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A Presentation to
Australia 2012/13: Boom or Gloom?
A complex picture behind some decent headline growth and labour market numbers and amid ongoing structural change
A tale of two halves for 2012, momentum likely to wane in H2 and into 2013
Investment momentum peaking, terms of trade declining, a weak housing market and considerable fiscal drag
But it is the global risks that worry us more
Cash to move to new low of 2.75% but overall conditions will not be as stimulatory as 2008/09
A different easing cycle – more protracted and punctuated by pauses
Risks remain predominantly global, but there are a number of domestic challenges
A structurally higher A$
Su-Lin Ong
Managing Director, Head of AU/NZ Economics & Fixed Income Strategy
+612 9033 3088
[email protected]
July 2012
Boom or gloom? Depends on who you ask
Australia (%)
Consumption
Dwelling
Business Investment
Domestic Demand
Stocks (ppc)
Net Exports (ppc)
GDP
Current Account Deficit/GDP
Unemployment Rate (end)
Wage Cost Index
Headline CPI
Core CPI
1
CY2010
2.9
4.1
-2.6
3.6
0.4
-1.5
2.6
CY2011
3.3
1.1
19.5
4.0
0.4
-2.6
2.1
CY2012 F
3.9
-5.8
18.9
4.4
0.0
-1.0
3.5
CY2013 F
2.7
2.5
11.1
3.2
0.0
-0.3
3.0
2.9
4.9
3.3
2.8
2.8
2.2
5.2
3.7
3.4
2.6
4.2
5.2
3.5
2.1
2.1
5.5
4.8
3.3
3.1
2.6
2012 – a tale of two halves as the terms of trade move lower
140
1.1
Terms of Trade Peaked
130
1
120
0.9
110
0.8
100
Terms of Trade
AUD/USD
90
0.7
80
0.6
70
0.5
60
RBC's
Forecasts
50
Dec-95
0.4
Dec-99
Source: Australian Bureau of Statistics
2
Dec-03
Dec-07
Dec-11
Income boost easing with the impact broad based
10.0
10.0
Income-Output Gap Narrowing
%y/y
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
0.0
0.0
-2.0
-2.0
ppt difference
GDP
-4.0
-6.0
Mar-02
Mar-04
Source: Australian Bureau of Statistics
3
-4.0
Real gross national income
Mar-06
Mar-08
Mar-10
-6.0
Mar-12
Some resilience in the broader measures of consumption
8
8
Discretionary Spending Strong
6
6
4
4
2
2
0
0
Retail -related consumption
Non-retail discretionary
consumption
-2
-2
Non-discretionary consumption
-4
Mar-07
Mar-08
Source: Australian Bureau of Statistics
4
Mar-09
Mar-10
Mar-11
-4
Mar-12
May not continue as national income moderates
5.0
25
Traditional Sales Stil Patchy
4.0
20
Retail sales (% m/m LHS)
Fiscal Package I
Housing borrowing (% y/y RHS)
3.0
15
Fiscal Package 2
2.0
1.0
5
0.0
0
-1.0
-5
-2.0
May-07
May-08
Source: Australian Bureau of Statistics
5
10
May-09
May-10
May-11
-10
May-12
And confidence remains lacklustre
130
2.0
Consumer Confidence Struggling
120
3.0
110
4.0
Long run average
100
6.0
90
80
7.0
Consumer Sentiment (Index LHS)
Cash Rate (% Inverted RHS)
70
Jun-97
Jun-00
Source: Westpac-Melbourne Institute, RBA
6
5.0
Jun-03
Jun-06
Jun-09
8.0
Jun-12
With little appetite to borrow
25
25
Credit Growth Remains Sluggish
20
20
15
15
10
10
5
5
0
0
Housing
-5
-5
Other personal
Other mostly business
-10
May-92
Source: RBA
7
Total Credit
May-96
May-00
May-04
May-08
-10
May-12
The structural change in household behaviour continues
25
25
Household Savings Rate
20
180
160
160
140
140
120
120
100
100
80
80
60
60
20
15
15
Long-run average = 10%
10
10
5
5
Seasonally Adjusted (%)
Trend (%)
40
0
40
0
Household debt/disposable income (% LHS)
20
-5
Mar-64
Mar-70
Mar-76
Mar-82
Source: Australian Bureau of Statistics
8
180
Debt Ratios Moving Lower
Mar-88
Mar-94
Mar-00
Mar-06
-5
Mar-12
20
House Prices (Index RHS)
0
Mar-82
Source: RBA
Mar-88
Mar-94
Mar-00
Mar-06
0
Mar-12
House prices to decline further
House Prices Moderating
50
150
40
125
30
20
100
10
0
75
Australia-wide (%, y/y, LHS)
Sydney (%, y/y, LHS)
Perth (%, y/y, LHS)
Melbourne (% y/y, LHS)
Brisbane (%, y/y, LHS)
Australia-wide (Index, RHS)
-10
-20
Mar-98
Mar-00
Mar-02
Source: Australian Bureau of Statistics
9
Mar-04
Mar-06
Mar-08
Mar-10
50
Mar-12
But it is the dwelling activity indicators that are more worrying
18,000
25.0
Building Approvals Still Weak
17,000
16,000
20.0
15,000
14,000
15.0
13,000
12,000
10.0
11,000
10,000
5.0
Building Approvals (Number, Trend, LHS)
9,000
RBA Housing Credit (% y/y RHS)
8,000
May-88
May-91
May-94
Source: Australian Bureau of Statistics
10
May-97
May-00
May-03
May-06
May-09
0.0
May-12
Forward indicators also point to a waning in momentum
10
3.0
PMIs in Contractionary Territory
8
2.0
6
1.0
4
0.0
2
-1.0
Domestic Demand (trend, %y/y, LHS)
0
-2.0
PMI-type composite growth indicator
(+1q, in stdev's, RHS)
-2
Sep-91
-3.0
Sep-96
Source: Australian Bureau of Statistics
11
Sep-01
Sep-06
Sep-11
Lopsided growth driven largely by buoyant business investment
20
Business Investment On An Upward Path
140
130
18
120
16
110
14
100
Business Investment/GDP (%, LHS)
12
90
Terms of Trade (Index, RHS)
80
10
70
8
60
6
Mar-92
Mar-96
Source: Australian Bureau of Statistics
12
Mar-00
Mar-04
Mar-08
50
Mar-12
Ongoing divergence among industries, evidenced in State variation
115
20
Rate sensitive sectors - sub-par growth
20
State final demand (% y/y)
113
Total
111
15
15
10
10
5
5
0
0
Mining
Retail
109
Construction
Hospitality
107
Manufacturing
105
103
101
99
AU ex. WA & Qld
WA
QLD
-5
97
Gross value added, re-indexed to Sep-09 = 100
95
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Source: Australian Bureau of Statistics
13
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
-10
Mar-07
Mar-08
-5
Mar-09
Source: Australian Bureau of Statistics
Mar-10
Mar-11
-10
Mar-12
Weak non resource sector spilling over to the labour market
30
Mining
QoQ change (k)
Manufacturing
25
Construction
Retail trade
20
Financial & insurance services
Professional, scientific & technical servs
15
Administrative & support services
Health care & social assistance
10
Agriculture, forestry, & fishing
5
0
-5
-10
-15
-20
Q3-11
Source: Australian Bureau of Statistics
14
Q4-11
Q1-12
Q2-12
But the picture is a little puzzling…we worry that momentum will not last
Participation Falling
67.0
4.0
5.0
66.0
6.0
65.0
7.0
64.0
8.0
63.0
9.0
62.0
10.0
61.0
Unemployment Rate (%, inverse, RHS)
Participation Rate (%, LHS)
60.0
May-82
May-87
May-92
Source: Australian Bureau of Statistics
15
May-97
May-02
May-07
11.0
12.0
May-12
With some softening in the leading indicators
5
20
NAB Survey and Employment
4
15
3
10
2
5
1
0
0
-5
-1
-10
-2
-15
-3
-20
Employment (%, y/y, LHS)
-4
-5
May-92
-30
May-96
May-00
Source: Australian Bureau of Statistics, NAB
16
-25
NAB Employment Index (Index, +6mnths, RHS)
May-04
May-08
May-12
And the terms of trade signal a warning on the labour market front
12.0
15
Unemployment and Terms of Trade
11.0
35
10.0
55
9.0
8.0
75
7.0
95
6.0
5.0
115
4.0
135
Unemployment Rate (% trend, LHS)
3.0
Terms of Trade (Index, inverse RHS)
2.0
May-82
May-87
May-92
Source: Australian Bureau of Statistics
17
May-97
May-02
May-07
155
May-12
And the real worry – the productivity challenge
Index
105
Productivity (% average annual growth)
100
Average since
2005 = 0.6%
95
90
1990-2005 average = 2.2%
85
80
75
70
65
1980's average = 1.3%
60
1980
1984
1988
Source: Australian Bureau of Statistics
18
Real GDP per hour worked
1992
1996
2000
2004
2008
2011
Amid sticky domestic inflation and high costs
Tradeable & Non Tradeable Inflation
7.0
Tradeable Inflation (% y/y)
Non Tradeable Inflation (% y/y)
6.0
6.0
5.0
5.0
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
0.0
-1.0
-1.0
-2.0
Mar-06
Mar-07
Mar-08
Source: Australian Bureau of Statistics, RBA
19
7.0
Mar-09
Mar-10
Mar-11
-2.0
Mar-12
Global growth momentum waning
Global Manufacturing Recession?
65
60
60
Expansion
55
55
50
50
45
45
40
40
Contraction
35
35
Chinese PMI
European PMI
US ISM
Australian PMI
30
25
Jun-00
Jun-02
Source: Bloomberg
20
65
30
Jun-04
Jun-06
Jun-08
Jun-10
25
Jun-12
Risks centre on Europe – recent developments are a step in the right direction
Put stress on
Banks
Put stress on
Bank funding market
(Peripheral) Economies
Put stress on
(Peripheral) Sovereign
Bond Market
Put stress on
21
(Peripheral)
Governments
Put stress on
But stagnant at best, deeper more protracted recession at worst
110
Index rebased:
start of crisis = 100
108
106
Japan: 1990-2000
104
US
France
102
100
UK
98
96
Spain
94
92
Italy
IMF projections
90
1
2
3
4
Source: DMO, Bank of England, RBC Capital Markets calculations
22
5
6
7
Years from start of crisis
8
9
10
11
Plenty of liquidity – but it’s not going anywhere
14
14
12
12
10
10
8
8
6
6
ECB M3 reference rate
4
2
4
2
M3, % y/y
Loans to the private sector, %
y/y
0
0
-2
-2
92
94
Source: ECB, Haver
23
96
98
00
02
04
06
08
10
12
US momentum waning – labour market weakness
600
67
Weather
boost
400
66
65
200
64
0
63
-200
62
-400
61
-600
60
Nonfarm payrolls (m/m, k, LHS)
-800
-1000
May-06
Employment-to-population ratio (%,
RHS)
Participation rate (%, RHS)
58
May-07
May-08
Source: DMO, Bank of England, RBC Capital Markets calculations
24
59
May-09
May-10
May-11
May-12
Ongoing household deleveraging
14000
US household credit market liabilities ($ billions)
12000
10000
mortgages
consumer credit
bank loans
other
total
8000
6000
4000
2000
0
52
56
Source: Haver
25
60
64
68
72
76
80
84
88
92
96
00
04
08
12
Housing demand and supply imbalance
9000
9000
8000
8000
"Shadow inventory"
Vacant homes for sale
7000
7000
6000
6000
5000
5000
4000
4000
3000
3000
2000
2000
1000
1000
0
0
80
Source: Haver
26
84
88
92
96
00
04
08
12
And even China is struggling
25
8.0
7.5
40
40
35
35
30
30
25
25
20
20
15
15
10
10
20
7.0
6.5
15
6.0
10
5.5
5.0
Industrial production (%y/y)
5
Prime lending rate (%, RHS)
0
Jun-02
Jun-03
Sources: Haver
27
Jun-04
Jun-05
Jun-06
4.5
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
4.0
Jun-12
RMB loan growth (%y/y, LHS)
5
5
Construction spending (%ytd, RHS)
0
May-04
May-05
Sources: Haver
May-06
May-07
May-08
May-09
May-10
May-11
0
May-12
With more direct consequences for Australia
106
60
50
104
40
102
30
100
20
98
10
0
96
-10
94
-20
China CLI (+3q, LHS)
92
-30
AU exports (trend, %y/y, RHS)
90
Mar-92
-40
Mar-94
Mar-96
Mar-98
Mar-00
Sources: Haver, Australian Bureau of Statistics
28
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
Mar-12
Although we still expect it to be more soft landing than hard
China export shares (2011)
Asia
40%
China average
Coastal/Major Cities
Source: CEIC
Central/Western
Sichuan
Hunan
Henan
Shaanxi
Hubei
Chongqing
0
Zhejiang
0
Jiangsu
5
Tianjin
5
Beijing
10
Guangdong
Latin America
6%
15
10
Shanghai
Japan
8%
Other
10%
29
20
15
EU
19%
25
20
US
17%
Source: Bloomberg
Growth in value added of industry, YTD 2011
25
But the underlying structural story has not changed
30.0
25.0
2000/01
2010/11
20.0
15.0
% of Total Merchandise Australian Exports
10.0
5.0
Germany
HK
Singapore
Taiwan
UK
NZ
Composition of Merchandise Exports
(top 10 exports)
Destination of Merchandise Exports
(top 10 destinations)
Iron Ore 24%
Coal 18%
Non-monetary Gold 6%
Crude Petroleum 5%
Natural Gas 4%
Wheat 2%
Aluminium Ores 2%
Copper Ores 2%
Manufactures 2%
Other Ores 2%
China 26%
Japan 19%
South Korea 9%
India 6%
Taiwan 4%
USA 4%
New Zealand 3%
UK 3%
Singapore 2%
Hong Kong 1%
Source: Australian Bureau of Statistics
30
US
India
Korea
Japan
China
0.0
And unlikely to do so given the long run dynamics
45
45
per Capita GDP (current US$, thousands)
40
40
China
India
OECD - Total
Korea
Malaysia
Japan
35
30
30
25
25
20
20
15
15
10
10
5
5
0
0
1980
Source: IMF
31
35
1985
1990
1995
2000
2005
The RBA has scope to ease further but it is a reluctant cutter
32
INDICATORS
TREND
POLICY INFLUENCE
Global growth/credit
Lending rates
Fiscal policy
Confidence
Inflation
Dwelling
Labour Market
Credit
A$
Consumption
Exports/Terms of Trade
Business Investment
Fragile
Higher
Contractionary
Modest
Easing
Weak
Resilient
Weak
Peaked?
Modest
Peaked/Elevated
Strong
Cut
Cut
Cut
Cut
Neutral/Cut
Neutral/Cut
Neutral
Neutral
Neutral
Neutral
Pause
Pause
RBA – a global canary?
RBA & Global Growth Prospects
7.5
105
7.0
103
6.5
6.0
101
5.5
5.0
99
4.5
97
4.0
RBA Cash Rate (%, LHS)
3.5
OECD Leading Indicator (Index, RHS)
3.0
2.5
Jul-02
Source: RBA, OECD
33
95
China Leading Indicator (Index, RHS)
Jul-04
Jul-06
Jul-08
Jul-10
93
Jul-12
Policy dilution with mortgage rates only modestly stimulatory
10.0
350.0
Ever widening mortgage rates-cash rates
9.0
300.0
8.0
Decade average for variable mortgage rates
(7.3%)
7.0
250.0
6.0
200.0
5.0
4.0
150.0
Cash Rate (% LHS)
3.0
Variable Mortgage Rate (% LHS)
Mortage Rate-Cash Rate (Margin, bp, RHS)
2.0
Jul-00
Jul-02
Source: RBA, RBC Capital Markets
34
Jul-04
Jul-06
Jul-08
Jul-10
100.0
Jul-12
And sharply contractionary fiscal policy
28
3
Heading Back Into the Black
2012-13
Budget
27
2
26
1
25
0
24
23
-1
22
-2
21
-3
Underlying Balance (% GDP, RHS)
Outlays (% GDP, LHS)
Revenues (% GDP, LHS)
20
19
18
1985/86
1990/91
1995/96
Source: Commonwealth Treasury, Budget Paper 1#
35
2000/01
2005/06
-4
2010/11
-5
2015/16
New low for cash but conditions will not be as stimulatory
350
85
Nothing special about 3% cash
330
80
310
Mortgage-Cash Spread (bp, LHS)
TWI (Index, RHS)
290
75
270
70
250
3% Cash
April 2009
230
210
65
60
190
55
170
150
Jun-02
Jun-04
Source: Australian Bureau of Statistics, RBA
36
Jun-06
Jun-08
Jun-10
50
Jun-12
Unemployment rate may not be as good guide to RBA policy action
6.75
2.50
Watch the unemployment rate?
3.00
6.25
3.50
4.00
5.75
4.50
5.00
5.25
5.50
4.75
6.00
6.50
4.25
Unemployment Rate (% LHS)
Cash Rate (% inverse RHS)
3.75
Jul-02
7.50
Jul-04
Source: Australian Bureau of Statistics, RBA
37
7.00
Jul-06
Jul-08
Jul-10
Jul-12
A structurally higher A$
180
1.05
160
Journal of Industrial Commerce, Metals (Index LHS)
140
0.95
AUD (RHS)
120
0.85
100
0.75
80
0.65
60
0.55
40
20
Jun-94
Jun-97
Sources: Bloomberg
38
Jun-00
Jun-03
Jun-06
Jun-09
0.45
Jun-12
Assisted by increased offshore demand
80.0
90
Allocation of Foreign Exchange Reserves
1.10
Offshore Demand For AU Bonds At Record Level
70.0
80
1.00
60.0
70
60
0.90
50.0
50
0.80
40.0
40
0.70
30.0
Dec-2001
Dec-2006
Dec-2011
30
* Mostly Canada & Australia
0.6020.0
20
0.5010.0
10
Non Resident Holdings of ACGBs (%, LHS)
A$ (RHS)
0
Mar-92
Mar-94
Mar-96
Mar-98
Sources: RBA, Bloomberg
39
Mar-00
Mar-02
Mar-04
Mar-06
Mar-08
Mar-10
0.40 0.0
Mar-12
US
EUR
Sources: IMF
JPY
Sterling
CHF
Other*
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is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an
offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of
original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes
profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws
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Disclaimer
Additional information is available on request.
To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE), which is a U.S. registered broker-dealer and which
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To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc. (member of IIROC). Any Canadian recipient of this report that is not
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To Singapore Residents: This publication is distributed in Singapore by RBC (Singapore Branch) and RBC (Asia) Limited, registered entities granted offshore bank
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Copyright © RBC Capital Markets, LLC 2011 - Member SIPC
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