Economic Perspectives from Global to Local What It Could Mean for Your Business Dean Pearson Head of Industry Analysis, NAB November 29, 2011
Global Economy
Global share markets & commodity prices Equity markets have been extremely volatile amid mounting fears that the world economy is facing a return to recession - generally 15% down compared to June. But at the height of GFC (Sept-Nov 2008) they fell 30-35%. That is because commodity prices not reacting as if a global crunch is underway….albeit recent weakness in iron ore prices needs to be watched. Change in Equity Markets since 1 June 2011 10 0 -10 -20 CHINA -30 JAPAN UK USA -40 AUSTRALIA GFC Sept - Dec USA -50 1/06/2011 8/06/2011 15/06/2011 22/06/2011 29/06/2011 6/07/2011 13/07/2011 20/07/2011 27/07/2011 3/08/2011 10/08/2011 17/08/2011 24/08/2011 31/08/2011 7/09/2011 14/09/2011 21/09/2011 28/09/2011 3 3
Global industrial production The industrial slowdown is quite synchronised across the world. The fundamental problem is shown in the 2nd chart - the world's richest economies are in the doldrums. Beyond debt, the problem is a lack of economic growth. 4 4
Europe government bond spreads and net debt EURO looks like now entering a mild recession (Q4 2011 & Q1 2012). Clearly markets now very much focused on risk of European default. Initial phase of the crisis was on risk of disorderly default by Greece, Portugal, Ireland. Focus really turning to Italy. European rescue fund simply not enough for Spain and especially Italy. Benchmark 10-year bond yields: daily (bps) 35 8 Sovereign debt panic mark II 30 7 6 25 5 Sovereign debt 20 panic mark I 4 15 3 10 Jan-10 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Italy Spain 5 0 Jan-10 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Greece Portugal Ireland Italy Spain Source: Datastream 5 5
Emerging market economies Emerging economies continue to out-perform. While “Big 3” developed economies at best only just back to pre GFC levels, developing world much stronger. That said, with the outlook for the developed world deteriorating, growth will slow in most emerging economies. GDP: Sep qtr 2007 = 100 Developed world Emerging world 150 140 Global liquidity crisis Global liquidity crisis 130 120 110 100 90 80 70 Sep-05 Sep-07 Sep-09 Sep-11 Sep-05 Sep-07 Sep-09 Sep-11 US Japan Euro area China India Brazil Sources: OECD Main Economic Indicators, CEIC, NAB 6 6
Why China & India are so important Industrialisation and urbanisation in China and India are following a familiar path. The Chinese economy is however 4 times the size of India's. Already China accounts for 50% of global steel. Relative Economic Development GDP per capita relative to advanced economies, equivalent prices % % Australia 80 80 Japan 60 60 South Korea 40 40 China 20 20 India 0 0 1950 1960 1970 1980 1990 2000 Source: Maddison database 7 7
Global food demand to be driven by China & India Emerging market economies are becoming more dependent on imports of staples. Food security is now a hot political issue in developing world. Protein Consumption and GDP 140 • As average incomes increase 120 Protein Consumption (g per person per day) over time, there is a tendency to consume more protein, especially China 100 meat. 80 • Over the years ahead, this switch in diets is likely to generate strong 60 underlying growth in demand for a India wide range of agricultural 40 commodities. 20 0 10000 20000 30000 40000 50000 GDP per capita Source: WHO, UN FAO, World Bank, NAB Economics 8
Is China a threat or a promise for agribusiness? Australia has a comparative advantage in terms of land intensive agribusiness: broad-acre crops, cattle, dairy and sheep. But we are now much more vulnerable to Chinese growth. Land Mass per Capita (sq kms) 0.40 0.35 • Key developing economies have a comparative advantage in 0.30 more labour intensive sectors: 0.25 – mainly pork and poultry, 0.20 horticulture and meat 0.15 processing. 0.10 0.05 0.00 China Indonesia Canada United States Brazil Australia Malaysia 9 Source: World Bank, NAB Economics
Australian Economy
Australian business conditions & confidence Conditions recover and businesses take comfort from better sales, a lower AUD and talk of interest rate cuts. Global uncertainty still weighing on near- term activity indicators. Business confidence improving after recent battering during Greece crisis. Business conditions (net balance) Business confidence (net bal., s.a.) 20 20 10 10 0 0 -10 -10 -20 -20 -30 -30 -40 -40 IV I II III IV I II III IV I II III IV IV I II III IV I II III IV I II III IV 2008 2009 2010 2011 2008 2009 2010 2011 Seasonally adjusted Trend Seasonally adjusted Trend Conds 1990s recn Conf 1990s recn 11 11
New ASX300 business survey - September qtr Business conditions for ASX300 firms declined further in Q3, narrowing the gap to the broader economy. Confidence among large firms has turned negative and is weaker than average. 20 20 Actuals Expectations 10 10 0 0 -10 Q1 Q2 Q3 Q1 Q2 Q3 -10 2011 2011 2011 2011 2011 2011 ASX NAB ASX NAB ASX NAB 300 QBS 300 QBS 300 QBS Conditions Confidence Q2 2011 Q3 2011 Q4 2011 NAB QBS ASX300 Trading conditions Profitability Employment 12 12
Business conditions by state Business conditions (seasonally adjusted) deteriorated across all states in October, with the exception of Queensland, where they were marginally higher. Trend conditions trend conditions remain strongest in WA, followed by NSW, and were weakest in SA, Tasmania and Victoria. 40 40 40 30 30 30 20 20 20 10 10 10 0 0 0 -10 -10 -10 -20 -20 -20 -30 -30 -30 -40 -40 -40 IV I II III IV I II III IV IV I II III IV I II III IV IV I II III IV I II III IV 2009 2010 2011 2009 2010 2011 2009 2010 2011 Australia NSW VIC Australia QLD WA Australia SA TAS 13 13
Labour market Labour market job growth still slowing – reflecting basically a flat H1 2011. While employment growth has slowed, hours worked are still robust – reflects shedding in weak and much stronger hours in strong sectors. Hours data shows labour market not as weak as rising unemployment suggests. Manufacturing has lost over 100,000 jobs in 3 years. Empl ploy oyment nt c cha hange nge cum. c chan ange p e pas ast 3 y 3 year ears ( ('000) 000) Austral alian an l lab abour m mar arket et 250 4 6.5 200 3 6.0 150 100 2 5.5 50 0 1 5.0 -50 -100 0 4.5 -150 Sep Sep Sep -1 4.0 2009 2010 2011 Dec Dec Dec Dec Dec Dec Dec 2007 2008 2009 2010 2011 2012 2013 Mining Employment (12-months-to, LHS) Manufacturing Unemployment rate (%, RHS) Education & training Health care & social assistance 14 14 Sources: ABS, NAB forecasts
Unemployment by region There are big disparities between unemployment both within and across Australian regions. Some suburbs and towns have clearly missed out on the boom. NSW V I C QLD WA SA TAS 15 15
Population growth and net interstate migration In recent years, the population has been growing by >2%, outstripping the Philippines, Malaysia, India, Indonesia & Vietnam. However, growth slowed to 1.5% in 2010, with net migration -35%. Victoria’s population growth has increased notably since the turn of the century. This trend softened significantly last year. Persons Annual Net Interstate Migration 60000 VIC QLD NSW WA SA Australia 40000 20000 0 -20000 -40000 -60000 1982 1987 1992 1997 2002 2007 1982 1987 1992 1997 2002 2007 Source: ABS, NAB Economics 16 16
Carbon tax In the near term net negative to GDP & boost to inflation. But, overall impact moderate. Some sectors better off, some worse. Modelling by Commonwealth Treasury suggests the largest negative impact on output growth for coal fired electricity generators (-10% by 2020). Also a marginal negative impact on output of some metal and cement manufacturers and coal miners. Output Growth by Sector, 1990 to 2050 • Inflation - accept 0.7% increase in 2012/13 per cent per cent • Growth - around 0.3% off GDP in 2012/13. 7 7 Reflects lower consumption from falling real wages 6 6 and lower business investment reflecting uncertainty and increased cost of capital. 5 5 4 4 • Employment - not enough to change unemployment much but net negative to near term 3 3 jobs growth. 2 2 • Costs of living - dangers re cost of living 1 1 increases feeding into wage pressures. The rise likely to be most apparent by mid 2012. 0 0 • Longer run - suspect more negative than current -1 -1 Agriculture Mining Manufacturing Construction Services modelling (wages are not fully flexible). Medium global action 90s 00s 10s 20s 30s 40s 17
Australia’s GDP profile Australia is slowing to a touch below trend with multi speed economy becoming more pronounced as restructuring occurs. Longer run we see accelerating growth but significant rebalancing challenges. In the near term, the carbon tax is a net negative to GDP & boost to inflation. But, overall impact moderate. For 2011 we have growth of 1 3/4% and around 4% in 2012. 18 18
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