Chief Economist, Commonwealth Bank of Australia Australia & New - - PowerPoint PPT Presentation

Chief Economist, Commonwealth Bank of Australia

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Better than most

 The Australian and New Zealand economies are resilient: – the Australian expansion is entering its 27th year and the last real recession was in 1990/91; – New Zealand was caught up in the global financial crisis but recovered quickly and has fared better than most.  Labour markets are solid but inflation rates are low.  Public finances and financial systems remain in respectable shape.  Policy makers retain some firepower: – policy rates are well above zero; – the OECD says that Australia and New Zealand have considerable “fiscal space”.  The generational benefits of the Asian emergence continue.

Australia & New Zealand In Perspective

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4 8

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4 8 Sep-06 Sep-10 Sep-14 Sep-06 Sep-10 Sep-14 % % Unemployment (%) GDP growth (%pa)

GROWTH & UNEMPLOYMENT

AUSTRALIA NEW ZEALAND

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 The longevity of the current expansion is a record on Australian historical standards.  Australia has also set a new global record,

• vertaking the Netherlands as the economy with

the longest economic expansion in the modern era

Better than all

Australia In Perspective

10 20 30 Finland (1992-07) UK (1991-08) France (1975-92) US (1991-08) Canada (1991-08) Netherlands (1983-08) Australia (1991-) Years

YEARS OF CONTINUOUS GROWTH

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 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.

It should be easier to grow from here

Commodity Headwinds Blown Out

100 200 300 400 100 200 300 400 Mar-00 Mar-04 Mar-08 Mar-12 Mar-16 Index Index Australia New Zealand

CBA COMMODITY PRICE INDICES

(USD terms, start=100)

Source: CBA

0.0 3.3 6.6 0.0 0.7 1.4 1987/88 1994/95 2001/02 2008/09 2015/16 % % Australia mining capex (rhs) New Zealand agriculral capex (lhs)

Source: CBA/RBA

CAPITAL SPENDING

(% of GDP

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The importance of Asia

A Favourable Global Backdrop

 “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.

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0.0 0.5 1.0

• 0.5

0.0 0.5 1.0 1980 1986 1992 1998 2004 2010 with China GDP with Advanced Economy GDP

COMMODITY PRICE CORRELATIONS

(trailing 10-yr correlation)

*Economist USD index with US GDP

GDP GROWTH CORRELATIONS

(Aus-US-China trailing 10-yr correlation)

Source: ABS/BEA/CEIC/RBA

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Resources & agricultural exports

Where Will The Growth Come From?

 The Australian resources sector is transitioning from the construction to export

• phase. Rising rural exports will help both Australia and New Zealand.

90 190 290 390 490 90 190 290 390 490 1986 1990 1994 1998 2002 2006 2010 2014 Index Index Dairy cattle farming Sheep, beef cattle & grain farming

NZ AGRICULTURE CAPITAL STOCK

(1986=100)

Horticulture & fruit growing

Source: StatsNZ

Poultry, deer &

• ther livestock

farming 6 8 10 12 14 15 30 45 60 1991 1996 2001 2006 2011 2016 % %

AUS MINING CAPITAL & EXPORTS

(% of GDP)

Resource exports (rhs) Mining capital stock (adv 3 yrs) (lhs)

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Infrastructure

Where Will The Growth Come From?

MAJOR TRANSPORT INFRASTRUCTURE PROJECTS (PRE MAY 2017 BUDGET)

Source: Macromonitor, @MichaelPascoe01

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 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).

Asian incomes & the shifting centre of economic gravity

Where Will The Growth Come From?

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Where Will The Growth Come From?

More students & more tourists

 Education and tourism flows are lifting.  Chinese tourists spend the most.

0.0 0.5 1.0 1.5 0.0 0.5 1.0 1.5 Jan 02 Jan 05 Jan 08 Jan 11 Jan 14 Jan 17 Mn Thousands Mn China India

AUSTRALIA: OVERSEAS ARRIVALS

(short-term, rolling annual total)

New Zealand Japan UK Europe ex UK

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6,000 9,000 China Italy Switzerland Netherlands Scandinavia Taiwan France Korea Germany Hong Kong India USA UK Thailand Canada Indonesia Japan A$

AVERAGE TOURIST SPEND

(2016/17)

Source: Tourism Research Australia

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High household debt & weak wage growth

 Household debt is at record highs and wages growth is subdued.  There are downside risks to consumer spending as a result.

Where Are The Risks?

40 65 90 115 40 65 90 115 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 % % Australia

HOUSEHOLD DEBT

(% of GDP)

Source: IIF

New Zealand 0.0 1.5 3.0 4.5 0.0 1.5 3.0 4.5 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17 % % New Zealand Australia

PRIVATE SECTOR WAGES

(annual % change)

Source: ABS/RBNZ

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The housing market

 Concerns about overvalued housing markets look overdone.  Demand is strong - population growth is robust in Australia and New Zealand.

Where Are The Risks?

1 2 1 2 Mar-93 Mar-99 Mar-05 Mar-11 Mar-17 % Australia New Zeland

POPULATION

(annual % change)

Source: ABS/StatsNZ

%

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Executive Director Currency Rate Strategy & International, Commonwealth Bank of Australia

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Japan’s Current Account Surplus Generates JPY Strength

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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.

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AUD/JPY – Torn Between AUD and JPY Strength. Modest Upside.

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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.

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 End Period

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Director FX Strategy & International Economics

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CNY: De-leveraging

Source: CBA

0.0 0.5 1.0 1.5 2.0 0.0 0.5 1.0 1.5 2.0 Jun 12 Jun 14 Jun 16 Jun 18

KEY ECONOMIC INDICATORS

m/m, seasonally adjusted

m%ch m%ch Retail Sales Fixed Asset Investment trend Industrial Production

Mid-cycle growth moderation amidst intensifying de-leveraging

2 4 6 8 2 4 6 8 Jan 13 Jan 15 Jan 17

INTERBANK RATE AND BOND YIELD

% % 7-day repo CGB 3m (SDR reference rate)

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CNH: De-internationalisation

Source: CBA

90 94 98 102 106 6.50 6.65 6.80 6.95 7.10 Jan 17 Mar 17 May 17 Jul 17 Sep 17

CNY FIXING & DXY

CNY fixing (lhs) DXY (rhs)

Continued renminbi de-internationalisation focuses on onshore linkage

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50 100 250 500 750 1,000 Dec-09 Dec-11 Dec-13 Dec-15 Dec-17 Change (rhs) Total (lhs)

CNH DEPOSITS IN HK

CNH bn CNH bn

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Australian Trade Commissioner − Facilitator

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Chief Economist, Commonwealth Bank of Australia Executive Director Currency & Rate Strategy & International, Commonwealth Bank of Australian Trade Commissioner − Facilitator Director FX Strategy & International Economics

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Important Disclosures & Disclaimer

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Important Disclosures & Disclaimer

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Important Disclosures & Disclaimer