Transcript Slide 1

Growth, investment, and trade
Doug McTaggart
September 2010
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Agenda
- US
• Recession and recovery
- Why Australia did well
- Openness and the Australian economy
- The commodities boom and Australia
• Sustainability
• Dutch disease
- Global structural imbalances
- Concerns
• Data requirements
2
GFC and the real economy – a recap
- Collapse of financial sector leverage led to a collapse of world growth in
the fourth quarter 2008
- Order of proceedings was
• Household confidence folded September 2008
• Retail sales and broader consumption fell
• Inventories/sales ratio soared
• Business confidence collapsed
• Manufacturing collapsed
• Business investment contracted
• Unemployment up
- End result
• Collapse in inventories and world trade
• Slowest global growth in over 50 years
3
A recession in US and Euro manufacturing
15
Annual growth in industrial production
10
5
per cent per year
Because discretionary
consumer spending collapsed,
inventories accumulated in a
totally unexpected way. This
led to a collapse in
manufacturing
0
-5
United States
-10
-15
Eurozone
-20
Industrial production fell at the
rate of 12 per cent per year in
the US, 20 per year on Europe,
and 40 per cent per year in
Japan
-25
1.6
Inventory to sales ratio -- US
per cent
1.5
1.4
1.3
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
1.2
Jan-92
4
World trade collapsed as in Great Depression
40
30
20
10
0
-10
Developing
economies
-30
5
Jan-12
Jan-10
Jan-08
Jan-06
Jan-04
Jan-02
Jan-00
Jan-98
Jan-96
Jan-94
Jan-92
Jan-90
Jan-82
-40
Jan-80
What the world stopped buying
was discretionary consumer
product
Developed
economies
-20
Jan-88
• Discretionary consumer
product
50
Jan-86
• Bulk commodities
Growth in world trade
Jan-84
What the world trades most are:
60
per cent per year
The decline in world trade was
the largest seen in many
decades, largely the result of
contracting household
consumption of discretionary
consumer goods, compounded
by the freeze in credit
The V-shaped global recession
Measured real GDP growth
fell in nearly all economies
2
0
-2
-4
US
6
UK
Canada
Australia
Mar-12
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
-6
Mar-84
.
4
Mar-82
Australia fared better than
most, though now the pack
is catching up
6
Mar-80
A V-shaped deep trough
occurred
Real GDP growth per year
8
% per year
September 2007 shaped
as the trough in a “normal”
business cycle, until the
GFC hit
10
This US recovery is par for the course
107
The US economy has
recovered from the deep
recession about as fast as it
could have, and at least as
fast as in past recessions
US Real GDP (NBER trough = 100)
106
Mar 1991
105
June 2009*
104
103
102
Nov 2001
101
100
Why the current paranoia
regarding double dips and
so?
Because attitudes to risk
have changed dramatically
over the last two years
99
-4
-3
-2
-1
0
1
2
3
4
5
6
7
8
Quarters around NBER trough
* QIC assumed trough. NBER is yet to report a trough date.
107
US private non-farm payroll employment (NBER trough = 100)
106
105
June 2009*
104
103
102
Mar 1991
101
100
99
Nov 2001
98
7
-12 -10 -8
-6
-4
-2
0
2
4
6
8
10 12 14 16 18 20 22 24
Months around NBER trough
* QIC assumed trough. NBER is yet to report a trough date.
The US economy reinvents itself …. again
change in output per hour
7
5
4
% per year
By allowing the unemployment
rate to reach double figures the
US economy again goes through
a process of “creative
destruction”
6
3
2
1
0
The process of reinventing itself
every decade or so ensures that
the US remains the most efficient
economy on the globe, with the
best prospects for future growth
-1
Change in unit labour costs
-2
14
12
10
To paraphrase George Friedman:
“This is the beginning of the
American Century”
% per year
8
6
4
2
0
-2
-4
Mar-12
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
Mar-84
Mar-82
-6
Mar-80
8
Why the US is so important
World Bank data for 2007 show
why the US is so important for
all in the global economy.
China and other emerging
economies have a long way to
go be dominant forces in the
global economy
9
20
15
per cent
US household consumption
accounts for one third of total
global consumption and about
one fifth of world output
(slightly lower with PPP
estimates)
Consumption shares of global output
2007
25
10
PPP
Constant (2000) US$
5
0
SSA
ARG
AUS
BRA
CHI
FRA
GER
IND
JAP
RUS
UK
US
Conclusions on the US
- The recent recession was one delivered by rational consumer
behaviour as they took steps to guard against a financial market meltdown – the recession we chose to have
- Even as global financial markets are de-leveraging by about 50%,
there is no evidence that households (US and other) are deleveraging or are having to de-leverage going forward
- US economic growth will quickly return to trend
- The US economy again reinvents itself
- The US economy, led by the US consumer, is and will remain the
engine of world growth. Other economies are largely dependent on
the US and the broader Anglo-world
10
How has Australia done through the GFC?
The Australian business cycle is
still highly correlated with the
US business cycle, albeit we
have done somewhat better in
recent times
3.0% 2004-10
11
6
4
2
0
-2
-4
US
Australia
Mar-12
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
Mar-84
-6
Mar-82
3.3% 1990-2004
8
Mar-80
And note that average GDP
growth was higher before the
commodities boom than it was
after:
10
per cent per year
It is clear the US drives the
Australian business cycle
Real GDP growth
Why Australia did relatively well
- Robust financial sector – even though relatively large
- National, uniform prudential legislation
- High immigration rates
- High initial interest rates
- Variable rate mortgages and consequent large fall
- Falling oil/petrol prices
- Recent experience with skilled labour shortages, labour hoarding
- Relatively small manufacturing sector
- Predominance of bulk commodity exports
- Stimulus packages
12
How open is the Australian economy?
Not very, relatively speaking!
150
211 / 361
120
1970
90
2008
per cent
So the question is, just how
much did Australia’s success
through the GFC revolve
around our trade links with Asia,
in general, and China, in
particular, via commodity
exports?
Imports + exports as a share of GDP
1970 and 2008
60
13
30
Ko
re
a
Si
ng
ap
or
e
Ge
rm
an
y
Ch
in
a
Ru
ss
ia
In
do
ne
si
a
UK
In
di
a
Ja
pa
n
Au
st
ra
l ia
Ar
ge
nt
in
a
US
az
il
0
Br
Note that Australia always was
and still remains a relatively
closed economy. We sit
alongside the US and Japan –
very large internal markets –
and also Brazil, Argentina and
India
The commodity price boom
Benchm ark com m odity prices (US$/t)
320
The commodities boom, beginning in
the early 2000s, but accelerating in
2004, has been very much a price
boom.
280
240
200
160
Coking coal
120
It has both supply and demand
elements.
80
40
Iron ore
0
Apr-02
Global stocks of commodities,
especially base metals, reached
record lows in 2004, fuelling price
rises
Apr-04
Apr-06
130
Apr-08
Apr-10
The terms of trade
120
110
100
90
80
70
60
Sep-10
Sep-07
Sep-04
Sep-01
Sep-98
Sep-95
Sep-92
Sep-89
Sep-86
Sep-83
Sep-80
Sep-77
Sep-74
Sep-71
Sep-68
Sep-65
Sep-62
50
Sep-59
2007-08 = 100
This coincided with increasing
demand for Australian coal and iron
ore from China, which between 2004
and 2008 went from being the
world’s largest importer of steel to
the world’s largest exporter
14
Therm al coal
The booming commodities sector
70
Industry share of capex
60
Other selected
industries
50
per cent
The re-direction of resource
utilisation in Australia has been
dramatic as seen in business
investment outcomes:
• Mining has squeezed out
capex spending in manufacturing
40
Mining
30
20
10
Manufacturing
• Capex spending in buildings
and structures has squeezed out
capex in plant and equipment
0
Type of capex
90
80
70
Plant and
equipment
per cent
60
50
40
30
Buildings and
structures
20
10
Jun-11
Jun-09
Jun-07
Jun-05
Jun-03
Jun-01
Jun-99
Jun-97
Jun-95
Jun-93
Jun-91
Jun-89
0
Jun-87
15
Uneven state impacts
The impacts have not been
uniformly positive across
Australia
• QLD has done moderately
well
40
35
per cent
• WA has dramatically
increased its capex share,
largely at the expense of
NSW, with less significant
impacts on VIC and SA
State share of capex
45
30
WA
25
NSW
QLD
VIC
20
15
10
5
SA
16
Jun-13
Jun-11
Jun-09
Jun-07
Jun-05
Jun-03
Jun-01
Jun-99
Jun-97
Jun-95
Jun-93
Jun-91
Jun-89
0
And trade impacts?
10
Real trade balance as a share of GDP
8
6
per cent
For the entire period of the
commodities boom,
Australia’s trade balance has
deteriorated, except when
imports crashed during the
GFC as households curtailed
consumption
4
2
0
-2
-4
2.5
But isn’t the commodities
boom, for Australia, an export
led boom?
Net exports contribution to GDP growth
2.0
GFC
1.5
What has happened?
percentage points
1.0
0.5
0.0
-0.5
-1.0
-1.5
Commodities boom
Mar-12
Mar-10
Mar-08
Mar-06
Mar-04
Mar-02
Mar-00
Mar-98
Mar-96
Mar-94
Mar-92
Mar-90
Mar-88
Mar-86
Mar-84
Mar-82
-2.0
Mar-80
17
Currency valuation effects
As the AUD appreciated,
tourism changed from a
large export industry to a
large import industry
150000
The Dutch disease
1.1000
100000
1.0000
50000
18
0.8000
-50000
0.7000
USD/AUD
-100000
0.6000
Net outbound
departures
Ja
n12
Ja
n11
Ja
n10
Ja
n09
Ja
n08
Ja
n06
Ja
n07
Ja
n05
0.4000
Ja
n04
-200000
Ja
n03
0.5000
Ja
n02
-150000
USD/AUD
Tourism as an export industry
Ja
n01
We haven’t managed this
very well.
Tourism as an import industry
0
Ja
n00
This is a dramatic example
of the Dutch Disease
(Gregory Thesis), and it
applies across the board to
all Australia export sectors
outside of the resources
sector
number per quarter
0.9000
The states and the Dutch disease
The GFC brought a
temporary end to this
disparity but it looks likely to
emerge again, when
spending stabilises
18
16
14
WA
QLD
12
10
per cent per year
The net effect of the Dutch
disease was very positive
for WA, good for QLD and
very bad for the other
states, leading to the two
speed economy
8
6
4
2
VIC
0
-2
NSW
SA
-4
19
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
Mar-08
Sep-07
Mar-07
Sep-06
Mar-06
Sep-05
Mar-05
Sep-04
Mar-04
Sep-03
Mar-03
Sep-02
Mar-02
Sep-01
Mar-01
Sep-00
Mar-00
-6
Are structural imbalances an impediment?
Are they structural imbalances at
all?
600
Current account deficits
Those countries with (relatively)
large and persistent CA deficits
are Anglo, rapidly growing and
demographically young.
China
200
Germany
Japan
Saudi
0
US $ Billion
These are good environments for
foreign investment
400
-200
• Good governance
-400
• Transparent
-600
• High yielding
-800
20
USA
-1000
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
And are likely to continue to attract
foreign investment flows for a long
time to come
Aust
UK
Productivity growth also dissappointing
Productivity growth through
the commodities boom has
also been disappointingly
low.
There are a number of
possible explanations for
this:
• Capacity limitations
• Lower R&D
• A 3-sector problem –
agriculture, mining and
utilities
• Slower micro-reform
21
Fred Hilmer: “What’s wrong with microeconomic reform today?”,
UNSW, 31 August 2010
What are the concerns?
- Is Australia putting all its eggs in the China basket and ignoring more
traditional sources of growth?
- Is the commodities price boom sustainable? The supply effect.
- Will the China effect persist?
- If so, how do we deal with structural re-alignment of Australian
industry that is required?
• Stolper-Samuelson: return to capital intensive factors (physical and
human capital -- skilled labour) goes up, return to other factors goes
down (less skilled labour)
• Capital-labour ratios rise
- What are the cross-jurisdictional implications?
22
Data issues
- To understand the impact on the structure of the Australian economy,
we require an integrated database by industry and region that is:
• Consistent with the national accounts
• At the same level of disaggregation as the input/output data
• Includes estimates of:
 Capital formation;
 Capital stock; and
 Return to capital.
- Problems with what we have:
23
• Annual national accounts lack sufficient industry disaggregation and a
return on capital measure;
• Quarterly business indicators definition may differ from national accounts
and lacks sufficient industry disaggregation
• Input/output data lacks timeliness, a measure of the industry capital stock
and return to capital.