economics@1 Economics@
Ian JamesIan JamesSenior EconomistSenior EconomistANZ BankANZ Bank
BendigoBendigoJuly 21, 2004July 21, 2004
Presentation to AIM/ANZ Breakfast
Will the economy deliver for Bendigo small business in 2004/05?
economics@2 Economics@
Despite official data suggesting economic Despite official data suggesting economic weakness in the early months of 2004weakness in the early months of 2004
Economic (GDP) growth
Source: National Accounts ABS Cat.no. 5601.0
-1
0
1
2
3
4
5
00 01 02 03 04
%% changeover the year
% quarterly change
economics@3 Economics@
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
01 02 03
% yearly change
GDP
Australian economic growth
-6
-4
-2
0
2
4
6
8
01 02 03
% point contribution to change in GDP
Domestic final demand
Net exports
The domestic economy continues to power aheadThe domestic economy continues to power ahead
Sources of GDP growth
Source: National Accounts ABS Cat.no. 5601.0
economics@4 Economics@Source: Retail Trade ABS Cat. No. 8501.0
0
5
10
15
20
Food Departmentt Clothing Household Recreation Hospitality Other Total
Australia Victoria
annual % change, nominal terms
Retail trade continues to grow at scintillating rates Retail trade continues to grow at scintillating rates boosted in June by one off family paymentsboosted in June by one off family payments
(Jan-May 2004 v’s Jan-May 2003)
economics@5 Economics@
New motor vehicle sales have powered to record New motor vehicle sales have powered to record highs highs
0
5
10
15
20
25
PMV's SUV's Light Trucks HeavyTrucks
Total
Source: Vfacts & Sales of New Motor Vehicles ABS Cat. No. 9314.0
% sales growth Jan-Jun 2004 on 2003%
economics@Economics@Source: ABS
0
1
2
3
4
5
Bendigo/Loddon
December quarter 2003 vs December quarter 2002
Takings (% ch)
Guest Arrivals (% ch)
Domestic tourism numbers are rising with Domestic tourism numbers are rising with favourable benefits on tourism accommodation favourable benefits on tourism accommodation
Bendigo Loddon accommodation(hotels/motels/serviced apts)
economics@7 Economics@
Reflecting economic buoyancy, road transport Reflecting economic buoyancy, road transport activity is strong with latest figures showing activity is strong with latest figures showing annualised growth of 12.5% annualised growth of 12.5% -- the fastest in 15 yearsthe fastest in 15 years
-10
-5
0
5
10
15
20
Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04
Road transport(seasonally adjusted real prices)
Source: National Accounts ABS Cat. No. 5206.0
Annual % change
economics@8 Economics@
Consumer confidence has risen to the highest level Consumer confidence has risen to the highest level in a decade and business remains extremely bullishin a decade and business remains extremely bullish
80
85
90
95
100
105
110
115
120
Jul-98 Jul-00 Jul-02 Jul-04
0
10
20
30
40
50
60
70
Jun-98 Jun-00 Jun-02 Jun-04
Consumer sentiment SME Confidence
Source: Sensis andSource: Sensis and
economics@Economics@Source: ABS Cat. No. 6416.0
-10
-5
0
5
10
15
20
25
30
35
40
45
50
87 89 91 93 95 97 99 01 03
Sydney
ann % ch.
Brisbane
Melbourne
ABS house price growth
Consumer confidence has been underpinned by Consumer confidence has been underpinned by rapid house price growth in capital citiesrapid house price growth in capital cities
-10
-5
0
5
10
15
20
25
30
35
40
45
50
87 89 91 93 95 97 99 01 03
Adelaide
ann % ch.
Perth
Hobart
economics@10 Economics@
And throughout regional cities, towns, coastal And throughout regional cities, towns, coastal resorts and even rural hamletsresorts and even rural hamlets
0
5
10
15
20
25
Bendig
o
Strath
fields
aye
Kanga
roo Fl
at
Eagle
hawk
Goorno
ngElm
ore
March Qtr 2004 on March Qtr 2003 Last Ten Years
% change
Source: Residex Pty. Ltd.
Median House Price Growth
economics@11 Economics@
Property price growth has been faster in country Property price growth has been faster in country Victoria than in MelbourneVictoria than in Melbourne
0
2
4
6
8
10
12
14
16
Houses Units
Vic. Country Melbourne
l Underpinned by improved employment prospects in agriculture due to farm consolidation and growth in more intensive areas of agriculture.
l Movement of lower income groups out of metropolitan areas due to affordability.
l Growth of tourism.
l Lifestyle considerations.
l Investors seeking the better yields available in country towns than capital cities.
l Improved communications and upgrading of transport links to capital cities.
Source: Residex Pty. Ltd.
%%Median Prices
Annual growth as at March 2004
economics@12 Economics@
Other data gave evidence of a robust economy.Other data gave evidence of a robust economy.
l Non residential construction continues to run hot with plenty ofuncompleted work in the pipeline.
l The labour market remains strong and the unemployment rate remains at levels last seen 14 years ago.
l Business is experiencing good conditions with strong cash flows through business and profit share at close to record highs.
l Cost pressures remain reasonably subdued - a surprise given the boom conditions the economy experienced in the latter part of 2003.
l Advertising expenditure has been very strong.
l There has been a notable increase in information technology expenditure.
economics@13 Economics@
In shortIn short
l Macro economic conditions were super strong in the latter half of 2003 - as good as it gets for Australian business.
l Conditions were not as good in the early months of 2004 but nonetheless remained strong.
l Overall 2003/2004 will have been a great year for domestically based Australian business.
economics@14 Economics@
So after the buoyancy of last financial So after the buoyancy of last financial year, is the economy heading for a year, is the economy heading for a
hangover in 2004/05?hangover in 2004/05?
economics@15 Economics@
Australian economic growth will be assisted by Australian economic growth will be assisted by a buoyant world economya buoyant world economy
ll The world economy is enjoying its strongest growth in four yearsThe world economy is enjoying its strongest growth in four years..
l US economic growth has bounced back strongly assisted by massivepolicy stimulus with the Fed funds rate at 1.25%, tax cuts and increased government expenditure.
l As a consequence, the US economy is forecast to grow about 4.5% in 2004 – the best outcome since 1997.
l Japan’s sustainable upturn has been the big global growth surprise with growth of 2.7% in 2003 and on track to lift to 4.5% in 2004 with business conditions the best in six years.
l The Chinese economy is red hot with growth at around 10% and despite a cooling due to capacity constraints is expected to continue to grow strongly.
l Nearly all East Asian economies will record stronger growth this year.l The U.K. economy is strong and while the picture in the rest of
Europe is more subdued things are looking better after two dismal years.
economics@16 Economics@Source: ABS, Economics@ANZ
1.0
1.5
2.0
2.5
3.0
98 99 00 01 02 03 04
$bn (trend)Mining investment
Overseas tourist arrivals
-40-20
02040
01 02 03 04
% yearly change
Export growth
-40-20
0204060
98 99 00 01 02 03 04
% yearly changeFarm production
Exports are set for a sharp rebound as 2004 Exports are set for a sharp rebound as 2004 proceedsproceeds
-202468
1012
01 02 03 04 05
% yearly change
economics@17 Economics@
Rural Victoria is looking strongRural Victoria is looking strong
l Dairy opening season prices are stronger, water allocations are up on last year and feed costs will be lower.
l Non irrigated pasture growth is strong across the State suggesting bountiful feed, hay and silage this season.
l The winter crop harvest is looking good and world prices are holding well.
l Lamb prices are at record highs.
l Beef prices are strong underpinned by the continuing ban in North Asia of US beef imports while store cattle are fetching sensational prices as strong re-stocker demand continues.
l Wool prices have fallen from their unsustainable peak but the recent rise in oil prices is correcting the distortion that developed between wool and synthetic prices.
economics@18 Economics@Source: Sensis, NAB, ABS *adjusted for five year realisation ratios, nominal
6080
100120140160180
90 92 94 96 98 00 02 04
% Debt to equity ratio
Business confidence
05
101520
Conditions Confidence
Index
2004-05 investment plans
20
22
24
26
90 92 94 96 98 00 02 04
% of factor incomeProfit share
The macroeconomic environment for business The macroeconomic environment for business remains favourableremains favourable
-5
0
5
10
Manuf'ingMining Other Total
% change from previous year May 04 and June04
economics@19 Economics@
Consumer spending will be assisted by income Consumer spending will be assisted by income tax cuts to flow to higher income earners and tax cuts to flow to higher income earners and increased family benefits from July 1increased family benefits from July 1
17.24.84.74.33.4Families
Net change in revenue ($bn)
4.75
07-08
14.734.253.801.93Income tax cuts
Total06-0705-0604-05
Note: figures in this table are in accrual, not cash, terms
economics@20 Economics@
The housing sector refuses to die despite a The housing sector refuses to die despite a mature cycle mature cycle
Housing finance commitments Residential building approvals
579
111315
98 99 00 01 02 03
'000 (3-mth moving avge)Houses
02468
10
97 98 99 00 01 02 03 04
$bn
Note: Finance commitments are for the construction or purchase of all dwellings. Approvals arefor private sector only. Source: ABS.
234567
98 99 00 01 02 03 04
'000 (3-mth moving avge)
Apartments, etc.
Owner-occupiers
Investors
0
2
4
6
8
97 98 99 00 01 02 03 04
$bn
economics@21 Economics@
5
6
7
8
9
10
11
87 89 91 93 95 97 99 01 03 05
%
0
2
4
6
8
10
12
14
16
18
87 89 91 93 95 97 99 01 03 05
% p.a.
Real
nominal
Sources: ABS; Economics@ANZ
Mortgage rates Unemployment rate
And the two main ‘triggers’ that have caused past And the two main ‘triggers’ that have caused past ‘busts’ in the housing market are benign ‘busts’ in the housing market are benign
economics@22 Economics@
Despite strong credit growth the RBA says it Despite strong credit growth the RBA says it will not kill the golden goose will not kill the golden goose
Sources: RBA, Economics@ANZ.
Credit growthl The Reserve Bank for sometime has
viewed present interest rates as mildly stimulatory- out of sync with a booming economy.
l Credit growth remains strong led by housing credit growing at 20% p.a. and personal lending at 14%.
l Although the RBA remains concerned about the pace of credit growth reduced commitments will ensure a slowing over the rest of the year.
l The RBA also believes that the excesses of the property price boom have passed.
l Hence recent statements have sent a clear message that interest rates are on hold.
l However in our view an interest rate increase is more likely than not.
-5
0
5
10
15
20
25
99 00 01 02 03 04 05 06
% change from year earlier
housing
business
personal
economics@23 Economics@
Has the A$ peaked/bottomed? Has the A$ peaked/bottomed?
Sources: Datastream, Economics@ANZ
l Most of the rise in the A$ since early 2002 was due to the decline in the US$ but the sharp run up to US 80c was aided by the Australian dollar story i.e.
– strong economic performance– sharp acceleration in commodity
prices– and wide interest rate differentials
with overseas. l So why did the currency tank in April?
– a belief that the interest rate differential would narrow
– concern about China and the implications for commodity prices.
l However we believe that the markets have overshot and our modelling suggests that fair value is US74c.
l Hence the currency may rally again to beyond this value before weakening in 2005 back to 65c by end 2005.
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
93 94 95 96 97 98 99 00 01 02 03 0490
95
100
105
110
115
120
125
130
US$/A$ exchangerate (LHS)
RBA index of
commodity prices in
US$ (RHS)
US$ Index
Australian dollar
economics@24 Economics@
Economic growth should rebound in the second Economic growth should rebound in the second half of 2004 but the drivers of growth will changehalf of 2004 but the drivers of growth will change
-6
-4
-2
0
2
4
6
8
Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05
Net Exports
GDP
Domestic Spending
Sources: ABS; Economics@ANZ
% pointContribution to economic growth
economics@Economics@
Four key economic issues impacting on Four key economic issues impacting on business in the Bendigo regionbusiness in the Bendigo region
economics@26 Economics@
Will high oil prices sink the world Will high oil prices sink the world recovery?recovery?
economics@27 Economics@
0
20
40
60
80
100
72 76 80 84 88 92 96 00 04
$US/ barrel
Spot WTI
Oil (May '04 prices)
While oil prices pose a risk they need to be kept in While oil prices pose a risk they need to be kept in perspectiveperspective
Sources: Datastream; Economics@ANZ
WTI crude oil price
l The high oil price is as much a story of a booming world economy as of potential supply problems.
l Since 1980, oil in today’s prices have averaged US $24/ barrel compared to the present price of around US$40.
l While oil at record (nominal) terms unsettles investors, in real terms the oil price is lower than at the time of the last oil crisis.
l And efficiency gains and the development of alternative sources means the world has become less dependent on oil.
l However the market is especially sensitive to bad supply-side news.
l Any further sustainable price increases have the ability to stifle world economic growth.
economics@28 Economics@
Can more be done for Regional Can more be done for Regional Australia?Australia?
economics@29 Economics@
Absolutely with infrastructure the keyAbsolutely with infrastructure the key
0
5
10
15
20
25
30
35
1995/96 1997/98 1999/00 2001/02 2003/04
Government debtPublic Corporations debtTotal public sector debt
%
l Infrastructure provision rather than grants and subsidies are the key to creating a dynamic regional Victoria.
l Access to a rapid internet service is essential to promoting business in regional Australia.
l Good transport links are important– hence the recent announcement of funds to continue the upgrading of the Calder highway is welcomed.
l As is commitments from both Federal and State governments for rail upgrades.
l But more can be done
Government debt as a % of GDP
Source: Budgetary Strategy and Outlook 2004-05
economics@30 Economics@
Will debt sink the household sector?Will debt sink the household sector?
economics@31 Economics@Source: ABS, ANZ, RBA
Interest payments to income
Household debt to income ratio
0
40
80
120
160
90 92 94 96 98 99 02 04
%
2
4
6
8
10
88 90 92 94 96 98 00 02 04
%Total
Housing
Household saving ratio
-4-202468
10
90 92 94 98 00 00 02 04
%, trend
Household borrowing
-505
10152025
93 95 97 99 01 03
% change over the year Housing
Personal
Household debt accumulation has been highHousehold debt accumulation has been high
economics@32 Economics@
And furtherAnd further
l And after years of building equity in their homes Australians are indulging in a new game – net equity withdrawal – with latest data suggesting that it is now close to 10% of household incomes.
l Hence Australian households have placed themselves in the position where they are more vulnerable to economic shocks.
l Have Australian households lost their marbles?l Debt accumulation has been driven by key structural changes
– declines in inflation and interest rates since the early 1990s– financial innovation and competition among lenders – a widely held belief that property is the place to be– generational and superannuation concerns.
l These developments have been a key driver of the strong surge in property prices and the subsequent rise in wealth has in turnallowed household spending to grow at a much faster rate than disposable income.
l So house prices become an important economic determinant.
economics@33 Economics@
Will established house prices crash?Will established house prices crash?
economics@Economics@
-30
-20
-10
0
10
20
30
40
Sydney Melb Bris Adelaide Perth Hobart AllCapitals
Sources: ABS; Economics@ANZ. Note: “Affordability” calculated for buyer on average incomewith 20% deposit for given level of mortgage interest rate.
% % deviation in house prices from ‘fair value’at March quarter 2004
% deviationa year earlier
Affordability constraints are beginning to pressure Affordability constraints are beginning to pressure house prices and hence household wealthhouse prices and hence household wealth
economics@35 Economics@
-30
-20
-10
0
10
20
30
40
50
60
86 90 94 98 02 06 10
%
Rea
Sources:, ABS; REIV, Economics@ANZ
-30
-20
-10
0
10
20
30
40
50
60
86 90 94 98 02 06 10
%
Rea
% deviationfrom fair-value
House prices(Annual %Change)
‘Soft-landing’ (a) ‘Front-load’ adjustment (b)
House prices(Annual %Change)
% deviationfrom fair-value
(a) Assumes adjustment to over-valuation occurs over a comparable period to previous episode (7 years)
(b) Assumes adjustment occurs more quickly, sentiment turns against housing, causingundervaluation by end of decade
But in our house prices will be tempered by the But in our house prices will be tempered by the favourable macrofavourable macro--economic environmenteconomic environment
economics@36 Economics@
ConclusionsConclusions
l The Australian economy has performed strongly in recent times, underpinned by a booming household sector.
l Economic conditions remain strong in the short-term with household expenditure gaining some support from the budget initiatives while growth will be supported by a recovery in exports.
l Domestic economic conditions will likely moderate from later this year
– households can’t keep borrowing to fund consumption and the housing cycle is turning down.
– a housing bust is unlikely, although price falls are possible.l Australian interest rates are on hold for now.l Australian economic growth is expected to be similar to this year
largely due to a recovery in the external sector.l The Australian dollar will hold its recent recovery on the back of
short term $US weakness but by 2005 will be headed down.
economics@37 Economics@
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