2 -4 -2 0 2 4 6 8 10 00 05 10 15 % change A dvanced economies D eveloping economies 30 35 40 45 50 55 60 65 70 80 85 90 95 00 05 10 15 % of total Advanced economies Developing economies The global financial crisis has accelerated the shift of global economic weight from ‘advanced’ to ‘developing and emerging’ economies Note: GDP converted to US dollars at purchasing power parities (PPPs). Source: IMF World Economic Outlook (October 2010). Shares of global GDP GDP growth
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2
-4
-2
0
2
4
6
8
10
00 05 10 15
% change
Advancedeconomies
Developingeconomies
30
35
40
45
50
55
60
65
70
80 85 90 95 00 05 10 15
% of total
Advancedeconomies
Developingeconomies
The global financial crisis has accelerated the shift of global economic weight from ‘advanced’ to ‘developing and emerging’ economies
Note: GDP converted to US dollars at purchasing power parities (PPPs).Source: IMF World Economic Outlook (October 2010).
Shares of global GDPGDP growth
3
-8
-7
-6
-5
-4
-3
-2
-1
0
1
80 85 90 95 00 05 10 15
'Advanced'
'Emerging and developing'
% of GDP
‘Developing and emerging’ economy public finances are in much better shape than those of ‘advanced’ economies
Source: IMF World Economic Outlook Database (October 2010).
‘General government’ budget deficits
4
0
20
40
60
80
100
120
80 85 90 95 00 05 10 15
% of GDP
'Advanced'
'Emerging anddeveloping'
‘Developing and emerging’ economy public finances are in much better shape than those of ‘advanced’ economies
Source: IMF World Economic Outlook Database (October 2010).
‘General government’ gross debt
5Central banks in the major advanced economies are likely to keep monetary policy settings loose for an extended period
Sources: US Federal Reserve; Bank of Japan; European Central Bank; Bank of England.
Monetary policy responses to the financial crisis
Central bank balance sheets
0
50
100
150
200
250
300
350
400
07 08 09 10 11
% of GDP
US Federal Reserve
Bank ofEngland
European Central Bank
Bank of Japan
0
1
2
3
4
5
6
7
01 02 03 04 05 06 07 08 09 10 11
% pa
US
UK
Japan
Euroarea
Monetary policy interest rates
6Markets remain skeptical about the efficacy of euro area bailouts
Note: ‘gross debt’ defined as in the Maastricht Treaty. Sources: OECD Economic Outlook database; Thomson Reuters Datastream.
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
0 25 50 75 100 125 150
% of GDP
Belgium
Finland
France
Germany
Greece
Ireland
ItalyNetherlands
Portugal
Spain
% of GDP
'General government' gross debt
'Ge
ne
ral g
ove
rnm
en
t' n
et
bo
rro
win
g
Slovakia
Austria
0
100
200
300
400
500
600
700
800
900
1000
07 08 09 10 11
Basis points
Ireland
Portugal
Greece
Italy
Spain
‘PIIGS’ 10-year bond yieldSpreads over German ‘bunds’
Euro area budget deficits andgross public debt, 2011
7Australia’s economy has continued to perform more strongly than those of other industrialized nations
Sources: Australian Bureau of Statistics; US Bureau of Economic Analysis; Japan Economic &Social Research Institute; Eurostat; UK Office of National Statistics; Statistics Canada; US Bureau of Labor Statistics; Japan Home Ministry: Statistics New Zealand..
90
92
94
96
98
100
102
104
106
108
08 09 10 11
Dec 2007 = 100
Australia
Japan
US
UK
Euro area
Canada
NZ
Real gross domestic product
3
4
5
6
7
8
9
10
11
08 09 10 11
% of labour force
Australia
Japan
US
UK
Euro area
Canada
NZ
Unemployment rate
8That’s not to say that the financial crisis hasn’t had some significant consequences in Australia
Household net worth
500
520540
560580
600620
640
01 02 03 04 05 06 07 08 09 10 11
% of annual household disposable income
Household saving
-4-202468
1012
01 02 03 04 05 06 07 08 09 10 11
% of household disposable income
Previous estimates
Latest estimates
Credit growth
-30
-20-10
010
2030
40
01 02 03 04 05 06 07 08 09 10 11
% change from year earlier
Securitized credit(down 52% since Aug 2007)
'On-balance-sheet' credit
Average hours worked
140
141142
143144
145146
147
01 02 03 04 05 06 07 08 09 10 11
Hours per employee per month
Trend
Sources: ABS; RBA.
9Australia does not have a public debt problem
Government borrowing and net debt, 2010
Source: IMF World Economic Outlook October 2010 database. * Public debt figures for China, India and Russia are gross, not net debt
Australia is better-placed to benefit from China’s rapid growth and industrialization than almost any other Western country
Shares of Australia’s merchandise exports
Source: ABS.
0
10
20
30
40
50
60
90 95 00 05 10
% of total (12-mth moving average)
China
ASEAN
Korea
India
TaiwanHK
India
‘Emerging’ East Asia
0
10
20
30
40
50
60
70
80
90 95 00 05 10
% of total (12-mth moving average)
US
Other
EU
NZ
Japan
Other
11Australia’s economy is now more closely correlated with China’s than with the United States’
Note: correlation is over rolling 10-year periods. Source: Phillip Lowe, Assistant Governor (Economic), Reserve Bank of Australia. “The Development of Asia – Risks and Returns for Australia”, Address to Natstats 2010 Conference, Sydney, 16th September 2010.
Correlation between Australian and US-Chinese real GDP growth
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
80 85 90 95 00 05 10
%
Correlation withUS real GDP growth
Correlation with Chinesereal GDP growth
12The resources boom is back, generating rapid growth in incomes (which are not fully captured by movements in real GDP)
Note: Real gross domestic income (GDI) is real GDP adjusted for movements in the ratio of export to import prices (the ‘terms of trade’).Sources: Reserve Bank of Australia; Australian Bureau of Statistics.
Australia’s ‘terms of trade’ are at their highest sustained level in at least 140 years
Source: Glenn Stevens, ‘The Challenge of Prosperity’, Address to CEDA Annual Dinner, 29th November 2010;
Australia’s ‘terms of trade’(ratio of export prices to import prices)
Financial years ended 30 June
14
Australia’s ‘terms of trade’ have risen much more than those of other major commodity exporting nations
Note: ‘terms of trade’ is the ratio of average export to average import prices. Source: IMF, Australia: 2010 Article IV Consultation – Staff Report (Country Report No. 10/331), October 2010, p. 11.
Major commodity exporting nations: terms of trade
15Business investment, especially in the resources sector, will pick up substantially from an already elevated base by historical standards
Forecast for 2010-11 based on investment intentions reported to the ABS September quarter 2010 capital expenditure survey and assuming that those intentions are ‘realized’ to the same extent that they have been, on average, over the five years to 2009-10.Source: Australian Bureau of Statistics.
Business investment
0
25
50
75
100
125
150
01 02 03 04 05 06 07 08 09 10 11
Services and other Manufacturing Mining
A$bn
Year ended 30 June
(f)
0
1
2
3
4
5
6
7
8
9
89 91 93 95 97 99 01 03 05 07 09 11
% of GDP
Manufacturingand services
Mining
Year ended 30 June
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
01 02 03 04 05 06 07 08 09 10 11
%
Actual
Trend
78
79
80
81
82
83
84
85
01 02 03 04 05 06 07 08 09 10 11
%
Actual
Trend
16… at a time when the Reserve Bank thinks there’s only limited room for the economy to grow at an ‘above trend’ pace …
Sources: National Australia Bank; Australian Bureau of Statistics.
Capacity utilization Unemployment rate
Shaded areas denote periods when annual ‘underlying’ inflation exceeded 3%
17The Reserve Bank’s forecasts envisage above-trend growth in 2011 and 2012 with inflation moving towards the top of the 2-3% target range
Source: Reserve Bank of Australia, Statement on Monetary Policy, May 2009 and November 2010.
Real GDP
‘Trend growth’
Consumer prices
Reserve Banktarget range
Reserve Bank forecasts of economic growth and inflation
-2
-1
0
1
2
3
4
5
6
05 06 07 08 09 10 11 12
% change from year earlier
RBAforecasts
(Nov 2010)
RBAforecasts(May 2009)
0
1
2
3
4
5
6
05 06 07 08 09 10 11 12
% change from year earlier
'Underlying'inflation
'Headline'inflation
RBAforecasts
(Nov 2010)
RBAforecasts(May 2009)
18The downturn in net immigration will detract from economic growth and potentially exacerbate labour shortages
Source: ABS.
Net permanent and long-term arrivals to Australia
100
150
200
250
300
350
400
01 02 03 04 05 06 07 08 09 10
'000s (12-mth moving total)
19
How will the Queensland floods affect the economic outlook
Initially, by detracting from economic activity– note, damage to or destruction of existing property is not recorded as a subtraction from
economic growth (it is treated as a ‘balance sheet’ item in the national accounts)– however lost production due to flooded mines, impassable roads or rail, destroyed crops,
cancelled tourist visits and business closures and employees unable to get to work – likely to exceed $6bn (½% of annual GDP) - could result in negative March qtr GDP growth
Also by putting upward pressure on inflation– Qld produces 27% of Australia’s fruit (almost 100% of tropical fruit) and 30% of Australia’s
vegetables (45% of tomatoes) – prices of these items will rise sharply, adding to the March quarter CPI (similar to effect of Cyclone Larry on banana prices in 2006)
Restocking, replacement, rebuilding and reconstruction will subsequently boost economic activity
– replacement of household effects, business stocks etc will provide an almost immediate boost to spending
– repair or replacement of dwellings, infrastructure assets etc will add to economic activity over the remainder of 2011 and beyond (depending on availability of suitable labour)
Relief, recovery and reconstruction costs will adversely affect government budgets– Federal Budget provides only $80mn pa from 2011-12 on for disaster relief– yet under natural disaster relief arrangements Canberra picks up 75% of all eligible
expenditures
20So the non-mining sectors of the Australian economy are likely to be ‘squeezed’ by higher interest rates
Sources: RBA; ABS.
0
2
4
6
8
10
12
01 02 03 04 05 06 07 08 09 10 11
% pa
Officialcash rate
Average rate paid bysmall business
Mortgate rate
Shaded lines show average for past 12 years
Australian interest rates
6
7
8
9
10
11
12
13
14
01 02 03 04 05 06 07 08 09 10 11
% of household disposable income
Average for past 12 years
Household net interest payments
21Housing activity has already begun to turn down, and house prices have stopped rising
Note: housing finance commitments for owner-occupiers excludes refinancing and alterations & additions.Sources: ABS; RP Data – Rismark International.
Housing finance commitments - investors
100
120
140
160
180
200
220
01 02 03 04 05 06 07 08 09 10 11
'000s (annual rate)
Trend
Actual
Residential building approvals
2
34
56
78
9
01 02 03 04 05 06 07 08 09 10 11
$bn per month
Trend
Actual
Housing finance commitments – owner-occupiers
4
6
8
10
12
14
16
01 02 03 04 05 06 07 08 09 10 11
$bn per month
Actual
Trend
Australian house prices
200250300350400450500550600
01 02 03 04 05 06 07 08 09 10 11
A$ 000
Capital cities
Other
22Australian house prices are unlikely to rise much if at all from present levels over the next few years, but a US-style housing crash still looks improbable
Sources: RP Data – Rismark International; ABS; RBA Bulletin Statistical Tables; US Federal Reserve.
Australian house prices
200250300350400450500550600
01 02 03 04 05 06 07 08 09 10
A$ 000Capital cities
Other
Australian house-price-to-income ratio
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
01 02 03 04 05 06 07 08 09 10
Times Using ABS capital cityhouse price series
Using RP Data-Rismarkseries incl. units & non-capitals
Housing debt-assets ratio
Australian household debt-income ratio
25
50
75
100
125
150
175
90 95 00 05 10
%
Owner-occupiedhousing debt
Total debt
10
20
30
40
50
60
90 95 00 05 10
%US
Australia
23Almost two-thirds of Australian home-buyers have debt-service ratios below 30%, while mortgage delinquency rates remain very low
Source: Reserve Bank of Australia Financial Stability Review September 2010, pp. 41-42, and sources cited there.
Owner-occupier debt service ratios Non-performing housing loans
24Australian residential property prices are also supported by a large and growing shortfall of supply relative to underlying demand
Underlying demand for housing and net additions to the housing stock
0
25
50
75
100
125
150
175
200
225
02 03 04 05 06 07 08 09 10
Underlying demand
Net additions to supply
'000 dwellings
Net shortage of housing
0
50
100
150
200
250
300
350
400
450
02 03 04 05 06 07 08 09 10 11 12 13 14 19
'000 dwellings
Note: The ‘housing shortage’ is the cumulative gap between underlying demand and net additions to supply from a base of 2001. Projections from 2010 are based on ‘medium’ projections of demand (assuming net immigration of 180,000 per annum) and of supply in line with the average of completions less demolitions over the period 1980 to 2007. Sources: National Housing Supply Council , 2nd State of Supply Report 2010.
25It’s surprising that Australian households are saving more assiduously than their American counterparts – despite much better ‘fundamentals’
Sources: ABS; RBA; US Federal Reserve; US Bureau of Economic Analysis; US Bureau of Labor Statistics.
Consumer confidence
-3
-2
-1
0
1
2
3
01 02 03 04 05 06 07 08 09 10 11
Std deviations from long-run average
Australia
US
Employment growth
Household saving ratesHousehold net worth
450
500
550
600
650
01 02 03 04 05 06 07 08 09 10 11
% of annual householddisposable income Australia
US
-4-202468
1012
01 02 03 04 05 06 07 08 09 10 11
% of annual householddisposable income
Australia
US
-6
-4
-2
0
2
4
6
01 02 03 04 05 06 07 08 09 10 11
% change from year earlierAustralia
US (householdsurvey)
26
The mining boom and a weak US dollar are also putting upward pressure on the Australian dollar
Key influences on A$-US$ exchange rate
Sources: Thomson Reuters Datastream; Reserve Bank of Australia; US Federal Reserve.
100
200
300
400
500
600
700
800
01 02 03 04 05 06 07 08 09 10 110.50
0.60
0.70
0.80
0.90
1.00
1.101966= 100
A$ vs US$(right scale)
US¢
CRB index of commodity prices (left scale)
60
70
80
90
100
110
01 02 03 04 05 06 07 08 09 10 11
0.50
0.60
0.70
0.80
0.90
1.00
1.10March 1973= 100
A$ vs US$(right scale)
US¢
US$ vs other major currencies
(inverted, left scale)
Commodity prices
Value of US dollar
0
100
200
300
400
500
01 02 03 04 05 06 07 08 09 10 11
0.50
0.60
0.70
0.80
0.90
1.00
1.10Bps
A$ vs US$ (right scale)
US¢Australian- US 2- year bond yield spread
(left scale)
Interest rate spreads
010203040506070
01 02 03 04 05 06 07 08 09 10 11
0.50
0.60
0.70
0.80
0.90
1.00
1.10%
A$ vs US$ (right scale)
US¢VIX index of US share market volatility (left scale)
Share market volatility
27The strong A$ will have an adverse impact on ‘trade-exposed’ non-resource sectors such as manufacturing, tourism and education
Source: ABS.
Short term overseas arrivals and departures
2
3
4
5
6
7
8
01 02 03 04 05 06 07 08 09 10 11
Millions (annual rate)
Arrivals
Departures
The strong A$ will erode the competitiveness and profitability of non-resource exporters (including manufacturing, tourism and higher education) and businesses competing in the domestic market with imports (including parts of agriculture, manufacturing, tourism and some retailing)
This is one of the main channels through which ‘market forces’ facilitate the shift of labour and capital towards the expanding resources sector
There’s little if anything governments can or should do about this (beyond things which they should be doing anyway, such as regulatory reform): suppressing or offsetting these ‘market forces’ would simply result in higher inflation (as they did in the early 50s, mid-70s and early 80s)
Rather, businesses in adversely affected sectors will need to lift their own productivity performance in order to survive
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
90 95 98 02 06 10
% pa (5 year rolling average)
'Quality adjusted' hours worked'
Financial years ended 30 June
28
Australia’s productivity growth has slowed over the last five years, after 15 years of above average growth
Source: ABS, Experimental Estimates of Industry Multi-factor Productivity, Australia (5260.0.55.002). December 2010.
Labour productivity Multi-factor productivity*
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
90 95 98 02 06 10
% pa (5 year rolling average)
'Quality adjusted' hours worked'
Financial years ended 30 June
29
Relative to the US, Australian labour productivity is back to where it was in 1990
Australian labour productivity as a percentage of the US
Sources: The Conference Board Total Economy Database 2010 (EKS PPP adjusted lab. prod.); Grattan Institute.
The global financial crisis has accelerated the transition of economic gravity from ‘advanced’ to ‘emerging’ economies
– growth in most ‘advanced’ economies will be constrained by public and/or household debt burdens– by contrast most major developing economies have already returned to ‘trend’ growth, are not
troubled by unsustainable public debts, and are instead having to deal with inflationary pressures and potential asset price bubbles
Unlike most other ‘advanced’ economies, Australia stands to benefit significantly from this changing pattern of global economic activity
– given our resources endowment and existing strong trade links with Asia– there are some risks around our high levels of household and foreign debt, but Australia doesn’t
have a public debt problem
Australia’s economic challenge is to maximize the long-term benefits from the ‘resources boom’ whilst minimizing inflationary pressures
– our ability to meet that challenge will be enhanced by disciplined, credible economic policy frameworks that allow ‘market forces’ to facilitate structural change
– interest rates and the A$ will remain above historic averages as part of this process
Queensland floods will detract from growth and add to inflation in the near term, while providing a boost to growth beyond the current quarter
Australia needs to lift its productivity performance– not least in order to ensure that we still have a diversified and resilient economy whenever the
resources boom eventually comes to an end
31Important information
This document has been prepared by Saul Eslake (the author) on behalf of Corinna Economic Advisory Pty Ltd, ABN 165 668 058 69 (Corinna), whose registered office is located at Level 12, 114 William Street, Melbourne, Victoria 3000 Australia.
Copyright in this document is held by Corinna. This document has been prepared for the use of the party or parties named on the first page hereof. No part of the document is to be reproduced, made available online, circulated or distributed without written permission.
This document does not purport to constitute investment advice. It should not be used or interpreted as an invitation or offer to engage in any kind of financial or other transaction, nor relied upon in order to undertake, or in the course of undertaking, any such transaction.
The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable. The views expressed in this document are those of the author. Neither the author nor Corinna however makes any representation as to their accuracy or completeness and the information should not be relied upon as such. All views, opinions and estimates herein reflect the author's judgement on the date of this document and are subject to change without notice. Each of the author and Corinna expressly disclaim any responsibility, and neither of them shall be liable for any loss, damage, claim, liability, proceedings, cost or expense (Liability) arising directly or indirectly (and whether in tort (including negligence), contract, equity or otherwise) out of or in connection with the views, opinions and contents of and/or any omissions from this document except to the extent that a Liability is made non-excludable by legislation.
