Global Economic Overview 9.2008 - IRIS Research Economic Overview 9... · Global Economic Overview ... & 3m th overnight indexed swaps Latest: 19 Sep '08 Previous Aus peak ... December
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1
Alan Oster - Group Chief Economist
Global Economic Overview
- Global Financial Instability & Outlook- Ramifications for Australia
2
Recent developments have cast concerns about what is happening globally and its local implications…
Key drivers include– How bad is the USA and how far is it spreading;– And how should monetary authorities respond – inflation v growth??
Fear also about US and global recession rising. Consumers globally lose confidence and housing markets suffer.
Financial conditions very volatile. More capital being written off and concerns about what happens next re financial fragility. Amazing few weeks;– Fannie Mae and Freddie Mac look more secure– But Lehman Brothers in bankruptcy protection– Merrill Lynch brought by Bank America & AIG by the Fed (effectively)– HBOS brought by TSB Lloyds
3
USA Treasury response – no one allowed to fail if it has systemic implications
Lehman Brothers – judgment is that its not systemic, with doubts around it for a long time & can organise a orderly sell offUS package– Temporary (2 years) ability for Treasury to purchase $US 700b of “mortgage related
assets” from USA (and then extended to non US) firms– Discount window opened (up to $US 250b) on money market mutual funds – to stop
runs on these firms. Fed will take their non liquid assets– Short selling on 799 financial firms and banks prohibited for 10 days (can be extended
to 30 days)– Goldman Sachs & Morgan Stanley now “banks”
Global co-ordination on short selling (UK, France, Germany, Switzerland & Canada. In Australia:
– Short selling (all kinds) of any stock prohibited for 30 days
4
Clearly this has seen very volatile markets – equity bonds and currency
Equity and currency markets almost back to where they wereBut govt bond yields lower and cost of funds to banks higher
Obviously operating in heightened risk environment.
- 1 0
1 0
3 0
5 0
7 0
9 0
1 1 0
1 3 0
1 5 0
1 7 0
M a y - 0 7 J u l - 0 7 S e p - 0 7 N o v - 0 7 J a n - 0 8 M a r - 0 8 M a y - 0 8 J u l - 0 8 S e p - 0 8
P r i c e o f L i q u id i t y f o r B a n k s
S o u r c e s : B l o o m b e r g , n a b C a p i t a l R e s e a r c h
A u s t r a l i a 7 7
U S 1 2 9b p s s p r e a d o f 3 m t h b a n k b i l l s & 3 m t h o v e r n ig h t i n d e x e d s w a p s
L a t e s t : 1 9 S e p '0 8
P r e v io u s A u s p e a k ( B e a r S t e a r n s b u s t )
5
Global equity markets fell around 20 % early in 2008 and another leg down (around 10% through June / July). Last week or so volatile. And some (China Hong Kong India) down further but others ….
C h a n g e in G lo b a l E q u ity M a rk e ts S in c e J u n e 2 0 0 7
-6 0
-4 0
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4/06
/200
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18/0
6/20
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/200
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/200
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/200
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/200
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17/1
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3/20
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24/0
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7/04
/200
8
21/0
4/20
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5/05
/200
8
19/0
5/20
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2/06
/200
8
16/0
6/20
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30/0
6/20
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14/0
7/20
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28/0
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11/0
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25/0
8/20
08
8/09
/200
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C H IN AJ ap an a llIn d iaU S S & PU KA u s tH o ng K o ng
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Recent credit crisis dropped commodities by another 10% bringing total falls from the peak to around 30%. Helping ease concerns about inflation
C R B R eu ters In d exes o f C o m m o d ity P rices
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50
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350
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/200
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/200
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1/12
/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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/200
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1/12
/200
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1/02
/200
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1/04
/200
8
1/06
/200
8
1/08
/200
8
C R BIN D U S T R IA LSG R A IN SLIV E S T O C K & M E A TE N E R G YP R E C IO U S M E T A LSS O FT A G R
7
Recent big picture on the economyMore signs of a co-ordinated slowdown globally China still the exception
9 0
9 2
9 4
9 6
9 8
1 0 0
1 0 2
1 0 4
1 0 6
Jul-2
008
Jun-
2008
May
-200
8
Apr
-200
8
Mar
-200
8
Feb-
2008
Jan-
2008
Dec
-200
7
Feb-
2007
Jan-
2007
Apr
-200
7
Mar
-200
7
Jul-2
007
Jun-
2007
May
-200
7
Aug
-200
7
Sep
-200
7
Nov
-200
7
Oct
-200
7
A u s tra liaU n ite d K in g d o mU n ite d S ta te sE u ro a re a C h in aJa p a nN e w Z e a la n d
O E C D L E A D IN G IN D IC A T O R S
T R E N D L IN E
8
Recent big pictureIn the USA activity held up but only via net exports. GNE near zero.Weak USD taking others growth – especially Europe and Japan
-2 .00%
-1 .00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
Mar
-85
Mar
-86
Mar
-87
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
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Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
-1 .50%
-1 .00%
-0 .50%
0.00%
0.50%
1.00%
1.50%
2.00%
C O N S U M P T IO NG D PG N EN E T E X P O R T S C O N T R IB U T IO N R H S
D R IV E R S O F U S AC T IV ITY - C onsum ptio n , G N E and N E T E xports 12 M ths to %
9
A few general observations on the global outlook
For 2008 really a story of switch in growth – USA v the restBut going forward key drivers of global outlook in 2009 are:– The lagged impact of further weakness in equity markets– Further weakness in housing markets globally (especially USA, Ireland, NZ,
UK and parts of Continental Europe)– Credit rationing in USA and Europe– The lagged impact of higher oil prices– Lower consumer and business confidence
• Especially caution spurred on by event risk
Indeed the chances of a very hard landing probably risen – 30% chance
10
Globally: GDP to slow to 2.5% in 2009 from around 3.2% in 2008.Some major economies moving into recession – most of the G-10 stalledNo fundamental recovery till late 2009. China slowing but….
Real output growth % change yoyGlobal GDP Forecasts December year annual average % change
2006 2007 2008(f) 2009(f) 2010(f)
US 2.8 2.0 1.6 0.7 2.5 Japan 2.4 2.0 0.4 0.4 2.2 UK 2.9 3.1 1.0 0.6 2.2 eurozone 2.9 2.6 1.3 0.7 2.0 Canada 3.1 2.7 0.8 1.1 1.9 Australia 2.5 4.2 2.5 2.2 2.6 New Zealand 1.6 3.1 0.4 1.7 3.8 China 10.7 11.4 9.5 8.3 7.6 India 9.8 9.3 7.7 6.5 6.8 World 4.6 4.3 3.2 2.5 2.8 Emerging E Asia 5.3 5.2 4.8 4.2 4.6 Latin America 5.1 5.3 4.7 4.0 4.4
World GDP Growth
0
1
2
3
4
5
6
7
8
9
10
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10%
ann
ual c
hang
e to
qua
rter
sho
wn
Forecast
Global growth
Developed economies
Emerging economies
11
Look to the USA
Key concerns are– Housing overbuild– House price wealth effects– Negative equity market wealth effects– Financial flow ons from Sub prime (notably increased funding
and capital costs, credit availability and capital losses – Oil (and other commodity) prices– And the will the credit crisis package work
12
Our forecasts show a “economy stalled” - with growth no better than 2001 Key issue is will it become a “major” recession. Clearly worst yet to come ( Oil and wealth effects from housing & equities)
-2 .0 0 %
-1 .0 0 %
0 .0 0 %
1 .0 0 %
2 .0 0 %
3 .0 0 %
4 .0 0 %
5 .0 0 %
6 .0 0 %
7 .0 0 %
Mar
-85
Mar
-86
Mar
-87
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
- 1 .5 0 %
-1 .0 0 %
-0 .5 0 %
0 .0 0 %
0 .5 0 %
1 .0 0 %
1 .5 0 %
2 .0 0 %
C O N S U M P T IO NG D PG N EN E T E X P O R T S C O N T R IB U T IO N R H S
D R IV E R S O F U S A C T IV IT Y - C o n s u m p tio n , G N E a n d N E T E x p o rts 1 2 M th s to %
13
Another perspective on the US is by using a Mini model of US economy. Model wants flatter for longer (oil prices and credit crunch).Deep recession still possible but still not the most likely outcome
Model based on- real rates- house prices- equity markets- oil prices- currency - credit crunch
What does the model need to get recession in 2009
- HP down 20% from here- Equities down 20% - Oil $140USD
How likely – possible but still not the most likely
US Quarterly GDP v Model
-1
-0.5
0
0.5
1
1.5
2
Jun-
86D
ec-8
6Ju
n-8 7
Dec
-87
Jun-
8 8D
ec-8
8Ju
n-8 9
Dec
-89
Jun-
9 0D
ec-9
0Ju
n-9 1
Dec
-91
Jun-
9 2D
ec-9
2Ju
n-9 3
Dec
-93
Jun-
9 4D
ec-9
4J u
n-95
Dec
-95
Jun-
96D
ec-9
6Ju
n-97
Dec
-97
Jun-
98D
ec-9
8Ju
n-99
Dec
-99
Jun-
00D
ec-0
0Ju
n-01
Dec
-01
Jun -
02D
ec-0
2Ju
n -03
Dec
-03
Jun -
04D
ec-0
4Ju
n -05
Dec
-05
Jun -
06D
ec-0
6Ju
n -07
Dec
-07
Jun-
0 8D
ec-0
8Ju
n-0 9
Dec
-09
Jun-
1 0D
ec-1
0
ACTUAL
Interest rate/ Los Model
14
Banks have acted to tighten lending criteria and hence supply ofbusiness lending – both in the US and Europe…
Bank Standards for Business Lending in USA / Europe
In Australia not rationing – other than at top end, as capital markets remain either closed or very expensive.
Net Percentage of Banks Tightening Lending Standards to Medium and Large Non-Financial Corporates
-40
-20
0
20
40
60
80
1991 1993 1995 1997 1999 2001 2003 2005 2007
Net
Per
cent
age
United States Euro area
Sources: US Federal Reserve and European Central Bank
15
On second round impact of sub prime – global higher funding costs- Was some local improvement given rate expectations but all changed in latest crisis- Now back to Bear Steins peaks
Near term liquidity costs (30 -90 days) very high and its global. Raising risk of non action from the banks even if RBA moves (or RBA will need to be more aggressive)
16
On second round impact of sub prime- Medium term funding costs for all banks (local and global)
Not a lot of change in Australia for medium term funding
And globally somewhat worse.
M e d iu m T e r m F u n d in g C o s ts
0
1 0
2 0
3 0
4 0
5 0
6 0
7 0
8 0
9 0
1 0 0
O c t 0 5 A p r 0 6 O c t 0 6 A p r 0 7 O c t 0 7 A p r 0 8 O c t 0 8
D o m e s t ic B a n k s
D o m e s t ic b a n k s p r e a d to s w a p -
2 - 3 y e a r
17
Chinese economic growth still very strong -10.1% in year to June. Leading Indicators still different to the rest of the OECD but slowing.And are signs manufacturing is also slowing – production down to 12.8%
Chinese lead indicators still strongBut are slowing
But may be first signs of slowing in industrial production in recent months –but Games disruption hard to untangle
Industrial Production - Total / Heavy/ LightAnnual Growth %
0
5
10
15
20
25
30
Aug
-98
Nov
-98
Feb-
99M
ay-9
9A
ug-9
9N
ov-9
9Fe
b-00
May
-00
Aug
-00
Nov
-00
Feb-
01M
ay-0
1A
ug-0
1N
ov-0
1Fe
b-02
May
-02
Aug
-02
Nov
-02
Feb-
03M
ay-0
3A
ug-0
3N
ov-0
3Fe
b-04
May
-04
Aug
-04
Nov
-04
Feb-
05M
ay-0
5A
ug-0
5N
ov-0
5Fe
b-06
May
-06
Aug
-06
Nov
-06
Feb-
07M
ay-0
7A
ug-0
7N
ov-0
7Fe
b-08
May
-08
Aug
-08
0
5
10
15
20
25
30TOTALHEAVY MANUFACTURINGLIGHT MANUFACTURING
18
More obvious is the slowing in exports – especially in local currency terms. Equity market falls have been among the largest (-60% y/y).Past significant policy tightening have started to eased somewhat.
Policy Measures- Tightening• Borrowing rate (1 year capital) progressively raised to 7.47% - Implying real rate of 6%• Lifted the bank reserve ratio to a record
17 ½ %•Oil subsidy lowered from 20 June –increasing prices by around 20%• EASING• But in late August credit limits to SMEsincreased• On 25 September
- Borrowing rate lowered by 27points to 7.2%•Reserves ratio lowered by 1%.
Export growth - % change year on year
0
5
10
15
20
25
30
35
40
45
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Export deliveries(Yuan)
Export receipts (US$)
19
Part of that easing reflected slower growth but also lower inflation.But China is no longer exporting deflation – rather adding to global pressures on the supply side (in addition to demand).
CPI inflation and contribution to growth
-3
-1
1
3
5
7
9
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
Non-food contribution
CPI
Contribution from food
Chinese trade price inflation % yoy
-6
-4
-2
0
2
4
6
Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07
US import pricesfrom China
Hong Kong re-export prices
Price of HongKong importsfrom China
20
But need to put all this in perspectiveBusiness investment is still very strong – above 20% in real terms 20%While real retail sales accelerating to 16½% .
Retail trade activity % change year on year
-5
0
5
10
15
20
25
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
RETAIL INFLATION RETAIL VALUES RETAIL VOLUMES
Investment indicators % change year on year
0
5
10
15
20
25
Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-0810
15
20
25
30
35
40
45
50
Fixed investment spending(RHS axis)
Value of fixed assets(LHS axis)
21
Chinese growth to slow moderately But we are comfortable with China growth slowing to around 8¼% in 2009 and around 7½ 2010 (from 9½% in 2008)
Tighter policy and slower global growth has slowed the economy in 2008 and more so in 2009
– Real rates are still high– As are reserve requirements
As will oil prices and equity markets– Oil up 20% as subsidy reduced– Equity markets down 60% (from mid 2007)
And no doubt timing of Olympics are distorting figures. But authorities are taking out some insurance via recent easing
And lots of policy flexibility if more is needed
Risks are probably for 2009/10 – especially if US stays flatter for longer.
22
On commodities we expect further falls in rural commodities.Oil basically we assume unchanged at around $115 per barrelBut see further moderate increases in iron ore / coal / steel.
Rural Commodities Non Rural Commodities
0
100
200
300
400
500
600
SQ 1996 SQ 1998 SQ 2000 SQ 2002 SQ 2004 SQ 2006 SQ 2008 SQ 2010
Non-rural Base Metals Energy Carbon SteelUS$ Index
Source: ABARE, Datastream, NAB Group Economics0
50
100
150
200
250
SQ 1996
DQ 1997
MQ 1999
JQ 20
00SQ 20
01DQ 20
02MQ 20
04JQ
2005
SQ 2006
DQ 2007
MQ 2009
Dairy Beef WoolWheat Cotton Sugar
US$ Index
23
AUD / USD Model: Model wants around 90c (+/- 5c). Hence current lows probably an overshoot. But unlikely to recovery until global outlook more certain. We see AUD moving down to around 77c by early 2009 before recovering to mid 80c
Model driven by:Commodities;
USD / EURO – as a measure of USD weakness
Long run rates;
Relative unemployment;
Stk break for late1990s (around 13c).
Relative Equity Mkts
Model AUD and Forecasts v Actuals
0.4
0.5
0.6
0.7
0.8
0.9
1
Feb-
85
Feb-
86
Feb-
87
Feb-
88
Feb-
89
Feb-
90
Feb-
91
Feb-
92
Feb-
93
Feb-
94
Feb-
95
Feb-
96
Feb-
97
Feb-
98
Feb-
99
Feb-
00
Feb-
01
Feb-
02
Feb-
03
Feb-
04
Feb-
05
Feb-
06
Feb-
07
Feb-
08
Feb-
09
Feb-
10
ACTUALPlus 1 std errorLess 1 std error
24
AUSTRALIA
25
Clearly global developments and rates have hurt confidence a good deal. Actual business outcomes slowing very sharply from May. Slowing faster than any time since early 1990s and already at 2001 lows
I n d e x
B u s i n e s s C o n f i d e n c e & C o n d i t i o n s
Sep-
90M
ar-9
1Se
p-91
Mar
-92
Sep-
92M
ar-9
3Se
p-93
Mar
-94
Sep-
94M
ar-9
5Se
p-95
Mar
-96
Sep-
96M
ar-9
7Se
p-97
Mar
-98
Sep-
98M
ar-9
9Se
p-99
Mar
-00
Sep-
00M
ar-0
1Se
p-01
Mar
-02
Sep-
02M
ar-0
3Se
p-03
Mar
-04
Sep-
04M
ar-0
5Se
p-05
Mar
-06
Sep-
06M
ar-0
7Se
p-07
Mar
-08
Sep
07N
ov 0
7Ja
n 08
Mar
08
May
08
Jul 0
8
-40-35-30-25-20-15-10
-505
10152025303540
-40-35-30-25-20-15-10-50510152025303540
C o n d i t i o n s
S e a s o n a l l y a d j u s t e d b y N a bI n d e x
C o n f i d e n c e
Q u a r t e r l y : S e p 9 0 t o J u n 2 0 0 8 M o n t h l y :A u g 0 7 t o A u g 0 8
• At least in August some stabilisation – but not broadly based
26
By sector all sectors fell except mining – which has started to recover after surprisingly weak numbers. Other sectors all still falling – especially wholesaling, transport, and finance business & property services.
B u s i n e s s C o n d i t i o n s b y I n d u s t r y
Nov
-05
Feb-
06
May
-06
Aug
-06
Nov
-06
Feb-
07
May
-07
Aug
-07
Nov
07
Feb
08
May
08
Aug
08
-10
0
10
20
30
40
50
Trans & UtilMining
Fin Bus & PropRec&Pers
I n d e x I n d e xM o n t h l y , S e a s o n a l l y A d j u s t e d 3 m o n t h M o v i n g A v e r a g e *
Nov
-05
Feb-
06
May
-06
Aug
-06
Nov
-06
Feb-
07
May
-07
Aug
-07
Nov
07
Feb
08
May
08
Aug
08
-10
0
10
20
30
40
50
MfgConstruction
RetailWholesale
27
What the Survey means is that since the accounts demand has slowed much more. To around 1¼ % annualised (or around 0.3% in the quarter). And non farm GDP is now around 2%.
-6
-4
-2
0
2
4
6
8
10
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
-6
-4
-2
0
2
4
6
8
10DOMESTIC DEMANDNAB
Domestic Demand 6mth Annualised v NAB Conditions (Change & Level)
-4
-2
0
2
4
6
8
10
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
-4
-2
0
2
4
6
8
10
NF-GDPNAB Business Conditions
Non Farm GDP 6 Mthly Annualised v NAB Conditions (Level & Change)
28
We also know that business does not see any sign of recovery in the December quarter. And that forward orders are still falling.
Index
Business Conditions Quarterly & Monthly, Seasonally Adjusted
Index
Mar
-00
Sep-
00
Mar
-01
Sep-
01
Mar
-02
Sep-
02
Mar
-03
Sep-
03
Mar
-04
Sep-
04
Mar
-05
Sep-
05
Mar
-06
Sep-
06
Mar
-07
Sep-
07
Mar
08
Sep-
08
-15
-10
-5
0
5
10
15
20
25
-10
-5
0
5
10
15
20
25
30
35
Quarterly Expectations RHS
Monthly Actuals LHS
Monthly Trend LHS
Index
New Forward Orders
Aug
-99
Aug
-00
Aug
-01
Aug
-02
Aug
-03
Aug
-04
Aug
-05
Aug
-06
Aug
-07
Aug
08
-15
-10
-5
0
5
10
15
-15
-10
-5
0
5
10
15Monthly - SA & TrendIndex
* Seasonally adjusted by NAB
Trend
Seasonally adjusted*
Average
29
And that reflects on confidence and especially outcomes by region. NSW a real concern. That is after falling in June quarter, Sept quarter looks worse. SA confidence looks to have deteriorated sharply recently.
Business Confidence by State
-20
-15
-10
-5
0
5
10
15
20
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08
Inde
x, s
a 3m
ma
WAQueenslandAustraliaSAVictoriaNSW
Business Conditions
-10
-5
0
5
10
15
20
25
30
35
40
Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08
Inde
x, s
a 3m
ma
WA Victoria AustraliaSA Queensland NSW
30
Consumption OutlookKey drivers of model are incomes (employment /wages) wealth effects from house prices
(indirectly interest rates) and equity prices. RBA past rate rises and lower equities will hurt . Model points to downside risks in the next 12 months – despite rate adjustments.
Assume flat equity markets in 2008 and 6% in 2009
House prices overall slow to around zero%
Rate cuts another 1 % by mid 2009
Real Consumption - Annual Growth
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
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
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%Model lhsActual plus f
Forecasts
Model
31
House Prices very important to consumption. Australian house prices models work well (incomes, population & rates). We expect growth rates going forward will slow back to around 0% but very different by state.
NATIONAL HOUSE PRICES: MODEL AND FORECASTS (to Dec'10)
-20%
-10%
0%
10%
20%
30%
40%
50%
Mar
-83
Mar
-84
Mar
-85
Mar
-86
Mar
-87
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
NO
MIN
AL
YOY
%
ACTUAL
MODEL
MODEL +1SE
MODEL-1SE
(F)
32
And its worth noting that relative to population Australia is inundersupply in housing starts (NSW even more so). But weaker economy means housing construction will struggle until 2010.
Dwelling Investment Growth Cycle
-35
-25
-15
-5
5
15
25
35
Mar-88
Mar-89
Mar-90
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
-35
-25
-15
-5
5
15
25
35
Quarterly 12 MTH TO
Private Dwelling Approvals To Population - Aust v NSW
0.0008
0.0013
0.0018
0.0023
0.0028
0.0033
Sep-
84
Sep-
85
Sep-
86
Sep-
87
Sep-
88
Sep-
89
Sep-
90
Sep-
91
Sep-
92
Sep-
93
Sep-
94
Sep-
95
Sep-
96
Sep-
97
Sep-
98
Sep-
99
Sep-
00
Sep-
01
Sep-
02
Sep-
03
Sep-
04
Sep-
05
Sep-
06
Sep-
07
0.0005
0.001
0.0015
0.002
0.0025
0.003
NSW
33
However need to keep a balanced viewAnd not all things have downside potential
In particular Australia better placed than most to weather storms:– Australian financial system still strong– Tax cuts are still coming– Higher than expected commodity price rises (around $40b)– Farm sector bounce– And there is lots of policy flexibility re rates and government
spending
34
Forecasts see growth slowing from 4% to 2 ½% in 2008 and even slower 2¼% in 2009. Even lower for non farm GDPLonger term recovery in 2010 as global growth picks up & rate cuts work
R ea l O u tp u t & D o m estic D em an d - 1 2 M th s to %
-2 %
-1 %
0 %
1 %
2 %
3 %
4 %
5 %
6 %
7 %
8 %
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
D o m estic D em an d N o n -fa rm G D P G D P
S ou rce s : A B S & N A B E co n om ics
35
And ex Farm and Mining the GDP forecasts are for growth in 2009 of only around 1%.
A n n u a l C h a n g e in G D P v E x F a rm & R e s o u rc e S e c to rs
-2 %
-1 %
0 %
1 %
2 %
3 %
4 %
5 %
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
a v e ra g e a n n u a l % g e c h a n g e
G D P -R H S
G D P e x R e s - R H S
36
And that means employment growth will slow dramatically (around ¾ % over the next year and unemployment will move up in 2009 noticeably– to around 6 % by late 2009.
A u stra lian L ab o u r M arke t
-0 .5 %
0 .0 %
0 .5 %
1 .0 %
1 .5 %
2 .0 %
2 .5 %
3 .0 %
3 .5 %
4 .0 %
4 .5 %
Mar
-96
Dec
-96
Sep
-97
Jun-
98
Mar
-99
Dec
-99
Sep
-00
Jun-
01
Mar
-02
Dec
-02
Sep
-03
Jun-
04
Mar
-05
Dec
-05
Sep
-06
Jun-
07
Mar
-08
Dec
-08
Sep
-09
Jun-
10
% c
hang
e - 1
2 m
onth
s to
3 .5
4 .0
4 .5
5 .0
5 .5
6 .0
6 .5
7 .0
7 .5
8 .0
8 .5
% -
rate
E M P L O Y M E N T - L H S U N E M P L O Y M E N T R A T E - R H S
37
Wages reasonably well behaved. A key near term driver now is increasing purchase costs. In turn driven by oil, shortages in mining and food. That is also causing a profit squeeze
Annual -%
C osts & P ricesA
ug-9
9
Feb-
00
Aug
-00
Feb-
01
Aug
-01
Feb-
02
Aug
-02
Feb-
03
Aug
-03
Feb-
04
Aug
-04
Feb-
05
Aug
-05
Feb-
06
Aug
-06
Feb-
07
Aug
-07
Feb
08
Aug
08
0
1
2
3
4
5
6
0
1
2
3
4
5
6
La bour costs
R eta i l pr i c es
Annual -%
Purchase costs
12 M onths ended, original data
E conom y-w ide p rices
38
Near term outlook for inflation still very highCore CPI higher than expected – and not much improvement till 2009.
Inflation momentum higher than we all expected – and clearly going higher given oil / food prices.We see Financial sector treatment as biasing the CPI up (around ¾ %)But we see core inflation rising to 4 ½% & remaining around 4 % in late 2008And not back into range till late 2009.RBA More pessimistic
Inflation (CPI) - Nab's Headline & Core v RBA Forecast & Target Through the year percentage change
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Core CPICore CPI RBAHeadline CPI
RBA Target
39
On short term interest rates dynamics…RBA more worried about demand risks in 2009 than inflation
Now that the RBA has started we see the timing and extent of each adjustment down as being heavily dependent on the data flow. However fundamental we still see the RBA as reaching the same spot by mid 2009 as previously expected. That is:– We still see the RBA as cutting at least once more before end 2008 – with at
this stage the most likely timing still being October; and
– By mid 2009 the RBA will have the official cash rate back to at least 6 per cent (i.e. 100 points of easing over the next year);
These adjustments would bring policy settings back to a more neutral, but still a firm policy stance
40
On short term interest rates dynamics…RBA more worried about demand risks in 2009 than inflation
Whether more is needed or not will depend on a number of considerations:
– Banks funding costs reflect both RBA actions and the state of financial markets. To the extent that banks do not fully pass on RBA cuts due to deteriorating credit markets, the RBA would be more aggressive; and
– The extent of the current slowing in demand and inflation. For example, a Taylor rule perspective – based on NAB’s demand and inflation forecasts -points to the possible need to lower rates more aggressively than we have currently forecast.
41
A Taylor’s Rule Perspective. More aggressive cuts could be in order
Taylor’s rule - a formula that implies a cash rate given inflation and growth outcomes vis a vis the central banks views of the relevant target.
Our forecasts for GDP and inflation point to the scope for even more cuts than we are forecasting
Australian Cash Rate
0
2
4
6
8
10
12
14
16
18
20
Sep-
85Se
p-86
Sep-
87Se
p-88
Sep-
89Se
p-90
Sep-
91Se
p-92
Sep-
93Se
p-94
Sep-
95Se
p-96
Sep-
97Se
p-98
Sep-
99Se
p-00
Sep-
01Se
p-02
Sep-
03Se
p-04
Sep-
05Se
p-06
Sep-
07Se
p-08
Sep-
09Se
p-10
%
0
2
4
6
8
10
12
14
16
18
20
Cash - actual + forecasts
Cash - Taylor's rule gdp
Cash - Taylor's rule dd
42
Financial markets: Summary
Economy to slow significantlyRBA to cut– 25 before Xmas at least– Another 75 pts before mid 2009 (cash at 6%)– Risks to growth and rates down
Long bonds broadly unchanged at around 6% – following global developments– Again some limited downside risks if cash rates fall below our expectations
Currency has over corrected but no recovery soon– Risks that AUD/USD goes to 77c by early next year– Recovery not this risks of global hard landing seen as overblown– AUD into mid 80c by late 2009
43
WHAT IF….
44
Another way to check our forecasts is to look at reduced form models of Australia
Our Australian reduced form model drives off: farm GDP – as a drought proxy - yield curves, commodity prices in AUD, the ASX, house prices and USA GDP – with each variable having its own estimated lag structure).
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Quarterly GDP & Forecasts MODEL
Quarterly GDP and Reduced Form Model
45
But what happens if get US recession not dissimilar to 1980s. That is US growth falls by around 2% in 2009 (rather than grows around ¾ %). We get something worse than 2000 but not quite as bad as 1990s.
Clearly hurts a lot and the message really is - “how bad the US”
Model suggestsHit really is 2009/10With big spill over to
equities, house & commodity prices
Takes all of the 2% off growth in 2009
RBA in rate cutting mode – down to 4% or lower
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Mar
-88
Mar
-89
Mar
-90
Mar
-91
Mar
-92
Mar
-93
Mar
-94
Mar
-95
Mar
-96
Mar
-97
Mar
-98
Mar
-99
Mar
-00
Mar
-01
Mar
-02
Mar
-03
Mar
-04
Mar
-05
Mar
-06
Mar
-07
Mar
-08
Mar
-09
Mar
-10
Quarterly GDP & Forecasts
MODEL
Model with US Recession
Quarterly GDP and Reduced Form Model
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