Economic Issues for the Cotton · PDF file1 economics@ Economic Issues for the Cotton Industry Saul Eslake Chief Economist ANZ Bank Royal Pines Resort Gold Coast 4 September 2003 Presentation

economics@1

Economic Issues for the Cotton Economic Issues for the Cotton IndustryIndustry

Saul EslakeSaul EslakeChief EconomistChief EconomistANZ BankANZ Bank

Royal Pines ResortRoyal Pines ResortGold CoastGold Coast

4 September 20034 September 2003

Presentation to thePresentation to the

Australian Cotton Shippers AssociationAustralian Cotton Shippers Association2003 Conference2003 Conference

Internet: http://www.anz.com/go/economicsE-mail: [email protected] [email protected]

economics@2

Australian cotton producers are vitally interested Australian cotton producers are vitally interested in export marketsin export markets

Australian cotton production and exports

Sources: Cotton Australia; ABARE; DFAT.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

92 93 94 95 96 97 98 99 00 01 02 03 04

Million bales

Production

Exports(f)

Indonesia

Thailand

Korea

Japan

Sth Asia

Thailand

EU

OtherChina

Australian cotton export markets, 2002

economics@3

The longThe long--awaited upturn in the global economy is awaited upturn in the global economy is now getting under waynow getting under way

l As ‘headwinds’ fade, massive policy stimulus is starting to work

l Most US economic data are now pointing to a strong rebound

– the labour market is the only major exception

l Japan’s economy has been tracking stronger than expected

l Most other Asian economies are reporting weak June quarter numbers (largely due to SARS)

– (limited) data since then generally points to a rebound in activity

l June quarter numbers for Europe have also been very weak

– but there are clear signs that ‘animal spirits’ are improving

Evidencel Deflation risks are receding

– in some economies (particularly China) inflation may surprise on the upside

l The next movements in global interest rates will be upwards

– albeit not until well into 2004– Europe may see one final rate cut

l Market expectations may have run somewhat ahead of reality

– so that volatility in financial markets will continue

l The fall in the US$ has been halted (for the moment)

– but will resume as global recovery becomes more synchronized

l ‘Geo-political risks’ could easily flare up again

Implications

economics@4

Policy stimulus is ‘kicking in’ as growthPolicy stimulus is ‘kicking in’ as growth--retarding retarding ‘headwinds’ fade away‘headwinds’ fade away

OECD monetary policy

Note: ‘Fiscal policy’ measure is the cyclically-adjusted primary budget balance (ie excluding net interestpayments). Sources: Datastream; OECD; Economics@ANZ.

OECD fiscal policy

-1.5-1.0-0.50.00.51.01.52.0

90 92 94 96 98 00 02 04

% of GDP

-1

0

1

2

3

4

90 92 94 96 98 00 02 04

% per annumG7 real3-mthinterestrate

l Economic policy settings have for some time been much more stimulative than during the early 1990s global downturn

l Over the past 18 months this stimulus has been blunted by a series of ‘headwinds’

– including geo-political tensions, falling share prices, high oil prices and SARS

– additionally it has taken some time to purge excesses and imbalances built up during the 1990s boom

l Although they haven’t gone away completely (and could flare up again), these headwinds have now eased enough to allow policy stimulus to come through

economics@5

Leading indicators for the global economy have Leading indicators for the global economy have turned around over the past twoturned around over the past two--three months three months

Leading indicators of global industrial production

-6

-4

-2

0

2

4

6

8

98 99 00 01 02 03 04

% change from year earlier

Industrial production

Real

OECD leading indicator,pushed forward 6 months

(last data:June)

Note: Global IP series constructed by Economics@ANZ from data for 42 countries. Global PMI is aweighted average of PMIs for the US, Euro area, UK, Canada, Australia and (from January 1999), HongKong and Singapore. Sources: Datastream, OECD, ISM, CIPS, Reuters, NTC, AiGroup, Economics@ANZ.

-6

-4

-2

0

2

4

6

8

98 99 00 01 02 03 0440

42

44

46

48

50

52

54

56

58

60% change from year earlier

Global purchasingmanagers' index (PMI), 3 mths fwd(right scale)Real

Industrial production(left scale)

%

(lastdata:Aug)

economics@6

Financial and commodity markets have also Financial and commodity markets have also detected the shift in the global economic cycledetected the shift in the global economic cycle

Share markets

70

80

90

100

110

02 03

31 Dec 2001 = 100Rest of world

US

10-year bond yields

2.53.03.54.04.55.05.5

02 03

% pa

Other G7

US

Currency trade weighted indices

80

90

100

110

120

02 03

31 Dec 2001 = 100

US$

Euro

Sources: Reuters; Datastream; Metallgesellschaft.

Base metal prices

95

100

105

110

115

120

02 03

31 Dec 2001 = 100

economics@7

Outlook for world economic growthOutlook for world economic growth% change in real GDP

5½5¼4.53.84.6Developing economies*

3.7

2.9

5.4

3.3

8.3

3.1

1.4

2.7

4.0

1996-2000

3½1¾-0.50.5Latin America

3¼

6¼

3½

8

1¾

1¾

¾

2½

2003 (f)

4¾4.62.0Other East Asia

64.45.0South Asia

42.82.1World*

7½8.07.3China

2½1.60.9Industrial economies*

1¾0.20.4Japan

21.11.6Western Europe

3½2.40.3United States

2004 (f)20022001

* Includes countries not shown separately. Sources: National statistical agencies; IMF; Economics@ANZ.

economics@8

Policy stimulus has allowed US households to Policy stimulus has allowed US households to start rebuild savings while continuing to spendstart rebuild savings while continuing to spend

Personal saving rate

Note: ‘Trend’ estimates calculated using ABS formulae. Sources: Commerce Department; Economics@ANZ.

Personal income

0

2

4

6

8

97 98 99 00 01 02 03

Real % ch. from year earlier(3-mth moving average)

After-tax

Pre-tax

0123456

97 98 99 00 01 02 03

% of disposable incomeTrend

Actual

Personal consumption spending

0123456

97 98 99 00 01 02 03

Real % ch. from year earlier(3-mth moving average)

Housing starts

1.4

1.5

1.6

1.7

1.8

1.9

97 98 99 00 01 02 03

Million units

Actual

Trend

economics@9

Meanwhile US corporate profitability has been Meanwhile US corporate profitability has been largely restored and investment is now recoveringlargely restored and investment is now recovering

-20

-10

0

10

20

97 98 99 00 01 02 03

% change from year earlier

After-tax profits

-4-202468

97 98 99 00 01 02 03

% change from year earlier

Unit labour costs

Productivity

Productivity and labour costs

Sources: US Bureau of Economic Analysis; Commerce Department; Bureau of Labor Statistics.

-20

-10

0

10

20

97 98 99 00 01 02 03

% change from year earlier Business investment(real terms)

Capital goods orders(excl. defence & aircraft)

Business investment

11

12

13

14

15

16

97 98 99 00 01 02 03

% of domestic non-financial gross product

Lowestsince1952

Net cash flow margin

Good resultgiven weak

growth

economics@10

While a nearWhile a near--term US recovery seems assured, term US recovery seems assured, it’s not yet clear how sustainable it will be it’s not yet clear how sustainable it will be

‘Financial balance’ = saving minus investment.Sources: Commerce Department; Economics@ANZ.

-4

-2

0

2

4

6

79 85 91 97 03

% of GDP (trend)

Business sector

Household sector

US financial balances

-8

-6

-4

-2

0

2

79 85 91 97 03

Government sector

Rest of the world

l Almost all of the ‘adjustment’ to the end of the 1990s bubble has taken place in the business sector

l Household finances remain very ‘unbalanced’ relative to historical norms, while another major imbalance as opened up (again) in the government sector

l These imbalances have helped keep the US economy afloat over the past three years – but they cannot be sustained indefinitely

l US households are vulnerable to any sharp rise in interest rates or persistent weakness in jobs growth

l The US as a whole is vulnerable to any major shifts in global capital flows

economics@11

Partial restructuring in some areas of Japan’s Partial restructuring in some areas of Japan’s economy is promoting a recovery in investmenteconomy is promoting a recovery in investment

Labour productivity

Sources: Economic & Social Research Institute; Bank of Japan.

Machinery orders

-30-20-10

010203040

97 98 99 00 01 02 03

% change from year earlier(3-mth moving avge) (excl. ships

& utilities)

-60

-40

-20

0

20

97 98 99 00 01 02 03

Net balance, optimists minus pessimists (%)

Small companies

Large companies

Business confidence

Operating profits

-40

-20

0

20

40

97 98 99 00 01 02 03

% change from year earlier

-15

-10

-5

0

5

10

97 98 99 00 01 02 03

% change from year earlier(6-mth moving avge)

(Manufacturing sector)

economics@12

Employment conditions in Japan have stopped Employment conditions in Japan have stopped deteriorating, giving consumers more confidence deteriorating, giving consumers more confidence

Employment

Average monthly earnings

Consumer confidence

30

35

40

45

50

97 98 99 00 01 02 03

%

All Japan

Tokyo

-2

-1

0

1

2

97 98 99 00 01 02 03

% change from year earlier(3-mth moving avge)

-3-2-1012345

97 98 99 00 01 02 03

% change from year earlier(3-mth moving avge)

Sources: Health, Labour & Welfare Ministry; Economic and Social Research Institute (ESRI).

Household saving ratio

101112131415

16

97 98 99 00 01 02 03

% (12-mth moving average)

economics@13

Deflationary pressures appear to be easing, which Deflationary pressures appear to be easing, which maymay pave the way to more sustainable growthpave the way to more sustainable growth

Wholesale prices

Sources: Bank of Japan; Home Ministry; OECD.

Consumer prices

-4-3

-2-1

01

2

97 98 99 00 01 02 03

% change from year earlier

2%GSTrise

-2

-1

0

1

2

3

97 98 99 00 01 02 03

% change from year earlier

"Headline"

"Core" (excl.food & energy)

2%GSTrise

l Protracted deflation has been both a symptom of the scale of Japan’s economic problems and an obstacle to recovery

l Deflationary pressures have eased noticeably this year

– something which didn’t happen (at the consumer level) during the last short-lived upturn in 2000

l Since its change of leadership in 2001 the Bank of Japan has been more vigorous in trying to end deflation by ‘unorthodox’ means

l A return to positive inflation would assist corporate and financial restructuring, and give monetary policy more ‘traction’

economics@14

China’s economy is regaining momentum after China’s economy is regaining momentum after the temporary jolt caused by the SARS outbreakthe temporary jolt caused by the SARS outbreak

Real GDP growth

Sources: National Statistics Bureau.

Industrial production

56789

1011

97 98 99 00 01 02 03 04

% change from year earlier

(f)

0

5

10

15

20

97 98 99 00 01 02 03

% change from year earlier

0

5

10

15

97 98 99 00 01 02 03

% change from year earlier

Retail sales Fixed capital investment

5

10

15

20

97 98 99 00 01 02 03 04

% change from year earlier

(f)

economics@15

China’s exports are growing rapidly China’s exports are growing rapidly –– but its but its imports are growing even fasterimports are growing even faster

Source: National Statistics Bureau.

l Chinese exports have risen at an average annual rate of 17% over the past five years – but imports have risen at an average annual rate of 24%

l Contrary to widespread opinion China’s trade surplus is shrinking

– China’s bilateral surplus with the US (and Australia) is widening

– but it runs (growing) deficits with most other countries

l A large part of China’s export growth is being driven by ‘out-sourcing’ from other countries

– ‘foreign-invested enterprises’ now account for over 60% of the growth in China’s exports

Trade balance

-100

1020

3040

50

97 98 99 00 01 02 03

% change from year earlier(6-mth moving avge)

Exports

Imports

Merchandise trade

0

10

20

30

40

50

97 98 99 00 01 02 03

US$ bn (12-mth moving total)

economics@16

China’s determination not to revalue the renminbi China’s determination not to revalue the renminbi is causing problems for its monetary policyis causing problems for its monetary policy

China’s balance of payments

Sources: Institute of International Finance; People’s Bank of China

-80-60-40-20

020406080

100120

97 98 99 00 01 02 03 04

US$ bn

Current account surplus

Net equity investment inflow

Net resident lending abroad

Errors & omissions

FX reserves

100

150

200

250

300

350

97 98 99 00 01 02 03

US$ bn

Maintaining the Rmb peg in the face of a dramatic swing in capital flows is forcing China into huge US$ purchases and Rmb sales

economics@17

China faces a (currently small but) growing risk China faces a (currently small but) growing risk of creditof credit--fuelled ‘overheating’ and inflationfuelled ‘overheating’ and inflation

Source: National Statistics Bureau.

l The massive build-up in China’s FX reserves has a counterpart in its domestic money supply

l Rapid monetary growth is in turn fuelling a boom in bank lending

– lending for construction has risen by 33%, and to private enterprises by 57%, over the year to July

l This boom will ultimately worsen banks’ bad loan problems

l The central bank and main bank regulator are trying to dampen down this boom by raising bank reserve requirements and issuing lending directives to banks

l Inflation has turned positive this year and is likely to rise further over the next 18 months

Inflation

Money and credit growth

05

10152025

30

97 98 99 00 01 02 03

% change from year earlier

Money (M2)

Bank credit

-6-4-202468

97 98 99 00 01 02 03

% change from year earlier

Consumerprices

Producer prices

economics@18

-8

-4

0

4

8

12

98 99 00 01 02 03 04

%

Other cottonOther cotton--importing Asian economies shouldimporting Asian economies shouldexperience slightly stronger GDP growth in 2004experience slightly stronger GDP growth in 2004

Sources: National statistical agencies; Economics@ANZ.

Korea

-4-202468

98 99 00 01 02 03 04

%

Taiwan

-15

-10

-5

0

5

98 99 00 01 02 03 04

%

Indonesia

-12

-8

-4

0

4

8

98 99 00 01 02 03 04

%

Thailand

-8

-4

0

4

8

12

98 99 00 01 02 03 04

%

Malaysia

-2

0

2

4

6

8

98 99 00 01 02 03 04

%

Philippines

economics@19

Indonesia’s economic environment is gradually Indonesia’s economic environment is gradually improving …improving …

Real GDP growth

Sources: BPS Statistics Indonesia; Datastream.

0

2

4

6

8

00 01 02 03

% change from year earlier

Budget balance

-5

0

5

10

15

00 01 02 03

% change fromyear earlier

Inflation

68

101214161820

00 01 02 03

% change

State Bank90-day rate

Interest rates

-4

-3

-2

-1

0

1

98 99 00 01 02 03 04

% of GDP

economics@20

… but security, regulatory and political risks … but security, regulatory and political risks continue to impede more rapid growthcontinue to impede more rapid growth

Rupiah vs US$

Source: Datastream.

300

400

500

600

700

00 01 02 03

Index

Jakarta stock exchange

7

8

9

10

11

1200 01 02 03

'000 Rph per US$ (inverse scale)l Financial markets have been

surprisingly unaffected by the Bali and Marriott bombings

l Concern over heightened security risks to some extent balanced by recognition of greater willingness on the part of Indonesian authorities to deal with it

l Progress in regulatory and legal system reform remains slow

l Political uncertainties will increase ahead of 2004 Parliamentary (April) and Presidential (July) elections

l So far Indonesia has not been able to sustain the 5-6% growth needed to reduce unemployment and poverty

economics@21

Potentially important developments in trade Potentially important developments in trade policy over the next 6policy over the next 6--1818 monthsmonthsl Termination on 1 January 2005 of the Agreement on Textiles and

Clothing, and removal of all remaining textile and clothing quotas– some countries (including the US) have reserved the right to impose

‘safeguard measures’ to prevent/reverse ‘import surges’– these ‘safeguards’ can be directed at specific countries – removal of quotas will advantage China in particular– but to some extent at the expense of other textile exporters such as

Bangladeshl Critical milestones in the ‘Doha Round’ of multilateral trade talks

– the only hope of eliminating global agricultural policy distortions, including US cotton subsidies of US$4bn on a $3bn crop produced by just 25,000 farmers

– elimination of all such distortions would produce global welfare gains estimated at over US$56bn, including over US$3bn for Australia*

* Mary E. Burfisher (ed.), The Road Ahead: Agricultural Policy Reform in the WTO, USDA Agricultural Economic Report No. 797, January 2001.

l Negotiations on a US-Australia Free Trade Agreement– limited implications for Australian cotton exporters

economics@22

Movements in the A$Movements in the A$--US$ rate in recent years US$ rate in recent years have largely mirrored movements in the US$have largely mirrored movements in the US$

Sources: Datastream; US Federal Reserve; RBA.

Monthly since 1997

45

50

55

60

65

70

75

80

85

97 98 99 00 01 02 03

80

85

90

95

100

105

110

US ¢ Index(March 1973 = 100)

A$/US$(left scale)

Trade-weightedIndex of US$ against other

major currencies(inverted;

right scale)

56

58

60

62

64

66

68

70

31-Dec 31-Mar 30-Jun 30-Sep

86

88

90

92

94

96

98

100

US ¢ Index(March 1973 = 100)

A$/US$(left scale)

Trade-weightedIndex of US$ against other

major currencies(inverted;

right scale)

Daily during 2003

economics@23

Whether a country has a current account deficit or Whether a country has a current account deficit or not matters less than how the deficit is financednot matters less than how the deficit is financed

Current account deficit

Net equity investment(incl. corporate bonds)

Net borrowing

Other (incl. central banks)

Sources: US Bureau of Economic Analysis.

US current account deficit and its financing

-300

-200

-100

0

100

200

300

400

500

600

96 97 98 99 00 01 02 03

US$ bn - four quarter moving total

l Until the collapse of its equities boom the US was able to finance its ever-growing current account deficit with equity inflows

l Since equity inflows are typically unhedged, they create net demand for US$ which (for a time) more than offset the selling of US$ due to the current account deficit

l From early 2002, the US current account deficit widened again –but the US became more reliant on debt financing, so the US$ fell

l Equity inflows appear to have picked up again recently with improved hopes for the US economy – but this may not be sustainable

economics@24

Australia is more reliant on borrowing to finance Australia is more reliant on borrowing to finance its deficit, and this affects the behaviour of the A$its deficit, and this affects the behaviour of the A$

Current account deficit

Net equity investment

Net borrowing

Other (incl. central banks)

Sources: ABS

Australian current account deficit and its financing

-30

-20

-10

0

10

20

30

40

50

60

96 97 98 99 00 01 02 03

A$ bn - four quarter moving total

l Australia has become a net equity capital, so that we now rely almost entirely on borrowing to finance our current account deficit

l Most of this borrowing is done by the banks, who typically hedge it –so that the inflows don’t create net demand for A$

l Over the first half of this year, a turnaround in net equity flows combined with large unhedged A$ bond purchases by Japanese retail investors) drove the A$ up sharply

l Renewed enthusiasm for equities since late June appears to have drawn capital away from Australia again, resulting in a renewed decline in the US$

economics@25

Asian central banks have financed half the US Asian central banks have financed half the US deficit in 2002deficit in 2002--03 but can’t keep it up indefinitely03 but can’t keep it up indefinitely

Source: Datastream; Economics@ANZ.

80

85

90

95

100

105

00 01 02 03

Index (Feb. 2002 = 100;monthly average)

US$ vs selected currenciesUS$ vs Asiancurrencies (¥, Won, Yuan, HK$, NT$ and S$

US$ vs other currencies (€, £, A$ and C$)

020406080

100120

China Japan OtherE. Asia

India Russia

US$ bn

Increase in FX reserves(12-mths to May/June 2003)

l Asian central banks’ reserves have risen by nearly US$270bn since mid-2003, reflecting purchases of US$ undertaken to stop their currencies rising against the US$

l These purchases would have been sufficient to finance around half the US current account deficit

l They also deflected most of the adjustment to a declining US$ on to ‘freely floating’ currencies such as the euro and the A$

l As seen in China’s case, such policies may have other adverse consequences and may not be sustainable indefinitely

l Changes in Asian currency policy could prompt a renewed US$ fall

economics@26

45

50

55

60

65

70

75

80

85

97 98 99 00 01 02 03 04

80

85

90

95

100

105

110

US ¢ Index (March1973 = 100)

A$/US$(left scale)

Index of US$ against other

major currencies(inverted;

right scale)

Some time next year the US$ is likely to begin Some time next year the US$ is likely to begin falling again, so the A$ may have another spurtfalling again, so the A$ may have another spurt

Sources: Datastream; Economics@ANZ

A$ vs US$ l The US current account is likely to approach 6% of GDP next year –and it’s unlikely that the US will be able to attract enough unhedged capital inflows to finance it: especially once growth begins to pick up outside the US

l The US$ is thus likely to begin trending down again some time next year – initially against the ‘freely floating’ currencies

l The A$ will trade in a US63-66¢ range near term but may have another spike upwards to around US70¢ during 2004

l While timing remains uncertain, a shift in Asian currency policies may take some of the pressure off the A$ and other ‘free floaters’

economics@27

Summary and implications for the Australian Summary and implications for the Australian cotton industrycotton industryl The world economy is in the process of picking up again

– world cotton consumption growth in 2003-04 may be a little stronger than the 1% forecast by ICAC (though still below 2002-03’s 4%)

l There are still significant imbalances within and among the world’s major economies

– it remains to be seen whether the recovery in the global economywill be sustainable beyond 2005

l Cotton-importing Asian economies should experience modestly stronger growth in 2004

– but there is a gradually increasing risk of ‘over-heating’ in China which could be followed by a temporary downturn

l Trade policy developments in the next 6-18 months could potentially bring major benefits to Australian exporters

– but powerful protectionist interests could stymie almost all progressl The US$ almost certainly has at least one more leg downwards

– implying that a further upwards move in the A$, perhaps to US70¢, is likely some time during 2004