Economic & Financial Market Outlook FINPRO Presentation Melbourne CBA Global Markets Research John Peters Director, Economics +(612) 9117 0112 25-26 May 2017
Overview Global growth to remain sub-trend in 2017 & 2018 • advanced economies on a two-speed path – US to outperform EZ, UK & Japan; • Fed to raise rates very slowly – Two more ¼% moves to 1¼%-1½% range in 2017; • China facing a structural slowdown but policy stimulus should see cyclical pick up (6.5%pa). Economic policy and markets • Central Banks to keep monetary policy settings in easing bias mode (except USA) as world tries to escape from deflation. Key Global Risks • Geopolitical Crisis e.g. escalating conflict in South China Sea (China vs US & Asian Allies). • US President Trump implementing mercantilist agenda i.e. anti free trade measures etc. • China economic/financial meltdown and or China RMB devaluation • Failure of quantitative easing in Europe & Japan 1
Our View (cont) . Australian growth transition proceeds unevenly - mining sector non-mining activity – economy dealing with the mining capex downturn quite well at the aggregate level; – resource exports delivering a significant growth boost; – the consumer and non-mining exports are sources of upside risk; – weak income growth the main downside risk – commodity prices and wages the keys; – the economy’s potential growth rate has stepped down (to ≈ 2¾%pa ). – Budget’s increase in infrastructure spending will help boost growth in medium term Economic policy and markets – RBA has a neutral bias – RBA concerns about house prices will see the next policy move a rate hike.; – We see RBA lifting the cash rate by ¼% to 1¾% in QIV 2018. – RBA preference for stimulus via lower AUD/Infrastructure spending – infrastructure prospects improved but more fiscal policy action needed as there is plenty of “fiscal space”. Net government debt <20% of GDP. – AUD to remain under downward pressure as US Fed lifts rates and RBA stays benched. 2
CBA Global Economic Forecasts CBA forecasts envisage sub-trend CBA Global Growth Forecasts global growth continues, although 2015 2016 2017 2018 the pace of growth should lift. (a) (f) (f) (f) Expected outcomes would provide World 2.9 2.7 3.2 3.4 a relatively benign backdrop for the Australian economy. United 2.6 1.7 2.4 2.7 States EM economies to outperform AE’s. Japan 1.2 1.0 0.9 0.6 China should do better than the consensus. Ending of recessions Eurozone 1.9 1.6 1.7 1.7 in Brazil and Russia help. United 2.2 1.9 1.6 1.6 Higher commodity prices to help Kingdom commodity and oil exporters. Canada 0.9 1.2 2.1 2.1 Brexit to weigh on the UK and, to a China 6.9 6.8 6.8 6.6 lesser extent, the EZ. India 7.3 7.2 7.0 7.6 Expansionary policies may see the New US surprise on the upside. 2.5 3.2 3.5 3.6 Zealand 3
Income Opportunities The shifting centre of economic gravity The centre of economic gravity is shifting back east. The speed of transition is exceptional (88 miles per year). 4
Real Global GDP Growth by Economic Grouping China’s Growth Emerging Economies Australia’s Growth Global Growth Advanced Economies IMF forecasts Australian economy likely to post average annual GDP growth of 2.9% between 2016-2020 – the highest among major advanced economies which are likely to grow on average by 2% in 2016-2020. 5
Australia In Perspective The economy is into its 26 th year of continuous growth Australia has completed 25 years of AUSTRALIA: ECONOMIC GROWTH (annual % change) uninterrupted economic growth. % % The IMF worries about the downside risks to its global growth forecasts: 25 years 6 6 – but those for Australia left unchanged in latest estimates. 3 3 Public finances and the financial system remain in reasonable shape: – the AAA rating remains . 0 0 Policy makers are prepared to use their remaining firepower if needed. -3 -3 The generational benefits of the 1959/60 1971/72 1983/84 1995/96 2007/08 resources boom and the Asian emergence continue. 6
Australia In Perspective Growth outperformance since the GFC ….. and from 2005! 7
Budget Overview Key numbers Underlying cash deficit for 2017/18 put at $29.4bn (1.6% of GDP) a reasonable improvement on the deficit of $37.6bn (2.1% FISCAL INDICATORS of GDP) now expected in 2016/17. % of (deficit(-) / surplus(+)) % of GDP GDP 3 3 Budget Underlying cash deficit narrows from here, (f) achieving a small surplus of $7.4bn (0.4% of GDP) by 2020/21. 0 0 Underlying cash balance The net operating balance reaches surplus a year earlier, in 2019/20. -3 -3 Net Operating balance Net debt peaks (as a share of GDP) in 2018/19 at 19.8%. -6 -6 1996/97 2001/02 2006/07 2011/12 2016/17 2021/22 The outcomes require rising revenues and significant spending restraint. 8
Budget Overview Key themes Adherence to the medium-term fiscal strategy: – Fiscal discipline will return Budget to surplus and then allow debt reduction. Infrastructure: – Large transport investment outlays will lift growth, jobs and productivity. Housing affordability: – Affordability will marginally improve by a limited lift in assistance to First Home Buyers, grants to lift new supply, reductions in investor tax deductions and the “ghost tax”. Company tax cuts: – Lower company tax with higher write-offs will lift investment. Education: – Needs-based funding for all schools. Higher education students face higher fees. Higher taxation – Higher Medicare levy, foreigner investors to pay more, higher levy on foreign workers, a new levy on banks. 9
Budget Overview Infrastructure Ramping up infrastructure spending is a major Budget theme. The Government’s infrastructure plan involves investing $75 billion in transport infrastructure between 2017/18 and 2026/27. The aim is to boost growth and productivity. The main infrastructure projects to get the go ahead are: – Western Sydney Airport - up to $5.3 billion committed for the Badgerys Creek Airport, commencing works in 2018; – Inland rail - $8.4 billion to connect Brisbane with Melbourne; – $1 billion infrastructure package for Victoria; and – $1.6 billion for new Western Australian projects. “Good” debt to be used to fund projects. The Government is currently using equity and debt financing for a number of major infrastructure projects. 10
Budget Overview New Revenue & Saving Measures Over the next four years, four key revenue and savings measures will save $20.1bn. $bn BUDGET REVENUE & SAVINGS $bn ($ per year) Measures include: 8 8 Increased – Increase in the Medicare levy – Major bank levy medicare levy estimated to raise $8.2bn over the next 6 6 four years; – Major bank levy – estimated to raise HECS reform $6.2bn over the next four years; 4 4 – HECS reform – estimated to save Jobs for families $3.7bn over the next four years; 2 2 – Jobs for families package – estimated to save $2.0bn over the next four years. 0 0 2017/18 2018/19 2019/20 2020/21 11
Judging The Budget Is the medium-term fiscal strategy on track? FISCAL CONSOLIDATION % % (% of GDP) 3 3 1975/ 76 1983/ 84 0 0 Current -3 -3 (2009/10) 1992/ 93 -6 -6 -2 0 2 4 6 8 10 Years from peak deficit Budget 2017 shows an upgrade to budget projections for the first time in a number of years. Nevertheless, the planned surplus for 2020/21, if achieved, would still represent the most drawn out period of Budget repair in at least 60 years. 12
Judging The Budget Are the wage assumptions plausible? The Budget projects wages growth to run at 2.5% in 2017/18. This looks credible. PRIVATE SECTOR WPI GROWTH % % 0.8 6 But wages growth is forecast to WPI actual (RHS) progressively accelerate and to be running WPI fitted model (RHS) at 3.75% in 2020/21. This is an optimistic assumption and represents a best case 0.4 2 scenario. Wage momentum (reflects inflation and Wages outcomes have undershot Budget inflation expectations) (LHS) forecasts over the past six years 0.0 -2 Risks are skewed to the downside given Underemployment there is elevated slack in the labour market (LHS) and underutilisation (i.e. unemployment plus underemployment) is high. Contributions to wages model relative to average -0.4 -6 Jun 00 Dec 04 Jun 09 Dec 13 13
Judging The Budget Does the focus on “good” and “bad” debt help? The government has livened up the fiscal GOVERNMENT DEBT debate by introducing the idea of “good” (share of CGS on issue) and “bad” debt. 500 500 $bn $bn Source: Beyond the theatrics, this distinction CBA approx should prove useful in shifting the debt-is- 400 400 evil mindset and allowing a sensible debate "Bad" on how to fund the day-to-day running debt 300 300 costs and longer-term infrastructure needs. We have argued this proposition for a 200 200 while. But the focus must be more than just 100 100 physical infrastructure. And not all infra- structure is good. The quality of spending "Good" debt matters. 0 0 2006-07 2009-10 2012-13 2015-16 The ratings agencies will focus on total debt – good and bad. 14
Recommend
More recommend
