-2
-2
-4
-4
-6
1977-78
1982-83
Source: Treasury.
1987-88
1992-93
1997-98
2002-03
2007-08
-6
2012-13
Government net debt position
for selected countries
140
Per cent of GDP
2008
Per cent of GDP
2009
2010
140
2014
120
120
100
100
80
80
60
60
40
40
20
20
0
0
-20
-20
Australia
Canada
UK
US
Advanced 25
Euro area
Japan
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.
Private consumption
(Nominal)
75
Per cent of GDP
Per cent of GDP
70
75
70
US
65
65
UK
60
60
Australia
55
55
50
Mar-79
Mar-82
Mar-85
Mar-88
Mar-91
Mar-94
Mar-97
Mar-00
Mar-03
Source: ABS Catalogue Number 5206.0, US Bureau of Economic Analysis and Office of National Statistics, UK.
Mar-06
50
Mar-09
The Australian economy –
Staying afloat in the global storm
David Gruen
Tuesday, 26 May 2009