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The economic ‘big picture’
Saul Eslake
Chief Economist
Bank of America Merrill Lynch Australia
Australia’s major tourism markets
Visitor arrivals by country of origin, 2011-12
1.4
Mns
1.2
1.0
0.8
0.6
0.4
0.2
0.0
Europe
Source: ABS.
NZ
ASEAN
China
Nth
America
Japan
Korea
HK
India
MENA
Other
Economic risks high in ‘advanced’ world
90
%
Probability of recession
Q2 2012 – Q1 2013
50
80
45
70
40
%
Probability of deflation
Q4 2013
35
60
30
50
25
40
20
30
15
20
10
10
5
0
0
US
Euro
area
Japan Emerging Latin Other
Asia America
Source: International Monetary Fund, World Economic Outlook,
October 2012
US
Euro
area
Japan Emerging Latin Other
Asia America
Public debt weighs on most ‘advanced’ economies
Net public debt, 2012
160
% of GDP
140
120
100
80
60
40
20
0
Japan
US
UK
Euro area
India*
* Gross debt. Source: IMF, World Economic Outlook database, October 2012.
Malaysia*
Korea
Indonesia*
China*
Australia
NZ
Europe already in ‘double dip’ recession
Euro zone real GDP
1
Euro zone unemployment
% ch. from previous quarter
12
% of the labour force
11
0
10
-1
BAML
forecast
-2
9
BAML
8
forecast
7
-3
07
08
09
10
11
12
Sources: Eurostat; Bank of America-Merrill Lynch Global Research.
13
07
08
09
10
11
12
13
Euro Central Bank has a plan … but will it work?
•
•
•
•
The European Central Bank has signalled
its preparedness to support the debt of
heavily indebted Euro member nations –
despite German reservations
But they (Spain and perhaps Italy) must
still formally apply for a ‘bailout’ –
which they have thus far been reluctant
to do
10-year government bond yields
7.5
Greece
(right scale)
7.0
% pa
30
6.0
25
5.5
Italy
5.0
4.5
And Europe still baulks at other ‘progrowth structural reforms
40
35
6.5
Even assuming they eventually do, fiscal
austerity will act as a drag on European
growth for most of this decade
Source: Thomson Reuters Datastream
% pa
20
Spain
15
4.0
10
3.5
5
3.0
0
07
08
09
10
11
12
The US looks better than Europe
US real GDP
6
4
US unemployment
% ch. from previous quarter
12
(annualized rates)
11
2
10
0
9
-2
8
-4
BAML
7
-6
forecast
6
-8
5
-10
4
07
08
09
% of the labour force
10
11
12
Sources: US Bureau of Economic Analysis; US Bureau of Labor
Statistics; Bank of America-Merrill Lynch Global Research.
13
BAML
forecast
07
08
09
10
11
12
13
US housing market looks to be turning
US house prices
210
US housing starts
Index: January 2000 = 100
2.5
2.3
2.1
200
190
Millions (annual rate)
1.9
1.7
1.5
180
170
160
1.3
1.1
150
140
0.9
0.7
0.5
130
120
06
07
08
09
10
Sources: Standard & Poor’s; US Commerce Department.
11
12
06
07
08
09
10
11
12
Shale gas is making a difference to the US
US natural gas production
27
US natural gas prices
Trn cubic feet (annual rate
600
Trend
25
US$/m3
500
23
400
Actual
21
300
19
200
17
100
15
0
90
92
94
96
98
00
02
04
Sources: US Energy Information Administration; IMF.
06
08
10
12
90
92
94
96
98
00
02
04
06
08
10
12
But the ‘fiscal cliff’ looms as a major risk
US Federal budget balance
2
Change in budget balance 2012 to 2013
% of GDP
US$bn
0
•
•
-2
-4
•
•
•
-6
-8
•
•
-10
-12
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Actual / 'Baseline'
Without 'fiscal cliff' measures
•
Expiry of Bush tax cuts
Non-indexation of alternative
minimum tax (AMT) thresholds
Expiry of payroll tax cut
Other tax measures
Expiry of extended
unemployment benefits
Other expiring spending
Automatic spending cuts
mandated by last year’s deal on
the debt ceiling
Other measures
Total
180
120
120
50
40
60
110
40
720
(4.6% of GDP)
Sources: US Congressional Budget Office; BofA Merrill Lynch Global Research.
Japan’s ‘lost decade’ continues into another
Japan real GDP
10
Japan ‘core’ inflation
% ch. from previous quarter
1
(annualized rates)
% change from year earlier
5
0
0
-5
BAML
-10
forecast
BAML
-1
forecast
-15
-2
-20
07
08
09
10
11
12
13
Sources: Japan Economic & Social Research Institute; Japan Home Ministry;
BofA Merrill Lynch Global Research.
07
08
09
10
11
12
13
China has not had a ‘hard landing’ …
China real GDP
16
China inflation
% ch. from year earlier
10
14
8
12
6
10
% change from year earlier
4
8
6
BAML
4
forecast
2
BAML
0
forecast
2
-2
0
-4
07
08
09
10
11
12
13
Sources: China National Statistics Bureau; BofA Merrill Lynch Global Research.
07
08
09
10
11
12
13
… but growth will slow for ‘structural’ reasons
China fixed asset investment as % of GDP
China working age (15-64) population
3.5
50
% pa
3.0
% pa
45
2.5
40
2.0
1.5
35
1.0
0.5
30
0.0
25
-0.5
-1.0
1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
Five years ended
Sources: United Nations; CEIC.
20
1981
1986
1991
1996
2001
2006
2011
Indonesia & Philippines stand out in other Asia
Real GDP growth
Korea
8
% ch from year earlier
Hong Kong
9
% ch from year earlier
Malaysia
9
% ch from year earlier
Indonesia
8
6
6
6
6
4
3
3
4
2
0
0
2
0
-3
-3
0
07 08 09 10 11 12 13
07 08 09 10 11 12 13
07 08 09 10 11 12 13
Singapore
Thailand
Taiwan
12
9
6
% ch from year earlier
3
0
-3
07 08 09 10 11 12 13
15
12
9
6
3
0
-3
% ch from year earlier
07 08 09 10 11 12 13
Sources: National statistics agencies & central banks;
BofA Merrill Lynch Global Research
9
% ch from year earlier
07 08 09 10 11 12 13
Philippines
8
6
6
3
4
0
2
-3
0
07 08 09 10 11 12 13
% ch from year earlier
% ch from year earlier
07 08 09 10 11 12 13
India needs renewed reform
India real GDP
12
India inflation
% ch. from year earlier
18
% change from year earlier
16
10
14
12
8
10
6
8
BAML
4
forecast
2
6
4
2
0
0
07
08
09
10
11
12
13
Sources: India Central Statistical Office; BofA Merrill Lynch Global Research.
07
08
09
10
11
12
Asia’s middle class will increase by 1.2bn this decade
The global middle class
Notes: Lower bound of ‘middle class’ is the average poverty line in Portugal and Italy.
Source: H Kharas & G Gertz, ‘The New Global Middle Class: A Cross-over from West to East’,
reproduced in Australian Government, Budget Statement No. 4 ‘Opportunities and Challenges of an
Economy in Transition’, 2011-12 Budget Paper No. 1, Budget Strategy and Outlook (Canberra, 2011).
New Zealand staging a slow recovery
NZ real GDP
1.5
NZ housing approvals
% ch. from previous quarter
2.8
1.0
0.5
NZ unemployment
'000s
7.5
2.6
7.0
2.4
6.5
Actual
2.2
6.0
0.0
2.0
5.5
-0.5
1.8
5.0
1.6
-1.0
4.5
Trend
1.4
4.0
-1.5
1.2
3.5
-2.0
1.0
3.0
07
08
09
Source: Statistics New Zealand
10
11
12
07
08
09
% of the labour force
10
11
12
07
08
09
10
11
12
Australia’s economy has done very well …
Real GDP
112
Dec qtr 2007 = 100
Unemployment rate
Australia
12
110
% of labour force
Euro area
11
108
Canada
106
10
Canada
9
104
NZ
102
US
100
UK
8
US
7
98
Euro
96
UK
Japan
94
6
4
90
3
09
10
11
12
Australia
5
92
08
NZ
Japan
08
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.
09
10
11
12
… partly on the back of the ‘resources boom’…
Resources industry construction work
Resources export commodity prices
175
100
Index: 2008-09 = 100
$bn
90
150
Work yet to be done
80
70
125
60
50
100
40
75
US$ terms
50
30
20
Work done
10
(annual rate)
0
25
02
03
04
05
06
07
08
09
Sources: RBA; ABS; BofA Merrill Lynch Global Research
10
11
12
02
03
04
05
06
07
08
09
10
11
12
… without triggering double-digit inflation
Consumer price index
30
% change from year earlier
25
20
Korean War
wool boom
WWI wheat
& wool boom
Late 60s/
early 70s
boom &
OPEC I
15
OPEC II
'China
boom'
10
5
0
-5
-10
-15
1900
1910
1920
1930
Sources: ABS; BofA Merrill Lynch Global Research
1940
1950
1960
1970
1980
1990
2000
2010
The strong A$ has played a major role in this
A$ vs US$
1.10
Consumer prices
7
US$ per A$
% change from year earlier
"Non-tradeables"
6
1.00
5
4
0.90
3
2
0.80
1
0.70
0
-1
0.60
-2
0.50
"Tradeables"
-3
02
03
04
05
06
07
08
Sources: Thomson Financial Datastream; ABS.
09
10
11
12
01
02
03
04
05
06
07
08
09
10
11
12
But tourism has been one of the casualties
Short-term arrivals and departures
9
Mns (seas. adj. ann. rate)
Trade balance on travel-related services
10
Departures
8
$ bn (annual rate)
Seas. adj.
8
7
6
Arrivals
6
5
4
Arrivals
ex-Chinese
4
2
Trend
3
0
2
1
-2
90
92
Sources: ABS.
94
96
98
00
02
04
06
08
10
12
90
92
94
96
98
00
02
04
06
08
10
12
The A$ seems to be defying ‘fundamentals’
Commodity prices and the A$
175
150
125
2008-09 = 100
US$
A$ vs US$
(right scale)
Interest rate differentials and the A$
1.10
1.00
0.90
500
450
400
Basis points
US$
Australia-US 2 yr bond
yield spread (left scale)
1.00
350
0.90
300
100
0.80
75
0.70
50
0.60
25
RBA commodity price index
(inverted, left scale)
01 02 03 04 05 06 07 08 09 10 11 12
Sources: RBA; ABS; Thomson Financial Datastream.
0.50
1.10
250
0.80
200
0.70
150
100
A$ vs US$
50
(right scale)
0
0.60
0.50
01 02 03 04 05 06 07 08 09 10 11 12
… perhaps due to its new ‘safe haven’ status
FX reserves held in ‘non-traditional’
currencies
350
US$ bns
250
'Other'
(ie, not US$, €,
¥, £ or SwFr
300
250
Foreign holdings of Australian
Government securities
A$bn
200
150
200
150
100
100
50
50
0
0
01 02 03 04 05 06 07 08 09 10 11 12
Sources: IMF; RBA.
01
02
03
04
05
06
07
08
09
10
11
12
Firms searching harder for productivity gains …
Labour productivity
6
Unit labour costs
9
% change from year earlier
5
Seasonally
4
adjusted
% change from year earlier
8
7
Trend
3
Seasonally
6
adjusted
5
2
4
1
3
0
2
Trend
1
-1
0
-2
-1
-3
-2
02
Source: ABS.
03
04
05
06
07
08
09
10
11
12
02
03
04
05
06
07
08
09
10
11
12
… heightening household fears about jobs
Unemployment and household
expectations regarding unemployment
Employment growth
5
% change from year earlier
8
4
7
% of labour force
%
180
Unemployment rate
(left scale)
3
Trend
2
160
6
140
5
Seas adj
120
1
4
Ratio people expecting higher to people
expecting lower unemployment (right scale)
0
03
04
05
06
07
08
Source: ABS; Westpac-Melbourne Institute.
09
10
11
12
100
80
3
02
200
02
03
04
05
06
07
08
09
10
11
12
Households have suffered big wealth losses …
House prices
Household net worth-income ratios
150
800
%
Australia
Index: 2006 = 100
125
100
750
US
75
UK
700
50
01
650
02
03
04
05
06
07
08
09
10
11
12
Share prices
600
550
Australia
500
US
450
01
02
03
04
05
06 07
08
09
10
11
12
Sources: ABS; US Federal Reserve: UK Office of National Statistics; Standard & Poors;
Thomson Financial Datastream.
140
120
100
80
60
40
Index: 2006 = 100
US
Australia
01
02
03
04
05
06
07
08
09
10
11
12
… which has prompted them to save more
Household perceptions of their own
financial situation
120
Household saving rates
Ratio of optimists to pessimists
14
% of household disposable income
12
110
Seas. adj.
Australia
10
100
Trend
8
UK
6
90
4
80
US
2
0
70
-2
60
-4
01
02
03
04
05
06
07
08
09
10
11
12
Sources: Westpac-Melbourne Institute; ABS; US Bureau of Economic Analysis; UK Office
of National Statistics.
01
02
03
04
05
06
07
08
09
10
11
12
•
Conclusions
Near-term risks to global economy remain tilted to the downside
―
―
•
―
Medium term growth prospects much brighter for Asia than for ‘advanced’ economies
―
―
―
•
US prospects better than Europe partly thanks to cheap energy and better demographics
but growth in all major ‘advanced’ economies constrained by need for ‘fiscal consolidation’
by contrast Asian economies (except for Japan and to some extent India) are not burdened by
unsustainable public debt
Australia approaching a major growth ‘transition’
―
―
―
•
Euro area recession will persist into next year
post-election ‘fiscal cliff’ is a major risk to the US outlook
growth across Asia has slowed partly reflecting weakness in ‘advanced’ economies
with commodity prices now past their peak, and the peak in resources investment likely to
occur within the next 18 months, growth will need to be driven by other areas eg housing
persistent A$ strength may complicate this task, forcing interest rates lower
Australian households will take time to ‘consolidate’ their balance sheets after the sharp fall
in wealth in recent years, and will maintain high saving rates for some years yet economies
All of which makes for a challenging environment for Australian tourism