Economics, interest rates and currencies chart pack. Charts prepared for ANZ Senior Management. April Saul Eslake Chief Economist ANZ Bank

Transcription

1 Economics, interest rates and currencies chart pack Charts prepared for ANZ Senior Management April Saul Eslake Chief Economist ANZ Bank Cut-off date for charts: 18 April

2 Summary of key economic forecasts 6 Oil prices (US$ per barrel) 1 World GDP growth (%) Australian GDP growth (%). ¾ r r Australian unemployment rate (%) a. ½ r ¾ Australian CPI inflation (%) a.6 Aust. current account deficit (% GDP) 6. 6½ r 6½ r Australian credit growth (%) a 1. 11½ r 11¼ r NZ GDP growth ¾ ¾ r NZ unemployment rate (%) a.6 ½ ¼ NZ CPI inflation (%) a.7 ¾ NZ current account deficit (% GDP) 6. ¾ 6½ NZ credit growth (%) a ½ r ¾ r a Year to December quarter; all other forecasts are calendar yearaverage. r Revised since last month; see slide.

3 Summary of key market forecasts Dec * Jun Dec Dec 6 US Fed funds rate (% pa)... r. r US 1-year bond yield (% pa)..8 r. r. r - US$ r 1. r 1.11 r US$ r 19 r 11 r US$ - Yuan RBA cash rate (% pa) Australian 1-year bond yield (% pa)..7 r. r.7 r A$ - US$ r.68 r.6 r RBNZ cash rate (% pa) NZ$ - US$.7.68 r.9 r. r A$ - NZ$ * actual r revised

4 Major revisions to forecasts over the past month Federal Reserve now expected to continue raising rates ¼ pc pt at each FOMC meeting for longer than previously thought implying funds rate at ¼% by end- (previously ¾%) and peaking at % (previously %) in 6 US dollar now seen as having bottomed against freelyfloating currencies (,, C$, A$, NZ$ etc) sooner and at lower levels than previously US will find it easier to finance its current account deficit through borrowing from foreign private sector lenders given higher interest rate profile US$- now not expected to reach low of $1., but instead to strengthen from mid-year onwards to $1. by end- A$ and NZ$ to fall further and sooner against US$, to US68 and 9 by end-, and 6 and by end-6 largely reflects much narrower interest rate differentials in these currencies favour due to higher US rate profile Australian GDP growth revised up from ¼% to ¾%, 6 down from ½% to % largely reflects much stronger than expected employment growth in March quarter, for which we assume there will be payback later in or 6

5 World economy is slowing but from a very fast pace to a fast pace OECD LEI monthly changes % change from previous month OECD leading indicator fell in February, after three consecutive increases around the turn of the year We expect global growth to slow from % (fastest since 1976) in to % this year and next (still above long-term trend of ¾%) World IP and the OECD leading indicator % change from year earlier OECD composite leading indicator, months forward World industrial production (-mth moving average) 1

6 World economic growth is expected to average % this year and next, down from % in World GDP growth % change from previous year Note: GDP is in US$ at purchasing power parity exchange rates. Sources: IMF; Economics@ANZ. Why slower growth? No new fiscal stimulus although G7 governments are not seriously tackling their deficits, nor are they this year (for the first time since ) adding to them Gradual withdrawal of monetary policy stimulus in the US US short-term interest rates will be back at neutral (around ½%) by this time next year interest rates in currencypegging countries will also tend to rise Drag from persistently high oil prices although not nearly as much of a negative as in the 197s and 8s, oil prices continuing in the US$+ range will detract from global growth

7 Macro-economic policy settings in major economies are becoming less stimulative Economic policy changes in the G7 7 Monetary policy - change in real 6-mth LIBOR (pc pts) UK Easier US - Japan Tighter Canada Euro area Fscal policy - change in structural fiscal balance (% of potential GDP) Monetary policy - change in real 6-mth LIBOR (pc pts) US Easier - UK Canada Tighter Euro area Japan Fscal policy - change in structural fiscal balance (% of potential GDP) 1 Source: IMF World Economic Outlook April.

8 Persistently high oil prices reflect exceptionally tight conditions in global oil markets 8 World oil supply and demand Capacity utilization in the global oil industry 8 8 Mn barrels of oil per day Supply 1 9 % Global oil refinery capacity utilization Demand OPEC production as a % of capacity Sources: BP Statistical Review of World Energy ; IMF World Economic Outlook April ; Economics@ANZ.

9 Oil prices are again striking new (nominal) highs but so far aren t hurting consumers too much 9 Crude oil prices Energy as a % of total US household spending 9 US$/barrel 8.8 % (-mth moving average) Real ( $) Average for past yrs.8 1 Nominal Sources: BP Statistical Review of World Energy ; IMF World Economic Outlook April ; Datastream; US Bureau of Economic Analysis; Economics@ANZ.

10 US economic indicators are mixed but on balance pointing to some slowing in growth Purchasing managers (ISM) indices Net balance (%) Services Manufacturing 1 Retail sales % change from previous month (excl. auto dealers and garages) Actual Trend Sources: Institute of Supply Management; US Commerce Department; Federal Reserve; Bureau of Labor Statistics Orders for non-defence capital goods (excl. aircraft) % change from year earlier Trend Actual 1 Non-farm employment Change from previous month ('s) Trend Actual 1

11 The US trade deficit is exerting a significant (and still growing) drag on overall growth 11 US exports and imports 17 US$ bn per month Imports 1 1 Exports US trade balance US$ bn (annual rate) Sources: US Census Bureau US imports are now more than 6% higher than US exports implying that exports need to grow nearly two-thirds as fast again as imports merely to stop the trade deficit from widening The continually widening trade deficit is subtracting ½-¾ pc points from GDP growth annually The deficit will be difficult to reduce without a recession exporters to the US tend to price to the US market, absorbing the impact of currency changes US demand for imports is highly income elastic but foreign demand for US exports is neither income nor price (currency) elastic

12 Gradually rising inflation (albeit from very low base) means Fed will continue normalizing rates 1 Producer prices intermediate goods % ch. from year earlier Headline nd highest since Sep 81 6 Producer prices finished goods % ch. from year earlier Headline 1 Highest since Dec 91 - Core (excl. food & energy) 1 - Core (excl. food & energy) 1 1 Consumer prices % ch. from year earlier Headline Core (excl. food & energy) 1 Sources: US Bureaux of Labor Statistics and Economic Analysis. Highest since Sep 6 - Labor costs % ch. from year earlier Average hourly earnings Unit labor costs Highest since Jun 1 1

13 Federal Reserve raises rates again but with slightly more hawkish language % pa Forecast % pa US fed funds rate 1 year bond yield Forecast Sources: US Federal Reserve; Datastream. The Federal Reserve has now raised the funds rate seven times, to ¾% The Fed s most recent statement reiterated the view that policy accommodation can be removed at a pace that is likely to be measured ie, ¼ pc point movements at each FOMC meeting is still the most likely scenario for the rest of But other parts of the FOMC statement were more hawkish pressures on inflation have picked up in recent months and pricing power is more evident with appropriate monetary policy action, the upside and downside risks to sustainable growth and price stability should be kept roughly equal (instead of the risks merely being roughly equal without policy action in previous statements Fed funds rate likely to reach % before year end and % by mid-6 1

14 Japan s economy still looks incapable of self- sustaining growth Real GDP Tankan business sentiment % change from previous qtr th technical recession in past decade Net balance optimistic (%) Large companies Small companies 1 Unemployment rate Inflation 9 % of labour force 1 % change from year earlier With unchanged participation rate -1 Actual 1-1 Sources: Economic & Social Research Institute; Welfare Ministry; Bank of Japan; Home Ministry; Economics@ANZ.

15 To date there s only limited evidence that China s economy is slowing from last year s rapid pace 1 Industrial production Freight traffic % ch. from year earlier Actual % ch. from year earlier 1 1 Actual 1 6-mth moving average mth moving average Primary energy production % ch. from year earlier Actual 6-mth moving average 1 Sources: China National Statistics Bureau; People s Bank of China. 1 1 Retail sales % ch. from year earlier Actual 6-mth moving average 1

16 Monetary growth and inflation have slowed, but a mushrooming trade surplus will boost liquidity 16 Money supply and bank lending Exports and imports 1 1 % ch. from year earlier M Bank loans 1 % ch. from year earlier (6-mth moving avge) Exports Imports 1 1 Producer and consumer prices 1 % ch. from year earlier 8 6 Producer prices - Consumer prices - 1 Sources: China National Statistics Bureau; People s Bank of China. 6 1 Merchandise trade balance US$bn (annual moving total) 1

17 Asian leading economic indicator also pointing to regional growth slowdown Asian LEI monthly changes % change from previous month The Asian LEI is a weighted average of the LEIs published for Korea, Taiwan, Thailand and Malaysia it leads the IP (ex China & Japan) cycle by around 6 months This LEI has declined in 8 of the past 9 months and is signalling a clear slowdown in growth during East Asian IP and the composite leading indicator % change from year earlier Industrial production (excl. Japan and China) Asian composite leading indicator (6 mths forward) 1 Sources: OECD; Datastream; Economics@ANZ.

18 East Asian trade flows are slowing, another pointer to slower overall economic growth 18 East Asian exports East Asian imports % change from year earlier (-mth moving average) % change from year earlier (-mth moving average) Total Tota l 1 1 Excluding China Excluding China Note: East Asia excludes Japan. Sources: Datastream; Economics@ANZ.

19 Investor risk aversion has risen noticeably over the past six weeks Dec US S&P index Re-based to 1 Dec = 1 1- Mar - Jun 9- Sep 9- Dec 1- Mar - Jun Dec % pa US 1-year bond yield 1- Mar - Jun 9- Sep 9- Dec 1- Mar - Jun 19 VIX index * US corporate bond spreads Dec Index 1- Mar - Jun 9- Sep 9- Dec 1- Mar - Jun Dec Basis points 1- Mar - Jun 9- Sep 9- Dec BB over AAA 1- Mar - Jun * Index of volatility of options on S&P index futures. Source: Datastream.

20 US$ may not be far from bottoming against the euro and other free floaters % pa US and Euro -mth rates 1 6 US$ per (inverted) US US dollar vs euro US and Euro -mth rates Euro area 1 6 Sources: Datastream; Economics@ANZ. The weakness in the US$ vs the euro has not been due to any compelling case for the euro on fundamental grounds, but rather to the US large and growing current account deficit and the low interest rates on offer to those willing to finance it US short rates crossed over euro area rates in December for the first time in nearly years The US-euro area -month interest rate spread will widen to over bp by September, and bp by March next year which should make financing the US current account deficit easier

21 Australia s economy has reached the point in the business cycle where things typically go wrong The Australian economy has now reached the point in the business cycle (no, it hasn t been abolished) from which every recession in Australia s post-war experience has sprung Output growth is now being impeded by capacity constraints, productivity growth has slowed sharply), demand is running at a substantially faster rate than supply, the current account deficit is widening rapidly, and anecdotal (though as yet not hard statistical) evidence of cost-price pressures is becoming more commonplace At this point in every previous business cycle, the Reserve Bank has waited too long to begin raising rates (because it has needed the permission of the Treasurer to do so), so that costprice pressures have become more entrenched, ultimately requiring recession-inducing rate increases to control it For now, we re saying this time it will be different - deregulation/privatization/internationalization of the economy makes it less likely that cost-price pressures in a few sectors will spread rapidly across the entire economy the RBA no longer needs politicians permission to raise interest rates 1

22 Current account deficit the worst in over years despite terms of trade being the best in years Current account balance Terms of trade * % of GDP 1 - = Real 1 1 Terms of trade more favourable than at any time since mid-197s commodities boom Real Current account deficit larger than 7% of GDP for first time since *The terms of trade is the ratio of export to import prices. Source: Australian Bureau of Statistics.

23 Australia s current account deficit is one of the largest in the world Current account balances, In US$ billions As a % of GDP 7 US$ bn 1 % In absolute terms, Australia s current account deficit was the th largest in the world in (or the rd largest if the euro-zone is treated as a single entity) US Spain UK Australia Italy Turkey Portugal Hungary Mexico Greece NZ Hungary Iceland Czech Rep. Australia NZ Portugal Greece US Turkey Spain Note: % of GDP chart refers to OECD countries only. Sources: IMF, World Economic Outlook April ; OECD Economic Outlook December ; Economics@ ANZ.

24 Financing Australia s deficit has thus far been quite easy largely because of our high rates 1 % of GDP (-qtr moving average) Government borrowing Australia % pa 9-day interest rates Foreign investors receive a substantial interest rate premium for the risks associated with financing Australia s current account deficit (though this is set to narrow in ) Australia US US Source: ABS; US Bureau of Economic Analysis; Datastream; Economics@ANZ.

25 However financing the deficit is likely to become more difficult later this year and in 6 Traditional fundamentals and the A$ Commodity prices Interest rate spreads US - = 1 RBA US$ commodity price index (right scale) A$-US$ (left scale) Commodity prices expected to ease moderately during US Australia-US 9-d interest rate spread (right scale) Basis points This spread will narrow as US rates rise more quickly than Australian rates A$-US$ (left scale) Sources: Datastream; Economics@ANZ.

26 Any increase in risk aversion on the part of global investors would also weaken the A$ Measures of investor risk aversion and the A$ Equity market volatility Credit market spreads 6.8 US Index (inverted) 1.8 US Basis points (inverted) VIX index (right scale) A$-US$ (left scale) A$-US$ (left scale) Spread between yields on A-rated corporate and - year US Treasury bonds (right scale) Note: The VIX index is a measure of US stock market volatility based on prices of options on S&P futures. Sources: Datastream; Economics@ANZ.

27 Despite the sharp fall in consumer sentiment in March, consumer spending seems to be OK Consumer sentiment Ratio of optimists to pessimists (%) Actual Trend 1 New motor vehicle sales Millions (annual rate) Trend Actual Retail sales % ch from previous month Trend Retail sales and cashcard index % ch. from year earlier Cashcard index Retail sales 1 7 Sources: Westpac/Melbourne Institute; ABS; First Data International Australia.

28 The slowdown in housing triggered by the late rate rises has clearly bottomed out Housing finance commitments Residential building approvals $ bn per month Owner-occupiers* Investors 1 Bottoming out after falling through 's (annual rate) Trend Actual Local council approvals also bottoming out 1 1 st home buyer finance % of ex-refi total Lower house prices are enticing 1 st home buyers back into the market Home-buying sentiment Ratio saying "good time" to saying "bad" This series has been a good leading indicator of trends in house prices * Excl. re-financing. Sources: ABS; Westpac/ Melbourne Institute; Economics@ANZ.

29 The labour market has been incredibly strong for an economy that is supposedly slowing Unemployment rate % of the labour force Actual Employment Change from previous month ('s) Trend 1 Source: ABS. Actual Trend Lowest since Nov Labor force participation rate % of the labour force 1 ' Actual Job vacancies Highest in 6- year history of this series 1 Trend 9 Record high

30 So does the Reserve Bank s decision to leave rates on hold in April mean they ve now peaked? Why rates might have peaked Why at least one further rise is still more likely than not The economy may already have peaked before the March rate increase raising rates again would risk an unnecessary slowdown The sharp fall in consumer confidence following the March rate hike suggests that this move will have a significant impact on household spending Rising retail petrol prices are equivalent (in terms of their impact on discretionary spending) to a further rise in interest rates There s still no convincing evidence that wage or price inflation have begun to rise, or will rise in the near future We lean towards this view Demand is still expanding at a % pace, too fast for an economy in which the supply side is increasingly being held back by capacity constraints The allegedly much greater sensitivity of household finances to interest rate increases has been much exaggerated, while the greatly diminished sensitivity of the corporate sector (and hence employment) to rate rises has been almost completely ignored The pending sharp decline in the A$ will turn import prices from a dampening influence on inflation to an additional source of price pressures Credit growth is still running well in excess of what the RBA regards as sustainable

31 As the A$ turns around, import prices will cease to offset domestically generated cost pressures Producer prices % change from year earlier Imported Consumer prices * % change from year earlier Excluding GST impact in -1. Sources: ABS; Economics@ANZ. Domestically produced 'Nontradeables' 'Tradeables' As a rough rule of thumb, every 1% (US 7½-8 ) rise (fall) in the A$ subtract (adds) about ½ pc pt from (to) inflation over the following year The rise in the A$ over the past two years has helped to keep underlying inflation in the lower half of the Reserve Bank s -% target band However with the A$ set to fall by as much as % by end- 6, import prices will no longer be providing an offset to domestic cost pressures Domestic price pressures are expected to escalate gradually as firms seek to pass on higher materials and labour costs

32 Credit growth still exceeding what the Reserve Bank regards as a sustainable pace Housing credit * Business credit 1 1 % change from year earlier over mths at annualized rate * incl. securitizations % change from year earlier over mths at annualized rate 1 6 Other personal credit Total credit 1 1 % change from year earlier over mths at annualized rate % change from year earlier over mths at annualized rate 1 6 Source: Reserve Bank of Australia; Economics@ANZ forecasts.

33 It s hard to believe the concerns raised in the RBA s SoMP * have been allayed by one ¼ pt rise Inflation Interest rates 7 % pa 6. % pa 6 'Headline' Inflation is headed for the upper half of the Reserve Bank s -% target band 6.. Cash rate 9-day bill yield 1 RBA inflation target band Excluding GST and 'volatile' items.. It s hard to imagine a single ¼ pc pt rate increase will fully alleviate all the RBA s concerns about risks to the inflation outlook * Statement on Monetary Policy Sources: ABS; RBA; Economics@ANZ.

34 Sense that there is only limited upside for short rates will see Australian bond spreads narrow 1-year yields Spreads 7. % pa Basis points Australia days-1 years US 1 1 Basis points Australia-US 1 year Sources: Datastream; Economics@ANZ.

35 NZ economic growth remained strong through end- although a turning point may be close Economic growth & output gap 1 % ch. % GDP (LHS) 1 The December quarter GDP outturn was relatively benign at. percent (.9 percent annual) -1-1 Output gap (RHS) Capacity utilisation rate 9 % Various one-off factors pushed the quarterly result lower and consequently, the March quarter outturn is expected to show some bounceback. Capacity utilisation remains just off its all-time highs However, even with expectations for a solid start to, leading indicators suggest the economy is close to a turning point Sources: Stats NZ, ANZ National Bank, NZIER

36 NZ inflationary pressures remain intense 6 1 Pricing intentions (LHS) Inflation & pricing intentions net balance % Inflation (RHS) CPI Inflation Inflation ANZ Forecasts % ch. from yr earlier 1. RBNZ Scenario 1: 1. Continued monentum with a. weaker exchange rate Sources: Stats NZ, RBNZ, National Bank, ANZ National Bank 1-1 The combination of lower output in Q and strong employment growth raises the output gap, increasing inflationary pressures as also evidenced by our quarterly business opinion survey Although the March quarter CPI rose.%, below the expected.6%, this was largely due to a seasonal fall in air fares (which subtracted. pc pts from the overall result) Contributing further to inflation pressures in coming months is the recent depreciation of the NZ$, which will raise tradables prices and has the potential to send CPI inflation through the top of the 1 to percent target band this year. Our forecasts put CPI inflation at ¼ percent by the September quarter.

37 RBNZ monetary policy will remain in a restrictive stance 7 Seven models of interest rates The movement in the CPI will % 9-day interest rate Market Pricing. Average of models and range of scenarios keep the RBNZ on tenterhooks over the coming six months. This will keep the risk profile for interest rates skewed upwards. However, the RBNZ will be reluctant to pull the interest rate trigger - largely because the economy is at a turning point and raising interest rates again risks slowing the economy further This view is consistent with various formal interest rate models and market pricing Sources: Reuters; ANZ National Bank

38 Notwithstanding recent persistent NZ$ strength vs the A$ the kiwi is still expected to weaken 8 A$/NZ$ 1. A$/NZ$ Average Sources: Reuters; ANZ National Bank forecasts A stronger US$ is expected to pull both the A$ and NZ$ lower over the remainder of In the near term, the 1bp interest rate spread between NZ and Australia is expected to favour the NZ$ over the A$ Over longer periods, the A$- NZ$ shows a strong tendency towards mean reversion Other factors arguing for a decline in the NZ$ vs A$ are - stronger growth in Australia than in NZ (though slower in both) continued widening in NZ s current account deficit cf. some narrowing in Australia s eventual narrowing in interest rate spread in favour of NZ as RBA lifts rates again and RBNZ begins to ease sooner

39 Higher interest rates and slowing economic growth will slow NZ credit growth over Housing credit * % change from year earlier 1 6 Business (incl. agriculture)credit 1 % change from year earlier Other personal credit Total credit % change from year earlier % change from year earlier 1 6 Source: Reserve Bank of New Zealand; ANZ National Economics forecasts.