The Economic Outlook. The Lucky Country in Middle Age? Philip Brown Senior Fixed Income Strategist. +(613)

Transcription

1 The Economic Outlook The Lucky Country in Middle Age? Philip Brown Senior Fixed Income Strategist +(613) March 15

2 Contents Chart No. Australia in perspective 4-9 What the RBA did - and Why 1-19 The end and start of the mining boom - 5 What GDP isn t telling us 6-34 Politics, the Budget and the AAA Rating 35-38

3 Summary Australia is growing economically, but very slowly. It has been an astonishing run of positive growth, but low-level positive growth. Australian growth to run below trend in the future. GDP isn t necessarily the best measure of growth. GDP responds oddly to mining growth. Other measures are better predictors of employment. Mining boom is changing, not necessarily ending. But not necessarily helping either. Weak growth suggests budget deficits will continue. This might eventually mean Australia loses the AAA rating 3

4 Australia in Perspective 4

5 Australia In Perspective The benefits of being inside the circle CBA TEI & THE CASH RATE Cash rate (lhs) 8 5 5% of world s population CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul % of global GDP but 54% of global growth 5

6 Australia In Perspective The economy has just completed its 3 rd year of continuous economic growth 1 8 GDP YOY RBA Forecasts 3 years Australia has just completed 3 years of uninterrupted economic growth. But the nature of that growth has changed significantly over time. 6 4 The mining boom never caused a single large spike in GDP. The lack of a recession hides a solid period of weaker-than-normal growth RBA forecasts are for this period to continue. GDP is being artificially strengthened by the treatment of mining in the data. Many other measures of growth are much weaker. 6

7 Australia In Perspective Views for 15 AUSTRALIAN GROWTH FORECASTS (for 15) Economist's consensus IMF The consensus for 15 is for GDP growth a little below trend: a wide forecast range (.3-3.1%) reflects varying views on the success of the growth transition. OECD RBA (midpoint) CBA Government (av next yrs) Trend growth (3) 4 6 Other aspects of the consensus include: inflation rates at the middle of the RBA s target; unemployment holding >6%; a stable current account deficit but a narrower budget deficit; and 7

8 Australia In Perspective Mining is really three separate booms 1 Index THREE BOOMS (start=1) Index 44 The resources boom is the defining feature of the Australian economic landscape over the past ten years: Commodity prices (RBA USD) (rhs) Mining capex (rhs) Resource exports (lhs) 9 /3 6/7 1/11 14/ the income phase associated with the step up in commodity prices is over and falling commodity prices and weak income growth are a threat; the mining investment phase triggered by high prices is ending and will weigh on economic growth and employment; the production and export phase is just beginning and exposure to global growth risks is higher as a result. 8

9 Australia In Perspective Narrowing imbalances and policy firepower AUSTRALIA: KEY BALANCES % % (rolling annual total, % of GDP) 3 3 % 8 Budget balance CBA TEI & THE CASH RATE (ex RBA capital 7. transfer in 14) Cash rate (lhs) 8 5 POLICY INDICATORS Cash Rates General Gov Net Debt % 1 of GDP Current account -9 Sep-97 Sep-1 Sep-5 Sep-9 Sep CBA TEI* (adv 9 mnths,rhs) -6 * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul G-7 Australia Source: IMF/CBA Dec-6 Dec-1 Dec Australian policy makers have firepower available. 9

10 What the RBA did and why 1

11 What the RBA did and why CBA view % % RBA CASH RATE CBA (f) 6 4 The RBA has abandoned it s preference for a period of stability in interest rates: a 5bpt rate in Feb 15 reduced the cash rate to a new record low of ¼%. A more pessimistic interpretation of the outlook for non-mining capex saw the RBA extend the period of below-trend economic growth that they expect. Jul-5 Jul-7 Jul-9 Jul-11 Jul-13 Jul-15 Mechanically, this leads to an uptick in unemployment expectations and a down step in underlying inflation forecasts. CBA Strategy view: further rate cut likely in May; cash rate then stable for a short while; another pair of cuts near year-end 11

12 What the RBA did and why Most Recent RBA statement HOUSE PRICES Australia Sydney Gave little short-term reason for not lowering rates With rates so low we can t cut as quickly as we used to. Not a standard recession, more a long slow weakening Clearly anticipated future easing. Expressed concern about property prices. Particularly in Sydney 1

13 What the RBA did and why One-off cuts are rare HOW LONG AT THE TROUGH? % (Australian cash rate since 199) % A rate cut after an extended period of stability last occurred in December That cut was justified on an unusual degree of turmoil on global financial markets, slower global growth, lower inflation and lower world interest rates The cut occurred despite solid domestic activity but was against a backdrop of below-target inflation Months from last cut

14 What the RBA did and why The RBA debate The case for another rate cut Longer period of below trend growth, despite previous rate cuts RBA AUD commentary that a lower AUD needed to achieve balanced growth AUD still above RBA Governor Stevens nominated preference of USD.75 Unemployment is yet to peak Commodity prices are still falling, weighing on incomes Renewed pessimism on the global backdrop, especially in Europe The disinflationary/deflationary impact of lower oil prices The need to boost confidence and flagging animal spirits 14 The case for no change The fundamentals for a lift are in place but have been for a long time. The lower AUD is working as expected in redirecting spending Cost cutting and productivity initiatives mean AUD less of a restraint than previously Leading indicators suggest stronger jobs growth and a likely peak in unemployment Drop in currency means AUD commodity prices have stabilised More aggressive policy response, especially from the ECB to help growth The stimulatory impact of lower oil prices on disposable incomes and business costs more effective than an equivalent rate cut Rate cuts could be seen as an indication of a worsening outlook and a negative for confidence

15 What the RBA did and why Forward guidance Points AUS: ECONOMIC SURPRISE INDEX Economic data better than expectations Points The RBA often moves ahead of expectations: RBA s Debelle warns guidance is clearly data dependent. If the data moves unexpectedly.so will the central bank. -75 Economic data worse than expectations Source: Citigroup -15 Jan-9 Jan-11 Jan-13 Jan Governor Stevens implicitly warned about relying on central bank guidance in his February testimony: The failure to remove the period of stability language before cutting rates reflects a view that if the outlook is changed it is best to get going with policy. The Governor believes that it is not our job to make sure nobody is surprised. 15

16 What the RBA did and why RBA labour market assumptions A longer period of below trend growth means the RBA now expects the unemployment rate to peak at a slightly later at a slightly higher rate (of 6½%). Compare this trend in the unemployment rate to the GDP data there s no jumps higher, but there is a long slow trend up. That s very unusual from a historic perspective. 16

17 What the RBA did and why RBA forecasts % 6 4 KEY RBA FORECASTS (annual % change) Growth RBA forecast range (Feb'15) Inflation Sep 7 Sep 11 Sep 15 Mar 8 Mar 1 Mar 16 % 6 4 RBA projections (February SMP) revised down near term GDP growth and inflation forecasts. Downward revisions amounted to ¼ppt, the smallest adjustment possible but extended the period of the trough. GDP growth below trend in 15, at or above trend in 16 and HI 17. Medium-term forecasts (mid 17) have growth at 3-4½. But RBA have been predicting a return back to trend for a while. Core inflation consistent with the -3% target right through the forecast period. 17

18 What the RBA did and why RBA domestic assumptions Technical assumptions: TWI=64, USD.78, cash rate based on market pricing, Brent crude=usd59, working age population growth 1¾. Longer period of sub-trend growth reflects more pessimistic view on outlook for nonmining capex. Growth positives are residential construction, a gradual decline in savings ratio and lower petrol prices assisting consumer spending, LNG exports towards end 16, benefits from lower AUD and lower interest rates. Terms-of-trade revised lower but most of the expected decline now in place ToT flattening out in HII 15. Wage restraint to continue and domestic inflation contained. Fiscal consolidation assumed to continue. 18

19 What the RBA did and why RBA Pricing Market expects another rate cut soon (April or May). Then expects a third rate cut, to 1.75%, sometime in the latter part of the year. The economy is weak but simply not getting much better. We don t believe a single rate cut (so far) will do much to help. A second, at least, is required. 19

20 The end and start of the mining boom

21 The end and start of the mining boom Resource investment has already peaked and is now falling % 6 4 MINING INVESTMENT (% of GDP) Source: RBA/CBA Previous booms % CBA TEI & THE CASH RATE 6 4 Cash rate (lhs) Mining capex peaked at around 7½% of GDP at the end of 1. Falling mining capex is a threat to jobs 8 growth through: - the 5 drag on economic growth; and - the lesser labour requirements of the operational phase than the construction - phase CBA TEI* (adv 9 mnths,rhs) Jul-97 Jul-99 Jul-1 Jul-3 Jul-5-5 The ratio of construction workers to operational workers is: * Deviation from trend -8-3:1 for coal and iron ore mines; 1:1 for WA LNG projects (51% of capex); Qld LNG (3% of capex) is based on coal seam gas and requires an ongoing investment in drilling wells and a sizeable upstream workforce. 1

22 The end and start of the mining boom Resource export volumes are going to rise Mt 1 KEY RESOURCE EXPORTS Mt 1 The resource export phase of the commodity boom is the most obvious source of new income Iron ore (lhs) LNG (rhs) 75 5 The addition to resource export earnings expected to build up to $5bn per year over next four years (or >3% of GDP). 5 Coal (lhs) CBA (f) For the export boom to work, our main export markets need to be strong enough to absorb the extra supply and pay a decent price.

23 The end and start of the mining boom Resource Income now that s the big question % COMMODITY INCOME IMPACT (rolling annual total, % of GDP) Source: CBA calculations Period averages CBA CBA TEI & THE CASH RATE (f) % 6 4 Cash rate (lhs) A rising terms-of-trade produces an income injection into the economy. A falling terms-of-trade involves an income extraction. 8 next year implies we are close to the CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 of ½% of GDP in Commodity price forecasts for the point of maximum weakness. - Nevertheless, there is an income drag -4 Sep-4 Sep-7 Sep-1 Sep-13 Sep

24 The end and start of the mining boom Currency pluses and minuses Index 7 COMMODITY PRICES & THE USD Index 15 CBA COMMODITY PRICE INDEX (start=1) 78 USD Index (inverse, lhs) AUD index Commodity prices (rhs) 1 Jan 11 Jan 1 Jan 13 Jan 14 Jan 15 5 USD index 66 Jan 14 Mar 14 Jun 14 Sep 14 Dec 14 Feb A stronger USD is reinforcing the trend towards lower USD commodity prices. A lower AUD is buffering local currency commodity prices and domestic incomes. 4

25 The end and start of the mining boom Near term risks US$tn COMMODITIES & GDP 1 % 15 CBA TAX INDICATOR (smoothed annual % change) % 5 16 CBA TEI & THE CASH RATE Nominal 7. GDP 8 Cash (rhs) rate 6.4 (lhs) Nominal GDP (lhs) QIV Iron ore prices (lhs) 4 May-9 Sep-1 Jan-1 May-13 Sep CBA TEI* (adv 9 mnths,rhs) -1 * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul CBA TFI (rhs) -3 Mar- Mar-5 Mar-8 Mar-11 Mar Falls in key bulk commodity prices point to ongoing weak income growth. But the CBA Tax Flow Indicator (TFI), an income proxy, has held up well showing that the Government has been fiscally contractionary. 5

26 What GDP isn t telling us 6

27 What GDP isn t telling us Recent GDP growth is almost entirely net exports (mining) %pts Net exports Other domestic spending Dwellings Nominal GDP GDP CBA TEI & THE CASH RATE Cash rate (lhs) GDP measures the volume of all things produced in the geographic 8 location of Australia. 5 It deliberately ignores price impacts. As such, the massive increase in commodity volumes show as huge - exports, even if the income we are earning from that export is falling CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Is there a better measure? Jul-97 Jul-99 Jul-1 Jul-3 Jul

28 What GDP isn t telling us Recent GDP growth is almost entirely net exports (mining) % Gross national income: Current prices Real net national disposable income per capita CBA TEI & THE CASH RATE Cash rate (lhs) GNI is the sum total of all moneys earned in Australia. 8 The falling price but rising volume of 5 commodity sales is, on balance, causing falling income (price falling faster than volumes rising) CBA TEI* (adv 9 mnths,rhs) * Deviation from trend population growth. Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 - GNI per capita takes this a step further. It removes the effect of Both these measures suggest recent period has been poor. 8

29 What GDP isn t telling us Recent GDP growth is almost entirely net exports (mining) y/y % 1 9 Nominal GDP CBA TEI & THE CASH RATE Cash rate (lhs) Nominal GDP is GDP taken at nominal prices (that is, it includes the 8 change in price as a positive or negative) Real gross domestic income CBA TEI* (adv 9 mnths,rhs) * Deviation from trend everyone. Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 Nominal GDP is growing, but very weakly. - This is unfortunate for those of us in the nominal economy. That is, Has particular effect on Government Budgets too. 9

30 What GDP isn t telling us Employment tends to follow GNE not GDP y/y % EMPLOYMENT vs GNE Employment (rhs) y/y % CBA TEI & THE CASH RATE Cash rate (lhs) economy CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 GDP. GNE is yet another measure of 8 growth. The E is Expenditure. 5 The total amount spent in an - Unsurprisingly, the best relationship between growth and employment is between GNE and employment, not Nominal GNE (lhs)

31 What GDP isn t telling us This is why unemployment in Australia is bucking the global trend % UNEMPLOYMENT RATE Euro zone UK US Australia Japan % 1 CBA TEI & THE CASH RATE 8 4 CBA TEI* (adv 9 mnths,rhs) Cash rate (lhs) Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 The unemployment rate has been trending higher in Australia since mid Unemployment has trended lower in - other countries and regions over the * Deviation from trend same period Source: CEIC Jan 5 Jan 7 Jan 9 Jan 11 Jan 13 Jan 15 31

32 What GDP isn t telling us Leading indicators CBA data TAXES & JOBS (annual % change) % % CBA indicator for February suggests underlying jobs growth of 17k per month..7 8 Tax data implying stronger jobs for a while job growth now caught up..3 Gross PAYG revenue (smoothed ) (rhs) Employment (lhs) Hurdle for keeping unemployment unchanged is 17k per month. -. Jan-4 Jan-6 Jan-8 Jan-1 Jan-1 Jan

33 What GDP isn t telling us A handover to housing? Residential construction: CBA Forecasts ' DWELLING COMMENCEMENTS ' Dwelling commencements likely to hit a record high in Boosted by government stimulus package CBA (f) 19 CBA dwelling starts forecasts: 1: 151k 13: 168k : 197k k 16: 19k 15 Average 5-1 (ex 1 stimulus boost) Construction activity to run well above 15k normal level. Composition of lending argues for a drawn out peak. 33

34 What GDP isn t telling us Supporting the transition pent up demand ' CBA: HOUSING DEMAND & SUPPLY Supply ' CBA TEI & THE CASH RATE Cash rate (lhs) Demographic trends have boosted housing demand. Competition with mining and infrastructure has 8 limited supply. 5 1 Pent-up demand Excess supply Demand -1 Sep-9 Sep-96 Sep- Sep-8 Sep CBA TEI* (adv 9 mnths,rhs) Jul-97 Jul-99 Jul-1 Jul-3 Jul-5-1 Underlying demand for housing has - run ahead of new supply until very * Deviation from trend recently So there is a accumulated or pentup demand for housing. 34

35 Government, the Budget and the AAA Rating 35

36 Government, the Budget and the AAA Rating Which side of the ledger is the problem? Government Operating Balance % GDP Revenue Expenses CBA TEI & THE CASH RATE Cash rate (lhs) There are serious issues on both sides 8 of the ledger. 5 Revenue is very low and expenses are very high. -5 equation. Cannot hope to solve the problem - without looking at both sides of the CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 IGR looks at long term trends, can only set long-term trend responses, not individual policy responses. 36

37 Government, the Budget and the AAA Rating This is the last chance to put things on track, though % GDP 6-7 GENERAL GOVT DEBT S&P Boundary GG Net Debt/GDP (Alt Scn) S&P Reported Actual /Estimate Forecast CBA TEI & THE CASH RATE CBA TEI* (adv 9 mnths,rhs) Cash rate (lhs) Jul-97 Jul-99 Jul-1 Jul-3 Jul The AAA rating is under threat, but not in this budget 8 The S&P data uses official (but out of date) 5Government estimates and is downwards -5 a little and still doesn t * Deviation from trend nowhere near 3%. Our data uses the most up-to-date - numbers and revises them reach the 3% threshold

38 Government, the Budget and the AAA Rating This budget will likely sail close to the downgrade, but not reach % GDP Debt Revisions at Each Budget Current May-14 May-13 May-1 May-11 May CBA TEI & THE CASH RATE CBA TEI* (adv 9 mnths,rhs) Cash rate (lhs) Jul-97 Jul-99 Jul-1 Jul-3 Jul-5 The AAA rating is under threat, but not in this budget The federal 8 Government is a large portion of General Government 5 The Federal Budget has been predicting a stabilisation of debt - every budget for years (both parties failed). -5 * Deviation We re from trend getting close to the point -8 where the reform has to stick

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