Australia: w hich direction? Hunter Research Foundation Michael Blythe Chief Economist Managing Director, Economics +(612) 9118 1101 michael.blythe@cba.com.au September 2016
Australia In Perspective The economy is into its 26 th year of continuous grow th Australia has completed 25 years of uninterrupted economic growth. AUSTRALIA: KEY INDICATORS The IMF has progressively cut global % % 12 12 growth forecasts and highlights downside risks: Unemployment – but those for Australia and Australia’s rate 8 8 (%) major trading partners largely unchanged. Public finances and the financial system remain in respectable shape: 4 4 – the AAA rating remains (for now); – the financial system is well capitalised 0 0 and profitable. Non-farm GDP Policy makers are prepared to use their (%pa) -4 -4 remaining firepower if needed. Sep-90 Sep-95 Sep-00 Sep-05 Sep-10 Sep-15 The generational benefits of the resources boom and the Asian emergence continue. 1
End Point Better than all? The current expansion of the Australian YEARS OF CONTINUOUS GROWTH economy keeps setting new records on Australian historical standards. Finland (1992-07) UK (1991-08) France (1975-92) US (1991-08) Canada (1991-08) Netherlands (1981-08) Australia (1991-) 0 10 20 30 Years 2
End Point Better than all! The current expansion of the Australian YEARS OF CONTINUOUS GROWTH economy keeps setting new records on Australian historical standards. Finland (1992-07) UK (1991-08) Australia will set a new global record by France (1975-92) 2018 if economic growth continues. US (1991-08) Canada (1991-08) Netherlands (1981-08) Australia (1991-) 0 10 20 30 Years 3
Unfinished Business Navigating the income “recession” and the mining capex “cliff” AUSTRALIAN INCOMES MINING CAPEX & JOBS '000 % (annual % change in nominal GDP) % % 205 9 24 24 Mining 18 18 construction 158 6 jobs proxy (lhs) 12 12 112 3 CBA (f) 6 6 Mining capex (% of GDP) Early '90s "Credit GFC (rhs) recession squeeze" Source: CBA/RBA 65 0 0 0 1959/60 1971/72 1983/84 1995/96 2007/08 1989/90 1995/96 2001/02 2007/08 2013/14 Australia is digesting the end of the commodity price and mining capex booms. The size of the task regularly sparks recession talk. 4
The Income Threat Income weakness brings a focus on cost containment: – households defer spending and focus on balance sheet repair; – businesses defer capital spending and labour hiring; and – governments tighten the fiscal screws . Income weakness encourages the pursuit of yield and capital gain: – asset price inflation creates “bubble” risks; – the composition of balance sheets becomes riskier; and – exposure to economic shocks or policy changes increases. The growth transition will involve job losses as the switch from resource construction to resource exports unfolds: – job security fears may remain elevated; and – exposure to global growth risks is higher. Economic policy becomes less effective: – job security fears and demand for income limit interest rate impact; – limits to fiscal stimulus lead to overreliance on monetary policy; and – extreme policy settings elsewhere limit AUD buffering role. 5
Can We Get There? The key forecast The swings in commodity prices are the COMMODITY PRICE FORECASTS major driver of the swings in Australian (RBA Non-Rural Index, USD) Index Index incomes: 135 135 Consensus Source: RBA, CBA, – commodity price forecasts are the ones forecasts Consensus Economics we need to get right. Feb'13 106 106 Forecasters have much to be modest Feb'14 about! Feb'15 78 78 Current forecasts consistent with the bottom now in place: Feb'16 – some key commodity prices have 49 49 improved in 2016. 20 20 Sep-99 Sep-03 Sep-07 Sep-11 Sep-15 6
Can We Get There? Incomes: commodity demand and supply BULK COMMODITY SUPPLY CBA CHINA TRACKER (incremental increase) (annual % change, real) 150 250 16% 16% Mt Forecasts Source: DIST/CBA Iron 100 200 ore 12% 12% CBA China Tracker 50 150 8% 8% Mt 0 100 Official GDP Thermal 4% 4% coal -50 50 Metallurgical coal -100 0 0% 0% Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 2011/12 2014/15 2017/18 2020/21 Chinese policy settings moving in a way that support the economy and commodity demand. Supply will rise further. But the largest increments are now behind us. A flat trend in commodity prices would see income growth pick up to 4-5%pa. 7
Can We Get There? Benefits in adversity? UNIT LABOUR COSTS THE AUD Index Index Index Index 120 120 Real 160 80 TWI (lhs) 100 100 140 70 80 80 120 60 Nominal TWI (rhs) 60 60 100 50 *Source: RBA 80 40 40 40 Sep-01 Sep-05 Sep-09 Sep-13 Sep-90 Sep-95 Sep-00 Sep-05 Sep-10 Sep-15 Weak wages growth means restrained real labour costs, supporting labour demand. Weak wages growth is helping turn a nominal depreciation into a real depreciation, assisting competitiveness. Focus on cost cutting / productivity has raised the AUD “pain” level. 8
Can We Get There? Gravity w ins The centre of economic gravity is shifting back east. The speed of transition is exceptional (88 miles per year). 9
Can We Get There? Income opportunities Chinese economic activity has slowed. CHINA: GROWTH & INCOMES But income growth remains robust. (2008=100) Index Index Income growth will drive the transition from investment/ infrastructure to Private consumption/ services. 215 215 wages Middle income populations want more State sector goods : wages 175 175 – larger and better quality housing; – more and better quality food; Disposable income – more consumer durables. (per capita) 135 135 Real GDP Middle income populations want more services : Source: CEIC – more financial & health services; 95 95 2008 2011 2014 2017 – more education services; – more holidays. 10
Can We Get There? More students & more tourists SHORT TERM OVERSEAS ARRIVALS EDUCATION VISAS (rolling annual total) Mn Mn '000 '000 1.5 1.5 New 400 400 Zealand Visa holders China in Australia 1.0 1.0 Europe 300 300 ex UK UK 0.5 0.5 Visas 200 200 Japan issued India 0.0 0.0 100 100 Jan 02 Jan 05 Jan 08 Jan 11 Jan 14 2002/03 2006/07 2010/11 2014/15 Leading indicators of education and tourism flows have lifted. 11
Can We Get There? The capex cliff: exporting the problem BULK COMMODITIES SELECTED MINING INDICATORS (contribution to GDP growth) %pts (rolling annual total) %pts Mn Forecast Source: *Air passengers 1.0 1.0 3.8 4.5 ABS/BITRE/DIBP on selected mining routes Iron (lhs) ore 0.5 0.5 3.5 3.0 0.0 0.0 3.2 1.5 Construction 457 Oil & visa grants Coal NZ arrivals gas Source: (index, rhs) (index, rhs) CBA/ABS/DIST -0.5 -0.5 2.9 0.0 05/06 09/10 13/14 17/18 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 About 50% of mining capex is imported – so we are “exporting” the problem of falling capex to those suppliers. Resource exports are growing strongly. We are also “exporting” the job loss problem. 12
The Great Transition Uneven The transition to non-mining led TRANSITION DRIVERS growth is proceeding at varying (end 2012=100) Index Index speeds. Residential 120 120 construction A residential construction boom is underway but there are fears the boom is nearing a peak. Non-mining 100 100 capex Non-mining capex has failed to lift as planned. 80 80 And weak public infrastructure Government spending is not helping economic capex Source: ABS 60 60 growth. Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 13
Transition Issues Housing: demand & supply POPULATION DRIVERS DWELLING PRICES % '000 '000 (8 capital cities) % 24 24 450 450 Price growth Net 12 12 migration 300 300 0 0 150 150 -12 -12 Price Natural momentum increase Source: CBA/RP Data CoreLogic -24 -24 0 0 1949/50 1964/65 1979/80 1994/95 2009/10 Jan-98 Jan-02 Jan-06 Jan-10 Jan-14 Housing demand has weakened and supply has lifted. Price momentum should continue to ease. 14
Transition Issues Public infrastructure: turning? The Deloitte Access Economics Investment Monitor reports substantial COMMITTED PROJECTS spike in committed projects in QII. $bn $bn 100 100 Committed projects up 205% to $73bn Source: Deloitte Access Economics (about 4% of GDP). Infrastructure spending boosts activity in 75 75 the short term by lifting aggregate demand and in the longer-term by raising aggregate supply . 50 50 The best outcomes are achieved if: – spending occurs in periods of economic 25 25 slack and easy monetary policy; – public investment efficiency is high; and – spending is financed by debt rather that 0 0 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 tax increases / spending cuts. 15
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