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Economic Outlook China, Trump & Trade Wars. We do live in interesting times.
Westpac Institutional Bank For the Tractor Machinery Association By: Justin Smirk, June 2018
2
– Summary from last year. – Growth risks to present themselves in 2018
• The year started strongly but is set to moderate as rates rise in the US, liquidity tightens in Europe & Japan and growth slows in China.
• The unwinding the mining boom has faded while the growth in exports associated with that investment continues, lower AUD supportive.
• Housing prices, and household debt, hit record highs. House price inflation to disappear by year’s end. Slow growth in wages means consumption continues below trend.
• Inflation well contained so energy shocks more of a potential risk to business activity than underlying inflation.
• Construction cycle is very mature & growth set to slow next year.
• Business confidence soft, sales are modest and political risks remain but population growth has picked up a little.
• RBA on hold, market rates being dragged higher, AUD heading down to US65¢.
3
The global economy
Energy & resources US powers ahead with Trump
Rural commodities Domestic economy
Housing & market interest rates Forecasts
The global economy had a solid start in 2018
4
5
Global PMI & global trade orders
30
35
40
45
50
55
60
30
35
40
45
50
55
60
Apr-98 Apr-02 Apr-06 Apr-10 Apr-14 Apr-18
index
Westpac global trade index JPMorgan global manufacturing PMI
index
Sources: Thomson Reuters, Markit, Westpac Economics.
6
Global trade: average tariffs, long history
0
5
10
15
20
25
30
0
5
10
15
20
25
30
1870 1890 1910 1930 1950 1970 1990 2010
% %
Sources: World Bank, Westpac Economics
China joins WTO
GATT
EEC/EU formed
NAFTA
WW2 WW1
US ‘Smoot Hawley’ tariffs
7
World growth firmer holding in 2018
*NIE are Newly Industrialised Economies – Republic of Korea, Hong Kong SAR, Taiwan Province of China, and Singapore.
2014 2015 2016 2017 2018(f) 2019(f) Australia 2.6 2.5 2.6 2.2 2.7 2.5 New Zealand 3.6 3.5 4.0 2.8 2.6 3.2 US 2.6 2.9 1.5 2.3 2.8 2.5 Euro 1.3 2.1 1.8 2.3 2.1 1.6 Japan 0.4 1.4 0.9 1.7 1.2 1.0 China 7.3 6.9 6.7 6.9 6.3 6.1 India 7.4 8.2 7.1 6.7 7.2 7.2 NIE’s* 3.5 2.1 2.3 3.1 2.8 2.6 World 3.6 3.5 3.2 3.8 3.8 3.7
8
Size of the global middle class
-
500
1,000
1,500
2,000
2,500
3,000
3,500
-
500
1,000
1,500
2,000
2,500
3,000
3,500
2009 2030
Pop. millions Pop. millions
North America
Asia Pacific
Europe
Source: OECD 2010
US has powered ahead in the age of Trump
9
10
Little slack in US labour market
0
2
4
6
8
10
12
14
16
18
0
2
4
6
8
10
12
14
16
18
1994 1999 2004 2009 2014
% % Unemploment rate
U6 measure*
Sources: Datastream, Westpac Economics
*includes marginally attached and part time for economic reasons.
Tax and spending hit deficit
0
2
4
6
8
10
12
0
2
4
6
8
10
12
1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025
% CBO alternative forecast (April 2018)* CBO baseline forecast (July 2017) Source: CBO, Westpac Economics
%
Reagan’s starting point
% of nominal annualised GDP
*assumes tax and spending policies extended to end of forecast horizon.
11
Chinese growth momentum to slow in 2018 & 2019
12
13
China real GDP to decelerate slowly
4
6
8
10
12
14
16
4
6
8
10
12
14
16
Jun-94 Jun-98 Jun-02 Jun-06 Jun-10 Jun-14 Jun-18
%yr %yr
Sources: Westpac Economics, CEIC.
WBC 2018 & 2019 year-avg f’casts
14
China’s growth transition
-2 -1 0 1 2 3 4 5 6 7 8
-2 -1 0 1 2 3 4 5 6 7 8
investment consumption net exports
ppt cont ppt cont
2010 2011 2012 2013 2014 2015 2016 2017
Sources: CEIC, Westpac Economics.
15
China debt: developed world scale
0
50
100
150
200
0
50
100
150
200
Australia US China
% of GDP % of GDP
government household corporate
Source: BIS, Westpac Economics *China government is nominal value
June 2017
Energy & Resources
16
17
Australian commodity prices outlook
0
100
200
300
400
500
600
700
0
100
200
300
400
500
600
700
Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15 Jun-18
index index Bulks* (lhs) Exchange traded* (rhs)
Sources: Westpac Economics, Bloomberg, ABS.
Bulks includes iron ore and coal. Exchange traded includes rural, crude oil, base metals and gold.
18
0
20
40
60
80
100
120
140
0
3
6
9
12
15
18
21
Jun-97 Jun-01 Jun-05 Jun-09 Jun-13 Jun-17 Jun-21
US$/bbl US$btmu
Spot Japan LNG (lhs) LNG fcs Brent (rhs) Brent fcs (rhs)
Sources: Westpac Economics, Bloomberg Forecasts
Japanese LNG & Brent crude oil
Rural Commodities
19
20
60
110
160
210
260
Aug-05 Aug-09 Aug-13 Aug-17
Live export cattle Beef index Lamb index Skim milk
2005=100
Sources: ABS, Westpac Economics.
Farm commodities in Australian dollars
60
110
160
210
260
Aug-05 Aug-09 Aug-13 Aug-17
Sugar Wheat Cotton Canola
2005=100
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21
50
150
250
350
450
550
650
50
150
250
350
450
550
650
1840 1860 1880 1900 1920 1940 1960 1980 2000
US¢/lb US¢/lb
Sources: Westpac Economics, Measuring Worth.com, USDA, NBER.
1951
1973
1885 to 1916
1935 to 1974
Beef prices in 2016 dollars
21
22
0
1000
2000
3000
4000
0
1000
2000
3000
4000
1841 1861 1881 1901 1921 1941 1961 1981 2001
US¢/bus US¢/bus
Sources: Westpac Economics, USDA, CBOT, Bloomberg
1885 to 1916
1935 to 1974 the Green Revolution broke the trend response to rising demand
1867 1855 1917
1947
1974
2009
Wheat price in 2017 dollars
23
0
20
40
60
80
100
120
0
20
40
60
80
100
120
1889 1909 1929 1949 1969 1989 2009
US¢/lb US¢/lb
Sources: Westpac Economics, Measuring Worth.com, USDA, NBER
1974
1980
1890 to 1916
1935 to 1974
2011
Inflation adjusted sugar prices
24
Disclaimer Technological advances continue
24
25
Disclaimer And it is not just tractors
25
26
Disclaimer Source – Westpac Wire
26
27
Disclaimer Of course, this means little with no rain
27
28
Domestic economy
29
Electricity futures
0
20
40
60
80
100
120
140
0
20
40
60
80
100
120
140
Sep-02 Sep-05 Sep-08 Sep-11 Sep-14 Sep-17
$/MWh $/MWh VIC QLD NSW SA
Sources: Westpac Financial Markets
Market in overcapacity so prices approximate short run marginal cost.
major drought
carbon price
Qld government intervention
30
Service exports: a bright spot, for now
0
5
10
15
20
25
30
0
5
10
15
20
25
30
Dec-93 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17
$bn $bn Sources: ABS, Westpac Economics Education
Leisure travel
Business services*
Transportation
Business travel
Rolling annual, nominal
* Business services: $20bn, including: legal & prof’ services $5bn financial services $4.2bn IT & Telecomm $3.4bn Intellectual property rights $1.2bn other, $10bn
Total service exports: +10% yr
31
-4
-2
0
2
4
6
8
10
-4
-2
0
2
4
6
8
10
Mar-98 Mar-02 Mar-06 Mar-10 Mar-14 Mar-18
% ann % ann Labour income
Consumption
Sources: ABS, Westpac Economics
real Consumption: 2017 Q4: 1.0%qtr, 2.9%yr LR avg: 3.3%yr
LR avg: 3.3%yr
f/cs to end 2019
Aus: consumer spend vs labour income
32
Unemployment and participation rates
4
5
6
7
8
62
63
64
65
66
67
May-01 May-05 May-09 May-13 May-17
% %
participation rate (lhs)
unemployment rate (lhs)
Sources: ABS, Westpac Economics.
PR average since March
2008 PR trend since Jan
2014
33
Australian participation rates by gender
70
71
72
73
May-08 May-14
male
%
58
59
60
61
May-08 May-14
female
% Sources: ABS, Westpac Economics.
34
Population growth
0.0
0.5
1.0
1.5
2.0
2.5
0.0
0.5
1.0
1.5
2.0
2.5
1980 1990 2000 2010
ann% ann% population contribution from net migration contribution from natural increase
Sources: ABS, Westpac Economics
35
Population growth: NSW lags VICTORIA
0
1
2
3
4
Jun-08 Jan-12 Jul-15
NSW Vic Tas Australia
% ann Sources: ABS, Westpac Economics.
0
1
2
3
4
Jun-08 Oct-11 Feb-15
WA Qld SA
% ann
36
Housing & market interest rates
37 37
Australian dwelling prices: capital cities
-15
-10
-5
0
5
10
15
20
25
30
-15
-10
-5
0
5
10
15
20
25
30
May-10 May-12 May-14 May-16 May-18
% %
Sydney Melbourne Brisbane Perth
Sources: CoreLogic, Westpac Economics * all dwellings
6mth annualised
38
Mortgage interest rates: ‘tiering’
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19
% % own-occ. - principal and interest (50%) own-occ. - interest only (15%) investor - principal and interest (13%) investor - interest only (22%)
Sources: APRA, RBA, Westpac Economics
*figures in brackets show Dec 2016 share of total loan approvals by value
weighted avg:
39 39
Big 4 bank funding pre-GFC and now
0
20
40
60
80
100
0
20
40
60
80
100
2006 2017
% %
Short wholesale
Long wholesale
Cert. of deposit
Other deposits
Term deposits
Call deposits
Equity Sources: APRA, Westpac Economics. *Long is >1 year
53.7%
38.4%
Liabilities + Equity
40 40
-40
-20
0
20
40
60
-40
-20
0
20
40
60
Jan 11 Jan 13 Jan 15 Jan 17
bps bps BBSW-OIS
LIBOR-OIS
TBILLS-OIS
Sources: Bloomberg, Westpac Economics
Short term funding spreads (3 month)
41
Forecasts
42 42
Federal Budget: $14.5bn deficit in 2018/19
-4.2
-70
-50
-30
-10
10
30
-7
-5
-3
-1
1
3
2007/08 2011/12 2015/16 2019/20
$bn % of GDP
$bn (rhs) % of GDP (lhs)
Sources: Budget papers, ABS, Westpac Economics Gov’t f/cs to ’21/22
underlying cash balance
-18.2
-14.5
+2.2 +11.0
+16.6
2019/20
43 43
At time of
forecast Sep-18 Dec-18 Jun-19 Dec-19
RBA Cash 1.50 1.50 1.50 1.50 1.50
Aus 10yr 2.58 2.75 3.05 3.10 3.00
3yr swap 2.03 2.40 2.50 2.50 2.70
Fed Funds 1.875 2.125 2.125 2.625 2.625
US 10yr 2.83 3.00 3.35 3.50 3.20
AUD/USD 0.739 0.74 0.74 0.72 0.70 Source: Westpac Economics
Current Forecasts – June 2018
43
44 44
Jul-18 Sep-18 Dec-18 Dec-19
Fair Value US¢ 77¢ 77¢ 76¢ 72¢
AUD/USD forecasts 74¢ 74¢ 74¢ 70¢
Cash rate spread -38ppt -63ppt -63ppt -113ppt
Commodities latest = 100 100 97.8 93.5 83.2
AU model breakdown
Source: Westpac Economics
45 45
Source: Westpac Economics
Westpac IQ – home of our research
www.wibiq.westpac.com.au
46
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Important Disclaimers
Information in this presentation correct as at July 2018
We are living in interesting times.
• US is starting out from a robust position, China tightening credit & continues to focus on environmental and structural improvements.
• US interest rates are rising and tighter liquidity driving a strong US dollar narrative.
• Overall, slower Chinese growth and a higher US dollar will see lower commodity prices. But watch out for shifting trade relations.
Domestically in Australia • Weak income growth to contain consumption.
• Housing will continue to correct in Sydney & Melbourne.
• Political uncertainty will weigh on business.
• RBA on hold in 2018 and 2019 but market rates to move higher.
• US rates to 112 basis points above RBA in 2019.
• Higher USD combined with weaker AUD. 47
