Economic Research November 2015 Global and Australian economic outlook (Still) the dark side of the boom Stephen Walters Chief Economist Australia and New Zealand 61-2-9003-7980 stephen.b.walters@jpmorgan.com J.P. Morgan Australia Limited See the end pages of this presentation for important disclosures.
Global GDP growth to be above trend by end 2015 (just) 2
but growth downgrades are dominating (again) GDP growth - major economies and zones % over year Change since % of Aust. 2014 2015 2016 Last change start of '15 (a) Exports Emerging economies 4.2 3.8 4.0-0.6 India 5.3 7.4 7.2 0.9 5 China 7.4 6.9 6.6-0.3 35 Asia ex. China/India 3.6 3.0 3.2-2.6 20 EMEA EM 1.8 0.2 1.8-1.0 1 Latin America 0.9-0.2 0.0-1.6 1 Developed economies 1.7 1.9 2.0-0.4 Australia 2.7 2.3 2.6-0.6 na United States 2.4 2.4 2.3-0.6 4 Canada 2.5 1.2 2.2-0.6 1 United Kingdom 2.8 2.4 2.1-0.5 2 New Zealand 3.3 2.2 2.1-0.5 3 Euro-area 0.9 1.5 1.8-0.2 6 Japan -0.1 0.6 0.9-0.7 17 Australia's export partners 3.9 3.5 3.5 World 2.7 2.6 2.8-0.5 (Consensus) 2.6 2.5 2.9 Source: J.P. Morgan, Consensus Economics. (a) Average growth for 2015 and 2016. 3
Largest downward growth revisions have been in emerging world 4
No lift in Aussie trading partner GDP growth expected in 2016 5
Main risk to DM economies comes from spillovers from EM 6
Good news? Global interest rates still low as are energy prices 7
Wasn t global QE supposed to trigger an inflation explosion? 8
Financial market volatility still elevated 9
US economy healing progressing ahead of Fed lift-off 10
Euro area momentum turning and jobless rate falling 11
Japan s policy change still a work in progress inflation positive! 12
China s GDP growth rate to stabilize from here on policy support 13
Share market troubles may threaten household sentiment channel 14
Decent GDP growth masking extended income compression 15
Recent growth downgrades leave growth close to trend in 2016 Annual change (%) Share of GDP 2010 2011 2012 2013 2014 2015(f) 2016(f) Household spending 53 3.3 3.1 2.5 1.7 2.4 2.6 2.7 Government consumption 18 3.4 3.5 2.3 0.8 2.0 3.3 1.8 Business investment 17 0.1 18.9 15.8-1.6-5.8-6.1-2.2 Government investment 5 16.9-9.9 6.4-8.8-1.1 0.1 5.7 Dwelling investment 5 4.8 1.8-6.1 0.4 8.0 9.3 1.6 Domestic final demand - 3.5 4.3 4.2 0.5 1.1 1.6 2.1 Change in inventories (cont.) - 0.4 0.4 0.0-0.4 0.0 0.0-0.2 Exports 22 5.8 0.1 6.0 6.2 6.7 4.2 3.6 Imports 21 15.2 11.0 6.2-1.8-1.7 1.2-0.1 Net Exports (cont.) - -1.5-2.1-0.2 1.6 1.7 0.6 0.8 GDP 100 2.3 2.7 3.6 2.1 2.7 2.3 2.6 16
Net exports delivering more than half the economy s expansion 17
Lucky country - terms of trade boom masked poor productivity 18
Boom bust - previous terms of trade booms ended badly Australia: terms of trade and GDP growth GDP, %oya 30 Wool/grain boom 25 Wool boom 20 Wool boom Wool/food boom (Korean war) Wool/grain boom ToT index Coal/iron ore boom 170 120 15 WW I WW II Terms of trade (rhs) 70 10 GDP (lhs) 20 5-30 0-5 Last recession -80-10 Recessions -15 01 11 21 31 41 51 61 71 81 91 01 11 Source: RBA, J.P.Morgan. -130-180 19
But no market economist forecasting recession in Australia! Previous terms of trade experiences Terms of trade GDP growth (%) Year of peak % rise - trough to peak % fall - peak to trough 3 years prior to peak 3 years after peak Recession? 1905 26.2-42.8 5.0 3.7 Yes 1925 128.2-54.0 4.2 0.1 Yes 1937 65.9-49.2 3.7 2.6 Yes 1951 186.7-47.9 7.0 2.8 Yes 1974 27.9-33.8 3.7 2.3 No Ave. 87.0-45.5 4.7 2.3 Yes 2011 94.3? 2.5?? 20
Boom brought structural headwinds high and rising costs The (high) cost of doing business in Australia % difference, Australia vs. global averages Tax rate (%) Lending rate (%) Multi factor and labour productivity %oya 5 4 Minimum wage (USD) Average wage (USD) 3 2 Output per hour worked Petrol (USc/l) Gas (USD mptu) Electricity (USc/KWH) 1 0-1 Multi-factor Source: OECD, World Bank, BP, J.P.Morgan. -50% 0% 50% 100% 150% 200% -2 96 98 00 02 04 06 08 10 12 14 Source: ABS 21
Slipping down the mining capex cliff after unprecedented splurge Mining investment 2005-12 : by country US$ billion 500 400 300 200 100 0 Phil. Sth Af. Source: Grattan Institute. USA Peru Rus. Bra. Chile Can. Aust 22
Resources pipeline shrinking but mainly via project completions Australia s investment pipeline September 2015 Source: Deloitte Access Economics. 23
Exports lifting - supply-side expansion paying dividends 24
China now taking 35% of our merchandise exports 25
House price growth is cooling but debt ratio is rising again 26
Bubble trouble? No but house price growth to cool in 2016 27
Supply (belatedly) responding record high housing starts 28
The squeeze - households income growing at multi-decade lows 29
Household (precautionary) savings rate still unusually high 30
Jobs growth running at a 5-year high but jobless rate to rise 31
Animal spirits, anyone? Cost of capital not the problem for business 32
RBA s easing cycle likely over Bank to start hiking in H1 2017 33
AUD adjusting but commodity prices down by more! 34
Australia one of the nine AAA-rated sovereigns left! Country ^ Nominal GDP share, % Bond market size*, USD Bond market, % of total 10 year bond yield Spread v. Aus. 10yr Germany 35% 1,375 52% 0.61-219 Canada 20% 468 18% 1.64 199 Australia 17% 320 12% 2.80 na Switzerland 8% 84 3% -0.34-193 Sweden 6% 85 3% 0.73-13 Norway 4% 53 2% 1.59-99 Denmark 4% 120 5% 0.87-131 Singapore 3% 68 3% 2.58 258 Luzembourg 3% 58 2% 2.18 218 US France UK Netherlands Finland Downgraded by S&P in 2011 Downgraded by Moodys in 2012 Downgraded by Fitch in 2013 Downgraded by S&P in 2013 Downgraded by S&P in 2014 Total 100% 2,632 100% 1.41 235 (Ave) (Ave) ^ AAA rated by all three ratings agencies. Conventional bonds only - no linkers or T-bills. Source: Bloomberg, J.P. Morgan. 35
NSW now leading state economic performance Unemployment rate (%) Employment growth (%oya) Retail spending (%oya) Capex (%oya) Building approvals (%oya) State final demand (%oya) NSW 5.5 3.8 4.1 4.1 12.4 3.4 VIC 5.6 3.0 4.8 9.9 24.3 3 QLD 6.2 2.9 2.5-29.8 72.4-3.3 WA 6.4 1.1 2.5 0.3-18.9-1.8 SA 7.5 0.4 3.6 1.1-16.5 0.8 TAS 6.5 0.4 3.2-5.6 42.8 0.7 36
State migration flows now smaller NSW and Victoria the winners 37
Economic Research November 2015 Global and Australian economic outlook (Still) the dark side of the boom Stephen Walters Chief Economist Australia and New Zealand 61-2-9003-7980 stephen.b.walters@jpmorgan.com J.P. Morgan Australia Limited See the end pages of this presentation for important disclosures.