A post-Budget economic and market outlook Dr Chris Caton June - - PowerPoint PPT Presentation

A post-Budget economic and market outlook

Dr Chris Caton June 2015

The missing guest at the growth party

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The path back towards balance

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11 years of deficit

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The terms of trade have come down a long way (index, 2012/13=100)

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Australia’s deficit is smaller than that of most other countries

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Australia’s non-existent government debt problem

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The economic background..but what if something goes wrong?

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Underlying cash balance (% of GDP). Still too good to be true?

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2015 Growth Forecasts (%)

Month of Forecast

J-14 J-14 A-14 S-14 O-14 N-14 D-14 J-15 F-15 M-15 A-15 M-15 Australia 3.0 2.8 2.9 2.9 2.9 2.9 2.8 2.7 2.7 2.6 2.6 2.5 New Zealand 3.0 3.0 3.0 3.0 2.9 3.0 3.0 3.1 3.0 2.9 2.9 2.9 US 3.1 3.0 3.1 3.1 3.1 3.0 3.0 3.2 3.2 3.1 2.9 2.5 Japan 1.2 1.3 1.2 1.3 1.2 1.3 1.2 1.2 1.3 1.1 1.0 0.9 China 7.1 7.2 7.2 7.1 7.1 7.1 7.0 7.0 7.0 7.0 6.9 6.9 Germany 2.0 2.0 2.0 1.8 1.5 1.4 1.3 1.4 1.5 1.8 1.9 2.0 UK 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.7 2.7 2.6 2.5 “World” 3.2 3.2 3.3 3.2 3.2 3.1 3.0 3.0 2.8 2.8 2.7 2.6

Source: Consensus Economics

Oil prices generally bounce hard

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Resources investment (% of GDP)

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Financial Market Forecasts

Now (29 May) End-Dec 2015 End-Jun 2016 AUD/USD 0.766 0.72 0.70 Official cash rate (%) 2.00 2.00 2.25 10 Year Bond yield (%) 2.78 3.00 3.25 ASX 200 5715 5800 6000

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The Australian Dollar and US Trade Weighted Index

Source: Datastream

0.40 0.49 0.58 0.67 0.76 0.85 0.94 1.03 1.12 64 84 103 122 142 161 180 1/3/00 2/27/014/24/026/19/038/13/0410/6/0512/4/061/28/083/20/094/30/10 6/14/11 7/24/12 9/4/1310/15/14 Index AUD/USD US TWI inverted (LHS) AUD/USD (RHS)

Volatility has picked up in the exchange rate

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Australian Share market Performance – ASX200

Source: Bloomberg

2500 3000 3500 4000 4500 5000 5500 6000 6500 7000 1/31/93 9/30/94 5/31/96 1/30/98 9/30/99 5/31/01 1/31/03 9/30/04 5/31/06 1/31/08 9/30/09 5/31/11 1/31/13 9/30/14

The Australian market is above fair value (forward p/e ratio)

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But the P/E tends to be higher when the cash rate is lower

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And yields in the share market still beat the alternatives

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Australia has kept pace with the developed world ex US

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We have been in almost perfect sync with the United States market.

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The labour market data are looking a little better. Has unemployment peaked?

Source: ABS

4.0 4.6 5.2 5.8 6.3 6.9 7.5 8500 9000 9500 10000 10500 11000 11500 12000 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 000’s % Employment (LHS) Unemployment Rate (RHS)

Contribution to employment growth in the year to February

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Australian inflation is not an issue

Source: ABS

1 2 3 4 5 6 7 Mar-90 Jun-93Sept-96Dec-99 Mar-03 Jun-06Sept-09Dec-12 Mar-16 Headline CPI Underlying inflation % BT Forecasts GST Effect

Household financial ratios

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House Prices - Australia v Sydney

Source: ABS

100 150 200 250 300 350 400 450 500 550 600 650 700 750 87 89 91 93 96 98 00 02 05 07 09 11 14

Sydney Australia

Index (1987 = 100)

Australian houses are the biggest in the world (sq m per capita)

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House prices have risen everywhere, particularly in Sydney ($’000s)

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Prices have been rising rapidly in Sydney only in the past year (% increase year to April 2015)

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Where’s the bubble? Average house price increase in the past ten years

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Credit growth has picked up, driven by investors

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The investors are now in charge

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Investors have been piling in in New South Wales

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Not much of the borrowing by investors finances new dwellings!

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Gross Domestic Product

Source: ABS

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1 2 3 4 5 6 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 Mar-16 Qtly growth Year-to growth Non-farm year-to growth %

BT Forecasts

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Ss: Consensus Economics

GDP Inflation Australia 2.8 2.6 New Zealand 2.6 2.0 United States 2.5 2.0 United Kingdom 2.3 1.9 Sweden 2.2 2.0 Norway 2.1 2.2 Spain 2.1 1.4 Canada 2.0 1.9 Switzerland 1.5 0.9 Netherlands 1.5 1.6 Eurozone 1.5 1.6 Germany 1.4 1.6 France 1.4 1.5 Italy 1.1 1.4 Japan 1.0 1.5

Global Medium-Term Economic Growth and Inflation Prospects (2015-2025)

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Asia-Pacific Medium-Term Economic Growth and Inflation Prospects (2015-2025)

GDP Consumer Prices

India 7.4 5.2 China 6.0 2.6 Indonesia 5.6 4.8 Philippines 5.3 3.9 Malaysia 4.7 3.2 Thailand 3.7 2.5 Singapore 3.2 1.7 Hong Kong 2.9 2.8 Taiwan 2.8 1.5 Australia 2.8 2.6 South Korea 2.7 2.2 New Zealand 2.6 2.0 Japan 1.0 1.5

Source: Consensus Economics

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Summary

à The big question in the US is when will rates begin to rise and how quickly? à Growth prospects have improved in the Eurozone. à We will always worry about China. à The Australian economy should continue to experience only moderate

• growth. The mining investment boom has ended with no significant pickup

to date in non-mining capex. à The cash rate may be on hold. à The exchange rate may fall further. à The Australian share market is above fair value. à Budgets come and Budgets go.

Disclaimer

This presentation has been prepared by BT Financial Group Limited (ABN 63 002 916 458) ‘BT’ and is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. BT does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this presentation. Except insofar as liability under any statute cannot be excluded, BT and its directors, employees and consultants do not accept any liability for any error or omission in this presentation or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise noted, BT is the source of all charts; and all performance figures are calculated using exit to exit prices and assume reinvestment of income, take into account all fees and charges but exclude the entry fee. It is important to note that past performance is not a reliable indicator

• f future performance.

This document was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author. For more information, please call BT Customer Relations on 132 135 8:00am to 6:30pm (Sydney time)

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