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The economic ‘big picture’. Saul Eslake Chief Economist Bank of America Merrill Lynch Australia. Australia’s major tourism markets. Visitor arrivals by country of origin, 2011-12. Source: ABS. Economic risks high in ‘advanced’ world. Probability of recession Q2 2012 – Q1 2013. - PowerPoint PPT Presentation
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The economic ‘big picture’
Saul EslakeChief Economist
Bank of America Merrill Lynch Australia
Australia’s major tourism marketsVisitor arrivals by country of origin,
2011-12
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
Europe NZ ASEAN China NthAmerica
J apan Korea HK India MENA Other
Mns
Source: ABS.
Economic risks high in ‘advanced’ worldProbability of recession
Q2 2012 – Q1 2013
0
10
20
30
40
50
60
70
80
90
US Euroarea
J apan EmergingAsia
LatinAmerica
Other
%
Source: International Monetary Fund, World Economic Outlook, October 2012
Probability of deflationQ4 2013
0
5
10
15
20
25
30
35
40
45
50
US Euroarea
J apan EmergingAsia
LatinAmerica
Other
%
Public debt weighs on most ‘advanced’ economiesNet public debt, 2012
0
20
40
60
80
100
120
140
160
J apan US UK Euro area India* Malaysia* Korea Indo-nesia*
China* Australia NZ
% of GDP
* Gross debt. Source: IMF, World Economic Outlook database, October 2012.
-3
-2
-1
0
1
07 08 09 10 11 12 13
% ch. from previous quarter
BAML
forecast
Europe already in ‘double dip’ recessionEuro zone real GDP
Sources: Eurostat; Bank of America-Merrill Lynch Global Research.
Euro zone unemployment
7
8
9
10
11
12
07 08 09 10 11 12 13
% of the labour force
BAML
forecast
Euro Central Bank has a plan … but will it work?
Source: Thomson Reuters Datastream
10-year government bond yields
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
07 08 09 10 11 12
0
5
10
15
20
25
30
35
40% pa % paGreece
(right scale)
Italy Spain
• The European Central Bank has signalled its preparedness to support the debt of heavily indebted Euro member nations – despite German reservations
• But they (Spain and perhaps Italy) must still formally apply for a ‘bailout’ – which they have thus far been reluctant to do
• Even assuming they eventually do, fiscal austerity will act as a drag on European growth for most of this decade
• And Europe still baulks at other ‘pro-growth structural reforms
-10
-8
-6
-4
-2
0
2
4
6
07 08 09 10 11 12 13
% ch. from previous quarter
(annualized rates)
BAML
forecast
The US looks better than EuropeUS real GDP
Sources: US Bureau of Economic Analysis; US Bureau of Labor Statistics; Bank of America-Merrill Lynch Global Research.
US unemployment
4
5
6
7
8
9
10
11
12
07 08 09 10 11 12 13
% of the labour force
BAML
forecast
US housing market looks to be turningUS house prices
Sources: Standard & Poor’s; US Commerce Department.
US housing starts
120
130
140
150
160
170
180
190
200
210
06 07 08 09 10 11 12
Index: J anuary 2000 = 100
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
2.5
06 07 08 09 10 11 12
Millions (annual rate)
Shale gas is making a difference to the USUS natural gas production
Sources: US Energy Information Administration; IMF.
US natural gas prices
15
17
19
21
23
25
27
90 92 94 96 98 00 02 04 06 08 10 12
Trn cubic feet (annual rate
Trend
Actual
0
100
200
300
400
500
600
90 92 94 96 98 00 02 04 06 08 10 12
US$/ m3
But the ‘fiscal cliff’ looms as a major riskUS Federal budget balance
Sources: US Congressional Budget Office; BofA Merrill Lynch Global Research.
-12
-10
-8
-6
-4
-2
0
2
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Actual / 'Baseline' Without 'fiscal cliff' measures
% of GDP
Change in budget balance 2012 to 2013
• Expiry of Bush tax cuts• Non-indexation of
alternative minimum tax (AMT) thresholds
• Expiry of payroll tax cut• Other tax measures• Expiry of extended
unemployment benefits• Other expiring spending • Automatic spending cuts
mandated by last year’s deal on the debt ceiling
• Other measures
180
120120
50
40
60
110
40
US$bn
720Total(4.6% of GDP)
-20
-15
-10
-5
0
5
10
07 08 09 10 11 12 13
% ch. from previous quarter
(annualized rates)
BAML
forecast
Japan’s ‘lost decade’ continues into anotherJapan real GDP
Sources: Japan Economic & Social Research Institute; Japan Home Ministry; BofA Merrill Lynch Global Research.
Japan ‘core’ inflation
-2
-1
0
1
07 08 09 10 11 12 13
% change from year earlier
BAML
forecast
-4
-2
0
2
4
6
8
10
07 08 09 10 11 12 13
% change from year earlier
BAML
forecast
0
2
4
6
8
10
12
14
16
07 08 09 10 11 12 13
% ch. from year earlier
BAML
forecast
China has not had a ‘hard landing’ …China real GDP
Sources: China National Statistics Bureau; BofA Merrill Lynch Global Research.
China inflation
… but growth will slow for ‘structural’ reasonsChina working age (15-64)
population
Sources: United Nations; CEIC.
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
1985 1990 1995 2000 2005 2010 2015 2020 2025 2030
% pa
Five years ended
China fixed asset investment as % of GDP
20
25
30
35
40
45
50
1981 1986 1991 1996 2001 2006 2011
% pa
Indonesia & Philippines stand out in other AsiaKorea
0
2
4
6
8
07 08 09 10 11 12 13
% ch from year earlier
Sources: National statistics agencies & central banks; BofA Merrill Lynch Global Research
Taiwan
-3
0
3
6
9
12
07 08 09 10 11 12 13
% ch from year earlier
Hong Kong
-3
0
3
6
9
07 08 09 10 11 12 13
% ch from year earlier
Singapore
-30369
1215
07 08 09 10 11 12 13
% ch from year earlier
Malaysia
-3
0
3
6
9
07 08 09 10 11 12 13
% ch from year earlier
Thailand
-3
0
3
6
9
07 08 09 10 11 12 13
% ch from year earlier
Indonesia
0
2
4
6
8
07 08 09 10 11 12 13
% ch from year earlier
Philippines
0
2
4
6
8
07 08 09 10 11 12 13
% ch from year earlier
Real GDP growth
0
2
4
6
8
10
12
14
16
18
07 08 09 10 11 12
% change from year earlier
0
2
4
6
8
10
12
07 08 09 10 11 12 13
% ch. from year earlier
BAML
forecast
India needs renewed reformIndia real GDP
Sources: India Central Statistical Office; BofA Merrill Lynch Global Research.
India inflation
Asia’s middle class will increase by 1.2bn this decadeThe global middle class
Notes: Lower bound of ‘middle class’ is the average poverty line in Portugal and Italy. Source: H Kharas & G Gertz, ‘The New Global Middle Class: A Cross-over from West to East’, reproduced in Australian Government, Budget Statement No. 4 ‘Opportunities and Challenges of an Economy in Transition’, 2011-12 Budget Paper No. 1, Budget Strategy and Outlook (Canberra, 2011).
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
07 08 09 10 11 12
% ch. from previous quarter
New Zealand staging a slow recovery NZ real GDP
Source: Statistics New Zealand
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
07 08 09 10 11 12
'000s
Actual
Trend
NZ housing approvals
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
07 08 09 10 11 12
% of the labour force
NZ unemployment
Australia’s economy has done very well …Real GDP Unemployment rate
90
92
94
96
98
100
102
104
106
108
110
112
08 09 10 11 12
Dec qtr 2007 = 100 Australia
Euro
US
UKJ apan
Canada
NZ
3
4
5
6
7
8
9
10
11
12
08 09 10 11 12
% of labour force
Australia
Euro area
USUK
J apan
Canada
NZ
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.
… partly on the back of the ‘resources boom’…Resources export commodity
prices
Sources: RBA; ABS; BofA Merrill Lynch Global Research
25
50
75
100
125
150
175
02 03 04 05 06 07 08 09 10 11 12
Index: 2008-09 = 100
US$ terms
0
10
20
30
40
50
60
70
80
90
100
02 03 04 05 06 07 08 09 10 11 12
$bn
Work yet to be done
Work done
(annual rate)
Resources industry construction work
-15
-10
-5
0
5
10
15
20
25
30
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
% change from year earlierKorean Warwool boom Late 60s/
early 70sboom &OPEC I OPEC II 'China
boom'
WWI wheat& wool boom
… without triggering double-digit inflation
Sources: ABS; BofA Merrill Lynch Global Research
Consumer price index
The strong A$ has played a major role in this
Sources: Thomson Financial Datastream; ABS.
A$ vs US$
0.50
0.60
0.70
0.80
0.90
1.00
1.10
02 03 04 05 06 07 08 09 10 11 12
US$ per A$
-3
-2
-1
0
1
2
3
4
5
6
7
01 02 03 04 05 06 07 08 09 10 11 12
% change from year earlier
"Tradeables"
"Non-tradeables"
Consumer prices
1
2
3
4
5
6
7
8
9
90 92 94 96 98 00 02 04 06 08 10 12
Mns (seas. adj. ann. rate)
Arrivals
Departures
Arrivals
ex-Chinese
But tourism has been one of the casualties
Sources: ABS.
-2
0
2
4
6
8
10
90 92 94 96 98 00 02 04 06 08 10 12
$ bn (annual rate)
Trend
Seas. adj.
Short-term arrivals and departures
Trade balance on travel-related services
The A$ seems to be defying ‘fundamentals’
Sources: RBA; ABS; Thomson Financial Datastream.
Commodity prices and the A$ Interest rate differentials and the A$
25
50
75
100
125
150
175
01 02 03 04 05 06 07 08 09 10 11 12
0.50
0.60
0.70
0.80
0.90
1.00
1.102008-09 = 100
A$ vs US$(right scale)
US$
RBA commodity price index(inverted, left scale)
0
50
100
150
200
250
300
350
400
450
500
01 02 03 04 05 06 07 08 09 10 11 12
0.50
0.60
0.70
0.80
0.90
1.00
1.10Basis points
A$ vs US$(right scale)
US$
Australia-US 2 yr bondyield spread (left scale)
… perhaps due to its new ‘safe haven’ status
Sources: IMF; RBA.
FX reserves held in ‘non-traditional’ currencies
Foreign holdings of Australian Government securities
0
50
100
150
200
250
300
350
01 02 03 04 05 06 07 08 09 10 11 12
US$ bns
'Other'
(ie, not US$, €,
¥, £ or SwFr
0
50
100
150
200
250
01 02 03 04 05 06 07 08 09 10 11 12
A$bn
Firms searching harder for productivity gains …
Source: ABS.
Labour productivity Unit labour costs
-3
-2
-1
0
1
2
3
4
5
6
02 03 04 05 06 07 08 09 10 11 12
% change from year earlier
Seasonally
adjustedTrend
-2
-1
0
1
2
3
4
5
6
7
8
9
02 03 04 05 06 07 08 09 10 11 12
% change from year earlier
Seasonally
adjusted
Trend
… heightening household fears about jobs
Source: ABS; Westpac-Melbourne Institute.
Employment growth Unemployment and household expectations regarding
unemployment
0
1
2
3
4
5
02 03 04 05 06 07 08 09 10 11 12
% change from year earlier
Trend
Seas adj
3
4
5
6
7
8
02 03 04 05 06 07 08 09 10 11 12
80
100
120
140
160
180
200% of labour force
Unemployment rate
(left scale)
%
Ratio people expecting higher to peopleexpecting lower unemployment (right scale)
Households have suffered big wealth losses …
Sources: ABS; US Federal Reserve: UK Office of National Statistics; Standard & Poors; Thomson Financial Datastream.
Household net worth-income ratios
House prices
450
500
550
600
650
700
750
800
01 02 03 04 05 06 07 08 09 10 11 12
%
Australia
US
UK 50
75
100
125
150
01 02 03 04 05 06 07 08 09 10 11 12
Index: 2006 = 100 Australia
US
40
60
80
100
120
140
01 02 03 04 05 06 07 08 09 10 11 12
Index: 2006 = 100
Australia
US
Share prices
… which has prompted them to save more
Sources: Westpac-Melbourne Institute; ABS; US Bureau of Economic Analysis; UK Office of National Statistics.
Household perceptions of their own financial situation
60
70
80
90
100
110
120
01 02 03 04 05 06 07 08 09 10 11 12
Ratio of optimists to pessimists
Seas. adj.
Trend
-4
-2
0
2
4
6
8
10
12
14
01 02 03 04 05 06 07 08 09 10 11 12
% of household disposable income
Australia
UK
US
Household saving rates
Conclusions• Near-term risks to global economy remain tilted to the downside
― Euro area recession will persist into next year ― post-election ‘fiscal cliff’ is a major risk to the US outlook― growth across Asia has slowed partly reflecting weakness in ‘advanced’ economies
• Medium term growth prospects much brighter for Asia than for ‘advanced’ economies
― US prospects better than Europe partly thanks to cheap energy and better demographics
― but growth in all major ‘advanced’ economies constrained by need for ‘fiscal consolidation’
― by contrast Asian economies (except for Japan and to some extent India) are not burdened by unsustainable public debt
• Australia approaching a major growth ‘transition’― with commodity prices now past their peak, and the peak in resources investment
likely to occur within the next 18 months, growth will need to be driven by other areas eg housing
― persistent A$ strength may complicate this task, forcing interest rates lower― Australian households will take time to ‘consolidate’ their balance sheets after the
sharp fall in wealth in recent years, and will maintain high saving rates for some years yet economies
• All of which makes for a challenging environment for Australian tourism
