24
Chief Economist, Commonwealth Bank of Australia
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69563
Better than most
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
The Australian and New Zealand economies are
resilient:
– the Australian expansion is entering its 27th year
and the last real recession was in 1990/91;
– New Zealand was caught up in the global financial
crisis but recovered quickly and has fared better
than most.
Labour markets are solid but inflation rates are low.
Public finances and financial systems remain in
respectable shape.
Policy makers retain some firepower:
– policy rates are well above zero;
– the OECD says that Australia and New Zealand
have considerable “fiscal space”.
The generational benefits of the Asian emergence
continue.
Australia & New Zealand In Perspective
-4
0
4
8
-4
0
4
8
Sep-06 Sep-10 Sep-14 Sep-06 Sep-10 Sep-14
%%
Unemployment(%)
GDP growth (%pa)
GROWTH & UNEMPLOYMENT
AUSTRALIA NEW ZEALAND
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69564
The longevity of the current expansion is a
record on Australian historical standards.
Australia has also set a new global record,
overtaking the Netherlands as the economy with
the longest economic expansion in the modern
era
Better than all
Australia In Perspective
0 10 20 30
Finland (1992-07)
UK (1991-08)
France (1975-92)
US (1991-08)
Canada (1991-08)
Netherlands (1983-08)
Australia (1991-)
Years
YEARS OF CONTINUOUS GROWTH
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69565
Australia is (successfully) digesting the end of the biggest commodity price and mining capex booms
ever seen.
New Zealand is exposed to the same commodity price and capex cycles.
It should be easier to grow from here
Commodity Headwinds Blown Out
0
100
200
300
400
0
100
200
300
400
Mar-00 Mar-04 Mar-08 Mar-12 Mar-16
IndexIndex
Australia
NewZealand
CBA COMMODITY PRICE INDICES(USD terms, start=100)
Source: CBA
0.0
3.3
6.6
0.0
0.7
1.4
1987/88 1994/95 2001/02 2008/09 2015/16
%%
Australiamining capex
(rhs)
New Zealandagriculral
capex(lhs)
Source: CBA/RBA
CAPITAL SPENDING(% of GDP
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69566
The importance of Asia
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
A Favourable Global Backdrop
“Asia” now drives Australian and New Zealand growth and incomes.
A positive view on Asia should mean a positive view on Aus/NZ as well.
-0.5
0.0
0.5
1.0
-0.5
0.0
0.5
1.0
1980 1986 1992 1998 2004 2010
with ChinaGDP
with AdvancedEconomy
GDP
COMMODITY PRICE CORRELATIONS(trailing 10-yr correlation)
*Economist USD index
with USGDP
GDP GROWTH CORRELATIONS(Aus-US-China trailing 10-yr correlation)
Source: ABS/BEA/CEIC/RBA
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69567
Resources & agricultural exports
Where Will The Growth Come From?
The Australian resources sector is transitioning from the construction to export
phase. Rising rural exports will help both Australia and New Zealand.
90
190
290
390
490
90
190
290
390
490
1986 1990 1994 1998 2002 2006 2010 2014
IndexIndex
Dairy cattlefarming
Sheep, beef cattle & grain
farming
NZ AGRICULTURE CAPITAL STOCK(1986=100)
Horticulture & fruit growing
Source: StatsNZ
Poultry, deer & other livestock
farming
6
8
10
12
14
0
15
30
45
60
1991 1996 2001 2006 2011 2016
%%
AUS MINING CAPITAL & EXPORTS(% of GDP)
Resourceexports
(rhs)
Mining capitalstock
(adv 3 yrs)(lhs)
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69568
Infrastructure
Where Will The Growth Come From?
MAJOR TRANSPORT INFRASTRUCTURE PROJECTS (PRE MAY 2017 BUDGET)
Source: Macromonitor,
@MichaelPascoe01
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b69569
The centre of economic gravity is shifting back east as Asian incomes rise.
The speed of transition is exceptional (140km or 88 miles per year).
Asian incomes & the shifting centre of economic gravity
Where Will The Growth Come From?
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b695610
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Where Will The Growth Come From?
More students & more tourists
Education and tourism flows are lifting.
Chinese tourists spend the most.
0.0
0.5
1.0
1.5
0.0
0.5
1.0
1.5
Jan 02 Jan 05 Jan 08 Jan 11 Jan 14 Jan 17
Mn
Th
ou
san
ds
Mn
China
India
AUSTRALIA: OVERSEAS ARRIVALS(short-term, rolling annual total)
NewZealand
Japan
UK
Europe ex UK
- 3,000 6,000 9,000
China
Italy
Switzerland
Netherlands
Scandinavia
Taiwan
France
Korea
Germany
Hong Kong
India
USA
UK
Thailand
Canada
Indonesia
Japan
A$
AVERAGE TOURIST SPEND(2016/17)
Source: Tourism Research Australia
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b695611
High household debt & weak wage growth
Household debt is at record highs and wages growth is subdued.
There are downside risks to consumer spending as a result.
Where Are The Risks?
40
65
90
115
40
65
90
115
Mar-99 Mar-03 Mar-07 Mar-11 Mar-15
%%
Australia
HOUSEHOLD DEBT(% of GDP)
Source: IIF
NewZealand
0.0
1.5
3.0
4.5
0.0
1.5
3.0
4.5
Mar-05 Mar-08 Mar-11 Mar-14 Mar-17
%%
NewZealand
Australia
PRIVATE SECTOR WAGES(annual % change)
Source: ABS/RBNZ
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b695612
The housing market
CBA TEI & THE CASH RATE
3.8
4.4
5.1
5.7
6.4
7.0
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05
-8
-5
-2
2
5
8
Cash
rate
(lhs)
CBA TEI*
(adv 9 mnths ,rhs)
%pa %pa
* Deviat ion from trend
Concerns about overvalued housing markets look overdone.
Demand is strong - population growth is robust in Australia and New Zealand.
Where Are The Risks?
0
1
2
0
1
2
Mar-93 Mar-99 Mar-05 Mar-11 Mar-17
%
Australia
New Zeland
POPULATION(annual % change)
Source: ABS/StatsNZ
%
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Executive Director Currency Rate Strategy & International, Commonwealth Bank of Australia
14
Japan’s Current Account Surplus Generates JPY Strength
Japan’s large current account surplus
(3.8% of GDP) generates a “natural”
tendency for the JPY to strengthen.
Large changes in Japan’s current account
surplus generate large changes in JPY.
U.S.–Japan interest rate (and bond)
differentials only make a difference on
USD/JPY exchange rate when the
differentials undergoes significant variation,
and Japan’s current account surplus is
stable.
JPY will strengthen modest against a
weakening USD over 2017-18.
15
AUD/JPY – Torn Between AUD and JPY Strength. Modest Upside.
AUD is heavily guided by Australia’s terms of trade, which
are rising, courtesy of higher commodity prices.
Japan’s terms of trade is trending lower as energy prices
lift modestly. A stronger Japanese economy is lifting
Japanese imports, restraining Japan’s trade surplus.
With interest rates low globally, Japanese investors are
moving out the yield curve. AUD/JPY is now more
correlated to changes in Australian ten-year bond yields.
With inflation low, we see modest upside in Australian ten-
year yields, and AUD/JPY, from this perspective.
Sep-17 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19
USD/JPY 110.00 109.00 108.00 105.00 104.00 103.00 102.00
AUD/USD 0.7900 0.8000 0.8200 0.8300 0.8400 0.8500 0.8600
AUD/JPY 86.90 87.20 88.56 87.15 87.36 87.55 87.72
End Period
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Director FX Strategy & International Economics
17
CNY: De-leveraging
Source: CBA
0.0
0.5
1.0
1.5
2.0
0.0
0.5
1.0
1.5
2.0
Jun 12 Jun 14 Jun 16 Jun 18
KEY ECONOMIC INDICATORSm/m, seasonally adjusted
m%chm%ch
Retail Sales
Fixed Asset Investment
trend
Industrial Production
Mid-cycle growth moderation amidst intensifying de-leveraging
2
4
6
8
2
4
6
8
Jan 13 Jan 15 Jan 17
INTERBANK RATE AND BOND YIELD
% %
7-day repo CGB 3m (SDR reference rate)
18
CNH: De-internationalisation
Source: CBA
90
94
98
102
106
6.50
6.65
6.80
6.95
7.10
Jan 17 Mar 17 May 17 Jul 17 Sep 17
CNY FIXING & DXY
CNY fixing (lhs)
DXY (rhs)
Continued renminbi de-internationalisation focuses on onshore linkage
-100
-50
0
50
100
0
250
500
750
1,000
Dec-09 Dec-11 Dec-13 Dec-15 Dec-17
Change (rhs)
Total (lhs)
CNH DEPOSITS IN HKCNHbn
CNHbn
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Australian Trade Commissioner − Facilitator
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Chief Economist,
Commonwealth
Bank of Australia
Executive Director
Currency & Rate
Strategy & International,
Commonwealth Bank of
Australian Trade
Commissioner −
Facilitator
Director FX Strategy &
International Economics
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
22
Important Disclosures & Disclaimer
23
Important Disclosures & Disclaimer
24
Important Disclosures & Disclaimer
