What s going on in the world economy, and what does it mean for Australia s resources sector?

Transcription

1 What s going on in the world economy, and what does it mean for Australia s resources sector? The WA Mining Club Hyatt Regency Hotel, Perth th May Saul Eslake Chief Economist

2 The -9 Budget has been brought down against the background of a serious financial crisis Dec- US mortgage delinquencies % of mortgages outstanding 9 days or more in arrears Sub-prime ABX index of prices of US mortgage-backed securities Mar- 7 BBB- rated Jun- 7 Sep- 7 Dec- 7 Prime Mar- AAA rated AA rated Jun- Bank Losses announced by major banks since mid-7 Citigroup UBS Merrill Lynch Bank of America Morgan Stanley HSBC JP Morgan Chase IKB Deutsche Washington Mutual Deutsche Bank Wachovia Credit Agricole Credit Suisse Mizuho Canadian Imperial (CIBC) Societe General TOTAL (incl. others not shown above) Total (US$ bn) Sources: US Mortgage Bankers Association; Bloomberg; ANZ Economics & Markets Research.

3 The IMF has estimated that total losses could eventually reach almost US$1 trn, nearly half of which would be by banks 3 Potential ultimate losses on unsecuritized loans Potential ultimate mark-tomarket losses on securities Type of loan Outstanding US$bn Estimated losses Type of security Outstanding US$bn Estimated losses Sub-prime Alt-A Prime Commercial real estate Consumer loans Corporate loans Leveraged loans ABS CDOs Prime MBS Commercial MBS Consumer ABS High-grade corporate High-yield corporate CLOs Total 1 37 Total 1 7 of which, banks 1-13 of which, banks 3-3 Notes: Alt-A means low-doc or no-doc mortgage loans. ABS = asset-backed securities; CDOs = collateralized debt Obligations; MBS = mortgage-backed securities; CLOs = collateralized loan obligations. Source: IMF Global Financial Stability Report April, p. 1

4 Financial market stresses have eased in recent weeks but it s far too early to say that the crisis is over Banks short-term funding costs 9-day Libor spread over OIS (bp) US Australia Dec- Jun-7 Dec-7 Jun Banks long-term funding costs -year swap spread (bp) Australia US Dec- Jun-7 Dec-7 Jun Corporate bond yield spreads AA spread over -7 yr gov't bond yields (bp) Dec- Jun-7 Dec-7 Jun- 31 Dec = 1 Share prices Australia US Australia US 7 Dec- Jun-7 Dec-7 Jun- Note: all data shown as -day moving averages. Sources: Bloomberg; Datastream.

5 Banks in the US and the euro area are tightening credit standards US banks Euro area banks Commercial & industrial loans Loans to enterprises - - Net balance tightening standards (%) Small Large Net balance tightening standards (%) Mortgage and consumer loans Mortgage and consumer loans - Net balance tightening standards (%) Mortgage* Consumer Net balance tightening standards (%) Consumer House purchase * Weighted average of prime & sub-prime after June 7 Sources: US Federal Reserve and European Central Bank surveys of loan officers.

6 There s no sign yet that the US housing market has bottomed, or that unemployment has stopped rising US housing, unemployment and consumer confidence House prices % change from year earlier Nat'l Assocn of Realtors index (3-mth ma) Housing starts Case-Shiller index 9 9 Unemployment 11 % of labour force (trend) Consumer confidence. Mns (annual rate; trend) Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: The Conference Board; Federal Reserve Banks of Chicago and Philadelphia; trend estimates derived by ANZ using Australian Bureau of Statistics formulae Ratio of optimistis to pessimists (%, trend)

7 The US non-financial corporate sector isn t under the sort of pressures that typically precipitate recessions 7 US non-financial corporate sector % of GDP Corporate profits Corporate debt-equity ratio 1 Interest cover Ratio of profits before interest & tax to net inteterst payments 9 9 Non-farm stocks-to-sales ratio %. % Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: Commerce Department; Federal Reserve Board; ANZ.

8 US businesses aren t slashing employment, production, capital expenditures, and stocks as they typically do in a recession US employment, durable goods orders, production and inventories Non-farm payroll employment % ch from year earlier (trend) Orders for non-defence capital goods Industrial production % ch from year earlier (trend) Manufacturers inventories % ch from year earlier (trend) % ch from year earlier (trend) Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: Bureau of Labor Statistics; Commerce Department; Federal Reserve Board; trend estimates derived by ANZ using Australian Bureau of Statistics formulae.

9 However US household finances are under considerably greater financial pressure than ever before 9 US household sector finances Household net worth % of annual personal disposable income 9 9 Household debt service ratio 9 Household spending on energy % of personal disposable income (trend) Personal saving rate 1 % 1 % of personal disposable income (trend) Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: Commerce Department; Federal Reserve Board; ANZ.

10 Rising exports, aided by a weaker US$, have more than offset the impact on GDP growth of falling housing construction 1 US dollar, exports and housing Exports of goods and services Exports and housing Real % ch from year earlier (trend) Cumulative change since Q (US$bn at annual rate) Exports of goods & services (+$19bn) Trade-weighted value of US$ 1 March 1973 = Residential construction (-$19bn) - Jun- Dec- Jun-7 Dec-7 Jun- Sources: Thomson Financial; US Bureau of Economic Analysis; ANZ.

11 European and Japanese economies will be adversely affected by 11 stronger currencies and (in Europe) tighter financial conditions Euro area Japan Composition of real GDP growth Composition of real GDP growth % pt contrbn to change in real GDP from year earlier Real GDP Domestic demand Net exports % pt contrbn to change in real GDP from year earlier Real GDP Net exports Domestic demand Trade-weighted value of euro Trade-weighted value of yen 11 1 Index Up ~% since late 1 1 Index Up ~1% since mid Sources: EuroStat; ECB; Japan Economic & Social Research Institute; Bank of Japan.

12 Developing country exports will be affected by the downturn in the US, though in a different pattern from 1 1 Asian exports to US and other markets Japan Other North-east Asia 3 % change from year earlier (-mth moving average) To other markets 3 % change from year earlier (-mth moving average) To other markets To US To US China South-east Asia % change from year earlier (-mth moving average) 3 % change from year earlier (-mth moving average) To other markets To other markets To US To US Sources: IMF Direction of Trade Statistics.

13 Growth in the big developing economies is not, in any case, largely dependent on exports 13 Contributions to China s real GDP growth Contributions to India s real GDP growth 1 % pts 1 % pts Domestic demand Net exports Domestic demand Net exports Source: China National Bureau of Statistics, CEIC.

14 Developing countries are much better placed to withstand global financial upheavals than in the latter part of the th century 1 Current account balances Foreign exchange reserves % of GDP 3. US$ trn Developing economies. Developing economies Advanced economies Advanced economies Sources: IMF; ANZ.

15 Most developing countries are more worried about rising inflation than slowing growth 1 Major developing economies consumer prices China Other East Asia South Africa 1 - % change from year earlier % change from year earlier % change from year earlier India Brazil Russia % change from year earlier 1 1 % change from year earlier % change from year earlier Sources: national statistical agencies; ANZ.

16 Major developing countries should continue to experience relatively strong growth, albeit a little slower than in -7 1 Major developing economies real GDP growth China Other East Asia South Africa 1 1 % change from year earlier % change from year earlier % change from year earlier India Brazil Russia 1 1 % change from year earlier % change from year earlier 1 % change from year earlier Sources: national statistical agencies; ANZ.

17 Advanced economies growth will slow sharply this year, but developing countries growth should stay fairly strong 17 World GDP growth World GDP growth % ch from year earlier 9 % ch from year earlier 7 Developing & emerging economies Advanced economies Note: Country and regional GDPs combined using purchasing power parity (PPP) weights Sources: IMF; ANZ estimates.

18 Developing countries will contribute two-thirds of total growth in the world economy over the next five years 1 Shares of world GDP growth % of total global GDP growth at PPPs) over rolling five year periods 3 % Developing & emerging economies -1 (f) Advanced economies US EU Japan Other Western China India Other East Asia Other developing Note: Korea, Taiwan, Hong Kong & Singapore classified as developing economies for these charts. Sources: IMF World Economic Outlook database April ; ANZ calculations.

19 China isn t doing anything that other Asian economies haven t done before (except that it s on a much bigger scale) 19 Long-term growth in selected Asian economies 1 % change from year earlier (-year rolling averages) 1 China from Korea from 19 Korea from 19 Singapore from 19 Japan Sources: The Conference Board Total Economy Database January ; ANZ.

20 The metal intensity of developing country growth is likely to rise sharply Base metal consumption and GDP per capita, Base metal consumption per capita Tonnes Malaysia Thailand China Russia Indonesia Sth Africa India Brazil Mexico Korea Spain Italy Japan Taiwan GDP (at purchasing power parities) per capita France Germany Australia UK Canada US US$ Sources: IMF World Economic Outlook September ; Economics@ANZ.

21 Metal demand from China (and other emerging markets) is likely 1 to continue to grow rapidly Metal consumption and GDP per capita, 19- Aluminium Steel 3 Kgs 1 Kgs Aluminium consumption per capita 1 1 Korea US EU China Japan US$ 1 3 Real GDP (at PPP) per capita Steel consumption per capita Korea Japan US China EU US$ 1 3 Real GDP (at PPP) per capita Sources: IMF World Economic Outlook September ; (Figure.7); Economics@ANZ.

22 Chinese demand for aluminium for transport and packaging is likely to grow very rapidly in coming years World and Chinese aluminium usage 1% 9% % % of total Al usage 9% 1% 1% Other 7% % % % % 7% Engineering Packaging % 3% 3% % Transport Building & construction % 1% % 1% Global 3% China Sources: WMBS; Australian Mineral Economics.

23 Developing country energy consumption will rise faster than incomes for the next few decades 3 Tonnes of oil equivalent per capita Tonnes Argentina Indonesia India Primary energy consumption and GDP per capita, China Saudi Arabia Brazil Russia Thailand Sth Africa Malaysia Mexico Korea Australia Sweden Spain France NZ Japan Germany Taiwan UK Italy GDP (at purchasing power parities) per capita Canada Sources: BP Statistical Review of World Energy ; IMF World Economic Outlook September ; Economics@ANZ. US US$

24 Primary energy consumption in China, India etc will rise substantially Primary energy consumption and GDP per capita, 19- Primary energy consumption per capita Tonnes of oil equivalent China India Korea Japan United States Australia Real GDP (at PPP) per capita (199 US$) US$ Sources: Groningen Growth and Development Centre Total Economy Database; BP Statistical Review of World Energy (); Economics@ANZ.

25 Persistently rising oil prices partly reflecting rapid growth in developing country demand, and flatlining in non-opec output Oil consumption Oil production Mn barrels per day OECD economies Mn barrels per day Non-OPEC Other economies 3 OPEC Sources: US Department of Energy; ANZ.

26 Chinese demand now dominates all commodities with the conspicuous exception of oil Shares of total consumption China and US Aluminium Nickel 3 % China USA % 3 1 China USA F 9F 1F F 9F 1F % Iron ore 3 % Oil China USA China USA F 9F 1F F 9F 1F Source: WBMS, AME, EIA, ANZ forecasts

27 Slowing economic growth in OECD economies points to an easing in base metal prices 7 The OECD business cycle and base metal prices % change from year earlier OECD leading economic indicator (left scale) % change from year earlier Metalgesellschaft base metals price index (right scale) Sources: Datastream; OECD.

28 as does some moderation in the pace of Chinese economic growth The Chinese business cycle and base metal prices 3 % change from year earlier % change from year earlier OECD China leading economic indicator (left scale) Metalgesellschaft base metals price index (right scale) Sources: Datastream; OECD.

29 Resources commodity prices are unlikely to rise much further but will remain elevated by historical standards 9 Base and precious metal prices Iron ore Nickel Oil 1 US$/tonne US /pound 1 US$/barrel US /pound Aluminium 1 US$ / oz Gold US$/tonne LNG Sources: Thomson Financial; ANZ.

30 Australia s national income will gain a further huge boost in -9 from higher coal and iron ore prices 3 Australia s terms of trade (ratio of export to import prices) Real gross domestic income (GDI) and product (GDP) 17 - = 1 7 % ch. from previous year Real GDI Real GDP Sources: ABS; Budget Paper No. 1, Statement 3.

31 Australia s has gained more than most economies from rising commodity prices yet still runs a very large external deficit 31 Terms of trade changes, Mar qtr 3 Dec qtr 7 Current account balances % of GDP, % % Norway Including increases in coal & iron ore prices Germany Japan Korea 1 NZ Canada Australia Norway Russia Japan Korea US France UK Germany Canada Russia France -1 - UK - Australia US NZ -3-1 Sources: RBA Statement on Monetary Policy May ; IMF, World Economic Outlook database, April.

32 Most of this extra income has been spent, adding to demand pressure in an increasingly capacity-constrained economy 3 Domestic demand vs supply % change from year earlier 7 Domestic final demand 3 1 Domestic supply (GDP + net drawdown of stocks) Sources: ABS; ANZ.

33 Australia s underlying inflation rate is now at its highest level since inflation-targeting began 33 Consumer prices % change from year earlier 7 "Headline" "Underlying" Reserve Bank forecasts 3 1 RBA target range Note: excludes impact of introduction of GST and major health policy changes. Sources: ABS; RBA.

34 The Reserve Bank is particularly concerned at the uptrend in inflation expectations 3 Household inflation expectations Business selling price expectations % pa % pa Actual Trend 3 3 Actual Trend Sources: Westpac-Melbourne Institute; nab.

35 Provided the economy continues to slow, and wages remain controlled, the RBA won t have to lift official interest rates again % pa Short-term interest rates 9-day bank bill yield RBA official cash rate Since inflation began breaking out of the RBA s target range in mid-7, the RBA has stepped up the pace of monetary tightening, raising official rates by 1 basis points in nine months Rates actually paid by borrowers have risen by an additional - basis points as banks have passed on some of their increased wholesale funding costs Soft and, increasingly, hard data is beginning to suggest that this tightening of financial conditions is working to slow growth in domestic spending as required to bring inflation from % back to -3% The RBA will thus keep official rates on hold provided that domestic spending doesn t re-accelerate, and that wages growth remains well behaved Last week s Budget didn t do anything to alter that outlook Rates won t start falling until mid-9 Sources: Thomson Financial; ANZ.

36 Some of the A$ s strength reflects US$ weakness, and that is likely to change over the next 1 months A$ and trade-weighted value of the US$ US Trade-weighted index of us$ against other major currencies (right scale, inverted) Mar 1973 = 1 A$ vs US$ (left scale) Sources: Datastream; US Federal Reserve; ANZ The US dollar likely passed a major cyclical low in April when negative sentiment about the credit crunch and the outlook for the US economy was at its most extreme Since then fears of a deep US recession have receded somewhat, and market confidence in the Fed s ability to balance downside risks to growth vs upside risks to inflation has improved The US current account deficit is on a slowly improving path Meanwhile market attention is shifting to the downside risks for European growth, and the prospects for eventual cuts in euro area interest rates Prospects for the US$ against other major currencies are improved by the growing likelihood that developing countries will allow greater appreciation of their currencies as an antiinflation policy

37 Support for the A$ from commodity prices and interest rate differentials will erode next year 37 A$ and commodity prices A$ and interest rate spreads 1. US 1- = US 1- = A$ vs US$ (left scale) RBA index of commodity prices in US$ (right scale) A$ vs US$ (left scale) Spread between Australian & US 9-day interest rates (right scale) Sources: Datastream; Reserve Bank of Australia; ANZ.