Transcript No Slide Title

2010/11 Budget Commentary &
Economic Overview
Rob Brooker
Head of Australian Economics
1
Overall reaction to the Budget
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Deficit reduction involves policy tightening together with strong
growth
Overall budget decisions broadly neutral over 4 year period
– But really around $2bn p.a.early, neutralised by resources tax
kicking in fully in 2012/13.
Monetary & fiscal policy now aligned

Economic forecasts appear credible
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2
This is very much a budget aimed at repairing the medium term
fiscal outcome: surplus returning 3 years early in 2012/13
Revenue/savings mostly known beforehand
3
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Miners super profits tax: $9 bn
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PBS reduced drug prices: $0.5 bn

Tobacco excise: $1.3 bn

ATO increased compliance (especially GST): $0.5 bn
Likewise spending/reduced taxes
4

Lower corporate tax rate (SME fast track): $2.3 bn

Small business depreciation: $1.0 bn
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Superannuation concessions: $1.9 bn
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Discount on interest income: $0.5 bn
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Health: $1.7 bn

Training & infrastructure fund: $0.8 bn

Resource exploration tax offset: $0.7 bn
How credible..
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5
Politics
– Clearly lot depends on super profit tax
Issues include at what rate (Govt bond rate hard
to defend) and will it be retrospective
– Govt linking it to other measures
Low-income & related super concessions
Infrastructure fund
Cut to company tax rate
– Will it get through the Senate??
Credibility
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■
■
6
Economics
– Forecasts
 we find the forecasts credible
Govt sees fiscal stimulus withdrawn from 2011/12
 That is we see tighter fiscal policy taking around 2% from GDP
But no scope for pre election spending if want fiscal repair
■ But fiscal position of Australia relatively remarkable
■ Net debt to peak at 6% and moving down thereafter
Looking at the Budget from the policy viewpoint (Structural
Surplus deficit)
Structural Deficit / Surplus
- Annual Movement % of GDP and Implied Balance
2
Surplus
106
1.5
 Tightening
0.5
102
starting in 2010/11
0
100
Change (% of GDP)
-0.5
98
-1
96
Deficit
-1.5
94
Level 2000/01 =100
104
1
Much more in
2011/12
-2
Change - LHS
-2.5
7
92
Level of Structural Surplus / Deficit
2012/13
2011/12
2010/11
2009/10
2008/9
2007/8
2006/7
2005/6
2004/5
2003/4
2002/03
2001/02
2000/01
1999/00
1998/99
1997/98
1996/97
1995/96
1994/95
1993/94
88
1992/93
-3.5
1991/92
90
1990/91
-3
 Budget repaired
by 2012/13
On forecasts
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8
Domestic Demand - Private & Public
We actually reduced our domestic
forecasts a touch But locally we still
expect stronger growth – coming earlier
due to terms of trade and investment
In 2010/11 we expect 4% vis a vis Govt’s
3 ¼% And better unemployment
Global forecasts very similar
9%
9%
7%
7%
4%
4%
2%
2%
-1%
-1%
-4%
Underlying Public Demand
-4%
Private Demand
-6%
-6%
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11

We were surprised by the extent of the
tightness implied in the public sector
numbers
Annual % change

Resource super profits tax
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9
Extractive industries taxed differently
– Susceptible to ‘super profits’ (profits > needed to invest)
Shifts tax from production to profit
– Marginal mines currently pay royalties (deductible from RSPT)
Fiscal stabilisation case
But uncertainty
– How to calculate ‘super profit’?
– How does it affect project evaluation?
Global Economy : Key Messages
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10
It is now clear that global growth has returned
But it is very varied by region
China very strong and Non Japan Asia has bounced back
USA also surprising – with potential upside risks
Japan also improving from a very low base
Europe still very disappointing – with growth downgrades
New twist is sovereign risk – which would have dangerous and large
effects if allowed to develop
– EURO/IMF package of E750bn should calm markets
– But growth prospects very poor
The latest estimates suggest Chinese GDP increased by around 3% in Q1
2010 implying growth still accelerating – currently 11.9% y/y
And heavily driven by secondary industry (i.e. big users of coal / iron ore)
China - Real GDP
China - Real GDP
Percentage change
Year-to-date percentage change
%
%
%
%
Year-ended
12
12
16
16
Secondary
9
9
12
12
Tertiary
6
6
8
8
Quarterly
3
3
0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
11
4
4
Primary
0
2000
0
2002
2004
2006
2008
2010
The strongest “V” has been in Non Japan Asia (ex China). China strength
and increased global trade the key drivers. While China off its peaks
production still robust. Indian production strong and accelerating.
12
Key fundamentals - USA
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13
High unemployment will act as a headwind
As will the withdrawal of stimulus (fiscal and monetary)
But traditional drivers of growth are equally powerful unless
something else intervenes
– Real rate are very low and fiscal pump priming large
– Equity markets are up substantially
– House prices are stabilising / turning up
– Currency is low
– And lags to falling oil prices
Most likely risk (outside Europe) is commercial property
Going forward…..model underlines why upside risk in 2010
But beyond near term growth not expected to continue to accelerate
Commercial property a risk on downside
US Quarterly GDP v Nab Mini Model
2
 Model based on
1.5
- real rates
- house prices
- equity markets
- oil prices
- currency
- credit crunch
1
0.5
0
ACTUAL / FORECASTS
-0.5
Interest rate/ Los Model
-1
-1.5
Jun-11
Dec-11
Jun-10
Dec-10
Jun-09
Dec-09
Jun-08
Dec-08
Jun-07
Dec-07
Jun-06
Dec-06
Jun-05
Dec-05
Jun-04
Dec-04
Jun-03
Dec-03
Jun-02
Dec-02
Jun-01
Dec-01
Jun-00
Dec-00
Jun-99
Dec-99
Jun-98
Dec-98
Jun-97
Dec-97
Jun-96
Dec-96
Jun-95
Dec-95
Jun-94
Dec-94
Jun-93
Dec-93
Jun-92
14
Dec-92
-2
European issues: The Problem child
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15
Growth seems to have stalled – with domestic demand negative in late 2009
Unemployment very high and falls in house prices substantial (especially
outside large economies)
Some of the smaller Europeans have pump primed to such a large extent
that doubts arise about ability / willingness to implement sufficiently tight
policies to put fiscal position back on sustainable path
– Greece, Italy, Ireland, Spain and to a lesser extent UK
Markets nervousness rampant
But package seems large enough to settle nerves in the short run. But
growth stalled and prospects poor.
So adding up gives global growth of around 4¼% in 2010 and 2011.
But key message is very different across regions – with gap widening.
Australia well placed re MTP growth – now up 5% in 2010
IMF
WEIGHTS
GDP US
GDP JAPAN
EURO GDP
UK GDP
nonjap asia
latin america
china
canada
India
Africa
CIS
E Europe
Middle East
Other advanced
GLOBAL TOTAL
16
0.21
0.06
0.152
0.031
0.042
0.085
0.125
0.018
0.051
0.024
0.043
0.035
0.05
0.073
0.999
ANNUAL GROWTH TOTALS
2009 (f) 2010 (f) 2011 (f) 2012 (f)
2008
2007
2006
3.2
3.0
3.3
-2.4
0.5
2.1
2.7
2.5
2.5
2.2
-5.2
-1.2
2.3
2.0
1.5
1.5
0.9
-4.1
0.6
2.7
3.1
2.5
2.5
0.7
-4.9
0.5
2.6
2.9
4.5
5.2
5.4
-1.0
2.0
5.6
5.4
4.0
4.0
3.6
-2.0
4.3
5.4
5.3
8.0
9.1
10.5
8.7
9.6
11.8
11.0
3.0
3.0
2.7
-2.6
0.4
2.5
2.9
7.3
7.5
8.0
5.7
7.3
9.3
9.9
5.3
5.9
4.7
2.1
5.5
6.3
6.1
4.0
3.8
4.0
-6.6
5.5
8.6
8.2
3.7
3.7
3.0
-3.7
3.0
5.7
6.7
4.8
4.8
4.5
2.4
5.1
5.9
5.7
3.6
3.6
3.3
-1.1
1.7
4.7
4.5
5.2
5.1
3.0
-0.8
4.1
4.2
4.0
New Zealand
2.0
3.2
0.0
-1.6
2.9
3.5
3.0
AUSTRALIAN MTP Ex weights
5.3
5.5
2.6
-0.2
5.0
4.9
4.5
Economic forecasts
2009-10
17
2010-11
NAB
Budget
NAB
Budget
GDP
2¼
2¼
4¼
3¼
Employment(a)
2½
2½
3½
2¼
CPI underlying(a)
2¾
2½
2½
2½
Wages(a)
2¼
2¾
4½
3¾
Terms of trade
-3 ½
-3¾
15 ¼
14 ¼
(a) Through-the-year growth rate
Where are we now.
Business confidence still strong but back from excessively strong readings
Also signs in recent months of larger falls in retail, construction and transport as
rates bite and Govt stimulus passes.
Business confidence (net balance)
20
0
-20
1990s recession
-40
Apr-07
18
Oct-07 Apr-08 Oct-08 Apr-09 Oct-09
Seasonally adjusted
Trend
Apr-10
Australian business activity – as measured by business conditions – easing back
a touch but still reasonable. Main slowing recently was in sales especially retail
transport and construction.
Business conditions components (net bal. s.a.)
40
Trading
Profitability
Employment
20
0
-20
1990s recession
-40
Apr-07
19
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
That said overall the survey is still suggesting that domestic
demand is still travelling at around 4% Recent slowing would be
welcomed by the RBA.
Forward Orders (Change & Level) As an Indicator of Domestic Demand
- 6 Mthly Annualised % in Demand
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
DEMAND 6Mthly Annualised
Forward Orders
20
Dec-09
Dec-07
Dec-05
Dec-03
Dec-01
Dec-99
Dec-97
Dec-95
-6
Dec-93
-6
Dec-91
-4
Dec-89
-4
Key factors driving higher growth prospects
 Better major trading partner
growth (5% in 2010)
Australia's Terms of Trade
1.4
21
1.1
1.0
0.9
0.8
Average - 1985 to 2000
0.7
Sep-10
Sep-09
Sep-08
Sep-07
Sep-06
Sep-05
Sep-04
Sep-03
Sep-02
Sep-01
Sep-00
Sep-99
Sep-98
0.6
Sep-97
Critically extra income in the
economy from commodity price
increases. As reflected in our
term of trade.
1.2
Sep-96
Faster start to year with high
confidence levels and new
orders
Index of Export to Import Prices
1.3
Source: ABS, &, NAB Economics
The strength of the labour market has important flow on effects to
income and housing prices and wealth
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22
The strengthening in hours worked and lower unemployment
While higher rates and the end of the first home owners boost will slow the
housing market, their impact is more than offset by lower unemployment
On housing critical issues are
– Population growth: currently near 2%
– Interest rates: to rise significantly
– The degree of over / under building: currently under built by around 50000
per annum
– Unemployment: Prospect of significant falls very important
Debt really only a big issue if unemployment rises and / or rates go too
high.
Higher capacity, confidence and incomes likely to see investment
strengthen significantly in 2010. Business still wary but intentions are
improving. Mining projects – especially Gorgon – will add further.
Business investment to increase by 15% in both 2010 and 2011.
Models point to some upside risk
oya
Underlying Business Investment - Actual v Model Forecasts
35
35%
25
25%
15
15%
5
5%
-5
-5%
-15%
-15
Model
Actual plus f
23
Jun-11
Jun-10
Jun-09
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
Jun-95
Jun-94
Jun-93
Jun-92
Jun-91
-25%
Jun-90
-25
For 2010 forecasts are for growth of 3 ¼ % - stronger (3 ½ %) Dec / Dec Qtr.
For 2011 expect even stronger growth at 4 %
■ GDP (fiscal years)
Real Output/Expenditure (GDP) - Quarterly
2.5%
Quarterly GDP
■2 ¼ % in 2009/10
■ 4 % in 20010/11
4 per. Mov. Avg. (Quarterly GDP)
2.0%
1.5%
■ The strength of the
forecasts are
underlined by
expected growth in
domestic demand of
5¼% in both calendar
years.
1.0%
0.5%
0.0%
-0.5%
24
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
Dec-97
Dec-96
Dec-95
Dec-94
Dec-93
Dec-92
Dec-91
Dec-90
Dec-89
Dec-88
Dec-87
Dec-86
Dec-85
Dec-84
-1.0%
The strength of the growth forecasts points to employment growth of around 3 ¼
per annum. Even with stronger partipation that could see unemployment fall to 4
½% by end 2010 and 4% by end 2011.
Australian Labour Market
9.0
EMPLOYMENT - LHS
4.0%
UNEMPLOYMENT RATE - RHS
8.5
8.0
7.5
7.0
2.0%
6.5
1.0%
6.0
5.5
0.0%
5.0
4.5
-1.0%
4.0
25
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
Jun-04
Sep-03
Dec-02
Mar-02
Jun-01
Sep-00
Dec-99
Mar-99
Jun-98
Sep-97
Dec-96
3.5
Mar-96
-2.0%
% - rate
% change - 12 months to
3.0%
On short term interest rates dynamics…
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26
RBA currently on hold looking at the world (Europe) and the impact of
what it has already done
We see cash rates moving up to 5¼% by end 2010 – which would, in an
environment of higher bank spreads, be a touch on the tight side of
neutral.
While every RBA meeting is “potentially live” depending on data, we
have pencilled in rate rises in August, September and December.
Moving into 2011 we expect rates to rise to 6% which is above current
market pricing and would be the best part of ¾% above neutral