déjà vu, all over again Doug McTaggart November 2011

Transcription

1 déjà vu, all over again Doug McTaggart November 211

2 Conclusions (November 21) Global recession was caused by a justifiable collapse in household confidence the recession we chose to have But as labour markets stabilised household confidence returned and resulted in V-shaped recession, with the resumption of normal growth To get a W, what would precipitate a second collapse in confidence? There are risks, of course Household de-leveraging is not one Rising interest rates will emerge with stronger growth Two significant medium terms risks are - Inflation is a significant medium term risk - Falling commodity prices Risk is over-priced and, therefore, risk assets are underpriced 2 2

3 Setting the scene Since this time last year: - Global growth has slowed, prompting renewed concerns of a double dip recession (W) - Australian growth has slowed - Growth in China has become more suspect - The US has postponed reckoning with its debt ceiling - European sovereign debt concerns have intensified Greece has been on the problem list for two years - Interest rates have fallen globally, except for those countries in danger of defaulting These are many of the concerns we were dealing with last year As a result, US and Australian equity markets have gone sideways rising then falling to post no gain Both bond and equity markets are pricing recession, even as company earnings contimue to increase 3

4 The problem is that consumer confidence remains fragile Consumer confidence remains weak because consumers have much to worry about: Consumer confidence Australia 5-5 Low growth Unemployment Debt Sovereign defaults Uncertain policy Weak governments Two-speed economies Volatile markets LGFVs Q1 2 Q3 2 United States Q1 21 Q3 21 Q1 22 Q3 22 Q1 23 Q3 23 Eurozone Q1 24 Q3 24 Q1 25 Q3 25 Q1 26 United Kingdom Q3 26 Q1 27 Q3 27 Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q

5 What do uncertain households do? They hoard cash Instead of spending, at previous levels, households are accumulating cash balances, with a sharp increase since early 28 per cent Cash as a share of financial assets Australian households 2 The big question is whether or not this represents a permanent change in behaviour to a more frugal future world. If households maintaining retail spending and hoarding cash, what are they not buying growth assets: housing and equities per cent Cash as a share of total assets US households So, what will happen to all this cash? Q1 199 Q Q Q Q Q Q Q Q Q Q1 2 Q1 21 Q1 22 Q1 23 Q1 24 Q1 25 Q1 26 Q1 27 Q1 28 Q Q1 21 Q1 211

6 The BIG apparent threats to markets No/low, weakening growth in US and Eurozone - Earnings collapse Sovereign debt defaults in Europe - Second financial crisis China recession - Collapse in global demand The new thrift - A fundamental change in consumer attitudes Inflation - Not on anyone s horizon yet 6

7 Is growth collapsing again, giving us a W? Recovery from the Great Recession was swift and V-shaped Real GDP growth But, was it just the first half of a W % per year 4 2 Current views are mixed with respect to a slide back into recession Mar-8 Mar-82 Mar-84 Mar-86 Mar-88 Mar-9 Mar-92 Mar-94 Mar-96 Mar-98 Mar- Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 US UK Canada Australia 7

8 Asian economies mostly prosper GDP growth in the region China Index March 28 = India Singapore Taiwan South Korea Australia Japan 8

9 The US recovery still isn t bad! There appears to be a good deal of concern that the recovery this time is different It is not, except for the fact it is off a lower than usual base Following the 1982/83 recession, it took ten years for the unemployment rate to fall from over 1% to 5%, even as growth remained strong June 29 US Real GDP (NBER trough = 1) Quarters around NBER trough US private non- farm payroll employment (NBER trough = 1) Mar 1991 Nov June 29 Mar Months around NBER trough Nov 21 9

10 The US is looking.ok Household confidence still weak House sales weak but stable Nominal retail sales stronger Car sales stronger Industrial production and employment growth holding at current levels Job vacancies rising and new applications for social security falling Supply disruptions from Japan earthquake past 3 rd quarter GDP likely to be marginally stronger than 2 nd quarter and close to average Bankruptcies are now below trend Corporate profitability and margins remain very strong Share buybacks are very strong Private sector balance sheets remain very strong 1

11 UK / Eurozone prospects are not as strong UK confidence is low but rising UK is choosing austerity as current policy and not expansionary monetary policy The peripheral Eurozone countries have solvency problems France and Germany are relatively strong The weak Euro is giving German exports a huge boost Euro confidence is softening As Germany goes so does Europe 11

12 Sovereign debt : most fiscal positions are improving While the fiscal positions of most countries is improving, the challenges rest with those banks exposed to those economies likely to default Greece and Portugal But markets know where the debt is, who holds it and by how much. This is in stark contrast to QIC Sovereign Index Norway Sweden Switzerland S.Korea Germany Finland Nether. Denmark 211 Australia Austria Czech R. Poland N.Zealand France Canada Japan US Slovak R. Mexico Belgium UK Hungary Spain Italy Ireland Portugal Greece 12

13 Who benefits from Euro doubts? The Eurozone is not a natural currency union 2 15 Industrial production in Europe Germany is doing well from an undervalued Euro, exports 5% of GDP and strong Greece is doing very poorly from an overvalued Euro, and struggling per cent per year Germany France Italy Spain Portugal Greece Austerity measures also hit unequally as is warranted Greeks will have to pay up to 14% of their gross disposable income, German less than 1% Q1 2 Q3 2 Q1 21 Q3 21 Q1 22 Q3 22 Q1 23 Q3 23 Q1 24 Q3 24 Q1 25 Q3 25 Q1 26 Q3 26 Q1 27 Q3 27 Q1 28 Q3 28 Q1 29 Q3 29 Q1 21 Q3 21 Q1 211 Q

14 The underlying problem is productivity 25 Unemployment rates - - Europe Flexible currencies work to balance underlying real or nominal shocks through appreciation or depreciation per cent 2 15 Spain Greece Portugal Following unification of Germany in 1989, Germany spent the next 2 years driving down costs and increasing productivity in the unified country ULCs - - Europe France Italy Germany They now expect other countries to undertake the same medicine Greece Given their commitment to a unified Europe, expect the pound of flesh to be paid Index: 2 = Italy Spain Portugal France 1 Germany Mar- Mar- 1 Mar- 2 Mar- 3 Mar- 4 Mar- 5 Mar- 6 Mar- 7 Mar- 8 Mar- 9 Mar- 1 Mar- 11 Mar- 12

15 China? Growth slowing Inflation holding Credit conditions tightening Land prices falling putting banks and shadow lending at risk LGFV = SOE + SPV = bad debts as land values (collateral) fall But even modest growth will support bulk commodity exports 15

16 The new frugal? 6 US household financial net worth Much has been made of household s being over-leveraged and therefore curtailing consumption to rid themselves of debt But, HH balance sheets are in good shape. They are not over-leveraged billions of dollars Financial assets 6.5% annual growth Financial net worth Liabilities HH savings has risen a lot recently because households are withholding discretionary spending Australian HH financial net worth In the US, note gross financial assets are roughly double the 1998 level, even though equity markets have gone sideways since 1998 $ millions % annual growth Cash balance are rising. Debt is roughly stable 2 Jun- 88 Jun- 9 Jun- 92 Jun- 94 Jun- 96 Jun- 98 Jun- Jun- 2 Jun- 4 Jun- 6 Jun Jun- 1 Jun- 12

17 Is inflation a risk? Inflation is relatively low in developed countries, relatively high in developing countries, but rising in both How will it re-emerge? Not necessarily home grown because of the output gaps a r y e r e p t n ce r e p Latest Global inflation 21 But exported from developing countries creating margin headroom in developed economies Australia Headline inflation Already, US and UK inflation is looking ominous per cent per year United Kingdom United States Mar- 2 Aug- 2 Jan- 3 Jun- 3 Nov- 3 Apr- 4 Sep- 4 Feb- 5 Jul- 5 Dec- 5 May- 6 Oct- 6 Mar- 7 Aug- 7 Jan- 8 Jun- 8 Nov- 8 Apr- 9 Sep- 9 Feb- 1 Jul- 1 Dec May- 11 Oct- 11 Mar- 12

18 Major threats a summary Economic growth - US looking OK Germany and France will pay to resolve European debt crisis - It is only a question of who - Greece and Portugal to avoid a default - European banks if they do default China is shakier but robust enough to keep going for now Households spending is still weak - But household balances keep getting stronger no household de-leveraging Future inflation is looming, but not on the radar for now 18

19 Australia has weakened in recent quarters, will bounce While prospects are mixed for different sectors with different exposures, supportive factors are: Real GDP growth US to avoid recession and continue to grow Asia/China growth moderate but remain robust per cent per year Australia United States Investment to remain focussed but strong -6 Sep-8 Sep-82 Sep-84 Sep-86 Sep-88 Sep-9 Sep-92 Sep-94 Sep-96 Sep-98 Sep- Sep-2 Sep-4 Sep-6 Sep-8 Sep-1 Sep-12 19

20 Responding to the commodity price boom 2

21 Resource projects are driving new investment Source: State Budget

22 Queensland coming back Strong recovery in Q2 QLD s SFD rose 3.5% in Q2 compared to a.7% rise in national final demand; Household and government consumption both rose.7%, while private business investment surged nearly 2% due to mining investment and the rebuilding effort; 14 Real domestic final demand (% y/y) 12 1 QLD Australia

23 Queensland: construction work done Queensland - Construction work done (y/y%) 5 4 Engineering construction Building work done Strong rise in construction work done in flood aftermath Construction work done rose 14.9% in Q2 after the floods and cyclones weighed on activity in Q1; Engineering construction drove the gain, rising 25.7% over the quarter, while building work done dipped.2%. Investment within the mining sector likely contributed to the strong rise in engineering construction. Within building work done, total residential work fell 4.6% but alterations rose 7.7% due to property repairs. Non-residential building increased 4.8%. Source: ABS, QIC calculations 23

24 A negative: Population growth is a concern 35 Queensland population growth The Queensland population growth rate is high because of the high natural growth rate and high international migration. But both these sources of growth add less to the household formation growth rate Number per quarter Net interstate migration Net interstate migration Natural increase International migration The past source of strong growth net interstate migration is at a very low level Number per quarter Jun- 81 Jun- 82 Jun- 83 Jun- 84 Jun- 85 Jun- 86 Jun- 87 Jun- 88 Jun- 89 Jun- 9 Jun- 91 Jun- 92 Jun- 93 Jun- 94 Jun- 95 Jun- 96 Jun- 97 Jun- 98 Jun- 99 Jun- Jun- 1 Jun- 2 Jun- 3 Jun- 4 Jun- 5 Jun- 6 Jun Jun- 8 Jun- 9 Jun- 1 Jun- 11 Jun- 12

25 Queensland Housing Sector Queensland - Private housing approvals (sa,s) Housing finance (number, y/y%) 1 8 Queensland Australia 6 4 Dwelling approvals surge in August Queensland building approvals rose nearly 2% in August, with strong gain in both housing and multi-dwelling construction But level of approvals remains close to lows of last twenty years Solid improvement in housing finance as the number of housing loans rose 2.3% in July, after two months of lacklustre growth Source: ABS

26 House prices to remain subdued The peaks in house price growth coincide with peaks in residential house approvals 6 5 Growth in house prices established houses With approvals weak, house prices will also remain subdued But there will be no collapse. Prices are supported by: per cent per year Sydney Melbourne Brisbane Underlying population growth No excessive over-building Low defaults and arrears Mortgagees hoarding interest rate cuts 1-1 Prices are held back by lack of confidence Jun- 87 Jun- 88 Jun- 89 Jun- 9 Jun- 91 Jun- 92 Jun- 93 Jun- 94 Jun- 95 Jun- 96 Jun- 97 Jun- 98 Jun- 99 Jun- Jun- 1 Jun- 2 Jun- 3 Jun- 4 Jun- 5 Jun- 6 Jun- 7 Jun- 8 Jun- 9 Jun- 1 Jun- 11 Jun

27 Outlook for the Qld economy Growth in QLD depressed by floods in 21/11, but rebounding strongly in 211/12 Strong growth in 211/12 as coal exports rebound and capital expenditure by the mining sector ramps up 211/12 real GSP to grow by 5.5 per cent average annual Real GDP/GSP grow th (%, annual average) 21/11 211/12 Australia NSW VIC QLD WA Source: OESR; ABS; QIC; CoPS 27

28 Best and worst performing industries Industry production (annual average growth rate, to 219-2) Air transport Mining Construction services Business services Rail - freight transport Paper products Food and drink products Other chemicals Other manuf acturing products Textiles, clothing & f ootwear Source: QIC 28

29 Is risk over-priced? The comparison between the two 16 year periods 1979 to 1995 and 1995 to 211 is stark US stockmarket growth 1.5% annual cgr 5.5% annual cgr Real outcomes are not significantly different but nominal outcomes and volatility are As a consequence, attitudes towards risk are very different and now risk is not well tolerated Given the massive build up in cash, this must change Jan 1, 1979 = Mar-79 Mar-81 Mar-83 Mar-85 Mar-87 Mar-89 Mar-91 Mar-93 Mar-95 Mar-97 Mar-99 Mar-1 Mar-3 Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 S&P 5 1.5% annual growth 9.% annual growth 7.% annual growth 5.5% annual growth Period Real GDP Inflation Nominal Profits Jun 79 to Jun 95 (16 years) Jun 95 to Jun 11 (16 years)

30 Conclusions Global growth has recovered from the recession Consumer confidence is fragile, and currently weak, creating a soft spot for current growth Major global economies, ex-japan, will continue to grow Labour markets have stabilised US and German economies look in good shape Global fundamentals are quite good Key risks to global growth are sovereign debt and future inflation Queensland suffered badly during GFC Population growth in QLD remains weak Global equities look cheap by historical standards 3