Transcript Slide 1

Asian Economics
Australia in the Asian century:
Looking beyond the mining boom
November 2012
Paul Bloxham
Chief Economist (Australia and New Zealand)
HSBC Bank Australia Limited
+61 (2) 435 966 522
[email protected]
Issuer of report: HSBC Bank Australia Limited
ABC
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
Global Research
View HSBC Global Research at: http://www.research.hsbc.com
Australia’s is now in its 21st year of continuous growth
Australian GDP Growth
Company
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%
F/C
8
6
4
2
0
Q4 1991
-2
-4
1980
1985
1990
1995
2000
2005
2010
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Source: ABS; HSBC estimates
2
Some signs of growth moderating into the second half of 2012
Unemployment Rate
Company
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Seasonally adjusted
%
%
10
10
8
8
6
6
4
4
2
2
1978
1982
1986
1990
1994
1998
2002
2006
2010
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Source: ABS
3
Timely measures of sentiment are around their average levels
NAB Business Survey
105
Company
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30
Conditions
90
15
75
0
60
-15
45
-30
30
-45
Confidence
15
-60
0
-75
-15
-90
-30
-105
-45
-120
1997
2000
2003
2006
2009
2012
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Source: Westpac-Melbourne Institute, NAB, Datastream
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Australia in the Asian century
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1) Asia is driving global growth, which is benefiting Australia
2) Mining boom not over yet: more investment and export ramp-up yet to come
3) Local economy will rebalance, with lower rates supporting housing and retail sales
4) Asia presents medium-term opportunities beyond just mining for Australia
5) Lifting productivity is the main challenge and important for inflation and rates
outlook
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1.1) Asia is driving global growth: economic centre of gravity moving east
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Source: Quah (2010)
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1.2) China and India expected to overtake the US and Europe as the largest in
the world
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1.3) Emerging economies already contributing more to global growth
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Source: HSBC estimates
8
1.4) China is delivering 50yrs of US advance every decade (India 30 yrs)
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1.5) Europe is straining under the weight of debt
General Government Gross Debt
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Per cent of GDP
%
European Countries
%
Other Advanced Countries
250
250
Japan
Greece
200
150
France
100
200
Italy
US
100
UK
Germany
NZ
50
Spain
Ireland
Australia
0
90
94
98
02
06
10
14
91
95
99
150
50
0
03
07
11
15
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Source: IMF
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1.6) Europe faces enormous challenges that will be with us for some time
European GDP
September 2007 = 100
Index
105
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North
Austria
Index
Other
105
Belgium
Portugal
100
Spain
France
95
95
Germany
Ireland
90
85
Italy
Greece
80
Sep-07
100
90
85
80
Sep-09
Sep-11
Jun-08
Jun-10
Jun-12
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Source: Datastream
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1.7) Timely indicators suggest Europe is in recession
European Coincidence Indicator (EuroCOIN)
Company
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%
%
1.0
1.0
0.5
0.5
0.0
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
1995
1998
2001
2004
2007
2010
2013
Source: Eurostat and HSBC
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grid from slide master
12
1.8) US is operating at well below its capacity
US - Employment to Population Ratio
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%
%
64
64
62
62
60
60
58
58
56
56
54
54
1950
1960
1970
1980
1990
2000
2010
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Source: Thomson Reuters Datastream
13
1.9) China’s PMI suggests around trend growth
China HSBC PMI
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Index
Index
55
55
50
50
45
45
40
40
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Source: HSBC; Bloomberg
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1.10) High commodity prices may be the new (old) normal?
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Real Commodity* Price Trends
Average for 1860-2010=100
Index
Index
110
110
100
100
90
90
80
1865
80
* Excludes oil
1875
1885
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
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Source: Erten and O’Campo (2012); HSBC
estimates
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1.11) But commodity demand still to be supported by emerging economies
Steel Demand Across Selected Economies
Copper Demand Across Selected Economies
Cu/pc
Stl/pc
Cu/pc
Asia (NID)
20
Stl/pc
Asia (NID)
20
0.75
16
Company
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0.75
Japan
16
Japan
12
US
8
China
3000
China
8500
22500
0.25
4
Latin America
1500
0.50
0.25
Europe*
India
0
500
0.50
8
Asia (other)
4
12
60000
India
0
163000
0.00
500
1500
3000
10.0
7.5
Japan
US
5.0
5.0
China
2.5
2.5
India
0.0
500
* Includes Switzerland
1500
Latin America
3000
8500
22500
GDP per capita (EKS$2011, log scale)
60000
0.0
163000
Per capita energy consumption (BTUs)
Asia (NID)
Europe*
60000
0.00
163000
0.40
Za/pc
7.5
22500
Energy Consumption
Zinc Demand Across Selected Economies
10.0
8500
GDP per capita (EKS$2011, log scale)
* Includes Switzerland
Za/pc
US
Latin America
GDP per capita (EKS$2011, log scale)
* Includes Switzerland
Europe*
US
0.35
0.30
0.25
0.20
Germany
Korea
0.15
Japan
0.10
China
Brazil
0.05
India
0.00
0
10
20
30
40
50
GDP per capita ('000s)
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Source: GGDC, Brook Hunt, HSBC estimates, IMF
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1.12) Bulk of global population at commodity intensive stage of development
Company
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Share of Global Population at Commodity Intensive Usage Stage
%
Forecast
%
60
60
40
40
20
20
0
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
0
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Source: Total Economy Database; IMF; HSBC
estimates
17
1.13) Commodity intensive economies driving the bulk of global growth
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Share of Global Growth in Commodity Intensive Usage Stage
%
Forecast
Global growth
6
%
6
4
4
2
2
0
0
-2
-4
1951
Commodity intensive phase
-2
Non commodity intensive phase
-4
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
2016
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Source: Total Economy Database; IMF;
HSBC estimates
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1.14) High AUD has been a key catalyst for slowdown in some sectors
Company
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Nominal Exchange Rate
3.00
Float
2.50
USD per AUD
2.00
1.50
1.00
UK pound per AUD
0.50
0.00
1901 1908 1915 1922 1929 1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006
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Source: RBA; HSBC
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2.1) Mining boom not over: just part way through second of three stages
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Mining boom stages
Stage 1: Commodity prices rise, boosting
incomes and motivating investment
Stage 2: Investment pick up owing to high
commodity prices
Stage 3: Capacity comes on line and
exports ramp up
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Source: HSBC
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2.2) Commodity prices have peaked, but remain historically high
Australia's Commodity Prices
Index
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2008/09 = 100
Index
In USD
160
160
120
120
80
80
In AUD
40
40
0
0
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
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Source: RBA, HSBC
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2.3) Free kick to income growth from rising commodity price has now passed
%
100
Nominal GDP and Commodity Prices
Year-ended percentage change
80
%
24
20
Commodity prices
(in AUD, LHS)
60
16
40
12
20
8
0
4
-20
0
Nominal GDP (RHS)
-40
-4
-60
2001
2003
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Source:
ABS;grid
RBA from slide master
Company
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-8
2005
2007
2009
2011
22
2.4) But terms of trade still at a very high level, making investment worthwhile
Australia's Terms of Trade
Index
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F/C
120
100
80
60
40
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
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Source: ABS, HSBC
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2.5) Mining investment should make large contribution to growth this year and next
Contribution to GDP from Engineering Investment
Company
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Year-ended change
%
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
2000
2002
2004
2006
2008
2010
2012
2014
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Source: ABS; HSBC estimates
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2.6) Much of the investment pipeline is for energy (LNG in particular)
Company
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Value of Advanced Mining Projects
$Abn
$Abn
Infrastructure
200
Energy
150
100
150
100
Mineral
Minerals &
Energy Processing
50
200
50
0
0
1995
1998
2001
2004
2007
2010
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Source: BREE, HSBC
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2.7) Export ramp-up has yet to come
Australian Commodity Exports Outlook
Company
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Financial years
Mt
Mt
Forecast
600
60
300
30
LNG*
Coal
Iron ore
LNG*
Coal
Iron ore
LNG*
Coal
Iron ore
LNG*
Coal
Iron ore
LNG*
Coal
Iron ore
LNG*
Coal
Iron ore
LNG*
Coal
Iron ore
0
LNG*
Coal
Iron ore
0
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
* Right hand side axis
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Source: BREE
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3.1) Some rebalancing expected: after some sectors slowed to make way for mining
Employment Across Industries
Company
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Trend, February 2007 = 100
Index
Index
Other industries
(67% of total)
110
110
105
105
Exchange rate sensitive industries*
(33% of total)
100
100
2007
2008
2009
2010
2011
2012
* Includes manufacturing, retail trade, accommodation and education
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Source: ABS; HSBC estimates
27
3.2) Keep in mind that Australia’s economy is mostly services
Company
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Source: ABS; RBA
28
3.3) Growth needs to switch from being commodity-driven to credit-driven
Commodity price driven growth
Index
Company
Index
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240
150
200
120
Terms of trade*
(RHS)
160
90
120
60
Credit to GDP
ratio (LHS)
80
30
40
0
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Source: ABS; RBA
*Ratio of export to import prices
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3.4) Credit growth has been weak, but domestic demand has been strong
Domestic Demand and Credit
Company
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Year-ended change
%
%
Real Credit Growth
(deflated by GNE deflator, RHS)
8
16
6
12
4
8
2
4
0
0
Growth in domestic
demand (LHS)
-2
-4
1997
-4
-8
1999
2001
2003
2005
2007
2009
2011
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Source: ABS; RBA
30
3.5) Financial system still works in Australia, so credit growth is lifting
Credit growth
%
%
Six-month annualised
30
Company
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30
Business
20
20
Housing
10
10
0
0
Personal
-10
-10
-20
-20
2000
2002
2004
2006
2008
2010
2012
Source: RBA
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31
3.6) Lower rates mean that housing prices are picking up
Capital city housing prices
Company
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$'000
$'000
550
550
500
500
450
450
400
400
2006
2007
2008
2009
2010
2011
2012
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Source: Rismark
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3.7) Housing building cycle likely to have troughed
Building Approvals - Australia
Company
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Number of buildings*
'000s
'000s
Total
15
15
10
10
Houses
5
0
5
* Thick line represents trend numbers w hile the lighter line represents seasonally adjusted number
** Includes non-residential buldings
1995
1997
1999
2001
2003 2005
2007
2009
Other**
0
2011
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Source: ABS; RBA; HSBC
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3.8) Households have already lifted their savings to elevated levels
Household Saving Ratio*
%
Company
Logo
Per cent of disposable income
%
15
15
10
10
5
5
0
0
-5
-5
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
* Net of depreciation
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Source: ABS, RBA
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3.9) Household caution is reflected in easing housing prices
Housing price to income ratio
Company
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6
5
4
3
2
1
0
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
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Source: RP Data / Rismark
35
3.10) Record number of outbound Australian tourists weakening domestic spending
Short-term Arrivals and Departures
Company
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Annual rolling total
mn
mn
Departures
8
6
8
6
Arrivals
4
4
2
2
0
0
-2
-2
Net flow
-4
1977
-4
1982
1987
1992
1997
2002
2007
2012
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Source: ABS
36
3.11) Exchange rate effect is starting to wear off
%
Overseas departures and the exchange rate
Year-ended percentage change
25
20
Company
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%
30
20
AUD trade-weighted
index (RHS)
15
10
10
0
Overseas
departures (LHS)
5
-10
0
-20
-5
-30
2005
2006
2007
2008
2009
2010
2011
2012
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Source: ABS
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4.1) Growing Asian middle class will bring opportunities beyond mining
Company
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- Increased demand for housing and consumer durables;
- Increased demand for more and better quality food;
- Increased demand for education services;
- Increased demand for holidays;
- Increased demand for financial services
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4.2) Chinese motor vehicle sales still have a lot of catching up to do
Company
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4.3) China should account for over a quarter of global car sales by 2018
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40
4.4) Food intake rising in developed countries
Company
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4.5) Higher incomes lead to higher meat consumption and less grain
Company
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4.6) China is driving Australia’s tourist arrivals numbers
Australian Overseas Arrivals*
Company
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Index January 2007 = 100
200
180
China (11%)
160
140
Other (12%)
120
US (7%)
NZ (20%)
100
Asia ex China (32%)
Europe (18%)
80
2007
2008
2009
2010
2011
2012
*Share of total in June 2012 in brackets
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Source: ABS
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5.1) Weak productivity growth remains Australia’s main challenge
GDP per hour worked*
Company
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Index (log scale)
190
5.20
2000-05
1.9%pa
5.10
5.00
130
4.90
4.80
2005-11
1.0%pa
1990-95
1.7%pa
1980-85
1.6%pa
1995-00
2.6%pa
110
4.70
1985-90
0.9%pa
100
4.60
1980
1984
1988
1992
1996
2000
2004
2008
2012
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Source: ABS
44
5.2) Growth has been driven by working harder, not necessarily smarter
Factor Contribution to Potential GDP Growth
%
Year-ended
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%
Total factor productivity
Growth in
hours worked
4
4
2
2
0
0
Growth in capital stock
-2
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
-2
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Source: ABS; HSBC
45
5.3) Weak productivity partly reflects the mining boom
Company
Logo
Decomposition of trend productivity growth
Annual average percentage change
Labour productivity
of which:
Capital deepening
Multifactor productivity
1973/74-1993/94
1993/94-2003/04
Selected market sector industries
1.8
3.1
Labour productivity
of which:
Capital deepening
Multifactor productivity
Source: RBA
1.3
0.6
1.3
1.8
Excluding mining and utilities
3.1
-
1.3
1.9
2003/04-2010/11
1.4
1.8
-0.4
1.7
1.3
0.4
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46
5.4) Weak productivity boosted local inflation, but import prices have fallen
Company
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Components of Inflation
Year-ended change
%
Non-tradeables
(domestic)
6
%
6
4
4
2
2
0
0
-2
Tradeables
(mostly imported)
-4
-2
-4
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Source: ABS, RBA
47
5.5) Inflation low, largely due to AUD appreciation in 2009 and 2010
Company
Logo
Measures of Underlying Inflation
Year-ended change
%
5
%
Weighted median
5
4
4
3
3
2
2
Trimmed mean
1
0
CPI
(excl vol items)
1
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
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Source: ABS; RBA
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5.6) Wages growth remains solid
Company
Logo
Labour Price Index Growth
Seasonally adjusted
%
%
4
4
Year-ended
3
3
Six month
annualised
2
2
Quarterly
1
1
0
0
1999
2001
2003
2005
2007
2009
2011
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Source: ABS; RBA
49
5.7) RBA rates are well below neutral
%
Variable mortgage rates and nominal cash rate
Company
Logo
12
10
8
6
4
2
0
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Margin
Cash rate
Effective mortgage rate
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Source: RBA; HSBC
50
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Disclosure appendix
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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 subject
security(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 compensation
was, 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 for
publication to other persons, whether through the press or by other means.
This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other
investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal
advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors
should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary,
seek professional investment and tax advice.
Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of
investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take
into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.
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 particular
investment 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 at
www.hsbcnet.com/research.
* HSBC Legal Entities are listed in the Disclaimer below.
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
Additional disclosures
1
2
3
This report is dated as at 12 October 2012.
All market data included in this report are dated as at close 12 October 2012, unless otherwise indicated in the report.
HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's
analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent
of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure
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Disclaimer
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Issuer of report
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© Copyright 2012, HSBC Bank Australia Ltd, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means,
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206/01/2012
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