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					Economic & Financial Outlook AIBF
Melbourne, 19 May, 2004

Jeff Oughton - Group Economics

National’s Macroeconomic Base Case…

Sustained Spending & Low Inflation in Australia Change in Mix of Growth/Business Activity

US leads a Global Recovery
Asset Returns Back to “Normal” Cash Rates Returning to Neutral, Bond Yields Rise Significantly, USD Stabilises & $A Retraces From 5 year High Equities Perform & House Price Rises Cool, Not Crash Risks Now More Balanced Some Vulnerabilities Remain Good Times Most Likely to be Sustained……!!!!
1

National’s Macroeconomic Base Case…

US & Asia lead a Global Recovery Global Asset Returns Back to “Normal” Cash Rates Returning to Neutral, Bond Yields Rise Significantly, USD Stabilises

2

Global Baseline … US sustains recovery….. Euro stabilises & joins in…... Go China……& Asia Leading to ….. Stronger World in 2004 …..&…..2005

World GDP Growth
annual % change annual % change

8
Non-Japan Asia

8
(f)

6

6

World

4

30 yr av.

4

2

US

2

Euro Area

0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

0

3

Global Cash Rates …. Set to rise during 2004 & 2005… Returning to Neutral………...Australia,NZ & UK Lead the Way…...
%

Global Cash Rates

%

8

8

6

Australia UK

6

4

4

2

EMU US

2

0 Dec-93

0 Aug-95 Apr-97 Dec-98 Aug-00 Apr-02 Dec-03 Aug-05 Jun-06 Jun-96 Feb-98 Oct-99 Jun-01 Feb-03 Oct-04

Oct-94

4

Non-Commodity Exports……Pick up Driven by global recovery ……...underpins Australian growth
Export Volumes & Major Trading Partner Growth
25
% y/y % y/y

MTP demand rhs
20

(f)

6

15 4 10 2

5

Non-commodity exports lhs
0 0 -5

-10 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04

-2

Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05

5

World Watch…….Macro Risks Abroad

• US policy very stimulatory, little room to maneouvre - current account & fiscal deficits very large (ie very susceptible to confidence in global markets) • Geo-political tensions…..spill over into trade & oil prices • Asian economic overheating & hanging together politically…. • Elsewhere, global activity still weak - Europe stabilising, but lacking real economic reform. • Lots hanging on US recovery being sustained & Asia playing catch up

6

Australian Economic Outlook
Sustained Growth Different Mix - Household Moderation Property Markets & Exports Tight Labour Markets

7

Australia… One of The Best Recent Performers around the Globe in past 10 yrs
”Explaining the Miracle” ……..Will Strong Growth Be Sustained ?
Real GDP
160

? ? Yes !!!

Index Mar 1991=100

160 150 140 130 120 110 100 90 Mar-91 Mar-94 Mar-97 Mar-00 Mar-03 Sep-92 Sep-95 Sep-98 Sep-01

Australia
150

US
140 130 120 110 100 90

Japan Euro UK NZ MTPs

8

National’s Business Survey………...Current Conditions……. Some Moderation in Domestic Strength ….But Still Robust

B u s in e s s C o n d itio n s b y In d u s tr y
T r e n d In d e x M o n th ly 2 0 0 2 , 2 0 0 3 & 2 0 0 4 T r e n d In d e x

40

40

30

30

20

20

10

10

0

0

-1 0 M a n u fa c tu r in g C o n s tr u c tio n -2 0 R e ta ilin g W h o le s a lin g
T r a n s . & U tilitie s A g r ib u s in e s s F in , B u s & P r o p R e c & P e rs

-1 0

-2 0

-3 0 J a n -0 2

-3 0

J u l-0 2

J a n -0 3

J u l-0 3

J a n -0 4 A p r-0 4

J a n -0 2

J u l-0 2

J a n -0 3

J u l-0 3

J a n -0 4 A p r-0 4

A p r-0 2

O c t-0 2

A p r-0 3

O c t-0 3

A p r-0 2

O c t-0 2

A p r-0 3

O c t-0 3

Construction activity cooling from very strong levels!!!!!!!
9

Sustained GDP Growth……Better Balance & Different drivers………. Closely Watching Dwelling Activity & Prices & Exports
GDP Growth - Composition
-3 -2 -1 0 1 2 3 4 5 6 7

Private consumption Dwelling investment Business investment Private Final Demand Public Final Demand Stocks GNE Exports Imports Farm GDP GDP
-3 -2 -1 0 1 2 3 4 5 6 7

2003 2004

Percentage Points - contributions to GDP during calendar year

10

Overall, short to medium term growth outlook…….. GDP (Australia’s output/income) Drought, weak external dd, rising $A…… interest rates “on hold” until late 2003 Rain, global recovery,tightening labour market, rising gearing……. tighter policy 03/04?
D o m e s tic D e m a n d & G D P
D o m e s tic D e m a n d (G N E )
6

% y/y

% y/y

8

8

(f)
6

4

4

Average

2

GDP

2

0

0

-2 S e p -8 9

-2 S e p -9 1 S e p -9 3 S e p -9 5 S e p -9 7 S e p -9 9 S e p -0 1 S e p -0 3 S e p -0 4
11

S e p -9 0

S e p -9 2

S e p -9 4

S e p -9 6

S e p -9 8

S e p -0 0

S e p -0 2

Australian Risks
Property Markets & Increased Household Gearing Tight Labour Markets Rain & World

12

Australian House Prices……Bubble???? No, But Increased Risks Yes, Households Worried, But Pessimism Should Be Avoided
Australian House Prices
% of respondents
80

$ooos/index 80 700 US S&P

$ooos/index

700

Yes

600
60 60

600

500

500

400
40 40

400
Aust. S&P

300
-5: 5% -10:- 5%
20

300

5:10%

No
20

200
Aust. House Prices

200

100
DK
0

100

-15:-10% -20:-15%

10:15%
0

Price Bubble?

Price Expectations For 2004 % Change

Dec-83 Jun-85 Dec-86 Jun-88 Dec-89 Jun-91 Dec-92 Jun-94 Dec-95 Jun-97 Dec-98 Jun-00 Dec-01 Jun-03 Dec-04

0

0

13

Housing Cycle………..Boom & Bust?? “Neutral” interest rates & limited excess ss…..mild downturn in activity & cooling prices
Dwelling Commencements - Australia
50,000
Quarterly Starts (F)

50,000

45,000

45,000

40,000

40,000

35,000

35,000

30,000

30,000

25,000
Dec-1985 Dec-1989 Dec-1993 Dec-1997 Dec-2001 Dec-1987 Dec-1991 Dec-1995 Dec-1999 Dec-2003

25,000
Dec-2005

14

Consumer health…….in Australia (v world) Indebtedness measures need to be examined carefully…... •Measures that relate debt to income (“financial health”) overplay the fragility of households …leaves out equity in home and investment properties, super etc. •The big picture is mostly about unemployment & interest rates, not debt per se. •Real problems arise when a lot of people lose ability to service loans…..distress & fire sales

15

Farm sector… Reversal of $A Helps, But More Rain Please
Farm Production
50% Farm Product (LHS) 40% 30% 30% 20% 10% 0% -10% -20% -10% -30% -40% -50% Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar- Mar87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 -20%
-10000 -5000

N et V alue of Farm Production
50%
15000

Rural Exports (RHS)

(F)
40%
10000

Net Value of Farm Production Change in NVP

20%
NVP $m

5000

Av

10%

0

0%

-30%
1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

16

Capacity Utilisation …Relatively High…..Watching for Wage & Price Pressures Significant Constraints on Sales/Output…..esp., People & Plant & Premises (3P’s!)
Capacity Utilisation, Demand & Supply Pressures
Cap U & Wages
% Rate 84 % oya

Demand & Supply Pressures
% of respondents

Capacity Utilisation - lhs

6

50

Labour availability

50

82

*

5
40 40

80 4
Premises & plant
30

Sales

78

*
Labour costs - rhs

30

3

76

20

20

2
Materials availability

*
74

Estimate for Q2

1

10

10

Sep-89 Jun-90 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94 Dec-94 Sep-95 Jun-96 Mar-97 Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03

Sep-89 Jun-90 Mar-91 Dec-91 Sep-92 Jun-93 Mar-94 Dec-94 Sep-95 Jun-96 Mar-97 Dec-97 Sep-98 Jun-99 Mar-00 Dec-00 Sep-01 Jun-02 Mar-03 Dec-03

17

Financial Summary Asset Markets Returning to Normal
House price rises cooling, Equity prices recovering Cash Rates Returned to Neutral, Rising Long Bond Yields “Normal” Sloping Yield Curves Exchange Rates driven by “fundamentals”

18

Key Economic Drivers of Financial Markets….An Aside

International & Domestic Forces
 Interest Rate Markets Cash, bills, bill futures, bonds Bond Markets Domestic economic news & monetary policy announcements. International factors i.e. US Bond Market, inflation and policy/country premium

 Currency Markets Spot & Futures  Share (Equity) Markets Industrials sector Resources sector

Commodity prices, interest rates, economic growth, inflation, balance of payments

Australian economic growth, profitability & interest rates Commodity prices, world growth & AUD

“What Moves Yields in Australia” RBA Discussion Paper by Frank Campbell & Eleanor Lewis (Aug 1998).

19

Global Equity Markets ..……..Tech Wreck…..Pork Pies…. (Temporarily) Scared by War…... Now Positioning for Growth, Buts? Betting on Underlying Growth & Earnings Path & Normal Times!

20

Australian House Prices…..wow……& why!!!….cooling or crashing?
$000's

500.0

Quarterly M edian House Prices - M oving Avg

450.0

SYDNEY ADELAIDE HO BART

M ELBO URNE PERTH DARW IN

BRISBANE CANBERRA

400.0

350.0

300.0

250.0

200.0

150.0

A perfect mix in 2001-02..03-04?: • Low inflation • Low interest rates ? • Low $A ? • Falling equities? • Gov’t assistance schemes? • Halving of Cap Gains Tax • Sustained growth • Falling unemployment • Easy & “innovative” finance? • Immigration • Supply? •“Animal”

100.0

A few Qs?????
Be alert & aware!!!!
D ec -93 D ec -94 D ec -95 D ec -96 D ec -97 D ec -98 D ec -99 D ec -00 D ec -01 D ec -02 D ec -03

50.0

0.0

Japan,Germany, HK…. Aussies in early 90s
21

$A story very much a $US story… now some local dynamics as well.

1 0 .9 0 .8 0 .7 0 .6 0 .5 0 .4

M o d e l & C o n fid e n c e in te rv a ls v A c tu a l
S truc tura l B re a k

Ac tua l

Ja n -8 4

Ja n -8 5

Ja n -8 6

Ja n -8 7

Ja n -8 8

Ja n -8 9

Ja n -9 0

Ja n -9 1

Ja n -9 2

Ja n -9 3

Ja n -9 4

Ja n -9 5

Ja n -9 6

Ja n -9 7

Ja n -9 8

Ja n -9 9

Ja n -0 0

Ja n -0 1

Ja n -0 2

Ja n -0 3

Ja n -0 4

Our models, based on our global forecasts suggest current “fair value” of US 0.76c

However, confidence intervals (or forecasting errors) are a wide +/- 4¢.
We expect to see the $A move back to the low $US 0.70 range in late 2004, as commodity prices peak and interest differentials narrow.
22

Ja n -0 5

2004/05 Federal Budget…….. Growth dividend spent on forthcoming election…Slightly Stimulatory....
T a b le 1 : B u d g e t A g g re g a te s:
2 0 0 4 /0 5 ($ b n ) 2 0 0 3 /0 4 B u d g e t E s tim a te s (a ) - % of G DP -1 .1 -0 .1 2 0 0 6 /0 7 ($ b n ) 2 .8 0 .3

Structural Surplus / Deficit - Australia
% of GDP
SURPLUS

% of GDP 96 Budget

2 99 Budget

2

2 0 0 4 /0 5 B u d g e t E s tim a te s P o lic y D e c is io n s   O u tla y s R evenues -7 .7 (*) -1 .7 -0 .2 1 1 .5 1 .8 0 .3 -9 .1 (*)

0

2000 Budget
2002 Budget 03 Budget

0

-4 .4 0 .0 1 3 .0 -0 .5 -0 .1

04 Budget

N e t in v e s tm e n t (A s s e t s a le s e tc ) E c o n o m ic p a ra m e te r c h a n g e s T o ta l C h a n g e (b ) - % of G DP

-2
Pre 96 Budget

-2

-4

-4

F is c a l B a la n c e (a ) + (b ) - % of G DP C a s h B a la n c e

0 .7 0 .1 2 .4

2 .3 0 .2 3 .4
DEFICIT

-6 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

-6

(*) $ 1 ½ b illio n s p e n t p rio r to 2 0 0 4 /0 5 B u d g e t
23

Inflation Outlook….Upside Risks …$A & Tight Labour Market Near Term Undershoot v Longer Term Upside Potential
H e a d lin e & U n d e rlyin g C P I - 1 2 M th to %
4 .0 %

3 .5 %

3 .0 %

RBA TARGET RANGE
2 .5 %

2 .0 % U N D E R L Y IN G C P I H E A D L IN E C P I 1 .5 %

1 .0 %

J u n -0 2

J u n -0 3

J u n -0 4

S e p -0 1

S e p -0 2

S e p -0 3

S e p -0 4

J u n -0 5

D e c -0 1

D e c -0 2

D e c -0 3

D e c -0 4

S e p -0 5

D e c -0 5
24

M a r-0 2

M a r-0 3

M a r-0 4

M a r-0 5

Monetary Policy: RBA

• Why RBA has moved? • Money very accommodative • Global picture improving • Domestic economy strong & not much spare capacity • Rural/internationally exposed sectors turning up • Fiscal policy looser in 2004 (election & tax cuts & new spending) • And housing still strong…..Needed a shot across the bows • Why RBA worried? • On housing “bubble”, RBA not worried that bust will cause systemic problems for most financial institutions. •Nor concern that most households might “drown in debt” - ample equity built up (available to be draw down) to survive temporary unemployment. •Rather concern is that consumers under some stress will continue to meet their mortgages, household spending & activity will slow markedly.
25

National’s view of RBA/monetary policy ……How much tighter & timing?

•Why the RBA stopped/paused? •Housing credit & prices cooling, •Seasonal conditions •$A reversal •“wait & see” • Keys to Watch…US, $A, Housing & Labour Markets • National’s view……a pause….another move in next few months •Probably don’t need much more - remember cash rates at around 6 1/2 to 7% takes as much out of household incomes as 18% in late 1980s!!!!.
26

National’s View Cash …A Bit More in Next Few Months…… Bonds ….Heading (steadily) higher with CPI & World…..Positive Slope….
%

Australian Outlook - Cash, Bills & Bonds
(f)

%

9

9

8
10 Year Govt. Bonds

8

7

7

6
90 day Bills

6

5
RBA cash

5

4 Jan-96Jan-97Jan-98Jan-99Jan-00Jan-01Jan-02Jan-03Jan-04Jan-05 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05

4

27

National v Bill Market… Market Expectations of a Bit More…..Bills around 6% by end 2005
90 Day Bank Bills - National v Market Forecasts
%

7
National's
Feb 00

7%
Base Case

6.5 6

6.5 6 5.5

Jan 03

Jun 02

19 May 04

5.5
24 Mar 04

5 4.5 4 3.5
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

7 Jan 03
24 Jul 03

5 4.5 4

90 Day Bills - Actual
19 June 03

Dec 01

Futures (f)

3.5
Jan-04 Jan-05 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03

28

National v Consensus ……..GDP & Bill Rates - 1 Year Ahead Forecasting Performance ….National : Similar on GDP .. Better on Rates
Australian GDP Forecasts
6
% Annual Average % Annual Average

Australian 90-day bank bill - year ahead forecast
6 6.5
% Annual Average % Annual Average

6.5

2004
High

2005
5

High

5

6
NAB

6

4

NAB Consensus

4 5.5

Actual Consensus

5.5

3

Low

3

5
Low

5

2

2

4.5

4.5

1 Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 Mar-04 Jan-04 Mar-04

1

4 Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

4 May-05

Mar-03

Jul-03

Nov-03

Mar-04

Jul-04

Nov-04

Mar-05

Drought, world, war
29

National’s view….Fixed v Floating? Risks & Margin Normal/neutral - cash 5.5%, 3yrs +70 bps + margin, 5 yrs + 100 bps + margin
%

Fixed v Floating

20 18 16 14 12 10 8 6 4

%

20 18 16 14 12

3 year swap

10 8

"Neutral"

6

90 day bill

4

2 2 Aug-86 Aug-88 Aug-90 Aug-92 Aug-94 Aug-96 Aug-98 Aug-00 Aug-02 Aug-04 Aug-87 Aug-89 Aug-91 Aug-93 Aug-95 Aug-97 Aug-99 Aug-01 Aug-03 Aug-05

30

Australian v Global Bonds…Rising Rates ….Narrowing Differential With US Pick up in Activity & Inflation …Tighter Monetary Policy

%

Global Bond Rates

%

10

10

8

8

Australia
6

UK

6

4

4

EMU US
2 Dec-93 2 Aug-95 Apr-97 Dec-98 Aug-00 Apr-02 Dec-03 Aug-05 Jun-06 Jun-96 Feb-98 Oct-99 Jun-01 Feb-03 Oct-04

Oct-94

31


				
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