Turbulent times for the global and Australian economies
Presentation to ASA/ASX Investor Hour RMIT University, Melbourne 6th August 2008 Saul Eslake Chief Economist
The current global financial crisis stems from the bursting of a ‘credit market bubble’
From this …
Cheap and easy money
2
To this ….
Reduced appetite for risk Distrust of new forms of finance
Increased appetite for risk
New forms of ‘financial engineering’
Reduced capacity for leverage
Increased capacity for leverage
Falling asset prices
Rising asset prices
Slowing economy
For a time, low interest rates and the explosion in ‘sub-prime’ lending created boom conditions in the US housing market
US housing market indicators up to mid-2006
Mortgage interest rates
8 7 6 5 4 3 2 1 0
% pa 30-year fixed rate
3
Housing starts
2.5 2.3
Mns (annual rate)
Adjustable-rate 'Fed funds' (cash) rate
2.1 1.9 1.7 08 1.5 01 02 03 04 05 06 07 08
01
02
03
04
05
06
07
Mortgage applications
170 160 150 140 130 120 110 100 90
Index (Jan-Dec 2000 = 100)
Home ownership rate
70 69 69 68 68 67
% of households
01
02
03
04
05
06
07
08
01
02
03
04
05
06
07
08
Sources: Mortgage Bankers’ Association of America; US Commerce Department.
Once US interest rates began rising, however, borrowers began defaulting and house prices began falling …
US housing market indicators
Mortgage delinquency rates
20 15 10 5 0 01 02 03 04 05 06 07 08
Prime
% of mortgages outstanding 90 days or more in arrears
4
Existing home sales
6.5 6.0 5.5 5.0 4.5 4.0 01 02 03 04 05 06 07 08
Mns (annual rate)
Sub-prime
Existing houses for sale
5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5
Mns
Existing home prices
240 220 200 180 160 140 120 100
Jan 2000 = 100
Down 19.8% from peak
01
02
03
04
05
06
07
08
01
02
03
04
05
06
07
08
Sources: Mortgage Bankers’ Association; US National Association of Realtors; Commerce Department; S&P (the Case-Shiller index).
… and the housing boom turned into a bust, which is continuing despite sharp cuts in the official cash rate
US housing market indicators
Mortgage interest rates
8 7 6 5 4 3 2 1 0
% pa 30-year fixed rate
5
Housing starts
2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8
Mns (annual rate)
Adjustable-rate
'Fed funds' (cash) rate
01
02
03
04
05
06
07
08
01
02
03
04
05
06
07
08
Mortgage applications
170 160 150 140 130 120 110 100 90
Index (Jan-Dec 2000 = 100)
Home ownership rate
70 69 69 68 68 67
% of households
01
02
03
04
05
06
07
08
01
02
03
04
05
06
07
08
Sources: Mortgage Bankers’ Association of America; US Commerce Department.
The US mortgage market meltdown has prompted a tidal wave of losses and write-downs by banks around the world
US mortgage delinquencies
20 15 10 5 0 00 01 02 03 04 05 06 07 08
Prime
% of mortgages outstanding 90 days or more in arrears
6
Losses announced by major banks since mid-2007
Bank Citigroup Merrill Lynch UBS Wachovia Bank of America HSBC IKB Deutsche Royal Bank of Scotland Washington Mutual Morgan Stanley JP Morgan Chase Total (US$ bn) 54.6 54.6 38.2 22.0 21.2 19.5 16.3 15.6 14.8 14.4 12.8 10.0 9.6 8.3 8.3 7.7 7.2 6.8 473.7
Sub-prime
ABX index of prices of US mortgage-backed securities
100 80 60 40 20 BBB- rated AA rated 0 Dec- Mar- Jun- Sep- Dec- Mar- Jun- Sep06 07 07 07 07 08 08 08 AAA rated
Wells Fargo Credit Suisse Credit Agricole Lehman Brothers Deutsche Bank HBoS Bayerische Landesbank Total (incl. others not shown above)
Sources: US Mortgage Bankers’ Association; Bloomberg; ANZ Economics & Markets Research.
The IMF has estimated that total losses could eventually reach almost US$1 trn, nearly half of which would be by banks
Potential ultimate losses on unsecuritized loans
US$bn Type of loan Outstanding 300 600 3 800 2 400 1 400 3 700 170 12 370 Estimated losses 45 30 40 30 20 50 10 225 100-130 Type of security
7
Potential ultimate mark-tomarket losses on securities
US$bn Outstanding 1 100 400 3 800 940 650 3 000 600 350 10 840 Estimated losses 210 240 0 210 0 0 30 30 720 340-380
Sub-prime ‘Alt-A’ Prime Commercial real estate Consumer loans Corporate loans Leveraged loans Total of which, banks
ABS CDOs Prime MBS Commercial MBS Consumer ABS High-grade corporate High-yield corporate CLOs Total of which, banks
Notes: ‘Alt-A’ means ‘low-doc’ or ‘no-doc’ mortgage loans. ABS = asset-backed securities; CDOs = collateralized debt Obligations; MBS = mortgage-backed securities; CLOs = collateralized loan obligations. Source: IMF Global Financial Stability Report April 2008, p. 12; affirmed in GFSR Market Update 28 July 2008.
Financial market stress has continued and affected the money, swap, bond and share markets
Banks’ short-term funding costs
125 100 75 50 25 0 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
Spread between 90-day wholesale rate and cash* (bp)
8
Corporate bond yield spreads
350 Spread over gov't 300 bond yields (bp) 250 200 150 100 50 0 Dec-06 Jun-07 UK US Euro area
UK US Euro area
Dec-07
Jun-08
Dec-08
Banks’ long-term funding costs
125 100 75 50 25 0 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
5-year swap spread (bp)
Share prices
31 Dec 2006 = 100
US UK
110 100 90 80 70 Dec-06 Jun-07 Dec-07 US UK Euro area Jun-08 Dec-08
Note: all data shown as 5-day moving averages. Sources: Bloomberg; Datastream.
Banks in the US and the euro area are tightening credit standards
US banks
Commercial & industrial loans
80 60 40 20 0 -20 -40 00 01 02 03 04 05 06 07 08
Small
Net balance tightening standards (%)
9
Euro area banks
Loans to enterprises
60
Large
Net balance tightening standards (%)
40 20 0 -20 00 01 02 03 04 05 06 07 08
Mortgage and consumer loans
80 60 40 20 0 -20 00 01 02 03 04 05 06 07 08
Consumer
Net balance tightening standards (%)
Mortgage and consumer loans
40 30 20 10 0 -10 00 01 02 03 04 05 06 07 08
Consumer
Net balance tightening standards (%)
Mortgage*
House purchase
* Weighted average of prime & sub-prime after June 2007 Sources: US Federal Reserve and European Central Bank surveys of loan officers.
Oil prices appear to have peaked for now but are still well above their previous high in inflation-adjusted terms
Oil prices
160 140 120 100 80 60 40 20 0 70 74 78 82 86 90 94 98 02 06 10 Oil price Oil price in 2007 dollars
US$ per barrel
10
Forecast
Note: Oil price is West Texas Intermediate. Source: Thomson Financial Datastream; US Bureau of Labor Statistics; ANZ.
Persistently rising oil prices partly reflecting rapid growth in developing country demand, and flatlining in non-OPEC output
Oil consumption
55 Mn barrels per day OECD economies
11
Oil production
45
Mn barrels per day Non-OPEC
(-0.3% pa over past 3 yrs)
50
45
40
40 35
(+3.6% pa over past 3 yrs)
Other economies
35
OPEC
30
30
25
25
20 90 94 98 02 06
20 90 93 96 99 02 05 08
Sources: US Department of Energy; ANZ.
The US hasn’t experienced consecutive quarters of negative GDP growth (yet)
US real GDP growth
8 7 6 5 4 3 2 1 0 -1 -2 00 01 02 03 04 05 06 07 08
% change from previous quarter (seas. adj. annualized rate)
12
Note: 2001 recession did not feature successive contractions in real GDP
Source: US Bureau of Economic Analysis. Shaded area denotes 2001 recession as designated by National Bureau of Economic Research.
The four key indicators used to delineate recession in the US have not yet turned down sharply as in previous recessions
NBER’s key recession gauges since Sep 2007 cf. previous recessions
Real personal income less transfers
100.5 100.0 99.5 99.0 98.5 0 3 6 9 12 15 18
Months since preceding cycle peak Preceding cycle peak = 100
13
Industrial production
101.0 100.0 99.0
Preceding cycle peak = 100
Since Sep 2007
Since Sep 2007 Average of seven recessions since 1960
Average of seven recessions since 1960
98.0 97.0 96.0 0 3 6 9
12
15
18
Months since preceding cycle peak
Employment
100.5 100.0 99.5 99.0 98.5 0 3 6 9 12 15 18
Months since preceding cycle peak Preceding cycle peak = 100
Real business sales
102.0
Preceding cycle peak = 100
Since Sep 2007 Average of seven recessions since 1960
101.0 100.0 99.0 98.0 97.0 96.0 0 3
Since Sep 2007 Average of seven recessions since 1960
6
9
12
15
18
Months since preceding cycle peak
Sources: US Bureau of Economic Analysis; Bureau of Labor Statistics; Federal Reserve Board; Commerce Department; ANZ Economics & Markets Research.
The US non-financial corporate sector isn’t under the sort of pressures that typically precipitate recessions
US non-financial corporate sector
Corporate profits
9 8 7 6 5 4 80 84 88 92 96 00 04 08
% of GDP
14
Interest cover
10 8 6 4 2 0 80 84 88 92 96 00 04 08
Ratio of profits before interest & tax to net inteterst payments
Corporate debt-equity ratio
250 200 150 100 50 80 84 88 92 96 00 04 08
%
Non-farm stocks-to-sales ratio
0.56 0.52 0.48 0.44 0.40 80 84 88 92 96 00 04 08
%
Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: Commerce Department; Federal Reserve Board; ANZ.
However US household finances are under considerably greater financial pressure than ever before
US household sector finances
Household net worth
650 600 550 500 450 400 80 84 88 92 96 00 04 08
% of annual personal disposable income
15
Household spending on energy
9 8 7 6 5 4 3 80 84 88 92 96 00 04 08
% of personal disposable income (trend)
Household debt service ratio
15 14 13 12 11 10 80 84 88 92 96 00 04 08
%
Personal saving rate
12 10 8 6 4 2 0 -2 80
% of personal disposable income (trend)
One-off tax rebates
84
88
92
96
00
04
08
Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: Commerce Department; Federal Reserve Board; ANZ.
Rising exports, aided by a weaker US$, have more than offset the impact on GDP growth of falling housing construction
US dollar, exports and housing
Exports of goods and services
20 15 10 5 0 -5 -10 -15
Real % ch from year earlier (trend)
16
Exports and housing
300 250 200 150 100 Exports of goods & services
Cumulative change since Q2 2006 (US$bn at annual rate) (+$233bn)
80
84
88
92
96
00
04
08
50 0 -50 -100 -150 -200 -250 Jun-06 Residential construction
(-$203bn)
Trade-weighted value of US$
150 140 130 120 110 100 90 80 70
March 1973 = 100
80
84
88
92
96
00
04
08
Dec-06
Jun-07
Dec-07
Jun-08
Sources: Thomson Financial; US Bureau of Economic Analysis; ANZ.
European and Japanese economies will be adversely affected by stronger currencies and (in Europe) tighter financial conditions
Euro area
Composition of real GDP growth
4 3 2 1 0 -1 01 02 03 04 05 06
Net exports Domestic demand
% pt contrbn to change in real GDP from year earlier
17
Japan
Composition of real GDP growth
4 3 2 1 0 -1 -2 01 02 03 04 05 06
Domestic demand
% pt contrbn to change in real Real GDP GDP from year earlier
Real GDP
Net exports
07
08
07
08
Trade-weighted value of euro
110 100 90 80 70 01 02 03 04 05 06 07 08
Index
Up ~40% since late 2000
Trade-weighted value of yen
150 140 130 120 110 01 02 03 04 05 06 07 08
Index
Up ~9% since mid-2007
Sources: EuroStat; ECB; Japan Economic & Social Research Institute; Bank of Japan.
Although higher oil and food prices are pushing up headline inflation, ‘core’ inflation remains little changed in G7 countries
Consumer prices
United States
5 4 3 2 1 0 01 02 03 04 05 06 07 08
Ex-food & energy
% change from year earlier
18
Euro area
"Headline"
5 4 3 2 1 0
% change from year earlier
"Headline"
Ex-food & energy
01
02
03
04
05
06
07
08
Japan
2 % change from year earlier 1 0 -1 -2 01 02 03 04 05 06 07 08
Ex-food & energy "Headline"
United Kingdom
4 3 2 1 0 01 02 03 04 05 06 07 08
Ex-food & energy
% change from year earlier
"Headline"
Sources: US Bureau of Labor Statistics; Eurostat; OECD.
Inflation is rising sharply across Asia – partly though far from entirely driven by higher food prices
Asian economies – consumer prices
China
10 8 6 4 2 0 -2 01 02 03 04 05 06 07 08 % change from year earlier 6 5 4 3 2 1 0 01 02 03 04 05 06 07 08
Exc. food & oil
19
Korea
% change from year earlier 10 8 6 4 2 0 -2
Thailand
% change from year earlier 12 10 8 6 4 Exc. food 01 02 03 04 05 06 07 08 2 0
Philippines
% change from year earlier
Exc. food
01 02 03 04 05 06 07 08
India
8 7 6 5 4 3 2 1 0 01 02 03 04 05 06 07 08 % change from year earlier 20 15 10 5
Indonesia
% change from year earlier 6 5 4 3 2 'Core' 0 01 02 03 04 05 06 07 08 1 0
Malaysia
% change from year earlier 30 25 20 15 10 5 0 -5 01 02 03 04 05 06 07 08
Vietnam
% change from year earlier
01 02 03 04 05 06 07 08
Sources: national statistical agencies; ANZ.
Inflation is also rising across other parts of the developing or emerging world
Selected other developing economies – consumer prices
Brazil
12 10 8 6 4 2 0 01 02 03 04 05 06 07 08 % change from year earlier 20 15 10 5 0 01 02 03 04 05 06 07 08
20
Turkey
% change from year earlier 16 14 12 10 8 6 4 2 0 -2
South Africa
% change from year earlier
01
02
03
04
05
06
07
08
Chile
10 8 6 4 2 0 -2 01 02 03 04 05 06 07 08 % change from year earlier 12 10 8 6 4 2 0 -2 -4 01 02
Saudi Arabia
% change from year earlier 30 25 20 15 10 5 03 04 05 06 07 08 0 01 02 03
Russia
% change from year earlier
04
05
06
07
08
Sources: national statistical agencies; ANZ.
Growth is also slowing in the developing world, although growth rates there will still be strong by historical standards
Major developing economies – real GDP growth
China
12 10 8 6 4 2 0 01 02 03 04 05 06 07 08 09 % change from year earlier 8 6 4 2 0 01 02 03 04 05 06 07 08 09
21
Other East Asia
% change from year earlier 8 6 4 2 0 01
South Africa
% change from year earlier
02 03
04
05 06
07
08 09
India
12 10 8 6 4 2 0 01 02 03 04 05 06 07 08 09 % change from year earlier 8 6 4 2 0 -2
Brazil
% change from year earlier 10 8 6 4 2 0 01 02 03 04 05 06 07 08 09
Russia
% change from year earlier
01 02 03 04 05 06 07 08 09
Sources: national statistical agencies; ANZ.
Resources commodity prices are unlikely to rise much further but will remain elevated by historical standards
Resource commodity prices
Coal
350 300 250 200 150 100 50 0
225 200 Coking 175 150 125 100 75 50 Steaming 25 0 03 04 05 06 07 08 09 10
22
Zinc
US¢/pound 1000 900 800 700 600 500 400 300 03 04 05 06 07 08 09 10 US$/oz
Gold
US$/tonne
03 04 05 06 07 08 09 10
Iron ore
100 75 50 25 0 03 04 05 06 07 08 09 10
Sources: Thomson Financial; ANZ.
US$/tonne
Aluminium
150 125 100 75 50 03 04 05 06 07 08 09 10 US¢/pound 150 125 100 75 50 25 0 US$/barrel
Oil
03 04 05 06 07 08 09 10
Australia’s national income is continuing to get a huge boost from rising commodity prices
Australia’s terms of trade (ratio of export to import prices)
175
2005-06 = 100
23
Real gross domestic income (GDI) and product (GDP)
6 5
% ch. from previous year
Real GDI
150
4 3 2 Real GDP
125
100
1 0 -1
75
50 50 60 70 80 90 00 10
-2 90 95 00 05 10
Sources: ABS; Budget Paper No. 1, Statement 3; ANZ Economics & Markets Research.
Australia is now starting to run trade surpluses for only the fourth time in two decades
Exports and imports
25
$ bn
24
Trade balance
2
$ bn
Imports 20
1 0
Trend
15 Exports 10
-1 -2 -3 Actual
5 90 93 96 99 02 05 08
-4 90 93 96 99 02 05 08
Sources: ABS; ANZ
Up until very recently most of the income generated by the commodities boom has been spent
Domestic demand vs ‘supply’
8 7 6 5 4 3 2 1 0 -1 -2 00
Sources: ABS; ANZ.
25
% change from year earlier
Domestic final demand
Domestic supply (GDP + net drawdown of inventories)
01
02
03
04
05
06
07
08
After nearly 17 years of continuous economic growth, Australia’s economy has run into serious capacity constraints
Indicators of ‘spare capacity’ in the Australian economy
Unemployment rate
12 11 10 9 8 7 6 5 4 3 88
% of the labour force
26
Capacity utilization rate
86 84 82 80 78 76 74
%
92
96
00
04
08
88
92
96
00
04
08
Businesses reporting labour shortages
35 30 25 20 15 10 5 0 88
% of businesses nominating 'suitable labour' as a constraint on output
Office vacancy rates
25 20 15 10 5 0
%
92
96
00
04
08
88
92
96
00
04
08
Sources: Australian Bureau of Statistics; nabCapital; Property Council of Australia.
Australia’s ‘underlying’ inflation rate is now at its highest level since inflation-targeting began
Consumer prices
8 7 6 5 4 3 2 1 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Note: excludes impact of introduction of GST and major health policy changes. Sources: ABS; RBA.
27
% change from year earlier
"Underlying" "Headline"
Reserve Bank forecasts
RBA target range
No allowance for ETS start-up
The rise in inflation has been broadly-based, and not solely due to global forces or in resource-rich States
Contributions to ‘headline’ inflation, year to June quarter 2008
5
% pt contribution to change in CPI
28
‘Headline’ inflation, resource boom cities vs others
5
% ch. from previous year Brisbane, Perth & Darwin
4
Other
4
3
Deposit & loan facilities House purchase or rent Energy Food Other Energy Food
"Nontradeable"
3
2
2
Sydney, Melbourne, Adelaide, Hobart & Canberra
1
1
"Tradeable"
0 03 04 05 06 07 08
0
Sources: ABS; ANZ.
The upward trend in inflationary expectations has been particularly alarming to the Reserve Bank
Household inflation expectations
7 6 5 4 3 3 2 1 0 01 02 03 04 05 06 07 08 2 1 0 01 02 03 04 05 06 07 08
% pa
29
Business selling price expectations
6
% pa
Trend Actual
5 4
Actual
Trend
Sources: Westpac-Melbourne Institute; nab.
Australia is exposed to the global credit crunch because of our large external deficit and the way we finance it
Current account deficits 2007
200 180 160 140 120 100 80 60 40 20 0
US Spain* UK Australia Italy* Greece* Turkey France* Romania Portugal Sth Africa India Poland Ireland* NZ
* member of euro area (deficit financed out of Germany's surplus)
30
Financing Australia’s current account deficit
120 100
Current account deficit A$ bn - 4-qtr moving total
US$ bn
US$739bn
80 60 40 20 0 -20 -40 00 01 02 03 04 05 06 07 08
Methods of financing Net equity Other net borrowing Banks' net borrowing Other (incl. reserves)
Sources: IMF; Australian Bureau of Statistics; ANZ.
Australian financial markets have come under the same pressures as their overseas counterparts
Banks’ short-term funding costs
125 100 75 50 25 0 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
90-day Libor spread over OIS (bp)
31
Corporate bond yield spreads
300 250 200 150 100 50 0 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08
AA spread over 5-7 yr gov't bond yields (bp)
US
US Australia
Australia
Banks’ long-term funding costs
150 125 100 75 50 25 0 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 US
5-year swap spread (bp)
Share prices
120
31 Dec 2006 = 100
Australia
110 100 90 80 70 Dec-06 Jun-07 Dec-07 US Australia Jun-08 Dec-08
Note: all data shown as 5-day moving averages. Sources: Bloomberg; Datastream.
As a result, banks have raised lending rates by more than the increases in the Reserve Bank’s official cash rate
Australian interest rates
16 14 12 10 8 6 4 2 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Cash rate
300 bp
32
% pa
Standard variable mortgage rate
180 bp 235 bp
Source: RBA.
The ‘credit crunch’ plus the effect of higher interest rates on credit demand has led to a sharp slowdown in credit growth
Credit provided to the Australian private sector
Total credit
18 16 14 12 10 8 01 02 03 04 05 06 07 08
% change from year earlier
33
Credit to households
25 20 15 10 5 0 01 02 03 04 05
Other personal
% change from year earlier
Housing
06
07
08
Credit by source
40 30 20 10 0 -10 -20 01 02 03 04
Securitized credit
% change from year earlier
Credit to business
By financial intermediaries
25 20 15 10 5 0
% change from year earlier
05
06
07
08
01
02
03
04
05
06
07
08
Source: Reserve Bank of Australia.
Tighter financial conditions and global uncertainty have contributed to sharp falls in confidence
Consumer confidence
140 130 120 110 0 100 90 80 90 93 96 99 02 05 08 Trend -10 -20 -30 90 93 96 99 02 05 Actual Trend
Ratio of optimists to pessimists (%)
34
Business confidence
40
Net balance of optimists minus pessimists (%)
Actual
30 20 10
08
Sources: Roy Morgan Research; nab; ANZ
‘Hard’ data is also increasingly suggesting that the economy is slowing – more quickly, perhaps, than expected
Retail sales
10 8 6 4 2 0 02 03 04 05 06 07 08
Actual % change from year earlier Trend
35
Housing finance commitments
60 40 20 0 -20 02 03 04 05 06 07 08
Actual % change from year earlier
Trend
Motor vehicle sales
15 10 5 0 -5 -10
% change from year earlier Trend
Residential building approvals
20 10 0
% change from year earlier Actual Trend
Actual
-10 -20 05 06 07 08 02 03 04 05 06 07 08
02
03
04
Sources: ABS; ANZ Economics & Markets Research.
Australia’s housing market has clearly softened but is unlikely to become as dire as America’s
House prices
20 15 10 5 0 -5 -10 -15 -20
% change from year earlier
36
Housing commencements
Australia
175 150 125 100
1990s average = 100
Australia
US
75 50 01 02 03 04 05 06 07
US
01
02
03
04
05
06
07
08
08
Population growth
2.0 1.5 1.0
US
% change from year earlier
Mortgage delinquency rates*
Australia
5 4 3 2 1 0
% of total loans outstanding
US
0.5 0.0 01 02 03 04 05 06 07 08
Australia
01
02
03
04
05
06
07
08
* 90 days or more past due. For Australia, securitized mortgages only. Sources: ABS; US Commerce Department; S&P; Mortgage Bankers’ Association of America.
The ‘resource boom States’ appear to be slowing more markedly than the rest of Australia
Retail sales
15 10 5 0 02 03 04 05
Rest of Australia
% change from year earlier (trend)
37
Employment
8 6 4 2 0 02 03 04 05 06
Rest of Australia
% change from year earlier (trend)
Qld, WA & NT
Qld, WA & NT
06
07
08
07
08
Housing finance commitments
30 20 10 0 -10 -20 -30
% change from year earlier (trend)
Unemployment rate
8
% (trend)
Rest of Australia
7 6 5 4 3
Qld, WA & NT Rest of Australia
Qld, WA & NT
02
03
04
05
06
07
08
02
03
04
05
06
07
08
Sources: ABS; ANZ Economics & Markets Research.
Economic growth will be much slower in 2008-09 than in recent years, and the unemployment rate will increase
Spending and output
8 7 6 5 4 3 2 1 0 -1 -2 01 02 03 04 05 06 07 08 09 GDP (output)
Real % change from year earlier
38
Employment and unemployment
4.0
% change from year earlier %
8
Domestic final demand
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 01 02 03 04 05
Employment (left scale)
7
6
5
Unemployment (right scale)
4
3
2 06 07 08 09
Sources: Australian Bureau of Statistics; ANZ.
The Reserve Bank has signalled that it will be cutting rates soon – probably beginning next month
Short-term interest rates
8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 01 02 03 04 05 06 07 08 09
RBA official cash rate 90-day bank bill yield
% pa
39
Yesterday’s RBA Board meeting left the cash rate unchanged at 7¼%, but signalled that ‘scope to move towards a less restrictive stance of monetary policy in the period ahead is increasing’ That probably means that they will cut the cash rate at next month’s meeting This earlier-than-expected rate cut likely stems from two considerations –
─ the further increase in banks’ lending
rates in July (when the RBA thought no further lift in official rates was needed) ─ the marked slowing in the economy over the past couple of months (perhaps more than they wanted)
There will likely be a second rate reduction before year-end (if only to ensure that lending rates do actually fall) Depending on the extent to which inflation begins to decline, rates will fall further during 2009
Sources: Thomson Financial; ANZ.
The prospect of lower interest rates and signs that commodity prices have peaked imply that the A$ is now heading lower
A$ and commodity prices
1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50 01 02 03 04 05 06 07 08 09
RBA index of commodity prices in US$ (right scale) A$ vs US$ (left scale)
US$ 2001-02 = 100
40
A$ and interest rate spreads
350 325 300 275 250 225 200 175 150 125 100 75 1.00 0.95 0.90 0.85 0.80 0.75 0.70 0.65 0.60 0.55 0.50
Spread between Australian & US 90-day interest rates (right scale) US$ 2001-02 = 100
600 500 400 300 200 100 0 -100
A$ vs US$ (left scale)
01 02 03 04 05 06 07 08 09
Sources: Datastream; Reserve Bank of Australia; ANZ.
After falling 28% from its peak the share market looks ‘cheap’ – but only if you are confident about the earnings outlook …
ASX All Ordinaries
7,000 6,500 6,000 5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000 01 02 03 04 05 06 07 08 12
Lowest since April 1991
31 Dec 1979 = 100
41
ASX trailing p/e ratio
24 22 20 18 16 14
10 01 02 03 04 05 06 07 08
Sources: ASX; Thomson Financial.
Earnings projections are more likely to be revised downwards over the next few months
Pre-tax company profits
(excludes financials)
10 9 8 7 6 5 4 3 2 1 0 88 93 98 03 08 88 93 98 03
42
50 40 30 20 10 0 -10 -20 -30
% change from year earlier (4-qtr moving average)
% of GDP (4-qtr moving average)
08
Sources: ASX; Thomson Financial.
43
Summary
The global credit crunch is continuing
– and won’t end until the US housing market bottoms out, which seems unlikely any time soon
The world economy is slowing
– the US hasn’t experienced recession yet, but probably will during the next 12 months – some other advanced economies will also fall into recession – in the developing world, by contrast, inflation is a bigger risk than recession
Australia’s economy is also slowing noticeably
─ rapid developing-country growth benefits Australia via its impact on commodity prices ─ but Australia is also exposed to the global credit crunch via our large current account deficit and the way in which it is financed ─ the effect of that exposure has been magnified by the upward trend in Australian interest rates (and oil prices) over the past 12 months
The next movement in Australian interest rates will be down
– with the first rate cut now likely to come as early as next month
The A$ has probably peaked against the US$
– the US$ may take another leg downwards against major currencies later this year as a US recession becomes more evident – but with Australian interest rates and commodity prices having peaked the A$ is now on a downward trend
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