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 2

The path back towards balance 3

11 years of deficit 1. 4

The terms of trade have come down a long way (index, 2012/13=100) 5

Australia’s deficit is smaller than that of most other countries 6

Australia’s non-existent government debt problem 7

The economic background..but what if something goes wrong? 8

Underlying cash balance (% of GDP). Still too good to be true? 9

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 3.0 3.0 3.0 3.0 2.9 3.0 3.0 3.1 3.0 2.9 2.9 2.9 Zealand 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 10

Oil prices generally bounce hard 11

Resources investment (% of GDP) 12

Financial Market Forecasts Now End-Dec End-Jun (29 May) 2015 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 13

The Australian Dollar and US Trade Weighted Index Index AUD/USD 180 1.12 AUD/USD (RHS) 1.03 161 0.94 142 0.85 122 0.76 US TWI inverted (LHS) 0.67 103 0.58 84 0.49 64 0.40 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 Source: Datastream 14

Volatility has picked up in the exchange rate 15

Australian Share market Performance – ASX200 7000 6500 6000 5500 5000 4500 4000 3500 3000 2500 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 Source: Bloomberg 16

The Australian market is above fair value (forward p/e ratio) 17

But the P/E tends to be higher when the cash rate is lower 18

And yields in the share market still beat the alternatives 19

Australia has kept pace with the developed world ex US 20

We have been in almost perfect sync with the United States market. 21

The labour market data are looking a little better. Has unemployment peaked? 000’s % 12000 7.5 11500 6.9 Employment (LHS) 11000 6.3 10500 5.8 10000 5.2 9500 4.6 9000 Unemployment Rate (RHS) 8500 4.0 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 Source: ABS 22

Contribution to employment growth in the year to February 23

Australian inflation is not an issue % 7 BT Forecasts Headline CPI Underlying inflation 6 5 GST Effect 4 3 2 1 0 Mar-90 Jun-93Sept-96Dec-99 Mar-03 Jun-06Sept-09Dec-12 Mar-16 Source: ABS 24

Household financial ratios 25

House Prices - Australia v Sydney Index (1987 = 100) 750 Sydney 700 Australia 650 600 550 500 450 400 350 300 250 200 150 100 87 89 91 93 96 98 00 02 05 07 09 11 14 Source: ABS

Australian houses are the biggest in the world (sq m per capita) 27

House prices have risen everywhere, particularly in Sydney ($’000s) 28

Prices have been rising rapidly in Sydney only in the past year (% increase year to April 2015) 29

Where’s the bubble? Average house price increase in the past ten years 30

Credit growth has picked up, driven by investors 31

The investors are now in charge 32

Investors have been piling in in New South Wales 33

Not much of the borrowing by investors finances new dwellings! 34

Gross Domestic Product % 6 Qtly growth Year-to growth Non-farm year-to growth 5 BT Forecasts 4 3 2 1 0 -1 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 Source: ABS 35

Global Medium-Term Economic Growth and Inflation Prospects (2015-2025) 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 Ss: Consensus Economics 36

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 37

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. � � 38 �

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