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Economics | Weekly International Highlights
Wednesday, July 11, 2018
Dick [email protected]
Jaewoo [email protected]
Sean [email protected]
Australia Real GDP Likely to Increase+3.0% in 2018:4Q and +3.25% in 2019:4Q
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GDP = + 1.4 - 0.006 x AS10YR\5 - 0.007 x BRENT\1 - 0.02 x TWA$\6 + 0.05 x M1YY\2 T-stats = + 1.6 - 5.6 - 2.7 -2.2 + 3.3
+ 0.02 x MTGAPPYY\1 + 0.3 x CHGDP\5 + 0.3 x USGDP\1 +2.8 +5.9 + 4.5
GDP = Australia Real GDP Y/Y%
AS10YR\5 = Australia 10-Year Bond Yield, Leading by 5 Qtrs.
BRENT\1 = Real Brent Y/Y %, Leading by 1 Qtr.
TWA$\6 = Australia Trade-Weighted A$, Leading by 6 Qtrs.
M1YY\2 = Australia Real M1 Y/Y %, Leading by 2 Qtrs.
MTGAPPYY\1 = Mortgage Approvals Y/Y %, Leading by 1 Qtr.
CHGDP\5 = China Real GDP Y/Y %, Leading by 5 Qtrs.
USGDP\1 = US Real GDP Y/Y %, Leading by 1 Qtr.
Fit 1997:4Q - 2018:1Q R-squared = 64%
THE MODEL
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
98 00 02 04 06 08 10 12 14 16 18
Apr (IMF) -- Fiscal drag inAustralia is estimated to be -0.4%of GDP in 2018 and -0.5% in2019.
AUSTRALIA REAL GDPY/Y % 2017:1Q +3.0%
This regression model projects
Australia real GDP increases
+3.2% y/y in 2018:4Q and +3.5%
in 2019:4Q. GDP is lifted by the
lagged effects of accommodative
monetary policy and faster global
growth (represented in the model
by GDP in the US). But it is
restrained by the lagged impact of
somewhat higher Australia bond
yields and slower growth in China.
The model does not capture
ongoing fiscal drag, as shown in
IMF estimates. But some of that
may be offset by higher public
expenditures that are not fully
reflected in the IMF calculations.
Nevertheless, we slightly reduced
our forecast to show +3.0% y/y in
2018:4Q and +3.25% y/y in
2019:4Q. Relative to the private
consensus, our forecast is in line
for 2018 (also +3.0%) and above
(+2.9%) for 2019.
Australia Real GDP Likely to Increase +3.0% in 2018:4Q and +3.25% in 2019:4Q
Feb (RBA) -- Public demand is expected to provide impetus to growth for sometime. In addition to strong infrastructure investment, growth in public consumptionis forecast to be faster than overall GDP growth.
July 11, 2018
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Australia Indicators Mostly PositiveAustralia’s PMIs are both at high levels: The mfg PMI was 57.4% in
June, and the svc PMI soared to 63.0%. Real retail sales have a rising
trend, albeit with some recent slowing. However, OECD’s broad LEI for
Australia has hooked down over the past eight mos.
Australia has not had a recession since 1991.May (RBA) -- Business conditions are very positive. Survey-based measures ofconditions are above average in all industries, including mining and retail, which hadpreviously been reporting much weaker conditions.
July 11, 2018
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Australia Consumer Spending Likely to Increase +2.5% in 2018 and +3.0% in 2019
Real DPI is rising but at a slow pace,
restrained by slow wage increases.
Consumer confidence has increased
gradually over the past four years, and
household net worth %DPI has
advanced to a record high. But
household debt has also risen and is a
source of concern -- albeit a diminishing
one -- to policymakers. Consumer
spending is likely to increase +2.5% y/y
in 2018:4Q and +3.0% in 2019:4Q.
Apr 11 (WSJ) -- The high level ofhousehold debt remains a source ofvulnerability for Australia’s economy,though risks in this area are no longerbuilding, following a recent tightening ofbank lending standards, RBA said.
July 11, 2018
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Australia Housing Construction Likely to be Flat; House Price Bubble Risk Lower.
Mtg rates are at a record low, partly
due to RBA keeping its policy rate low
(see page 8). The rising trend in
house prices has been a source of
concern to the RBA, but there has
been a slowdown recently. Mtg
approvals are high but have hooked
down. Foreign buyers, particularly
Chinese, have been a major source of
upward pressure on prices, even
though new restraints have been
imposed. Overall the outlook is for
housing construction to be little
changed.
May (RBA) -- Conditions in the Sydney andMelbourne established housing marketshave eased. Nationwide measures ofhousing prices were little changed over thepast six months, and price falls wererecorded in some areas.
July 11, 2018
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Australia Capex Recovering
Mining investment plunged after a
major round of new mines and
related facilities was completed.
The slowdown in China IP
suggests current capacity is
ample. But the decline in mining
capex is basically over. And
company earnings are rising.
Capex is likely to increase about
+5.0% y/y in 2018:4Q and +7.0%
in 2019:4Q. David Raso notes
improvement at cap goods cos.
David Raso Evercore ISI July 2018Australia operating expense and capexcontinues to recover solidly with machinesin heavy use. Caterpillar’s largest dealer inAustralia has seen earth moving machinesat customers grow 3% y/y and mining eqpgrow 1%. Mining equipment fleetutilization is 90.8% vs 78.2% a year ago.Paccar, with its leading Australiacommercial truck position, is currentlygrowing its truck sales 10%+ y/y.
May (RBA) -- Business investment isexpected to continue growing over thenext few years, as non-mining investmentcontinues to expand and the drag frommining investment diminishes.
July 11, 2018
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Australia’s largest exports include: coal,iron ore, gold, wool, aluminum, wheat,machinery, and transport equipment.Australia’s largest trading partners are:China (32%), Japan (16%), Korea (7%),and US (5%).
Australia Net Exports ProbablyNeutral for GDP
Apr 11 (WSJ) -- Australia could be hithard if trade tensions between China andthe US ramp up. Any resulting slowdownin global growth could lead to weakerdemand for Australian commodityexports such as iron ore and coal.
Net exports surged over the 2012-
2016 period as exports were lifted
by rising commodity demand --
especially from China -- and
imports were roughly flat. More
recently, exports have slowed while
imports picked up, although both
have seen bounces in the opposite
direction. The synchronized global
expansion is a plus. However,
demand from China is uncertain,
especially in the context of trade
tensions and new tariffs.
July 11, 2018
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RBA Likely to Retain Current PolicyLabor costs have accelerated
despite sluggish wages, but the CPI
is running slightly below the lower
end of the target band. With this
mixed backdrop, the RBA is likely to
keep policy unchanged for a while
longer.
The improving economy might
argue to tighten policy, but RBA has
emphasized slow wage growth. In
addition to low inflation, the RBA is
probably hoping to avoid a
substantial appreciation in the A$,
which would hurt exports as the
transition from the mining boom
continues; the move toward higher
tariffs is a related concern.
Eventually, however, some policy
tightening is likely.
May (RBA) -- If the economy continuesto perform as expected, higher interestrates are likely to be appropriate atsome point. Notwithstanding this, theBoard does not see a strong case for anear-term adjustment in the cash rate.
July 11, 2018
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Mixed Australia Financial Conditions
+43%
Investors can obtain exposure to Australian stocks --long or short -- through iShares EWA ETF.
Bond yields are up from their
lows but remain well below US
rates. Stock prices are up +60.9%
from their 2011 low and are up
+2.5% ytd. Australia banks are
financially solid.
Company earnings have
moved up, in part because of
some recovery in the natural
resource sector; however, earnings
remain below their prior peaks.
The forward P/E for the ASX is
above its 10-year average.
Feb (IMF) -- Australian banks havefurther strengthened their resilience tonegative housing and other shocks in2017 and improved their fundingprofile.
+60.9%
July 11, 2018
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