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

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


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


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


-505

1015202530

01 02 03 04 05 06 07 08 09


-10-505

1015202530

01 02 03 04 05 06 07 08 09


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


GDP(output)

Domesticfinal demand

Tighter financial conditions will likely see a significant slowing in domestic demand over the next eighteen months

Spending and output


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


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


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 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


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


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


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: [email protected]

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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