Asian Economics Managing Australia’s mining boom · This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer,

Global Research

Asian Economics

1Q 2011

Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Paul BloxhamChief Economist (Australia and New Zealand)HSBC Australia Bank Limited+61 (2) 435 966 522 [email protected]

Managing Australia’s mining boom

July 2011

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Delete grid from slide master2

Australia’s export prices relative to import prices at highest level ever

Source: RBA, HSBC estimates

40

60

80

100

120

140

1910 1930 1950 1970 1990 20101890

Terms of TradeAnnual, 2007/08=100

1870

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Australia has many commodities and large reserves

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Global growth is now being dominated by the emerging economies …

Source: HSBC calculations

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…particularly as China and India seek to lift their living standards

Source: Angus Madisson (2010)

0

20

40

60

80

100

1820 1850 1880 1913 1940 1970 2000

GDP Per Capita Relative to United States%

W. Europe

JapanKorea

China

India

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China still has a lot more urbanisation to come

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Commodity prices rising very sharply, boosting incomes and investment

Source: RBA

0

20

40

60

80

100

120

140

160

1982 1985 1988 1991 1994 1997 2000 2003 2006 20090

20

40

60

80

100

120

140

160

In USD

In AUD

Commodity Prices2008/09 = 100Index Index

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AUD at highest level in real terms against our trading partners

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Australian dollar highest in post-float period, but not highest ever

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1901 1910 1919 1928 1937 1946 1955 1964 1973 1982 1991 2000 2009

USD per AUD

Float

Nominal Exchange Rate

UK£ per AUD

Source: Butlin (1977); RBA; HSBC

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There is a massive mining investment boom

Source: ABS

0

5

10

15

20

25

1986 1989 1992 1995 1998 2001 2004 2007 20100

5

10

15

20

25

*Per cent of quarterly nominal GDP

Engineering Construction Work yet to be Done*

Mining Investment Pipeline*

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Mining investment is set to be a record share of the economy

Source: ABS; RBA; HSBC estimates

0

2

4

6

8

10

1860 1880 1900 1920 1940 1960 1980 2000

% Mining Investment *

*Per cent of nominal GDP

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Source: ABS, Butlin (1977); RBA; HSBC estimates

Analogue of rise in mining investment is contraction elsewhere

50

60

70

80

90

100

1860 1880 1900 1920 1940 1960 1980 2000

% Non-mining Share of Nominal GDP*

Non-mining (including public sector)

Non-mining private sector

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Strong demand not being matched by supply … productivity is weak …

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… lack of electricity supply capacity is driving utilities inflation …

Source: ABS

-10

-5

0

5

10

15

20

1993 1996 1999 2002 2005 2008 2011-10

-5

0

5

10

15

20Utilities Inflationye% ye%

Electricity Water & Sewerage

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…commodity prices are feeding through to Chinese export prices…

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… labour supply has slowed due to lower migration …

Source: ABS

0.0

0.5

1.0

1.5

2.0

2.5

1989 1992 1995 1998 2001 2004 2007 20100.0

0.5

1.0

1.5

2.0

2.5Population Growth* % ye% ye

*working age

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… labour demand has also leveled out …

Source: ABS

10800

10900

11000

11100

11200

11300

11400

11500

Jan-2009

Apr-2009

Jul-2009

Oct-2009

Jan-2010

Apr-2010

Jul-2010

Oct-2010

Jan-2011

Apr-2011

EmploymentPersons, '000s

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…but the labour market is tight…

Source: ABS

Unemployment Rate

2

4

6

8

10

12

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 20102

4

6

8

10

12% %

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When the unemployment rate is below 5%, inflation rises …

Source: ABS; RBA; HSBC

0

1

2

3

4

5

3 4 5 6 7 8 9 10 11 12

Infla

tion

(%, 4

Q a

dvan

ced)

Unemployment rate (%)

Inflation and Unemployment Trade-off

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… partly because wages rise ahead of productivity

Source: ABS

-4

-2

0

2

4

6

8

10

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Year-ended

Nominal Unit Labour Costs%

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Source: ABS, RBA

So inflation is picking up again …

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 730.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Underlying InflationAverage of trimmed mean and weighted median

RBA's Target Band*

*In quarterly termsSource: ABS

201020001995 2005

% %

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Source: ABS, RBA; HSBC estimates

… and we are forecasting a further pick-up

0

1

2

3

4

5

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011Quarterly Year-ended

Inflation*%

*Trimmed Mean

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To contain inflation, the RBA will need to lift rates

Source: RBA; HSBC estimates

0

2

4

6

8

1993 1995 1997 1999 2001 2003 2005 2007 2009 20110

2

4

6

8Cash Rate% %

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Source: Federal Treasury

Fiscal authorities could have helped out more

-5

-4

-3

-2

-1

0

1

2

3

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Budget Balance% of GDP

November 2010 Update

May 2011 Budget

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A key challenge is that the gains are not evenly shared

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Source: ABS

Retail spending is modest …Retail Sales

Year-ended growth

-2

0

2

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011-2

0

2

4

6

8

10

12

% %

Values

Volumes

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… households are saving a lot …

Source: ABS

-5

0

5

10

15

20

25

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

Household Saving%

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…the housing market is flat …

400

450

500

550

600

2008 2009 2010 2011

Capital City Dwelling Prices

Top (-5.4%)

Levels, $'000

Bottom (-0.5%)Middle (-0.9%)

*y-o-y rates in bracketsSource: Rismark

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… credit growth has slowed …

Source: Rismark

-10

-5

0

5

10

15

20

25

30

1990 1995 2000 2005 2010

Business

Housing

Intermediated Credit Growth%ye

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… tourism is weakening …

Source: ABS

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

2005 2006 2007 2008 2009 2010 2011-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7Overseas Arrivals and Departuresm m

Departures

Arrivals

Net

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Non-mining sector investment expected to be fairly weak

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Risks

• Sharp downturn in the emerging economies, necessarily driven by China given its size – remember, China will have cycles too!

• Commodity supply comes on more quickly than expected – there are plenty of rocks in the ground, just limited capacity to extract them

• A negative global financial event – likely driven by sovereign debt concerns in the US and Europe – leading to a global downturn

• A potential policy error by the RBA given a rapid shift in the economy’s structure – this could be upside or downside to inflation and rates

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Spares

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Asia is re-emerging …

Source: Angus Maddison (2010)

0

20

40

60

80

100

1820 1850 1880 1913 1940 1970 2000

% Composition of World GDP

1820 1870 1913 1950 20081980

China

India

Other E. Asia

US

Other W . Europe

UKGermany

France

Largest and second largest economies in 1870

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The emerging world is driving global growth

Source: EIU, IMF and HSBC

-2 0 0-1 0 0

01 0 02 0 03 0 04 0 05 0 06 0 07 0 08 0 0

1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7 2 0 0 9 2 0 1 1 fU S E u ro z o n e L a tin A m e ric a A s ia e x C J C h in a

U S Db nGlobal Consumption

-1 0 0 0-8 0 0-6 0 0-4 0 0-2 0 0

02 0 04 0 06 0 08 0 0

1 0 0 0

1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7 2 0 0 9 2 0 1 1 fU S E u ro z o n e L a tin A m e ric a A s ia e x C J C h in a

Global Investment

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Asia needs a lot more commodities in order to develop

Source: RBA

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Developed world matters less now

Source: RBA

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Asia matters for Australia

Source: ABS

0

5

10

15

20

25

30

1990 1994 1998 2002 2006 20100

5

10

15

20

25

30

Exports by DestinationSelected Countries

China (24%)

Japan (19%)

India (8%)

ASEAN (10%)

% %

EU (8%)

Korea (8%)

US (4%)

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Resource exports account for the bulk of exports by value

Source: ABS; HSBC

0

2

4

6

8

10

12

14

16

18

1989 1993 1997 2001 2005 2009

Value of Exports$billion

Resources

Other

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Mining is a rising share of Australian corporate profits

Source: ABS; HSBC

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1995 2000 2005 2010

Mining Profits Share of total

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The Australian labour market is tightening up

Source: ABS; HSBC

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012

Unemployment rate%

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Some supply constraints remain: Not enough houses

Source: ABS; HSBC

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1987 1990 1993 1996 1999 2002 2005 20080.0

0.5

1.0

1.5

2.0

2.5

3.0% ye % yeHousing and Population

Number of dwellings

Population

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Although recent appreciation of the AUD is doing some of the RBA’s work

Source: RBA; HSBC estimates

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

Jan2010

Mar2010

May2010

Jul2010

Sep2010

Nov2010

Jan2011

Mar2011

May2011

AUD/USD

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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subjectsecurity(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensationwas, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Bloxham

Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not forpublication to other persons, whether through the press or by other means.

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The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested.Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particularinvestment product is not indicative of future results.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available atwww.hsbcnet.com/research.

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Additional disclosures 1 This report is dated as at 9 June 2011. 2 All market data included in this report are dated as at close 9 June 2011, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business . HSBC's

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Documents

Asian Economics Managing Australia’s mining boom · This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer,