Transcript here

The global financial crisis has accelerated the shift of global economic
weight from ‘advanced’ to ‘developing and emerging’ economies
GDP growth
10
Shares of global GDP
70
% change
Developing
economies
8
% of total
65
Advanced
economies
60
6
55
4
50
2
Advanced
economies
0
45
40
-2
35
-4
30
00
05
10
15
Note: GDP converted to US dollars at purchasing power parities (PPPs).
Source: IMF World Economic Outlook (October 2010).
Developing
economies
80
85
90
95
00
05
10
15
2
‘Developing and emerging’ economy public finances are in much better
shape than those of ‘advanced’ economies
‘General government’ budget deficits
1
% of GDP
0
-1
-2
-3
-4
-5
-6
'Advanced'
'Emerging and developing'
-7
-8
80
85
90
Source: IMF World Economic Outlook Database (October 2010).
95
00
05
10
15
3
‘Developing and emerging’ economy public finances are in much better
shape than those of ‘advanced’ economies
‘General government’ gross debt
120
% of GDP
100
'Advanced'
80
60
'Emerging and
developing'
40
20
0
80
85
90
Source: IMF World Economic Outlook Database (October 2010).
95
00
05
10
15
4
5
Central banks in the major advanced economies are likely to keep
monetary policy settings loose for an extended period
Monetary policy responses to the financial crisis
Central bank balance sheets
Monetary policy interest rates
7
400
% pa
% of GDP
350
6
Bank of
England
UK
300
5
US
Federal
Reserve
250
4
200
3
150
2
Euro
area
1
European Central Bank
100
Bank of Japan
50
Japan
US
0
0
01
02
03
04
05
06
07
08
09
10
11
Sources: US Federal Reserve; Bank of Japan; European Central Bank; Bank of England.
07
08
09
10
11
6
Markets remain skeptical about the efficacy of euro area bailouts
‘PIIGS’ 10-year bond yield
Spreads over German ‘bunds’
Euro area budget deficits and
gross public debt, 2011
0
% of GDP
1000
-1
Basis points
Greece
900
'General government' net borrowing
Finland
-2
800
Germany
-3
Austria
-4
700
Italy
Netherlands
600
Belgium
Slovakia
-5
-6
Portugal
Spain
Ireland
500
France
400
Portugal
300
Spain
-7
Greece
-8
200
Italy
-9
Ireland
% of GDP
100
-10
0
25
50
75
100
'General government' gross debt
125
150
0
07
08
09
Note: ‘gross debt’ defined as in the Maastricht Treaty. Sources: OECD Economic Outlook database; Thomson Reuters Datastream.
10
11
7
Australia’s economy has continued to perform more strongly than
those of other industrialized nations
Real gross domestic product
108
Dec 2007 = 100
Unemployment rate
11
% of labour force
Euro area
Australia
106
10
US
104
9
Canada
102
Canada
US
100
NZ
Euro area
98
8
UK
7
NZ
6
96
Australia
UK
5
94
Japan
92
4
Japan
90
3
08
09
10
11
08
09
10
11
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..
8
That’s not to say that the financial crisis hasn’t had some significant
consequences in Australia
Household net worth
640
620
600
580
560
540
520
500
Credit growth
% of annual household
disposable income
01 02 03
04 05
40
30
20
10
0
-10
-20
-30
06 07 08
09 10 11
% change from year earlier
'On-balancesheet' credit
Securitized credit
(down 52% since Aug 2007)
01
02 03
Household saving
12
10
8
6
4
2
0
-2
-4
Latest
estimates
Previous estimates
02
03
Sources: ABS; RBA.
04
05
06
07
08
05
06 07
08
09 10
11
Average hours worked
% of household
disposable income
01
04
09
10
11
147
146
145
144
143
142
141
140
Hours per employee per month
Trend
01 02 03
04 05
06 07 08
09 10 11
9
Australia does not have a public debt problem
Government borrowing and net debt, 2010
15
% of GDP
'General government' net borrowing
10
Norway
Australia
5
NZ
Russia*
Korea
0
Brazil
China
Switzerland
* Canada Germany
Sweden
-5
Finland
Denmark
Portugal
France
Netherlands
Spain
-10
Italy
Belgium
Greece
UK
Japan
Iceland
US
India*
-15
Ireland
-20
-175
% of GDP
-150
-125
-100
-75
-50
-25
0
25
50
75
100
125
'General government' net debt
Source: IMF World Economic Outlook October 2010 database. * Public debt figures for China, India and Russia are gross, not net debt
150
175
200
10
Australia is better-placed to benefit from China’s rapid growth and
industrialization than almost any other Western country
Shares of Australia’s merchandise exports
Other
‘Emerging’ East Asia
60
80
% of total (12-mth moving average)
% of total (12-mth moving average)
70
50
60
India
India
40
Other
50
ASEAN
30
NZ
40
US
30
20
EU
HK
20
Korea
Taiwan
10
10
China
0
Japan
0
90
Source: ABS.
95
00
05
10
90
95
00
05
10
11
Australia’s economy is now more closely correlated with China’s than
with the United States’
Correlation between Australian and US-Chinese real GDP growth
%
0.7
0.6
Correlation with Chinese
real GDP growth
0.5
0.4
0.3
Correlation with
US real GDP growth
0.2
0.1
0.0
80
85
90
95
00
05
10
Note: correlation is over rolling 10-year periods. Source: Phillip Lowe, Assistant Governor (Economic), Reserve Bank of Australia. “The Development of Asia
– Risks and Returns for Australia”, Address to Natstats 2010 Conference, Sydney, 16th September 2010.
12
The resources boom is back, generating rapid growth in incomes
(which are not fully captured by movements in real GDP)
Gross domestic product (GDP)
Export commodity prices
160
Index (2008-09 = 100)
10
Real % change from year earlier
Rural
140
Gross domestic income
(GDI)
8
120
6
100
4
80
Non-rural
2
Gross domestic product
(GDP)
60
0
40
-2
20
-4
0
01 02 03
04 05
06 07 08
09 10 11
01
02
03
04
05
06
07
08
Note: Real gross domestic income (GDI) is real GDP adjusted for movements in the ratio of export to import prices (the ‘terms of trade’).
Sources: Reserve Bank of Australia; Australian Bureau of Statistics.
09
10
11
13
Australia’s ‘terms of trade’ are at their highest sustained level in at
least 140 years
Australia’s ‘terms of trade’
(ratio of export prices to import prices)
180
170
1900-01 to 1999-2000
average = 100
RBA
forecast
Actual
160
150
5 year centred
moving average
140
130
120
110
100
90
80
70
20th century trend
60
50
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020
Financial years ended 30 June
Source: Glenn Stevens, ‘The Challenge of Prosperity’, Address to CEDA Annual Dinner, 29th November 2010;
Australia’s ‘terms of trade’ have risen much more than those of other
major commodity exporting nations
Major commodity exporting nations: terms of trade
Note: ‘terms of trade’ is the ratio of average export to average import prices.
Source: IMF, Australia: 2010 Article IV Consultation – Staff Report (Country Report No. 10/331), October 2010, p. 11.
14
15
Business investment, especially in the resources sector, will pick up
substantially from an already elevated base by historical standards
Business investment
150
A$bn
(f)
9
% of GDP
8
125
Services and other
Manufacturing
Mining
100
Manufacturing
and services
7
6
5
75
Mining
4
3
50
2
25
1
0
0
01
02
03
04
05
06
07
Year ended 30 June
08
09
10
11
89
91
93
95
97
99
01
03
05
07
Year ended 30 June
Forecast for 2010-11 based on investment intentions reported to the ABS September quarter 2010 capital expenditure survey and assuming that those
intentions are ‘realized’ to the same extent that they have been, on average, over the five years to 2009-10.
Source: Australian Bureau of Statistics.
09
11
16
… at a time when the Reserve Bank thinks there’s only limited room for
the economy to grow at an ‘above trend’ pace …
Capacity utilization
85
Unemployment rate
%
7.5
%
Actual
7.0
84
Actual
6.5
83
Trend
6.0
82
5.5
5.0
81
4.5
Trend
80
4.0
79
3.5
78
3.0
01
02
03
04
05
06
07
08
09
10
11
01
02
03 04
05
06
07
08 09
Shaded areas denote periods when annual ‘underlying’ inflation exceeded 3%
Sources: National Australia Bank; Australian Bureau of Statistics.
10
11
The Reserve Bank’s forecasts envisage above-trend growth in 2011 and
2012 with inflation moving towards the top of the 2-3% target range
Reserve Bank forecasts of economic growth and inflation
Real GDP
6
Consumer prices
6
% change from year earlier
5
RBA
forecasts
(Nov 2010)
‘Trend growth’
% change from year earlier
5
4
'Underlying'
inflation
4
RBA
forecasts
(Nov 2010)
3
2
3
1
2
0
RBA
forecasts
(May 2009)
-1
1
-2
Reserve Bank
target range
RBA
forecasts
(May 2009)
'Headline'
inflation
0
05
06
07
08
09
10
11
12
05
06
Source: Reserve Bank of Australia, Statement on Monetary Policy, May 2009 and November 2010.
07
08
09
10
11
12
17
The downturn in net immigration will detract from economic growth and
potentially exacerbate labour shortages
Net permanent and long-term arrivals to Australia
400
'000s (12-mth moving total)
350
300
250
200
150
100
01
Source: ABS.
02
03
04
05
06
07
08
09
10
18
19
How will the Queensland floods affect the economic outlook
 Initially, by detracting from economic activity
– note, damage to or destruction of existing property is not recorded as a subtraction from
economic growth (it is treated as a ‘balance sheet’ item in the national accounts)
– however lost production due to flooded mines, impassable roads or rail, destroyed crops,
cancelled tourist visits and business closures and employees unable to get to work – likely
to exceed $6bn (½% of annual GDP) - could result in negative March qtr GDP growth
 Also by putting upward pressure on inflation
– Qld produces 27% of Australia’s fruit (almost 100% of tropical fruit) and 30% of Australia’s
vegetables (45% of tomatoes) – prices of these items will rise sharply, adding to the March
quarter CPI (similar to effect of Cyclone Larry on banana prices in 2006)
 Restocking, replacement, rebuilding and reconstruction will subsequently boost
economic activity
– replacement of household effects, business stocks etc will provide an almost immediate
boost to spending
– repair or replacement of dwellings, infrastructure assets etc will add to economic activity
over the remainder of 2011 and beyond (depending on availability of suitable labour)
 Relief, recovery and reconstruction costs will adversely affect government budgets
– Federal Budget provides only $80mn pa from 2011-12 on for disaster relief
– yet under natural disaster relief arrangements Canberra picks up 75% of all eligible
expenditures
So the non-mining sectors of the Australian economy are likely to be
‘squeezed’ by higher interest rates
Australian interest rates
12
Household net interest payments
14
% pa
Average rate paid by
small business
% of household disposable income
13
10
12
8
11
Mortgate
rate
6
10
9
4
Average for past 12 years
Official
cash rate
2
8
7
Shaded lines show average for past 12 years
6
0
01
02
03
Sources: RBA; ABS.
04
05
06
07
08
09
10
11
01 02 03
04 05
06 07 08
09 10 11
20
Housing activity has already begun to turn down, and house prices have
stopped rising
Residential building approvals
Housing finance commitments – owner-occupiers
16
$bn per month
220
14
12
180
10
160
8
6
120
4
100
03
04
05
06
07
08
09
10
Actual
140
Trend
02
Trend
200
Actual
01
'000s (annual rate)
01 02 03
11
$bn per month
600
550
500
450
400
350
300
250
200
Actual
Trend
01
02
03
04
05
06
07
08
09
10
11
06 07 08
09 10 11
Australian house prices
Housing finance commitments - investors
9
8
7
6
5
4
3
2
04 05
A$ 000
Capital cities
Other
01 02 03
Note: housing finance commitments for owner-occupiers excludes refinancing and alterations & additions.
Sources: ABS; RP Data – Rismark International.
04 05
06 07 08
09 10 11
21
Australian house prices are unlikely to rise much if at all from present levels
over the next few years, but a US-style housing crash still looks improbable
Australian household debt-income ratio
Australian house prices
600
550
500
450
400
350
300
250
200
%
175
A$ 000
Capital cities
Total debt
150
125
100
Other
75
Owner-occupied
housing debt
50
25
01
02
03
04
05
06
07
08
09
10
90
95
Australian house-price-to-income ratio
6.0
5.5
Times
00
05
10
Housing debt-assets ratio
%
60
Using ABS capital city
house price series
US
50
5.0
4.5
40
4.0
3.5
3.0
2.5
30
Using RP Data-Rismark
series incl. units & non-capitals
Australia
20
10
01
02
03
04
05
06
07
08
09
10
90
Sources: RP Data – Rismark International; ABS; RBA Bulletin Statistical Tables; US Federal Reserve.
95
00
05
10
22
Almost two-thirds of Australian home-buyers have debt-service ratios
below 30%, while mortgage delinquency rates remain very low
Owner-occupier debt service ratios
Non-performing housing loans
Source: Reserve Bank of Australia Financial Stability Review September 2010, pp. 41-42, and sources cited there.
23
Australian residential property prices are also supported by a large and
growing shortfall of supply relative to underlying demand
Underlying demand for housing
and net additions to the housing
stock
225
Net shortage of housing
450
'000 dwellings
200
175
Underlying demand
400
Net additions to supply
350
'000 dwellings
300
150
250
125
200
100
150
75
100
50
50
25
0
0
02
03
04
05
06
07
08
09
10
02 03 04 05 06 07 08 09 10 11 12 13 14
19
Note: The ‘housing shortage’ is the cumulative gap between underlying demand and net additions to supply from a base of 2001. Projections from 2010 are
based on ‘medium’ projections of demand (assuming net immigration of 180,000 per annum) and of supply in line with the average of completions less
demolitions over the period 1980 to 2007.
Sources: National Housing Supply Council , 2nd State of Supply Report 2010.
24
25
It’s surprising that Australian households are saving more assiduously
than their American counterparts – despite much better ‘fundamentals’
Employment growth
Consumer confidence
3
Std deviations from long-run average
6
Australia
2
Australia
4
1
2
0
0
-1
-2
-2
% change from year earlier
US (household
survey)
-4
US
-3
-6
01
02
03
04
05
06
07
08
09
10
11
01
02
% of annual household
disposable income
Australia
600
550
US
500
450
01 02 03
04 05
06 07 08
04
05
06
07
08
09
10
11
Household saving rates
Household net worth
650
03
09 10 11
12
10
8
6
4
2
0
-2
-4
% of annual household
disposable income
Australia
US
01
02
03
Sources: ABS; RBA; US Federal Reserve; US Bureau of Economic Analysis; US Bureau of Labor Statistics.
04
05
06
07
08
09
10
11
The mining boom and a weak US dollar are also putting upward pressure
on the Australian dollar
Key influences on A$-US$ exchange rate
Value of US dollar
60
70
80
March 1973
= 100
US$ vs other
Interest rate spreads
US¢
1.10
1.00
major currencies
(inverted, left scale)
0.90
0.80
90
A$ vs US$
(right scale)
100
110
500
400
300
0.70
200
0.60
100
0.50
0
01 02 03 04 05 06 07 08 09 10 11
Bps
700
1966
= 100
A$ vs US$
(right scale)
1.10
1.00
0.90
A$ vs US$
(right scale)
0.70
0.60
0.50
01 02 03 04 05 06 07 08 09 10 11
Share market volatility
US¢
600
1.10
1.00
0.90
500
0.80
400
300
200
100
US¢
0.80
Commodity prices
800
Australian-US
2-year bond
yield spread
(left scale)
0.70
CRB index of
commodity prices (left scale)
01 02 03 04 05 06 07 08 09 10 11
0.60
0.50
0
10
20
30
40
50
60
70
%
VIX index of US share market
volatility (left scale)
US¢
1.10
1.00
0.90
0.80
0.70
A$ vs US$
(right scale)
01 02 03 04 05 06 07 08 09 10 11
Sources: Thomson Reuters Datastream; Reserve Bank of Australia; US Federal Reserve.
0.60
0.50
26
27
The strong A$ will have an adverse impact on ‘trade-exposed’ nonresource sectors such as manufacturing, tourism and education




The strong A$ will erode the competitiveness
and profitability of non-resource exporters
(including manufacturing, tourism and higher
education) and businesses competing in the
domestic market with imports (including parts
of agriculture, manufacturing, tourism and
some retailing)
This is one of the main channels through
which ‘market forces’ facilitate the shift of
labour and capital towards the expanding
resources sector
There’s little if anything governments can or
should do about this (beyond things which
they should be doing anyway, such as
regulatory reform): suppressing or offsetting
these ‘market forces’ would simply result in
higher inflation (as they did in the early 50s,
mid-70s and early 80s)
Rather, businesses in adversely affected
sectors will need to lift their own productivity
performance in order to survive
Short term overseas arrivals and
departures
8
Millions (annual rate)
Departures
7
6
Arrivals
5
4
3
2
01
02
03
04
05
06
07
08
09
10
11
Source: ABS.
Australia’s productivity growth has slowed over the last
five years, after 15 years of above average growth
Labour productivity
3.5
Multi-factor productivity*
% pa (5 year rolling average)
2.5
3.0
% pa (5 year rolling average)
2.0
2.5
1.5
2.0
1.0
1.5
0.5
'Quality adjusted'
hours worked'
1.0
0.0
'Quality adjusted'
hours worked'
0.5
-0.5
0.0
-1.0
-0.5
90
95
98
02
Financial years ended 30 June
06
10
90
95
98
02
06
10
Financial years ended 30 June
Source: ABS, Experimental Estimates of Industry Multi-factor Productivity, Australia (5260.0.55.002). December 2010.
28
Relative to the US, Australian labour productivity is back
to where it was in 1990
Australian labour productivity as a percentage of the US
92
%
91
Australian GDP per
hour worked as a
p.c. of US
90
89
88
87
86
85
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
Sources: The Conference Board Total Economy Database 2010 (EKS PPP adjusted lab. prod.); Grattan Institute.
29
Summary
 The global financial crisis has accelerated the transition of economic gravity from
‘advanced’ to ‘emerging’ economies
– growth in most ‘advanced’ economies will be constrained by public and/or household debt burdens
– by contrast most major developing economies have already returned to ‘trend’ growth, are not
troubled by unsustainable public debts, and are instead having to deal with inflationary pressures
and potential asset price bubbles
 Unlike most other ‘advanced’ economies, Australia stands to benefit significantly from
this changing pattern of global economic activity
– given our resources endowment and existing strong trade links with Asia
– there are some risks around our high levels of household and foreign debt, but Australia doesn’t
have a public debt problem
 Australia’s economic challenge is to maximize the long-term benefits from the
‘resources boom’ whilst minimizing inflationary pressures
– our ability to meet that challenge will be enhanced by disciplined, credible economic policy
frameworks that allow ‘market forces’ to facilitate structural change
– interest rates and the A$ will remain above historic averages as part of this process
 Queensland floods will detract from growth and add to inflation in the near term, while
providing a boost to growth beyond the current quarter
 Australia needs to lift its productivity performance
– not least in order to ensure that we still have a diversified and resilient economy whenever the
resources boom eventually comes to an end
30
Important information
This document has been prepared by Saul Eslake (the author) on behalf of Corinna Economic Advisory Pty
Ltd, ABN 165 668 058 69 (Corinna), whose registered office is located at Level 12, 114 William Street,
Melbourne, Victoria 3000 Australia.
Copyright in this document is held by Corinna. This document has been prepared for the use of the party or
parties named on the first page hereof. No part of the document is to be reproduced, made available online,
circulated or distributed without written permission.
This document does not purport to constitute investment advice. It should not be used or interpreted as an
invitation or offer to engage in any kind of financial or other transaction, nor relied upon in order to undertake,
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Copyright (2010) © Corinna Economic Advisory Pty Ltd ABN 165 668 058 69
31