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LGMA Finance Professionals Network Event Economic Presentation 16 August 2013 Craig McGuinness Economist / Senior ALM Analyst FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Four years after the recession the global economy is still battling to return to normal. Source: IMF World Economic Outlook FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Europe remains the number one trouble spot in the global economy Source: Datastream, Reuters, IMF, Societe Generale FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Things are (slowly) improving across the Atlantic though the employment situation remains dire. Source: Datastream, Federal Reserve, WATC calculations FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Bank of Japan and the new Abe Government have implemented huge stimulus measures in an attempt to finally breathe life into the Japan’s moribund economy. Source: Datastream FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS China’s growth has slowed in recent years. Source: Western Australian Department of Treasury and Finance FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS However the urbanisation project has a long way to go… Source: RBA paper – Chinese Urban Residential Construction to 2040 FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS …suggesting that while they have passed their peak, commodity prices are likely to remain well above pre-2005 levels. FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS In the short to medium term the pullback in commodity prices is likely to continue to weigh on national income. Source: National Bureau of Statistics FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Weaker national income growth in the period ahead suggests employment growth is likely to remain sluggish which will put further upward pressure on the unemployment rate. Source: Australian Bureau of Statistics FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS With inflation comfortably within target the RBA has room to move should it be necessary to cut rates further. Source: Australian Bureau of Statistics FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Australian householders are world class when it comes to borrowing to invest in property Source: Reserve Bank of Australia FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Though we have (so far) escaped the hangover that other countries have suffered. Peak Trough WA +225% (Mar 10) -7% (Sep 11) Australia +158% (Jun 10) -5% (Dec 11) US +106% (Jun 06) -33% (Mar 12) Ireland +136% (Sep 07) -51% (Mar 13) Spain +130% (Sep 08) -27% (Mar 13) Source: Datastream / WATC FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS With the mining investment boom winding down, exports are set to take over as the State’s major growth driver. Source: ABS / Department of Treasury / WATC FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Central bank money creation has helped push up equity prices across the world. Source: Bloomberg FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Recent declines in the $A along with RBA rate cuts is helping to ease domestic monetary conditions. Source: Bloomberg FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS While a falling A$ is good for exports and trade exposed sectors, it can be a double-edged sword. Source: Bloomberg / WATC FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Our current forecast is for the RBA to cut the cash rate one more time to 2.25%, with November 2013 the most likely near term candidate. Source: WATC / Reuters FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS Domestic rates remain low when compared to the major central banks however. Source: Bloomberg FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS With the neutral cash rate now estimated to be around 1 percentage points lower than it was pre-GFC long-term rates are also likely to be lower than the old norm. Source: WATC FINANCIAL SOLUTIONS FOR THE BENEFIT OF ALL WESTERN AUSTRALIANS