Chief Economist, Commonwealth Bank of Australia
Australia & New Zealand In Perspective Better than most The Australian and New Zealand economies are resilient: GROWTH & UNEMPLOYMENT % % – the Australian expansion is entering its 27th year 8 8 and the last real recession was in 1990/91; Unemployment – New Zealand was caught up in the global financial (%) crisis but recovered quickly and has fared better than most. 4 4 Labour markets are solid but inflation rates are low. Public finances and financial systems remain in respectable shape . GDP growth Policy makers retain some firepower: 0 0 (%pa) – policy rates are well above zero; – the OECD says that Australia and New Zealand have considerable “fiscal space”. AUSTRALIA NEW ZEALAND The generational benefits of the Asian emergence -4 -4 Sep-06 Sep-10 Sep-14 Sep-06 Sep-10 Sep-14 continue. 3 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Australia In Perspective Better than all YEARS OF CONTINUOUS GROWTH The longevity of the current expansion is a record on Australian historical standards. Finland (1992-07) Australia has also set a new global record, overtaking the Netherlands as the economy with UK (1991-08) the longest economic expansion in the modern era France (1975-92) US (1991-08) Canada (1991-08) Netherlands (1983-08) Australia (1991-) 0 10 20 30 Years 4 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Commodity Headwinds Blown Out It should be easier to grow from here CBA COMMODITY PRICE INDICES CAPITAL SPENDING (USD terms, start=100) (% of GDP Index Index % % New Zealand Australia agriculral capex 400 400 (lhs) 1.4 6.6 300 300 200 200 0.7 3.3 New Australia Zealand mining capex 100 100 (rhs) Source: CBA Source: CBA/RBA 0 0 0.0 0.0 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16 1987/88 1994/95 2001/02 2008/09 2015/16 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 . 5 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
A Favourable Global Backdrop The importance of Asia COMMODITY PRICE CORRELATIONS GDP GROWTH CORRELATIONS (trailing 10-yr correlation) (Aus-US-China trailing 10-yr correlation) 1.0 1.0 with China GDP with 0.5 0.5 Advanced Economy GDP 0.0 0.0 with US GDP *Economist USD index Source: ABS/BEA/CEIC/RBA -0.5 -0.5 1980 1986 1992 1998 2004 2010 “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. 6 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Where Will The Growth Come From? Resources & agricultural exports AUS MINING CAPITAL & EXPORTS NZ AGRICULTURE CAPITAL STOCK (1986=100) (% of GDP) % % Index 60 14 490 Index 490 Source: StatsNZ Dairy cattle Mining farming capital stock 45 12 390 390 (adv 3 yrs) (lhs) Horticulture & fruit growing 30 10 290 290 Poultry, deer & Sheep, beef other livestock cattle & grain farming farming Resource 15 exports 8 190 190 (rhs) 0 6 90 90 1991 1996 2001 2006 2011 2016 1986 1990 1994 1998 2002 2006 2010 2014 The Australian resources sector is transitioning from the construction to export phase. Rising rural exports will help both Australia and New Zealand. 7 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Where Will The Growth Come From? Infrastructure MAJOR TRANSPORT INFRASTRUCTURE PROJECTS (PRE MAY 2017 BUDGET ) Source: Macromonitor, @MichaelPascoe01 8 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Where Will The Growth Come From? Asian incomes & the shifting centre of economic gravity 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). 9 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Where Will The Growth Come From? More students & more tourists AUSTRALIA: OVERSEAS ARRIVALS AVERAGE TOURIST SPEND (short-term, rolling annual total) Mn Mn (2016/17) 1.5 1.5 Thousands Japan New Indonesia Zealand Canada Thailand UK China USA 1.0 1.0 India Europe Hong Kong ex UK Germany Korea UK France 0.5 0.5 Taiwan Japan Scandinavia Netherlands Switzerland Italy India China 0.0 0.0 - 3,000 6,000 9,000 Jan 02 Jan 05 Jan 08 Jan 11 Jan 14 Jan 17 Source: Tourism Research Australia A$ Education and tourism flows are lifting. Chinese tourists spend the most. 10 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Where Are The Risks? High household debt & weak wage growth HOUSEHOLD DEBT PRIVATE SECTOR WAGES (% of GDP) (annual % change) % % % % 4.5 4.5 Australia 115 115 Australia 3.0 3.0 90 90 New Zealand 1.5 1.5 65 65 New Zealand Source: IIF Source: ABS/RBNZ 40 40 0.0 0.0 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 Household debt is at record highs and wages growth is subdued. There are downside risks to consumer spending as a result. 11 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Where Are The Risks? The housing market POPULATION (annual % change) % % Australia 2 2 1 1 New Zeland Source: ABS/StatsNZ 0 0 Mar-93 Mar-99 Mar-05 Mar-11 Mar-17 Concerns about overvalued housing markets look overdone. Demand is strong - population growth is robust in Australia and New Zealand. 12 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Executive Director Currency Rate Strategy & International, Commonwealth Bank of Australia 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
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. 14
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. End Period 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 15
Director FX Strategy & International Economics 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
CNY: De-leveraging Mid-cycle growth moderation amidst intensifying de-leveraging INTERBANK RATE AND BOND YIELD KEY ECONOMIC INDICATORS m/m, seasonally adjusted m%ch m%ch % % 2.0 2.0 8 8 CGB 3m (SDR 7-day repo Fixed Asset reference rate) Investment 1.5 1.5 trend 6 6 Retail Sales 1.0 1.0 4 4 0.5 0.5 Industrial Production 2 2 0.0 0.0 Jan 13 Jan 15 Jan 17 Jun 12 Jun 14 Jun 16 Jun 18 Source: CBA 17
CNH: De-internationalisation Continued renminbi de-internationalisation focuses on onshore linkage CNY FIXING & DXY CNH DEPOSITS IN HK CNH CNH bn bn 7.10 106 100 CNY fixing (lhs) 1,000 6.95 102 50 750 6.80 98 0 500 -50 6.65 94 250 Change (rhs) DXY (rhs) Total (lhs) 0 -100 6.50 90 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Jan 17 Mar 17 May 17 Jul 17 Sep 17 Source: CBA 18
Australian Trade Commissioner − Facilitator 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
Director FX Strategy & Australian Trade Executive Director Chief Economist, International Economics Commissioner − Currency & Rate Commonwealth Facilitator Strategy & International, Bank of Australia Commonwealth Bank of 1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
1f5fdde2f6ffc0ec546645a26573cc2be85d51cdfdde0854c1ffb6ff431b6956
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