The AUD, rates, and the changing face of the Australian economy

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1 The AUD, rates, and the changing face of the Australian economy Presentation to Australian Association of Agricultural Consultants Outlook Day, Hyatt Regency, Perth, WA David de Garis, Director and Senior Economist 27 November 2015

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3 Key take away points The Fed: after crawl-off in December, the Fed will still be cautious in 2016 The USD will continue to restrain US growth and inflation That s USD positive but global/china growth mixed The local resources industry remains painful; the stars are coming into alignment for farmers The AUD has a lot of negative news priced in already RBA a very reluctant rate cutter: at risk of under-estimating the transition We expect the RBA is done with cutting, barring an exceptional event 3

4 4 The US story to date: close to full employment

5 5 US consumer inflation rates: take your choice

6 Recent data points to slowing world trade and production this year 6

7 The long term relationship between the AUD and commodity prices 7

8 The iron ore market is caught between flat demand and higher supply

9 . Australia s higher iron ore output and exports increasing market share

10 Bulk commodity export volumes

11 The outlook for iron ore production.. Rio Tinto BHP (Pilbara only) Fortescue FY15 production 294mt 254mt 165mt Current production (latest qtr annualised) ~300mtpa ~260mtpa ~168mtpa FY16 Guidance 330mt (CY15) (I expect ~ in CY16) 270mt 165mtpa Longer term 360mtpa 290mtpa ~~~ mtpa (Dependent!) Future investment/production prospects Rio: Infrastructure expansion almost complete. De-bottlenecking to lift output well beyond 330mt, towards 360mt. It s now mine capacity rather than infrastructure that s the constraint. Have plans to bring on new supply & will do so progressively towards 360mtpa as market allows, and quickly if warranted. BHP: Can move to mtpa; should market conditions improve. No Port Hedland Outer Harbour development. Can get to 300mtpa by squeezing more from inner harbour and without much more Capex. Fortescue: pretty much done for now. Roy Hill: nearing start-up. Will ramp up to 55mt capacity over time. 11

12 The global oil supply face-off 12

13 The US shale industry has slashed new exploration; production peaking? 13

14 14 Lower crude prices are deflating Japanese LNG import prices

15 AUD/USD fairly valued at higher than spot 15

16 The market is re-building longer USD positions again; AUD sentiment choppy/poor 16

17 Focus on the Fed rate lift-off now and for those at zero, more QE? ECB, BoJ 17

18 Most central banks including the RBA - are hoping the US$ gets an extra uplift 18

19 The A$ has become more competitive; the US and China losing competitiveness 19

20 Australia s CPI not threatening the RBA s inflation target 20

21 The market pricing for less than one more rate cut 21

22 Key macro forecasts for the year ahead Forecasts Economics - yoy% Markets /Rates 19 Nov Dec 15 Mar 16 Jun 16 Sep 16 Household Consumption RBA Cash Business Investment day bills Domestic demand Year Swap Exports Year Swap Imports Net Exports (a) year ACGB Real GDP Aus-US 10yr bond Fed Funds Rate CPI US 10 Year Bond Underlying CPI Wages AUD AUD/NZD Terms of Trade AUD/JPY Unemployment rate (%) AUD/EUR Current Account - % GDP AUD/GBP Fiscal Balance* - % GDP AUD/CNY Source: Bloomberg; NAB. * June fiscal year a. contribution to annual GDP. Inventories and statistical discrepancy not show n 22

23 Increasing business activity means spending is rising, lifting import demand too 23

24 Construction (apartments) better, services too; retail hinting at better times 24

25 Queensland business conditions showing some recovery signs 25

26 The business investment cycle still flat 26

27 The diverse story exists in state labour markets Source: SEEK

Contrast the broad-based strength in NSW/Vic with broad-based weakness in WA Design & Architecture Education & Training Farming, Animals & Conservation Trades & Services CEO & General Management

28 Contrast the broad-based strength in NSW/Vic with broad-based weakness in WA Design & Architecture Education & Training Farming, Animals & Conservation Trades & Services CEO & General Management Consulting & Strategy Engineering Call Centre & Customer Service Legal Real Estate & Property Administration & Office Support Healthcare & Medical Construction Hospitality & Tourism Manufacturing, Transport & Logistics Science & Technology Marketing & Communications Community Services & Development Sport & Recreation Government & Defence Retail & Consumer Products Information & Communication Technology Advertising, Arts & Media Sales Mining, Resources & Energy Human Resources & Recruitment Accounting Insurance & Superannuation Banking & Financial Services NEW JOB ADS NSW October 2015 vs October %5%7% -3% -2% 1% 1% 4% 4% 4%4% 15% 17% 18% 19% 20% 20% 21%24% 8% 13% 14% 15% 25%29%31% 39% 41%44% -10% 0% 10% 20% 30% 40% 50% CEO & General Management Education & Training Marketing & Communications Sport & Recreation Trades & Services Advertising, Arts & Media Real Estate & Property Farming, Animals & Conservation Healthcare & Medical Community Services & Development Manufacturing, Transport & Logistics Construction Sales Consulting & Strategy Government & Defence Administration & Office Support Information & Communication Technology Call Centre & Customer Service Retail & Consumer Products Hospitality & Tourism Human Resources & Recruitment Design & Architecture Science & Technology Legal Accounting Banking & Financial Services Engineering Mining, Resources & Energy Insurance & Superannuation NEW JOB ADS QLD October 2015 vs October % -14% -11% -10% -9% -7% -6% -6% -3% -3%-1% -15% -1% -1% 0% 2% 2% 4% 5% 5%9%13% 39% 32% 19%22% 15% 17% 18% -40% -20% 0% 20% 40% 60% Government & Defence Sport & Recreation Marketing & Communications Education & Training Real Estate & Property Legal Call Centre & Customer Service Healthcare & Medical Advertising, Arts & Media Community Services & Development Accounting Design & Architecture Hospitality & Tourism Farming, Animals & Conservation Mining, Resources & Energy Sales Information & Communication Technology Administration & Office Support Human Resources & Recruitment Trades & Services Engineering Retail & Consumer Products Manufacturing, Transport & Logistics Banking & Financial Services Science & Technology CEO & General Management Consulting & Strategy Insurance & Superannuation Construction NEW JOB ADS WA October 2015 vs October % 8% 19% 3% -13% -9% -9% -8% -6% -5% -5%0% -14% -15% -15% -16% -22% -19% -17% -23% -24% -24% -29% -27% -25% -30% -41% -46% -47% -60% -40% -20% 0% 20% 40% Source: SEEK

29 The regional story of strength and weakness; note the varied nature across WA Increasing Stable Easing Strong NSW Port Macquarie & Mid North Coast Wollongong, Illawarra & South Coast Gosford & Central Coast Blue Mountains & Central West Wagga Wagga & Riverina Coffs Harbour & North Coast Goulburn & Southern Tablelands Lismore & Far North Coast Tamworth & North West NSW VIC Geelong & Great Ocean Road Bendigo, Goldfields & Macedon Ranges Ballarat & Central Highlands Shepparton & Goulburn Valley Mornington Peninsula & Bass Coast Bairnsdale & Gippsland Traralgon & La Trobe Valley Mildura & Murray Horsham & Grampians Yarra Valley & High Country QLD Cairns & Far North QLD Gold Coast TAS Hobart Launceston & North East Devonport & North West WA Northam & Wheatbelt NSW Tumut, Southern Highlands & Snowy Albury Wodonga & Murray QLD Sunshine Coast Bundaberg & Wide Bay Burnett Hervey Bay & Fraser Coast TAS Central & South East NT Darwin Strengthening Stable Deteriorating Neutral NSW Sydney VIC Melbourne SA Adelaide Hills & Barossa Riverland & Murray Mallee Mr Gambier & Limestone Coast Yorke Peninsula & Clare Valley NSW Richmond & Hawkesbury WA Geraldton, Gascoyne & Midwest Mandurah & Peel Albany & Great Southern SA Fleurieu Peninsula & Kangaroo Island NT Alice Springs & Central Australia Recovering Stable Deteriorating Weak NSW Newcastle, Maitland & Hunter Far West & North Central NSW QLD Brisbane WA Broome & Kimberley NSW Dubbo & Central NSW QLD Townsville & Northern QLD Rockhampton & Capricorn Coast Mackay & Coalfield Toowoomba & Darling Downs Somerset & Lockyer SA Coober Pedy & Outback SA Whyalla & Eyre Peninsula WA Bunbury & South West Kalgoorlie, Goldfields & Esperance NT Katherine & Northern Australia QLD Gladstone & Central QLD Mt Isa & Western QLD WA Perth Port Hedland, Karratha & Pilbara SA Adelaide Footnote: Strong = high levels of job advertising; Neutral = moderate levels of job advertising; Weak = low levels of job advertising Increasing = trending up; Stable = flat trend; Easing/Deteriorating = trending down Source: SEEK 29

30 The transition from mining to tourism 30

31 Australian property markets: diverse trends; still evident foreign interest Table: CoreLogic RP Data home values (*) Brisbane- Gold Coast Adelaide Perth 5 Capital cities 15-Nov-15 Sydney Melbourne % change This week This month Last month Past 3 months Year to date months (*) End period changes. Sources: CoreLogic RP Data, NAB Global Mark ets Research 31

32 Residential property markets 32

33 Not a jobless recovery 33

34 Any questions? 34

Australia: Economic and Financial Outlook

Australia: Economic and Financial Outlook Greg Noonan Head of Business Markets Queensland & Agribusiness 5 June 2015 Australian economy and financial markets continue to be impacted by a large number of