Accounts, credit cards, loans, insurance | ANZ - Global outlook · 2008-05-21 · Commercial real estate: 2 400. 30: Consumer loans. 1 400: 20. Corporate loans: 3 700. 50: Leveraged
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1
Global outlook
An de-synchronisation of the global growth cycle over the past six months is expected to shift to a broad based slowdown in the world economy by the end of 2008.
- The effects of a global tightening of financial conditions will eventually mean slower growth in all the world’s major economies.
- Evidence of a US economic recession has become more compelling.
- Pressure on bank balance sheets and wide credit spreads will also dull the impact of monetary easing on the underlying economy.
- The key uncertainty remains the emerging economies, although our base case remains for a moderate slowdown.
A key concern is that the full magnitude of the global credit squeeze is yet to be seen. One interpretation of recent financial disruptions is that we are experiencing the initial fall-out from a significant household balance sheet adjustment in many industrialised economies that follows an extended period of debt accumulation and asset price appreciation.
- Repairing household balance sheets will take an extended period, unlike a standard corporate balance sheet event. This could fundamentally change the global economic landscape given the important role of the Western consumer in driving global growth over the past decade.
- While economic recession in this instance may not be deep, it could be prolonged.
2IMF estimates potential losses at US$945bn, of which banks’ losses are reckoned to be US$440-510bn…
Estimated losses on unsecuritized loans
Notes: ‘Alt-A’ means ‘low-doc’ or ‘no-doc’ mortgage loans. ABS = asset-backed securities; CDOs = collateralized debtObligations; MBS = mortgage-backed securities; CLOs = collateralized loan obligations.Source: IMF Global Financial Stability Report April 2008, p. 12
Type of loanUS$bn
Out- standing
Estimated losses
Sub-prime 300 45
‘Alt-A’ 600 30
Prime 3 800 40
Commercial real estate 2 400 30
Consumer loans 1 400 20
Corporate loans 3 700 50
Leveraged loans 170 10
Total 12 370 225
of which, banks 100-130
Estimated mark-to-market losses on securities
Type of securityUS$bn
Out- standing
Estimated losses
ABS 1 100 210
CDOs 400 240
Prime MBS 3 800 0
Commercial MBS 940 210
Consumer ABS 650 0
High-grade corporate 3 000 0
High-yield corporate 600 30
CLOs 350 30
Total 10 840 720
of which, banks 340-380
3
0 5 10 15 20 25
ABN Amro Canadian banks
Bear Stearns SachsenLB Dresdner
Goldman Sachs Royal Bank of Scotland
E*Trade Barclays
Lehman Brothers Mizuho Financial Group
Bayerische Landesbank Societe Generale
Canadian Imperial Asian banks excluding
Wachovia Credit Suisse
Credit Agricole Deutsche Bank
Bank of America European banks not
Washington Mutual IKB Deutsche
JPMorgan Chase HSBC
Morgan Stanley Citigroup
Merrill Lynch UBS
The largest losses have been felt primarily by US-based banks
... $250bn of which has been announced so far
Sources: Bloomberg; ANZ
US$ bn
Asset write-downs and credit lossesamount to US$250 bn as of April 2008
4
The outlook for Australia
Although the Australian and US business cycles are no longer well correlated, the latest shock has been transmitted to Australia through highly globalised financial markets. There is little doubt that the combination of rising official interest rates and tighter financing conditions in wholesale financial markets will impact the underlying economy.
- As the commercial banks become an increasingly important source of funding for the Australian economy, their cost and terms of the provision of credit will be an important factor in the economic outlook.
The Australian economy now appears to be approaching, or may have even reached, a ‘tipping point’, where the impact of tighter financial conditions outweighs the stimulus coming from higher commodity prices.
In the short-term, the risks to policy are skewed to the upside. But over a longer-time frame, our expectations of a slowdown in domestic and global growth should provide the economic environment for a reduction in official interest rates from cyclically high levels.
The Rudd Government remains committed to delivering the large income tax cuts which it promised during last year’s election campaign. Other Budgetary measures should be more contractionary, although are likely to be smaller in magnitude.
- the Treasurer has indicated that the Government will ‘bank’ any additional windfall revenue gains accruing from further increases in commodity prices.
5The Australian and US business cycles are no longer well correlated …
Source: ANZ and Bloomberg
-4
-2
0
2
4
6
8
10
82 84 86 88 90 92 94 96 98 00 02 04 06
US Real GDP AUS Real GDP
YO
Y C
han
ge
(Per
cent)
Correlation coefficients:Mar-80 to Jun-01: +0.64Sep-01 to Jun-07: -0.01
6Australia is much less directly dependent on the US and other OECD export markets than it used to be
Australia’s major export markets
0
5
10
15
20
25
30
88 92 96 00 04 08
% of total (12-mth moving average)
US
Japan
NZ
EU
Sources: Australian Bureau of Statistics.
Advanced economies
0
2
4
6
8
10
12
14
16
18
20
88 92 96 00 04 08
% of total (12-mth moving average)
China
Other North-East Asia(Korea, Taiwan, HK)
India
ASEAN
GCC
Developing economies
7…and Australia is exposed to the global credit crunch as a result of the way it has financed its large current account deficit
Financing Australia’s current account deficit
-40
-20
0
20
40
60
80
100
00 01 02 03 04 05 06 07
Net equity Banks' net borrowing
Other net borrowing Other (incl. reserves)
A$ bn - 4-qtr moving total
Current account deficit
Methods of financing
Maturity structure of net foreign debt
1015
2025
3035
40
00 01 02 03 04 05 06 07
% of total
< 28 days
-20
0
20
40
60
80
100
88 92 96 00 04 08
% of total% of total Private sectorfinancial corporations
Private sector non-financial corporations
Public sector
Net foreign debt, by borrower
Sources: Australian Bureau of Statistics; ANZ.
8
4.0
5.0
6.0
7.0
8.0
9.0
10.0
01 02 03 04 05 06 07 08
% pa
RBA officialcash rate
Standard variablemortgage rate
3-yrfixedrate
Interest rates actually paid by borrowers have risen by a lot more than official interest rates set by the RBA
Mortgage rates
Note: Business lending rates are quarterly averages of rates actually paid, as calculated by the RBA, up to the.December quarter 2007. Sources: RBA; ANZ.
Business loan rates
4.0
5.0
6.0
7.0
8.0
9.0
10.0
01 02 03 04 05 06 07 08
% pa
RBA officialcash rate
Large businessvariable rate
Small businessoverdraft rate
9
Consumer confidence impacted heavily by recent events
Source: WBC-MI
70
80
90
100
110
120
130
140
150
160
97 98 99 00 01 02 03 04 05 06 07 08
Index
Consumer sentiment
Time to buy a household item
Consumer sentiment index
10
Retail sales down for two consecutive months
Source: WBC-MI
-8
-4
0
4
8
12
16
20
01 02 03 04 05 06 07 08
Annual % ch
Total retail sales
HH goodsTotal ex
HH goods
Nominal retail sales
11
-10
-5
0
5
10
15
20
25
85 87 89 91 93 95 97 99 01 03 05 07
annual % ch.
Personal
Housing
Demand for household credit has also softened
Household credit growth
*Excluding refinancingSource: ANZ and RBA
Housing finance approvals*
0
2
4
6
8
10
12
14
99 00 01 02 03 04 05 06 07
$m
Investor
Owner-occupier
12
-6
-4
-2
0
2
4
6
01 02 03 04 05 06 07 08 09
% of disposable income
-4
-2
0
2
4
6
8
10
01 02 03 04 05 06 07 08 09
Real % change from year earlier
Real householddisposableincome
Real householdconsumption expenditure
Household income and spending growth are likely to slow significantly in response to tighter monetary and fiscal policy
Household income and spending
Sources: Australian Bureau of Statistics; ANZ.
Household saving rate
13
Business confidence and conditions trending downwards
-20
-15
-10
-5
0
5
10
15
20
25
97 98 99 00 01 02 03 04 05 06 07 08
Index
Business confidence
Business conditions
Surveyed business conditions and confidence
Source: NAB
14
Business investment expectations likely to be scaled back
Mining
Manufacturing
Other industries
Total excl. farm and finance
Actual and projected capital expenditure
Note: Data are for financial years ended 30 June. Projections for 2007-08 and 2008-09 are based on expected levels of capital expenditure reported to the ABS in its January-February 2008 survey, adjusted for the extent to which expectations in this survey have been realized over the five years to 2006-07. Sources: ABS; ANZ.
0102030405060708090
01 02 03 04 05 06 07 08 09
% change(current prices)
-20
-10
0
10
20
30
01 02 03 04 05 06 07 08 09
% change(current prices)
-505
1015202530
01 02 03 04 05 06 07 08 09
% change(current prices)
-10-505
1015202530
01 02 03 04 05 06 07 08 09
% change(current prices)
15Business credit growth eases: is this due to easing demand or supply?
-5
0
5
10
15
20
25
30
00 01 02 03 04 05 06 07 08
% change
Annual
Annualised quarterly
Sources: Reserve Bank of Australia
Business credit growth
16
-2
-1
0
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08 09
Real % change from year earlier
GDP(output)
Domesticfinal demand
Tighter financial conditions will likely see a significant slowing in domestic demand over the next eighteen months
Spending and output
Sources: Australian Bureau of Statistics; ANZ.
17
-30
-20
-10
0
10
20
30
40
50
98 99 00 01 02 03 04 05 06 07 08
0
1
2
3
4
5Annual % ch
Job vacancies
Employment growth
Annual % ch
Forward looking indicators are already pointing to slower employment growth
Job vacancies and employment
Sources: Australian Bureau of Statistics; ANZ.
18
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
01 02 03 04 05 06 07 08 092
3
4
5
6
7
8% change from year earlier
Unemployment(right scale)
Employment(left scale)
%
... but the deterioration in labour market conditions will be gradual in the presence of skill shortages and labour hoarding
Sources: Australian Bureau of Statistics; ANZ.
Employment and unemploymentBusinesses reporting labour shortages
0
5
10
15
20
25
30
35
88 92 96 00 04 08
% of businesses nominating 'suitable labour' as a constrainton output
19
50
60
70
80
90
100
110
120
130
140
60 65 70 75 80 85 90 95 00 05 10
2005-06 = 100
Note: “terms of trade” is the ratio of average export to average import prices.Sources: Reserve Bank of Australia; ABS; ANZ.
Australia’s “terms of trade”
75
100
125
150
175
200
225
250
275
300
90 92 94 96 98 00 02 04 06 08 10
2001-02 = 100(US$ terms)
Near-term jumpreflects highercoal & iron ore
prices
Rises in coal and iron ore export prices will deliver a further leg upwards in Australia’s commodity price cycle in 2008-09
Australian export commodity prices
20
0
1
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08 09
Real % change from year earlier
Real GDP(output)
Real gross domesticincome (GDI = GDPadj. for changesin terms of trade)
This will boost Australia’s income by another 2% in 2008-09, on top of 11% from terms of trade gains already so far this decade
Australia’s real gross domestic income and output
Sources: Australian Bureau of Statistics; ANZ.
Expected rise in coal & iron ore
prices will add 2% to Australia’s
income in 2008-09
21Tax cuts from 1 July mean that fiscal policy will continue to be recycle income from the corporate sector to households
Australian incometax collections
11.0
11.5
12.0
12.5
13.0
13.5
00 01 02 03 04 05 06 073.0
3.5
4.0
4.5
5.0
5.5
6.0% of GDP % of GDP
Companies(right scale)
Individuals(left scale)
Net saving by sectors ofthe Australian economy
-3
-2
-1
0
1
2
3
4
5
6
00 01 02 03 04 05 06 07
% of GDP (4-qtrmoving average)
Households
Government
Business
Sources: Australian Bureau of Statistics; ANZ.
22It will take some time for slower growth to help alleviate serious capacity constraints
Unemployment rate
Indicators of ‘spare capacity’ in the Australian economy
3456789
101112
88 92 96 00 04 08
% of the labour force
Businesses reporting labour shortages
05
101520253035
88 92 96 00 04 08
% of businesses nominating 'suitable labour' as a constrainton output
Capacity utilization rate
74
76
7880
82
84
86
88 92 96 00 04 08
%
Office vacancy rates
0
5
10
15
20
25
88 92 96 00 04 08
%
Sources: Australian Bureau of Statistics; nabCapital; Property Council of Australia.
23
100
120
140
160
180
200
00 01 02 03 04 05 06 07 08
'000s (annual rate)
Completions
Underlying demand
0
1
2
3
4
00 01 02 03 04 05 06 07 08
%
Average forall capitals
Housing is increasingly in short supply, putting upward pressure on rents
Housing supply and demand
Rental vacancy rates
Capital city house prices
0
5
10
15
20
25
00 01 02 03 04 05 06 07 08
% change from year earlier
Capital city dwelling rents
0
2
4
6
8
10
00 01 02 03 04 05 06 07 08
% change from year earlier
Australian housing market fundamentals
Sources: Australian Bureau of Statistics; Real Estate Institute of Australia; ANZ.
24
-2
0
2
4
6
01 02 03 04 05 06 07 08 09
% change from year earlier Wage cost index
Unit labour costs(costs per unit of output)
2
3
4
5
01 02 03 04 05 06 07 08
% pa
Actual
Trend
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
01 02 03 04 05 06 07 08 09
% change from year earlier'Headline'
'Underlying'(weightedmedian)
High inflation (reflecting demand growth in excess of supply potential as well as global factors) remains a serious concern
Consumer prices
Reserve Banktarget band
Measures of labour costs
Household inflation expectations
Sources: Australian Bureau of Statistics; Reserve Bank of Australia; Westpac-Melbourne Institute; ANZ.
25
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
01 02 03 04 05 06 07 08 09
% pa
RBA officialcash rate
90-daybank bill yield
The 1% increase in official rates since August, combined with the effects of the credit crunch, should now be ‘enough’ for the RBA
Short-term interest rates The RBA tightened monetary policy aggressively in late 2007 and early 2008.Mortgage rates have risen by an additional ~0.4 pc points, and business rates by rather more, over and above this increase in official ratesCombined with the other effects of the credit crunch, a stronger exchange rate and sharply lower share prices this amounts to a substantial tightening of financial conditionsThe RBA is increasingly comfortable that domestic demand is slowing, which will eventually put downward pressure on inflation.Official rates have thus peaked, and will fall from mid-to-late 2009 onwardsMarket pricing for rate cuts in 2008 is premature, with the risks to inflation in the short term still to the upside.
Sources: Thomson Financial; ANZ.
26
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
01 02 03 04 05 06 07 08 09-100
0
100
200
300
400
500
600
700US ¢
A$ vs US$(left scale)
Spread betweenAustralian & US
90-day interest rates(right scale)
2001-02 = 100
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
01 02 03 04 05 06 07 08 0975
100
125
150
175
200
225
250
275
300US ¢
A$ vs US$(left scale)
RBA index ofcommodity pricesin US$(right scale)
2001-02 = 100
Support for the A$ from commodity prices and interest rate differentials will erode next year
A$ and commodity prices A$ and interest rate spreads
Sources: Thomson Financial; Reserve Bank of Australia; ANZ.
27Summary
The US sub-prime mortgage crisis has morphed into a fully-fledged global credit crunch
– the US economy may fall into recession (though it probably isn’t there yet)
– Europe and Japan are also likely to experience significantly weaker economic growth
Developing Asian and other emerging economies are much less reliant on foreign capital than previously and so won’t be significantly affected by the credit crunch, although their exports to the US will slow
– developing country demand will likely keep commodity prices high
– metallurgical and thermal coal prices both likely to be significantly higher in 2008- 09, though this probably represents the peak
Although Australia will continue to benefit from rapid growth in China and other developing countries, its large current account deficit and reliance on banks’ overseas borrowings makes it vulnerable to the credit crunch
Domestic demand growth will slow sharply from its 2007 pace of nearly 6% to less than 3% by early next year
– there is some risk of an earlier and sharper slowdown in domestic spending
This sharp slowdown will allow Australian interest rates to fall from mid-2009 onwards, and the A$ will also fall significantly as rates come down
28
The material in this presentation is general background information about the Bank’s activities current at the date of the presentation. It is information given in summary
form and does not purport to be complete. It is not intended to be relied upon as advice to investors or potential investors and does not take into account the investment
objectives, financial situation or needs of any particular investor. These should be considered, with or without professional advice when deciding if an investment is
appropriate.
For further information visit
www.anz.comor contact
Jill CraigHead of Investor Relations
ph: (613) 9273 4185 fax: (613) 9273 4091 e-mail: Jill.Craig@anz.com
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