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Economic Update
15 Oct 2015
Welcome: Our Presenters
Julie Toth, Chief Economist, Ai Group
Tony Melville, Head of Communications, Ai Group
Warren Hogan, Chief Economist , Ai Group
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Warren Hogan
ANZ Economic Outlook
Global, Asia, Australia: The Bumpy Road Ahead
Warren Hogan Chief Economist
15 October 2015
Global growth remains sub-trend and momentum is waning. Emerging world is slowing while developed economies’ growth is good
Global growth forecasts
7
6
5
4
3
2
1
0
-1
-2
-3
Contr
ibution
2
Source: Bloomberg, Thompson Reuters Datastream, Markit, ANZ Research
98 00 02 04 06
Other Developed
08 10 12 14
Other Emerging
16
ppt
US China
fore
casts
Global trade is weak having fallen below the levels of a year ago in the past three months.
Global trade
8 Source: Bloomberg, Markit, ANZ Research
Global PMIs highlight the divergence between ‘goods’ and ‘services’ industries and can explain some of the weakness in world trade. Is this cyclical or secular?
Global PMI – Manufacturing vs Services
65
35
45
55
99 01 03 13 15
Ind
ex
05 07
Manufacturing
09 11
Services
9 Source: Bloomberg, Markit, ANZ Research
GDP
5
Global growth forecasts
1998-2007
average
2008-2012
average
2013 2014 2015f ANZ
2016f
2017f IMF
2015f 2016f
Consensus (BBG)
2015f 2016f 2017f
United States
Euro area
United Kingdom
Japan
China
Korea
Taiwan
Indonesia
Thailand
Hong Kong
Malaysia
Singapore
Philippines
Vietnam
East Asia ex-Japan
India
Australia
New Zealand
Emerging
Developed
2.9
2.3
3.0
1.3
10.2
6.0
5.0
4.6
5.0
5.0
5.6
6.4
4.7
6.9
7.9
7.2
3.8
3.8
0.9
-0.4
-0.1
0.0
9.2
3.3
3.6
5.8
2.9
2.6
4.1
5.9
4.8
5.8
7.4
7.6
2.5
1.1
1.5
-0.3
1.7
1.6
0.0
2.9
2.2
5.6
2.8
3.1
0.0
4.4
0.0
6.0
6.5
0.0
2.0
2.5
5.6
1.2
2.4
0.9
3.0
-0.1
7.3
3.3
3.8
5.0
0.9
2.5
6.0
3.0
6.1
6.0
6.2
7.4
2.8
3.3
5.2
1.6
2.4
1.5
2.5
1.1
6.8
2.2
1.3
4.6
2.6
2.1
4.3
2.3
5.7
6.5
5.7
8.0
2.2
2.1
4.6
1.9
2.3
1.5
2.5
1.0
6.3
2.9
2.0
5.0
3.5
2.5
4.7
2.6
6.0
6.5
5.5
8.1
2.4
2.1
4.9
1.9
2.3
1.6
2.0
1.0
6.0
3.3
3.4
5.4
3.8
3.1
5.0
2.8
5.8
6.2
5.5
8.0
2.9
2.7
4.9
1.9
2.5
1.5
2.4
0.8
6.8
7.5
4.2
2.1
2.3
1.7
2.2
1.2
6.3
7.5
4.7
2.4
2.3
1.5
2.5
0.9
7.0
2.7
3.4
5.0
3.4
2.5
4.8
2.7
6.2
6.1
6.1
7.4
2.5
2.8
4.3
2.0
2.8
1.7
2.3
1.4
6.7
3.4
3.4
5.6
4.0
3.0
5.1
3.1
6.3
6.3
6.1
7.6
2.8
2.6
5.1
2.4
2.7
1.6
2.4
0.7
6.5
3.5
3.1
6.1
3.9
3.0
4.8
3.2
6.3
6.2
3.1
2.5
5.3
2.3
World 4.3 3.2 3.5 3.5 3.4 3.5 3.5 3.5 3.8
Developed GDP vs long-term average Emerging GDP vs long-term average
Emerging East Asia GDP vs long-term average South Asia GDP vs long-term average
Regional GDP growth forecasts
5
4
3
2
1
0
-1
-2
-3
-4
-5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Developed 1990-2008 2000-2008
%
fore
casts
0
2
4
6
8
10
12
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Emerging 1990-2008 2000-2008
15 16 17
%
fore
casts
0
2
4
6
8
10
12
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
East Asia ex Japan 1990-2008 2000-2008
15 16 17
%
fore
casts
10
9
8
7
6
5
4
3
2
1
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
South Asia 1990-2008 2000-2008
%
fore
casts
6 Source: Bloomberg, IMF, ANZ Research
Portfolio flows to emerging markets
7 Source: IIF, ANZ Research
The US growth outlook is positive and the unemployment rate is close to the Fed’s view of full employment. Global factors are weighing on inflation.
GDP growth ISM manuf. vs ISM services
30
40
50
60
70
97 99
Index
01 03 05
ISM non manuf.
07 09 11 13 15
ISM manuf.
10
8
6
4
2
0
-2
-4
-6
-8
-10
00 02 04
%
06 08 10
q/q annualised
12
y/y
14 16
fore
casts
3
5
7
9
11
80 85 90 95 00 05 10 15
%
Fed estimate of "NAIRU "5.0% to 5.2%
Unemployment rate
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
95 97 99 01 03 05 07 09 11 13 15
%
y/y
Weighted median Core PCE Core CPI
8
Source: Bloomberg, BLS, BEA, Thompson Reuters Datastream, ANZ
Core inflation measures
Although euro area growth eased a touch in Q2, growth appears to be becoming more entrenched and the drivers are broadening. Inflation pressures remain subdued.
GDP GDP and Credit demand
Inflation measures
Household and corporate demand, lhs GDP, rhs
Manufacturing PMIs by country
-6
-5
-4
-3
-2
-1
0
1
2
3
4
04 05 06 07 08 09 10 14 15
% c
hange
y/y
11 12
q/q
13 -6
-4
-2
0
2
4
6
-60
-40
-20
0
20
40
60
02 03 04 05 06 07 08 09 10 11 12 13 14 15
y/y
%
change
Index, dem
and for
cre
dit
-1
0
48
1
44
2
3
4
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
y/y
% c
hange
Core CPI CPI ex-energy Headline CPI
Economic activity contracting
36
40
52
56
60
64
10 11 12
Euro area Germany
13 14 15
Index
France Spain
Economic activity expanding
9
Source: Bloomberg, ECB, Eurostat, Markit, ANZ Research
China output growth 16
14
12
10
8
6
4
2
0
Economic growth in China is slowing as the period of hyper- industrialisation comes to an end
1980 1983 1986 1989 1992 1995 1998 2001 2004
LT average
10 Source: Bloomberg, ANZ Research
2007 2010 2013 2016
Year-
avera
ge %
change
GDP growth
Source: CEIC, ANZ Research
China employment structure is a good indicator of how much industrial change lies ahead of them
40% of Chinese workers are employed in service industries. It is about 80% in the US and Australia
450
400
350
300
250
200
150
100
50
0 1990 1993 1996 1999 2002 2005
Secondary industry
2008 2011
Tertiary industry
11
2014
millio
n
Primary industry
0
20
40
60
35% 80
30%
100
120
140
160
10%
15%
20%
25%
40%
45%
50%
55%
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
million t
onnes
mark
et
share
China World (ex China) China's market share
12 Source: Bloomberg, ANZ Research
World steel production
Steel production appears to have peaked in 2015. China is now a major steel exporter
China needs to address debt issues through raising equity in the corporate sector – SOE reform is critical.
13
Source: CEIC, Bloomberg, ANZ Research
Outstanding debt, % of GDP
220
100
120
160
China's fiscal expansion via its
banking system
140
180
200
03 04 05 06 07 08 09 10 11 12 13 14 15
% o
f G
DP
China - outstanding borrowing by households and businesses, % GDP
China Debt in economy
Source: CEIC, IMF, ANZ Research
China – Debt in economy
250
15 16 23 25 27 31 35 38 19 17
17 17 15 15 15 15 19 18 24 28 28 30
34 36
79 82
96 100 98
104 108
111
0
50
100
150
200
2007 2008
Local government
2009 2010 2011
Central government
2012 2013 2014
Corporate
14
% o
f G
DP
Household
China’s private consumption is about half of the US consumer market, 2014
Note: For international comparison, the size of consumption is valued in PPP terms. Nominally, China’s household consumption totalled USD3.8trn in 2014, almost as large as Germany’s GDP.
15 Source: World Bank, IMF, OECD, ANZ Research
China’s consumer is an unusually small proportion of the economy
Per capita income and consumption (as a % of GDP)
This is unique in terms of other Asian economies and other emerging economies
16 Source: IMF, ANZ Research
GDP and consumption growth in China
China’s consumer market will provide the demand on which the new industries will develop and drive the ‘Great Transition’
17 Source: CEIC, ANZ Research
Resources investment has a long way to fall. This has yet to fully weigh on employment and, more importantly, household income/spending
Resources investment and employment 32000 300
60
90
120
150
180
210
240
270
0
4000
8000
12000
16000
20000
24000
28000
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Resources investment (LHS) Resources employment, Labour Force Survey (RHS)
000s
$m
per
quart
er, c
hain
volu
me
18 Sources: ABS, ANZ Research
Dwelling investment 16
14
12
10
8
6
4
2
0 80 82 84 86 88 90 92 94
New dwellings (Seas Adj)
New dwellings (Trend)
96 98 00 02 04 06 08 10 12 14 16
Alterations & additions (Seas Adj)
Alterations & additions (Trend)
Dw
ellin
g investm
ent,
$ b
illion (
real $ 2
011-1
2)
forecasts
Residential construction has been a critical source of economic activity since the peak in the mining investment cycle
19 Source: ABS, Property Council of Australia, Residex, ANZ Research
The residential housing cycle is nearing a peak. This will impact both jobs and construction as well as prices and the wealth effect.
Residential construction and industry expectations
31
34
37
40
43
46
49
52
55
58
61
-20
-10
0
10
20
30
40
50
60
70
80
07 08 09 10 11 12 13 14 15 16
ANZ-Property Council housing construction outlook (12 months forward)
ABS new dwelling approvals (RHS)
ABS new dwelling commencements (RHS)
20 Sources: ABS, PCA, ANZ Research
Num
ber ('0
00s)
Net
bala
nce
Signs that auction markets are cooling…
Home prices and auction clearance rates
38%
46%
54%
62%
70%
78%
86%
-8
-4
0
4
8
12
16
09 10 11 12 13 14 15
House prices: capital city weighted average (lhs)
Auction clearance rate: capital city weighted average (forward 3 mths, rhs)
21 Sources: CoreLogic, RPData, ANZ Research
% o
f tota
l auctio
n re
sults
, sa
y/y
% c
hange
Investment intentions for 2015-16 by industry 30
20
10
0
-10
-20
-30
-40
-50
22 Source: ABS, Datastream, NAB, ANZ Research
% c
hange y
/y, ppts
contr
ibution to 2
015-1
6 g
row
th
% change y/y ppts contribution to 2015-16 growth
A strong uplift in investment outside of mining and construction looks unlikely
Why poor capex outlook? Australian firms use effective discount rates that are high (in this low yield environment)…
Hurdle rates for investment decisions, 2014
23
Source: Deloitte, RBA, ANZ Research
The ANZ Research Stateometer. Divergent trends are continuing right through the winter months
The ANZ Stateometer
24 Sources: ANZ Research
Growth support from the AUD will wane
Net services trade and the currency -45
-30
-15
0
15
30 -1.0
-0.5
0.0
0.5
1.0
1.5
80 83 86 89 92 95 98 01 04
Net services trade, contribution to y/y GDP growth (LHS)
07 10 13 16
AUD trade weighted index (RHS)
y/y
% c
hange
Perc
enta
ge p
oin
ts
fore
casts
30 Sources: ABS, RBA, ANZ Research
RBA to cut in 2016. More cuts are needed to eat into unemployment
RBA cash rate and the unemployment rate
31 Sources: ABS, RBA, ANZ Research
Turnbull’s ascension to the Prime Ministership led to an immediate bounce for the Coalition in the polls
Newspoll
27 Source: Newspoll, ANZ Research
The distribution of this document or streaming of this video broadcast (as applicable, “publication”) may be restricted by law in certain jurisdictions. Persons who receive this publication must inform themselves about and observe all relevant restrictions. Disclaimer for all jurisdictions, where content is authored by ANZ Research: Except if otherwise specified below, this publication is issued and distributed in your country/region by Australia and New Zealand Banking Group Limited (ABN 11 005 357 522) (“ANZ”), on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, “recipient”). This publication may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. Nothing in this publication is intended to be an offer to sell, or a solicitation of an offer to buy, any product, instrument or investment, to effect any transaction or to conclude any legal act of any kind. If, despite the foregoing, any services or products referred to in this publication are deemed to be offered in the jurisdiction in which this publication is received or accessed, no such service or product is intended for nor available to persons resident in that jurisdiction if it would be contradictory to local law or regulation. Such local laws, regulations and other limitations always apply with non-exclusive jurisdiction of local courts. Certain financial products may be subject to mandatory clearing, regulatory reporting and/or other related obligations. These obligations may vary by jurisdiction and be subject to frequent amendment. Before making an investment decision, recipients should seek independent financial, legal, tax and other relevant advice having regard to their particular circumstances. The views and recommendations expressed in this publication are the author’s. They are based on information known by the author and on sources which the author believes to be reliable, but may involve material elements of subjective judgement and analysis. Unless specifically stated otherwise: they are current on the date of this publication and are subject to change without notice; and, all price information is indicative only. Any of the views and recommendations which comprise estimates, forecasts or other projections, are subject to significant uncertainties and contingencies that cannot reasonably be anticipated. On this basis, such views and recommendations may not always be achieved or prove to be correct. Indications of past performance in this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Additionally, this publication may contain ‘forward looking statements’. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward looking statements. All investments entail a risk and may result in both profits and losses. Foreign currency rates of exchange may adversely affect the value, price or income of any products or services described in this publication. The products and services described in this publication are not suitable for all investors, and transacting in these products or services may be considered risky. 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Except as required by law, and only to the extent so required: neither ANZ nor its Affiliates warrant or guarantee the performance of any of the products or services described in this publication or any return on any associated investment; and, ANZ and its Affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceedings, cost or expense (“Liability”) arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with this publication. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. ANZ and its Affiliates do not accept any Liability as a result of electronic transmission of this publication. 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Disclaimer
The distribution of this document or streaming of this video broadcast (as applicable, “publication”) may be restricted by law in certain jurisdictions. Persons who receive this publication must inform themselves about and observe all relevant restrictions. Disclaimer for all jurisdictions, where content is authored by ANZ Research: Except if otherwise specified below, this publication is issued and distributed in your country/region by Australia and New Zealand Banking Group Limited (ABN 11 005 357 522) (“ANZ”), on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, “recipient”). This publication may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. Nothing in this publication is intended to be an offer to sell, or a solicitation of an offer to buy, any product, instrument or investment, to effect any transaction or to conclude any legal act of any kind. If, despite the foregoing, any services or products referred to in this publication are deemed to be offered in the jurisdiction in which this publication is received or accessed, no such service or product is intended for nor available to persons resident in that jurisdiction if it would be contradictory to local law or regulation. Such local laws, regulations and other limitations always apply with non-exclusive jurisdiction of local courts. Certain financial products may be subject to mandatory clearing, regulatory reporting and/or other related obligations. These obligations may vary by jurisdiction and be subject to frequent amendment. Before making an investment decision, recipients should seek independent financial, legal, tax and other relevant advice having regard to their particular circumstances. The views and recommendations expressed in this publication are the author’s. They are based on information known by the author and on sources which the author believes to be reliable, but may involve material elements of subjective judgement and analysis. Unless specifically stated otherwise: they are current on the date of this publication and are subject to change without notice; and, all price information is indicative only. Any of the views and recommendations which comprise estimates, forecasts or other projections, are subject to significant uncertainties and contingencies that cannot reasonably be anticipated. On this basis, such views and recommendations may not always be achieved or prove to be correct. Indications of past performance in this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Additionally, this publication may contain ‘forward looking statements’. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward looking statements. All investments entail a risk and may result in both profits and losses. Foreign currency rates of exchange may adversely affect the value, price or income of any products or services described in this publication. The products and services described in this publication are not suitable for all investors, and transacting in these products or services may be considered risky. ANZ and its related bodies corporate and affiliates, and the officers, employees, contractors and agents of each of them (including the author) (“Affiliates”), do not make any representation as to the accuracy, completeness or currency of the views or recommendations expressed in this publication. Neither ANZ nor its Affiliates accept any responsibility to inform you of any matter that subsequently comes to their notice, which may affect the accuracy, completeness or currency of the information in this publication. Except as required by law, and only to the extent so required: neither ANZ nor its Affiliates warrant or guarantee the performance of any of the products or services described in this publication or any return on any associated investment; and, ANZ and its Affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceedings, cost or expense (“Liability”) arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with this publication. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. ANZ and its Affiliates do not accept any Liability as a result of electronic transmission of this publication. 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Disclaimer
Julie Toth
Economic Update
15 Oct 2015
The Australian Economy:
the dollar
and other challenges
in 2016
Julie Toth
Chief Economist
GDP growth in Q2 2015 was 2.0% p.a. slower than this
decade’s average and slower than past decades Australian GDP growth to Jun 2015, % p.a.
Source: ABS National Accounts
What is growing? mining, finance, health, education.
Some parts of manufacturing recovering as dollar drops Real value added output: industry size ($bn) growth rates
Source: ABS National Accounts
Better start to 2015-16: Ai Group indexes show services,
house building & parts of manufacturing improving
Sources: Ai Group
Australian PMI®, Australian PSI®, Australian PCI®
What level of AUD is good for business? 2/3 of
manufacturers can survive US$0.90. Sub-$0.80 is better AUD tolerance: manufacturing businesses that can remain competitive at each
AUD/USD trading range, (cumulative per cent of businesses), 2013 to 2015*
Source: Ai Group, CEO Survey: Business Prospects. 2015
Trading range for AUD/USD:
Competitive in export markets Competitive against imports
2015 2014 2011 2015 2014 2011
0.50-0.60 100 100 100 100 100 100
0.61-0.70 98 97 95 98 94 91
0.71-0.80 94 95 93 94 92 74
0.81-0.90 63 76 67 66 75 45
0.91- 1.00 29 37 35 24 43 19
Benefits of lower dollar: recovery in export volumes for
services and some types of manufactured goods
Source: ABS
Australian export volumes per qtr, to Q2 2015
2015
2015
Low dollar for services: tourism and education exports
(more visitors spending) are rising rapidly & strongly
Source: ABS and ANZ
Australian export earnings, net tourism and education related services
Low dollar for services: import replacement is a crucial
response. e.g. holiday departures still high but falling
Sources: ABS
Short-term holiday visitor arrivals and resident departures, to Aug 2015
Low dollar for manufacturing: recovery in goods exports
(e.g. food, pharma, health products, equipment)
Sources: RBA and Ai Group
AUD Trade Weighted Index and the Australian PMI® exports sub-index
Low dollar for manufacturing: food exports up strongly,
other sectors’ exports recovering or steady
Sources: ABS
Manufactured goods exports by sector, annual value
Australia’s economy in 2016
Dollar is lower!
But what else needs to happen?
Jobs, incomes, investment
What are our national
strengths and weaknesses?
What can businesses do
to build their competitiveness?
What should policy-makers do
to build our competitiveness?
Where to in 2016? Employment growth better lately, but
unemployment rate seems to be ‘stuck’ above 6% Australian employment, labour force and unemployment rate (trend)
Source: ABS, Labour Force Australia, to Aug 2015.
Source: ANZ and ABS
Where to in 2016? Mixed messages about the labour
market: more job ads but also stubborn unemployment National unemployment rate and ANZ job ads ratio
Estimated resident population, annual growth (to Dec 2014)
Source: ABS
Where to in 2016? If Australian population growth is
slower, then our ‘potential’ GDP growth is slower too
Source: ABS
Where to in 2016? Nationally, our falling ‘real income per
capita’ is limiting growth in local spending & investment
Source: ABS
Where to in 2016? Lower profits for miners and other
sectors reduces their ability and incentive to invest Corporations’ gross operating profits (nominal), by major sector
Private business capital investment (CAPEX), annual value
Source: ABS
Investing for growth? Business intentions suggest 30%
less on buildings in 2015-16, 18% less on equipment
Australian rankings in WEF Global Competitiveness Report 2015-16
Source: WEF
Australia’s global competitiveness ranking improved to
21st place in 2015-16, up one place from last year
BEST INDICATORS (strengths)
rank
WORST INDICATORS (weaknesses)
rank
Financial markets 7 Labour market efficiency 36
Higher education 8 Goods market efficiency 27
Primary education 9 Business sophistication 27
Population health 9 Innovation 23
Infrastructure 16 Market size 22
Institutions 19 Technological readiness 21
Australia’s most problematic factors for doing business, 2015-16
Source: WEF
Australia’s global competitiveness rankings suggest the
labour market & tax are currently our weakest spots
Australia’s labour market rankings, 2015-16
Source: WEF
Australia’s labour market rankings suggest we need to
focus on cooperation & flexibility as much as cost
Global competitiveness leaders, 2015-16
Source: WEF
The global leaders show we need to focus on
innovation, connections, agility, to build on our ‘basics’
GCI Rank,
2015-16
Country
(GCI rank in 2014-15)
Basic
requirements*
Efficiency
enhancers#
Innovation and
sophistication**
1 Switzerland (1) 2 4 1
2 Singapore (2) 1 2 11
3 United States (3) 30 1 4
4 Germany (5) 8 10 3
5 Netherlands (8) 7 9 6
6 Japan (6) 24 8 2
7 Hong Kong (7) 3 3 23
8 Finland (4) 11 13 5
9 Sweden (10) 13 12 7
10 United Kingdom (9) 25 5 9
* The ‘basic requirements’ group of indicators are about institutions, infrastructure, macroeconomic environment, health , primary education. # The ‘efficiency enhancers’ group of indicators are about higher education, training, goods market efficiency, labour market efficiency, financial market development, technological readiness and market size. ** The ‘innovation and sophistication’ group of indicators are about business sophistication and innovation.
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• Australian PMI, PSI and PCI (monthly) • Ai Group Economics Weekly (weekly every Friday) • Ai Group Economics Factsheets on inflation, wage
trends and other topics (regular)
• Australian Construction Outlook (twice per year)
• Australian CEOs Business Prospects (annual, Feb)
• World Economic Forum (WEF) Global Competitiveness Index (annual, Sep)
• Federal and State Gov Budget updates for business
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