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Global Overview&
Australia– where to now for the multi speed
economy
Alan Oster – Group Chief Economist
2
Recently financial markets have turned surprisingly optimistic. Equity markets up fear index down.
Really reflects lowering of fear of global problems
Important factors are:Fiscal cliff delayedLess talk of EuropeChina clearly bottomedAnd new Govt in
Japan pushing expansionary policy
But economies not much better Indeed in Q4 2012 worsened. So what about the globe going forward
0
10
20
30
40
50
60
06/06/2011 29/08/2011 21/11/2011 13/02/2012 07/05/2012 30/07/2012 22/10/2012 14/01/2013 08/04/201360
70
80
90
100
110
120
Australian share market
Share markets in major developed economies
VIX index ofmarket volatility LHS)
FINANCIAL MARKET INDICATORS
3
Global outlook:Cautious optimism but mixed… recent data concerning
Global growth of around 3% in 2013 and still sub trend (3.7%) in 2014 Developed world a struggle– US sluggish but sustainable growth – fiscal cliff delayed and debt debate
still coming. Sequester now kicking in. But housing recovery helping – Europe back into recession – with sovereign risk still an issue. Five quarters
in a row of flat to negative growth. 6th coming– Japan with new Govt pushing increased spending and loosening monetary
policy (and the Yen) GDP turns up but moderately. Emerging economies softened in response to trade downturn from developed economies and previous policy tightening (now reversing).– China slowed a lot but appears to be stabilising - we expect growth around
8%. Q1 2013 on downside but still expect reasonable growth..– India in need of stimulus. Central bank cut despite inflation concerns– Non China Asia slowed as world trade softening Growth around 3.6% but
weaker if you are more trade exposed (HK, Singapore, Korea)Fed and ECB have however removed tail risk of global meltdown
4
European sentiment may be bottoming but not their economy• European confidence still at historic lows• But looks to have bottomed – re ECB• Cyprus not yet big issue
• But can’t say the same about their economy
• 5 quarters of flat or negative GDP –about to report a 6th.
European Economic (Consumer and Business) Sentiment- Measured as Deviation in European Sentiment From Long Run Average
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
May
-07
Sep
-07
Jan-
08
May
-08
Sep
-08
Jan-
09
May
-09
Sep
-09
Jan-
10
May
-10
Sep
-10
Jan-
11
May
-11
Sep
-11
Jan-
12
May
-12
Sep
-12
Jan-
13
-5
-4
-3
-2
-1
0
1
2
Feb-
06
Feb-
07
Feb-
08
Feb-
09
Feb-
10
Feb-
11
Feb-
12
Feb-
13
-5
-4
-3
-2
-1
0
1
2
GDP QTR %BUSINESS CLIMATE INDICATOR
EUROPEAN GDP AND BUSINESS CLIMATE INDICATOR
5
And as a result unemployment across the region continues to deteriorate. Especially in the periphery
Albeit the crunch is different across regions
0
5
10
15
20
25
Jun-04 Jun-06 Jun-08 Jun-10 Jun-12
Netherlands Germany FranceItaly Spain Greece
Unemployment rates (%)
Source: OECD
EUROPEAN WIDE UNEMPLOYMENT %
6.5
7.5
8.5
9.5
10.5
11.5
12.5
Jul-0
7
Mar
-08
Nov
-08
Jul-0
9
Mar
-10
Nov
-10
Jul-1
1
Mar
-12
Nov
-12
6
Overall we see continuing recession in Euro-land in 2013. No positive quarterly growth till late 2013.
-3.00
-2.50
-2.00
-1.50
-1.00
-0.50
0.00
0.50
1.00
1.50
Mar
-05
Jun-
05
Sep-
05
Dec
-05
Mar
-06
Jun-
06
Sep-
06
Dec
-06
Mar
-07
Jun-
07
Sep-
07
Dec
-07
Mar
-08
Jun-
08
Sep-
08
Dec
-08
Mar
-09
Jun-
09
Sep-
09
Dec
-09
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Jun-
11
Sep-
11
Dec
-11
Mar
-12
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
-3.00%
-2.50%
-2.00%
-1.50%
-1.00%
-0.50%
0.00%
0.50%
1.00%
1.50%
Net Exports & Stocks ContrDEMANDGDP
EUROPEAN GDP Demand and Net Exports Qtrly % and Qtrly Contribution
We don’t expect positive overall growth till Q3 2013Domestic demand is even more depressedEurope has benefited from better exports – mainly Germany
7
US economy numbers bouncyBut fundamentals seem reasonable – but modest
US GDP increased by 2.5% annualised in Q1 after a flat (defence cutback) Q4 2012
Growth mainly reflecting consumption and investment (dwellings)
Key survey of manufacturing and services also around 3% (annualised) in Q1 2013
Data a bit weaker in March month and if continues implies growth around 2 to 2 ½ % in Q2 2013
-9
-6
-3
0
3
6
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
ANNUALISED GDPMAN ISMTOTAL ISM
US Quarterly Growth Annualised and Manufacturing / Total ISM
8
On the positive side…… HousingOn the negative……… Fiscal restraint
50
75
100
125
150
175
40179 40544 40909 41275 40422 40787 41153 40330 40695 4106150
75
100
125
150
175
Construction activity Home sales
Existing
new homes
Residential property market indicatorsJan 2010 = 100
Private new construction
Starts
Permits
Jan 2010 = 100
Stock available for sale
existing (1 family & condos)
new 1 family homes
Housing construction (and prices up)
And overbuild over
But fiscal policy likely to take out around 1% in 2013 and 2014 (similar to 2012)
And debt ceiling still there….. politics
Change in cyclically adjusted budget balance (ex TARP)
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
% potential GDP
9
Our forecast suggests moderate on-going US growth
Model based on : Real interest rates, House prices, Equity prices, Oil prices, TWI (currency), Commodity prices, Credit rationing and lags.
Overall we expect growth of only around 2.1% this year and near 3% in 2014
That means hard to lower unemployment in the near term
Fed wont raise rates till unemployment is below 6 ½% (say late 2015)
But QE will probably stop late 2013 or early 2014.
US Quarterly GDP v Nab Mini Model
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
Sep
-01
Sep
- 02
Sep
- 03
Se p
-04
Sep
-05
Sep
-06
Sep
-07
Sep-
08
Se p
-09
Sep
-10
Sep-
11
Sep
-12
Sep
-13
Se p
-14
10
Japanese outlook: Policy change has had a large financial impact …
New Government has announced stimulus package and Bank of Japan has activated QEQE in Japan broadly similar in size to what the Fed is doingHas weakened the Yen and driven up equities USA Japan and Aust Equity Prices
From Sept 2012 (Sept =100)
95
105
115
125
135
145
155
165
Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13
USAJapanAust
Yen v AUD & USD From Sept 2012 to Mid May 2013
75
80
85
90
95
100
105
Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13
AUD/ YEN (26%)
USD/YEN(29%)
11
Japanese outlook: Better but still not great …Overall around 1.7% in 2013 and 2.2% in 2014
Expect ramp up in public spending
And better net exportsAlso increased wealth helps
consumer
Tankan Survey pointing to better growth
And it has showed up in GDP
QTR Tankan Model Of GDP
-5-4-3-2-101234
Q2
05
Q2
06
Q2
07
Q2
08
Q2
2009
Q2
2010
Q2
2011
Q2
2012
Qtrly GDP %EQ Based on Tanken
Quarterly Growth (%) & Contribution for Net Exports
-1.00%
-0.80%
-0.60%
-0.40%
-0.20%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
NET EXPORTS (LHS)Domestic Demand (RHS)GDP (RHS)Public Demand (RHS)
12
China: National accounts disappointed in Q1 2013, but robust growth expected to continue in 2013GDP disappointed in Q1 2013, but
growth to remain robust
But, rapid pace of previous years is behind us
Authorities see growth as “stable”, while composition is improving
Business sentiment indicators point to a (tentative) bottom in late 2012
Albeit different across industries
0
4
8
12
2000 2002 2004 2006 2008 2010 20120
4
8
12
% %
China - Real GDPPercentage change
Year-ended
Quarterly*
* Data prior to DQ2010 are estimated by NAB.Source: CEIC Database, NAB
China Business ClimateIndex
80
90
100
110
120
130
140
150
1999 2001 2003 2005 2007 2009 2011 201380
90
100
110
120
130
140
150
Index Index
Sources: CEIC
Retail/Wholesale
Manufacturing
Real EstateAggregate
13
Of course government policy important, but export slowdown may bottom as global growth improves
Central government spending has supporting investment growth, but impact fading
Real estate investment recovery on shaky ground following property controls
China’s exports generally outperformed expectations this year (15% yoy in April)
Exports to HK have risen sharply, but inconsistencies suggest that actual export demand may be overstated.
Government stimulus investmentFixed asset investment; year-ended percentage change (3mma)
-30
-20
-10
0
10
20
30
40
2006 2007 2008 2009 2010 2011 2012 2013-30
-20
-10
0
10
20
30
40
Sources: Thomson Reuters
% %Local Governments
Central Governments
China's Inflated Export NumbersYear-ended percentage change
-60
-40
-20
0
20
40
60
2005 2007 2009 2011 2013 2006 2008 2010 2012-60
-40
-20
0
20
40
60
% %
Sources: CEIC; NAB
Exports to Hong Kong Exports to Taiwan
Chinese Export Data
Partner Imports data
14
As a result industrial production has turned. Retails strengthening from good levels.
Industrial production is steady, but with more subdued growth (up around 9¼% yoy in April)
Industrial sector battling with over capacity in certain segments
Retail sales up 12.8% in year to April. Implying real growth around 11.8%Consumer confidence has
weakened, reflecting slower income growth.
Deflation of the Industrial SectorIndex; Year-ended percentage change
25
30
35
40
45
1996 1998 2000 2002 2004 2006 2008 2010 2012-10
-5
0
5
10
Source: CEIC
Index %
Capacity utilisation
Producer prices
-4
1
6
11
16
21
2004 2005 2006 2007 2008 2009 2010 2011 2012 201380
100
120
140
160
180
China - Retail SalesYear-ended percentage change; index
%
Index
Real Retail Sales
Nominal Retail Sales
* No observation is shown for January due to the effect of Chinese New Year; Feburary shows the average of January and February compared to December.
Consumer Confidence
15
Growth outlook: We expect growth to hold up at around 7.8% in 2013 – with policy remaining accommodative
China - Monetary Policy ResponsePercentage points of GDP growth
0.0
0.1
0.2
0.3
0 1 2 3 4 50.0
0.1
0.2
0.3
Ppts Ppts
Source: NAB Research
50bp cut to interest rate
50bp cut to reserve requirement ratio
Quarters
Economic Forecasts
2012 2013 2014 2012 2013 2014 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Real GDP 7.8 7.8 7.6 7.9 7.7 7.8 7.9 7.9 7.9 7.8 7.4 7.3Exchange Rate (USD/CNY) 6.3 6.1 6.1 6.4 6.2 6.1 6.1 6.1 6.1 6.1 6.1 6.1Monetary Policy (end of period)Benchmark Lending Rate 6.00 6.0 7.0 6.00 6.00 6.00 6.00 6.00 6.25 6.50 6.75 7.00Reserve Ratio Requirement* 20.0 21.0 21.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Sources: CEIC; NAB Group Economics
Year Average Chng % Year-ended Chng %
* For large depository institutions
China Real GDP GrowthYear-ended percentage change
0
2
4
6
8
10
12
14
2000 2002 2004 2006 2008 2010 2012 20140
2
4
6
8
10
12
14
% %
NAB Fcst
NAB Forecasting
Model
Source: CEIC, NAB
16
In Non Japan Asia data has been a bit soft –hopefully a temporary issue
But are seeing a similar trends in Latin America – so likely to reflect softness in global demand
17
Overall we see modest growth going forward in Asian tigers
Average annual growth in GDP (%)
2011 2012 2013 2014
Hong Kong 4.9 1.4 2.7 3.6
Indonesia 6.5 6.2 6.2 5.9
Singapore 5.2 1.3 2.3 3.6
Taiwan 4.1 1.2 3.3 4
Thailand 0 6.8 4.6 5
Malaysia 5.1 5.6 5.4 5.6
S Korea 3.7 2.0 1.8 2.8
Philippines 3.9 6.6 4.4 4.8
Tigers 4.2 3.8 3.7 4.3
• But growth stronger in near term where there is less reliance on global growth e.g. Indonesia• But worse where open to trade (HK & Singapore)• Or to competitiveness via currency (e.g. South Korea)
Asian Tigers Demand Components y/y %
18
Global economic forecasts: Key themeTrend growth returns in 2014 but recent weakness...
IMF
weight2012 2013 2014
World 3.1 3.1 3.7
United States 20 2.2 2.1 2.9
Euro zone 15 -0.5 -0.6 1.1
Japan 6 2.1 1.6 2.2
China 14 7.5 7.8 7.6
Asian Tigers 8 3.7 3.6 4.3
India 6 5.1 5.7 6.4
19
AUD a proxy for global risk appetite and commodities.And of course China
Our model says AUD good value USD 98c (+/- 5c). So not radically over valued
That probably reflects foreign demand for AUD in foreign central bank reserves –diversification a key driver. Hedge funds less involved
Not a lot RBA can do – rates matter but not a lot
We see AUD around parity (a touch below) for rest of 2013 then easing to mid to lower 90c by late 2014. Model driven by: commodity prices; US TWI – as measure of USD weakness;
long and short run rates; relative unemployment; relative equity markets and VIX.
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
Feb-85Feb-86Feb-87Feb-88Feb-89Feb-90Feb-91Feb-92Feb-93Feb-94Feb-95Feb-96Feb
-97Feb-98Feb-99Feb-00Feb
-01Feb-02Feb-03Feb-04Feb-05Feb-06Feb-07Feb-08Feb-09Feb-10Feb-11Feb-12Feb-13Feb-14
Series1
Plus X2 Std Dev
Minus X2 Std Dev
Model AUD and Forecasts v Actuals
20
Australian industry shifted up the global cost curve – especially against other advanced economies
21
Iron ore cost curves important – Aust low cost And a longer term perspective interesting.
Current price
Price in Oct / Nov 2012
0
40
80
120
160
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
40
80
120
160
Contract Price 62%Fe** (w/ forecast)
Spot Price 62%Fe*
Iron Ore PricesFOB Basis
* Spot price is calculated on an FOB basis by subtracting Port Dampier to Qingdao shipping rates from the cost and freight price. 62% Fe spot price is an estimate from published 63.5% price.** Up to Q3 2011, based on formulation that quarterly contract price equals previous quarters average spot price, lagged one month (eg. DQ = Average(Jun-Aug spot price)). Estimated using spot from Q4 2011.Source: ABARE, Bloomberg, Thomson Datastream, NAB
US$/T US$/TNAB Forecast
Australia a low cost provider Recent price spike not likely to be maintained But still very profitable
22
Thermal coal story not so good
23
Some key themes on Australia
• Domestic economy very mixed and in our view has hit a softer patch that has continued into the first part of 2013.
• House prices and equity markets helping wealth and consumer. But big offsets in lack of non mining investment as mining turns down, weaker commodity prices and high currency.
– Multi-speed nature continuing – with the weak getting worse. Mining investment continuing but will slow and go backwards as export boom replaces it as a key driver of growth. But employment demand will weaken (less miners to run v build a mine)
– Currency stays high and may be having larger expectation impacts on activity.
• With economy still struggling in H1 2013, growth in 2013 will be a around 2.3 % So unemployment to rise by late year (around 5¾ - 6%)
• Structural adjustment challenge massive. Another cut (s) required (25 points)
24
Our survey suggests domestic economy quite weak.Survey has tracked local economy well for 20 years
-10
-5
0
5
10
15
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Mar
-11
Mar
-12
Mar
-13
G NE Q trly An nua lisedN AB FO R W ARD OR DER S
Q uarterly Chang e in G NE v NAB Indicator Based on Forward O rd ers
25
A concern is that appears stronger industries are now weakening as well – especially, but not just, mining…
-50
-25
0
25
50
2000 2003 2006 2009 2012-50
-25
0
25
50
ppt ppt
Source: NAB
Range of industry conditions
Average
Monthly Business Conditions by IndustryNet balance, deviation from industry average since 1989
26
Still big divergence of conditions and confidence across industries. But mining scared and weakening
Business Conditions and ConfidenceThree Months to April; sa
Source: NAB
-25
-20
-15
-10
-5
0
5
10
15
Min
ing
Tran
spor
t&
Util
ities
Rec
& p
ers
Fina
nce
Who
lesa
le
Ret
ail
Man
uf
Con
stn All
Conditions
Confidence
Mining conditions deteriorating rapidly. Manufacturing very poor. Retail not goodPersonal services and transport & utilities reasonable. Finance confidence global.
27
Forward indicators a real concernAs is low level of capacity utilisation
We have a new forward indicator based on wholesale conditions leading general conditions by 3 to 4 monthsImplies still weak Q2 2013 – i.e. if
anything a weakening in growth momentum
And capacity utilisationrates getting very low
Not a great incentive to invest – especially in non mining
Business Conditions v Wholesale As a Leading Indicator
-20
-15
-10
-5
0
5
10
15
20
25
1997
M07
1998
M07
1999
M07
2000
M07
2001
M07
2002
M07
2003
M07
2004
M07
2005
M07
2006
M07
2007
M07
2008
M07
2009
M07
2010
M07
2011
M07
2012
M07
BUSINESS CONDITIONSWHOLESALE LEADING INDICATOR
78
79
80
81
82
83
84
85
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
CAPUM_SA
28
Confidence improved on global sentiment in early 2013 But below long run average and a touch weaker in April.
Long run average
Confidence better in early 2013 (fiscal cliff avoided, better China data & rates)But still a touch below long run average. April weaker on mining gloom
-40
-30
-20
-10
0
10
20
II III IV I II III IV I II III IV I II
2010 2011 2012 2013
Seasonally adjusted TrendConf 1990s recn Conf GFC
Business confidence (net balance)
29
Re-inventing the Australian economy.The challenge
Health care and social security the biggest employer and where the growth is largest (280k)
Miners and Education are both employing around 125k nearly as many as manufacturing fired (140k)
These trends not recognised in the debate or at least in the press
But still real and represent a big policy challenge. Its not going away
Employment - Changes since March 2008
-210
-160
-110
-60
-10
40
90
140
190
240
290
Mar
-08
Sep
-08
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
Sep
-11
Mar
-12
Sep
-12
Mar
-13
Health and Social Assistance
Mining
Accom and Food
Manufacturing
Media and Telcos Retail
Education &Training
30
Better equity markets and turning house prices have helped perceptions of wealth. But we remain cautious
House price expectations turning increasingly positive – Nab Property Survey
Over the medium term our Australian model wants moderate growth.
Accelerating in near term but then flattens out by end 2013 as unemployment rises
Property Survey - House Price Expectations
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15
Australia Victoria NSW Qld SA/NT WA
%
Expectations
And reflected in our state forecastsNAB Modelling - House Price Forecasts
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
2011 2012 2013 2014
Australia Victoria NSW Qld SA/NT WA
NAB Forecasts
%
Australian House Prices - 12 Mth %
-15
-10
-5
0
5
10
15
20
25
30
35
40
45
50
Sep-
87
Dec
-89
Mar
-92
Jun-
94
Sep-
96
Dec
-98
Mar
-01
Jun-
03
Sep-
05
Dec
-07
Mar
-10
Jun-
12
Sep-
14
% o
ya
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Actual / ForecastsModel
31
Recent ABS data suggest a surge in retail sales. More strength but are technical issues here.
ABS Nominal retail trade strong but bouncy
Our credit card data ($3bn per month) suggests recent moves overstated and hence March negative
April up around ½%Grouped RWH v ABS
-30
-20
-10
0
10
20
30
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Sep
-12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb-
13
Mar
-13
Apr
-13
Chn ABS
Chn RWH Grouped Cards
32
Investment – a tale of mining v the rest
Mining investment now exceeds investment in the rest of economy combined
0
20
40
60
80
100
120
140
2010-11 2011-12 2012-13 2013-14Ave 5-yr RR Min 5-yr RR Max 5-yr RR
Source: ABS & NAB calculations
$ bn Mining capex Other selected industries capex
0
20
40
60
80
100
120
140
2010-11 2011-12 2012-13 2013-14
Source: ABS & NAB calculations
$ billion
33
Its not that mining investment wont be really strong for ages. Rather its moving out of the growth phase
0
2
4
6
8
10
Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14
Mining investment (LHS) RBA forecast (LHS)
Mining investment* (quarterly, CVM)
Source: NAB* NAB estimate
% GDPAlso a critical point is that mining is
moving from investment to exports
Good for productivity and hopefully neutral for growth
But will lower demand for employment
8 people to build an LNG platform 1 to run it
4 to build a mine 1 to run it
Hence critical for non mining investment to help offset the slack
34
Critical issue is will non mining investment offset slowing mining. Nothing in credit data and investment intentions
Personal (credit card) and business credit currently around flat to negative
Home loans at 5% a 30 year low
Key System Credit Aggregrates3 mths at annual rate - saar
-15
-10
-5
0
5
10
15
20
25
Jun-
04
Dec
-04
Jun-
05
Dec
-05
Jun-
06
Dec
-06
Jun-
07
Dec
-07
Jun-
08
Dec
-08
Jun-
09
Dec
-09
Jun-
10
Dec
-10
Jun-
11
Dec
-11
Jun-
12
Dec
-12
BUSINESS
%
HOUSING
OTHER
Non-mining investmentActual and NAB expectations net balance
-30
-20
-10
0
10
20
30
40
1990 1993 1996 1999 2002 2005 2008 2011-30
-20
-10
0
10
20
30
40
Non-mining GFCF NAB capex 12-mth expectations
% change on prev. year
Net balance
Quarterly non-mining GFCF estimated by NABSources: ABS, NAB
35
GDP loses momentum– we expect 2.3 % in 2013.Slightly better in 2014 on rate cuts but mining boom has big impacts on demand v GDP (esp in 2015)
Australian GDP and Domestic Demand: At a 6monthly Annualised Rate
-2.5%
-0.5%
1.5%
3.5%
5.5%
Dec
-09
Mar
-10
Jun-
10
Sep-
10
Dec
-10
Mar
-11
Jun-
11
Sep-
11
Dec
-11
Mar
-12
Jun-
12
Sep-
12
Dec
-12
Mar
-13
Jun-
13
Sep-
13
Dec
-13
Mar
-14
Jun-
14
Sep-
14
Dec
-14
Mar
-15
Jun-
15
Sep-
15
Dec
-15
% c
hang
e - 1
2 m
onth
s to
GDP Domestic Demand
36
For labour market lower growth raises unemployment And phasing of mining boom keeps it there
Australian Labour Market
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Mar
-12
Jun-
12
Sep
-12
Dec
-12
Mar
-13
Jun-
13
Sep
-13
Dec
-13
Mar
-14
Jun-
14
Sep
-14
Dec
-14
Mar
-15
Jun-
15
Sep
-15
Dec
-15
% c
hang
e - 1
2 m
onth
s to
4.5
5.0
5.5
6.0
6.5
% -
rate
EMPLOYMENT - LHS
UNEMPLOYMENT RATE - RHS
37
RBA to cut by another 25 points in 2013 – to 2½ %
Economy hitting a soft patch
Inflation not an issue
RBA took the opportunity to go early – in May we expected JuneIts about helping competitiveness of struggling parts of the economyWe still are very worried re non mining investmentAt the margin we have lower growth expectations for 2013But very similar inflation outlook
We expect RBA to have to respond again as unemployment rises to 5¾-6% by mid late 2013. Accelerating house prices on the other hand could complicate the timing process
We have a final cut in late 2013 as mining phasing heralds further labour market weakness (say November).
38
Overall reaction to the Budget.What a difference a year makes!!!
• This is a very political document - with last years rhetoric about the need to get back to surplus for global credibility ditched
• But path of progress back to surplus is much slower than expected – involving less pain to the economy than we expected. Indeed the impact is practically nothing in 2014/15 building through time to around ½% in the out years
• The budget is helping to repair some structural problems via scrapping last years welfare increases (spreading the benefits of the boom) and the baby bonus, increasing the medicare levy to help fund national disability reform, tightening offshore tax arrangements and acknowledging lower carbon price
• Overall a budget more in keeping with a weaker economy
• Forecasts at 2.7% for 2013/14 and 3% reasonable (we are a touch lower). But we have lower start in 2012/13 More importantly we have a much weaker nominal economy –important re budget outcomes re profit and taxes.
• We still see need for another 25 point cut in rates to get 2013/14 forecasts. And we still see November as the most likely timing,
39
In corporate speak, Budget has “negative jaws”Mainly fixed on revenue side – and after a few years
Fixing “jaws” is the key to fiscal sustainability
Clearly main driver is the fall in revenues
But expenses (after shooting up during GFC ) have remained at higher levels
22
23
24
25
26
2000-01 2004-05 2008-09 2012-13 2016-1722
23
24
25
26
Commonwealth revenue & expenses*% of GDP
RevenueExpense
%
Sources: ABS; Commonwealth Treasury; NAB calculations; RBA* GST classified as Commonwealth tax & expense
%
40
Fiscal impact – Nothing like last yearNothing much to out years and then only around ½%
Analysis based on OECD methodology;
-4-3.5
-3-2.5
-2-1.5
-1-0.5
00.5
11.5
22.5
3
1990
/91
1991
/92
1992
/93
1993
/94
1994
/95
1995
/96
1996
/97
1997
/98
1998
/99
1999
/00
2000
/01
2001
/02
2002
/03
2003
/4
2004
/5
2005
/6
2006
/7
2007
/8
2008
/9
2009
/10
2010
/11
2011
/12
2012
/13
2013
/14
2014
/15
2015
/16
Cha
nge
(% o
f GD
P)
Structural Impulse - Annual Movement % of GDP
Loosening Policy
Tightening Policy
41
The uncertainties
• How much of the package will get ever see the light of day post the election.
• Lots of the action re expenses kicks in late in the period – especially Gonski and National Disabilities. That of course is where the forecasting uncertainties are greatest.
• Need to be careful re future election commitments – not a lot of scope for “election goodies” if fiscal outcomes are to be achieved.
• Even in the near term revenue forecasts have been terrible. At present we are more bearish than Government re the current nominal outcomes.
• The world. We are weaker and nervous.
42
Australian economic forecasts2012-13 2012-13 2013-14 2013-14 2014-15 2014-15
NAB Treasury NAB Treasury NAB Treasury
Real GDP 2.7 3 2.6 2 ¾ 3.1 3
Employment 1.0 1 ¼ 0.9 1 ¼ 0.9 1 ½
Unemployment rate* 5.7 5 ½ 5.9 5 ¾ 6.1 5 ¾
CPI underlying** 2.3 (1)2 ½ 2.7 (1)2 ¼ 2.6 (1)2 ¼
RBA cash rate* 2.75 NA 2.50 NA 3.25 NA
$US/$A* 1.03 (2)1.03 0.96 (2)1.03 0.91 (2)1.03
Nominal GDP 2.1 3 ¼ 4.2 5 4.9 5
*at end of period; ** through-year growth; (1) headline rate; (2) technical assumption
43
Currency forecasts in more detail