Economic & Financial Market Outlook FINPRO Presentation - - PowerPoint PPT Presentation

FINPRO Presentation Melbourne

CBA Global Markets Research

Economic & Financial Market Outlook

John Peters Director, Economics +(612) 9117 0112 25-26 May 2017

1

Overview

 Global growth to remain sub-trend in 2017 & 2018

• advanced economies on a two-speed path – US

to outperform EZ, UK & Japan;

• Fed to raise rates very slowly – Two more ¼%

moves to 1¼%-1½% range in 2017;

• China facing a structural slowdown but policy

stimulus should see cyclical pick up (6.5%pa).  Economic policy and markets

• Central Banks to keep monetary policy settings

in easing bias mode (except USA) as world tries to escape from deflation.  Key Global Risks

• Geopolitical Crisis e.g. escalating conflict in South

China Sea (China vs US & Asian Allies).

• US President Trump implementing mercantilist

agenda i.e. anti free trade measures etc.

• China economic/financial meltdown and or China

RMB devaluation

• Failure of quantitative easing in Europe & Japan

2

Our View (cont)

.  Australian growth transition proceeds unevenly - mining sector non-mining activity – economy dealing with the mining capex downturn quite well at the aggregate level; – resource exports delivering a significant growth boost; – the consumer and non-mining exports are sources of upside risk; – weak income growth the main downside risk – commodity prices and wages the keys; – the economy’s potential growth rate has stepped down (to ≈ 2¾%pa). – Budget’s increase in infrastructure spending will help boost growth in medium term  Economic policy and markets – RBA has a neutral bias – RBA concerns about house prices will see the next policy move a rate hike.; – We see RBA lifting the cash rate by ¼% to 1¾% in QIV 2018. – RBA preference for stimulus via lower AUD/Infrastructure spending – infrastructure prospects improved but more fiscal policy action needed as there is plenty of “fiscal space”. Net government debt <20% of GDP. – AUD to remain under downward pressure as US Fed lifts rates and RBA stays benched.

3

 CBA forecasts envisage sub-trend global growth continues, although the pace of growth should lift.  Expected outcomes would provide a relatively benign backdrop for the Australian economy.  EM economies to outperform AE’s. China should do better than the

• consensus. Ending of recessions

in Brazil and Russia help.  Higher commodity prices to help commodity and oil exporters.  Brexit to weigh on the UK and, to a lesser extent, the EZ.  Expansionary policies may see the US surprise on the upside.

CBA Global Economic Forecasts

CBA Global Growth Forecasts 2015

(a)

2016

(f)

2017

(f)

2018

(f)

World

2.9 2.7 3.2 3.4

United States

2.6 1.7 2.4 2.7

Japan

1.2 1.0 0.9 0.6

Eurozone

1.9 1.6 1.7 1.7

United Kingdom

2.2 1.9 1.6 1.6

Canada

0.9 1.2 2.1 2.1

China

6.9 6.8 6.8 6.6

India

7.3 7.2 7.0 7.6

New Zealand

2.5 3.2 3.5 3.6

4

 The centre of economic gravity is shifting back east.  The speed of transition is exceptional (88 miles per year).

The shifting centre of economic gravity

Income Opportunities

5

Real Global GDP Growth by Economic Grouping

 IMF forecasts Australian economy likely to post average annual GDP growth of 2.9% between 2016-2020 – the highest among major advanced economies which are likely to grow on average by 2% in 2016-2020. Global Growth China’s Growth Australia’s Growth Emerging Economies Advanced Economies

6

 Australia has completed 25 years of uninterrupted economic growth.  The IMF worries about the downside risks to its global growth forecasts: – but those for Australia left unchanged in latest estimates.  Public finances and the financial system remain in reasonable shape: – the AAA rating remains.  Policy makers are prepared to use their remaining firepower if needed.  The generational benefits of the resources boom and the Asian emergence continue.

The economy is into its 26th year of continuous growth

Australia In Perspective

• 3

3 6

• 3

3 6 1959/60 1971/72 1983/84 1995/96 2007/08 % %

AUSTRALIA: ECONOMIC GROWTH

(annual % change)

25 years

7

Australia In Perspective

Growth outperformance since the GFC ….. and from 2005!

8

Budget Overview

Key numbers

 Underlying cash deficit for 2017/18 put at $29.4bn (1.6% of GDP) a reasonable improvement on the deficit of $37.6bn (2.1%

• f GDP) now expected in 2016/17.

 Underlying cash deficit narrows from here, achieving a small surplus of $7.4bn (0.4% of GDP) by 2020/21.  The net operating balance reaches surplus a year earlier, in 2019/20.  Net debt peaks (as a share of GDP) in 2018/19 at 19.8%.  The outcomes require rising revenues and significant spending restraint.

• 6
• 3

3

• 6
• 3

3 1996/97 2001/02 2006/07 2011/12 2016/17 2021/22

FISCAL INDICATORS

(deficit(-) / surplus(+))

% of GDP % of GDP

Budget (f)

Underlying cash balance Net Operating balance

9

Budget Overview

Key themes

 Adherence to the medium-term fiscal strategy: – Fiscal discipline will return Budget to surplus and then allow debt reduction.  Infrastructure: – Large transport investment outlays will lift growth, jobs and productivity.  Housing affordability: – Affordability will marginally improve by a limited lift in assistance to First Home Buyers, grants to lift new supply, reductions in investor tax deductions and the “ghost tax”.  Company tax cuts: – Lower company tax with higher write-offs will lift investment.  Education: – Needs-based funding for all schools. Higher education students face higher fees.  Higher taxation – Higher Medicare levy, foreigner investors to pay more, higher levy on foreign workers, a new levy on banks.

10

Budget Overview

Infrastructure



Ramping up infrastructure spending is a major Budget theme.



The Government’s infrastructure plan involves investing $75 billion in transport infrastructure between 2017/18 and 2026/27.



The aim is to boost growth and productivity.



The main infrastructure projects to get the go ahead are:

–

Western Sydney Airport - up to $5.3 billion committed for the Badgerys Creek Airport, commencing works in 2018;

–

Inland rail - $8.4 billion to connect Brisbane with Melbourne;

–

$1 billion infrastructure package for Victoria; and

–

$1.6 billion for new Western Australian projects.



“Good” debt to be used to fund projects. The Government is currently using equity and debt financing for a number of major infrastructure projects.

11

Budget Overview

New Revenue & Saving Measures

 Over the next four years, four key revenue and savings measures will save $20.1bn.  Measures include: – Increase in the Medicare levy – estimated to raise $8.2bn over the next four years; – Major bank levy – estimated to raise $6.2bn over the next four years; – HECS reform – estimated to save $3.7bn over the next four years; – Jobs for families package – estimated to save $2.0bn over the next four years.

2 4 6 8 2 4 6 8 2017/18 2018/19 2019/20 2020/21 $bn BUDGET REVENUE & SAVINGS

($ per year)

$bn Jobs for families HECS reform Major bank levy Increased medicare levy

12

Judging The Budget

 Budget 2017 shows an upgrade to budget projections for the first time in a number

• f years.

 Nevertheless, the planned surplus for 2020/21, if achieved, would still represent the most drawn out period of Budget repair in at least 60 years.

Is the medium-term fiscal strategy on track?

• 6
• 3

3

• 6
• 3

3

• 2

2 4 6 8 10 Years from peak deficit

FISCAL CONSOLIDATION

(% of GDP)

Current (2009/10) 1975/ 76 1983/ 84 % % 1992/ 93

13

Judging The Budget

 The Budget projects wages growth to run at 2.5% in 2017/18. This looks credible.  But wages growth is forecast to progressively accelerate and to be running at 3.75% in 2020/21. This is an optimistic assumption and represents a best case scenario.  Wages outcomes have undershot Budget forecasts over the past six years  Risks are skewed to the downside given there is elevated slack in the labour market and underutilisation (i.e. unemployment plus underemployment) is high.

Are the wage assumptions plausible?

• 6
• 2

2 6

• 0.4

0.0 0.4 0.8 Jun 00 Dec 04 Jun 09 Dec 13 %

Underemployment (LHS) Wage momentum (reflects inflation and inflation expectations) (LHS)

PRIVATE SECTOR WPI GROWTH

%

Contributions to wages model relative to average WPI fitted model (RHS) WPI actual (RHS)

14

Judging The Budget

Does the focus on “good” and “bad” debt help?

 The government has livened up the fiscal debate by introducing the idea of “good” and “bad” debt.  Beyond the theatrics, this distinction should prove useful in shifting the debt-is- evil mindset and allowing a sensible debate

• n how to fund the day-to-day running

costs and longer-term infrastructure needs.  We have argued this proposition for a while.  But the focus must be more than just physical infrastructure. And not all infra- structure is good. The quality of spending matters.  The ratings agencies will focus on total debt – good and bad.

100 200 300 400 500 100 200 300 400 500 2006-07 2009-10 2012-13 2015-16 $bn $bn "Good" debt

GOVERNMENT DEBT

(share of CGS on issue)

Source: CBA approx

"Bad" debt

15

Infrastructure: a missed opportunity – low interest rates?

Judging The Budget



Exceptionally low borrowing rates are an attraction for more infrastructure spending.



Borrowing and paying interest is an effective way of sharing the cost of long- life assets among the users over time.

16

 Ongoing deficits plus an infrastructure push mean Commonwealth net debt will climb further to 19.5%of GDP in 2017/18 before peaking at 19.8%of GDP in 2018/19 thereafter tracking lower to 17.6% of GDP by 2020/21.  This number will remain the focus of attention by policymakers, markets and rating agencies.

Judging The Budget

Where is the debt?

50 100 50 100 Public sector Private business Households % Common- wealth %

AUSTRALIAN GROSS DEBT IN 2016

(% of GDP)

Source: Treasury

States Public corporations

• 7

7 14 21

• 7

7 14 21 1974/75 1984/85 1994/95 2004/05 2014/15

COMMONWEALTH BUDGET

(% of GDP)

% %

Budget (f)

Net Debt Budget balance

17

Australian Economic & Financial Market Outlook- 2017 & 2018

` Direction of Risk

• Global Growth 

World economy to grow by 3.4% pa.

• Domestic Growth

 Local economy to grow by 2¾-3¼% pa.

• Dwelling Investment

 Record low interest rates support housing activity.

• Monetary Policy

 RBA has cut rates to record low 1½% - likely cyclical low. No rates hikes likely in 2017 or HI 2018.

• Underlying CPI

 CPI at 2.1%pa in QI2 017. QI Core CPI 1.8% pa. RBA sees core inflation below 2-3% target until 2018.

• Unemployment

 Unemployment is 5.7% - peaked for cycle at 6.4% in early 2015. Unemployment to track lower toward 5½% over 2017 & 2018.

• AUD Outlook

 Trade mostly in US$0.71-US$0.78 zone in 2017 & 2018.

18

Australian Economy: GDP Grew 1.1% and 2.4%pa 2016 in QIV 2016

.

• 15

15 30

• 15

15 30 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 % %

GDP

(annual % change)

Consumer spending Housing Business Investment Gov't Net Exports (cont. to growth)

% ch Contrib.

(ppts)

GDP Of which: Consumer spending 0.9 0.5 Dwelling invest. 1.2 0.1 Business invest. 1.6 0.2 Public spending 1.5 0.3 Inventories ~

• 0.2

Gross National Expenditure 1.0 1.0 Imports 1.4

• 0.3

Exports 2.2 0.5

19

GDP Growth: Drivers & Restraints Tailwinds/Positive Drivers

 Record low interest rates  Firm Population growth  Strong residential construction upswing  China: strong export volume growth  Lower AUD – 35% below MOST recent peak of USD1.10  Rising wealth (super, housing, equities)  Commodity prices have bottomed, now rising again (Terms of Trade)

20

GDP Growth: Drivers & Restraints Headwinds/Restraints

 Sharp contraction in mining investment  Weak non-mining investment  Soft business confidence  Relatively high household savings ratio  Record low wages growth  Diffident consumers  Global risks/fears

21

Australian Economy: GDP to Grow by 2¾-3¼% in 2017 & 2018

STRONGEST GROWTH OUTLOOK

• LNG projects, construction & exports. Iron ore exports.
• Mining operation, related equipment & services.
• Infrastructure – roads, rail, water, power, utilities.
• related construction, engineering & services.
• Housing construction, alts & adds.
• Household goods/ services, education & health services.
• Domestic & Inbound tourism.

MODERATE TO LOW GROWTH OUTLOOK

• Staples – groceries, food, hardware, communications
• Outbound tourism & internet buying, imported car sales.
• Cafes, restaurants etc;
• Defence.
• Commercial construction, rentals (?) & fit-outs
• Discretionary retail – clothing/shoes, cosmetics, a/visual.
• Manufacturing – high tech, mining, metals/wood related.

SECTORS WITH DOWNSIDE RISK

• Coal & iron ore mining –construction & exploration.
• Retail exposed to internet-based alternatives.
• Manufacturing – car industry, textiles & food groups.

22

No surprises…

Consumers still cautious

 Consumer spending grew by a touch under 3% (i.e. 2.9%) in 2016.  Spending has run well below the pre- financial-crisis period where growth around 4-5%pa was seen as normal.  The factors that produced that early 2000s period of robust growth – sustained rises in wealth and leverage – are unlikely to be repeated.  But other forces are at work that may see consumers fill some of the gap left by weaker than expected non-mining capex.  These include: ongoing jobs growth as well as very low rates and rising house prices, especially in Eastern State capital cities.

• 3

3 6 9 12

• 3

3 6 9 12 Sep-98 Sep-01 Sep-04 Sep-07 Sep-10 Sep-13 Sep-16

CONSUMER INDICATORS

Saving ratio (rhs) %pa % Consumer spending (lhs)

23

 Dwelling starts are at record highs. The ≈225k starts in 2015 and 2016 were well above “normal” levels around 155k.



A residential construction boom was the inevitable outcome of the background conditions in 2012:

–

strong population growth;

–

rising student and foreign investor demand;

–

pent-up demand from the earlier period

• f underbuilding;

–

falling mortgage rates lifting affordability and increasing the attractiveness of housing as an investment.  These drivers have now eased back.

An extreme boom

Growth Tailwinds Easing

100 150 200 100 150 200 Sep-86 Sep-95 Sep-04 Sep-13 Dwelling commencements '000 '000

DWELLING CONSTRUCTION

(rolling annual total)

Building approvals

24

 Slower population growth means less housing demand at a time of rising supply.  The accumulated or pent-up demand for housing at the national level is now satisfied.

Slower population growth & satiated demand

Growth Tailwinds Easing

150 300 450 150 300 450 1949/50 1964/65 1979/80 1994/95 2009/10

POPULATION DRIVERS

'000 '000 Net migration Natural increase

• 100

100 200

• 100

100 200 Sep-90 Sep-96 Sep-02 Sep-08 Sep-14

Demand Supply

'000

Pent-up demand Excess supply

CBA: HOUSING DEMAND & SUPPLY

'000

25

 The transition to non-mining led growth is proceeding at varying speeds.  A residential construction boom is underway but there are fears the boom is nearing a peak.  Non-mining capex has failed to lift as planned.  And weak public infrastructure spending has not helped economic growth.

What’s Not

Missing links in the growth transition

60 80 100 120 60 80 100 120 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Index Index Residential construction Non-mining capex Government capex

TRANSITION DRIVERS

(end 2012=100)

Source: ABS

26

CBA Forecasts

 Dwelling commencements hit a record high in 2016.  The peak is at hand but construction activity to remain well above the 155k “normal” level.  CBA dwelling starts forecasts: – 2012: 153k – 2013: 170k – 2014: 202k – 2015: 226k – 2016: 232k – 2017: 211k – 2018: 193k

Growth Tailwinds Easing

130 155 180 205 230 130 155 180 205 230 1998 2002 2006 2010 2014 2018 '000 '000 Average 2005-12 (ex 2010 stimulus boost) Boosted by government stimulus package

DWELLING COMMENCEMENTS

CBA (f)

27

Housing Outlook

Issues & Drivers of Domestic Property Markets in 2017

■ Economic Growth + Positive for Property ■ Monetary Policy

+ + Record low interest rates positive for property

■ Underlying CPI

+ In check for now - very positive

■ Unemployment

+ To head down towards 5½% in 2016 & 2017.

■ AUD Outlook

+ Lower AUD makes real estate attractive to foreigners.

■ Population growth + Strong growth via immigration – unequivocal positive ■ Lucrative tax breaks + + Boosts local housing investor demand substantially. ■ RBA/APRA measures - -

Macro-prudential measures capping investor loans

28

From “bubble” to “bust”?

Some New Challenges

 For a bubble, rising dwelling prices need to be accompanied by: – rapid growth in housing credit over short periods; – easing lending standards; and – expectations of ongoing price gains.  Equally, for a bust falling dwelling prices need to be accompanied by: – higher interest rates; and – higher unemployment.

   

30 60 90 10 20 30 Sep-98 Sep-02 Sep-06 Sep-10 Sep-14 % %pa Housing credit (lhs)

HOUSING BUBBLE INDICATORS

House price expectations (net % expecting higher prices, rhs) New home loans with LVR>80% (% of total, rhs) Low doc loans (% of total, rhs)

29

Building approvals easing in March (in January)

Table 1: Residential Building Approvals – March 2017 ABS data sa NSW Vic Qld SA WA Tas ACT trend NT trend Aust Level, no.

5089 5433 2853 876 1587 190 308 49 16484

%chg mth

• 25.8
• 1.0
• 21.3

0.3

• 1.9

13.1

• 7.2
• 18.3
• 13.4

% ann chg

• 18.4
• 6.6
• 37.2
• 27.3
• 18.9

10.5

• 35.4
• 60.2
• 19.9

Ann total ‘000s

74.2 67.9 42.8 11.2 20.6 2.1 5.6 1.1 225.4

2 4 6 8 10 12 2 4 6 8 10 12 Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

DWELLING APPROVALS

(monthly, sa)

Multi-unit Houses '000 '000 20 40 60 80 20 40 60 80 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

• RESID. BLDG APPROVALS

(rolling annual total)

'000 SA WA QLD NSW VIC ROA '000

30

Labour Market Has Been Under Pressure As Economy Transitions!

• Employment growth in Australia was estimated to be running at 1.6%pa) in April.
• Jobs currently being created are part-time rather than full-time positions and this dynamic

underlines the continuing spare capacity in the labour market despite the low 5.7% unemployment rate.

38 40 42 44 46 48 50 8 12 16 20 Jun- 79 Jun- 84 Jun- 89 Jun- 94 Jun- 99 Jun- 04 Jun- 09 Jun- 14

EMPLOYMENT TO POPULATION RATIO

% % Full-time employment to population, rhs Part-time employment to population, lhs 5 10 15 20 5 10 15 20 Aug 79 Aug 85 Aug 91 Aug 97 Aug 03 Aug 09 Aug 15 % % Unemployment rate Underemployment rate

LABOUR FORCE

(% of total)

Underutilisation rate

• 30

30 60 90

• 1.0

0.0 1.0 2.0 3.0 Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16

EMPLOYMENT GROWTH

Employment growth (3mnth average, rhs) Employment growth %pa (lhs) % '000

31

31

Australia: OZ Services Sector To Continue Expand Strongly In Years Ahead!

• 3.0
• 2.0
• 1.0

0.0 1.0 2.0 3.0 Health Prof serv Mining Prop & Bus Education EGW Pers & oth Gov admin Transp

• Cult. & Rec.

Rental Admin Accomm Construct Fin & insur Wholesale Agri Communic Retail Manufact

% CHG IN SHARE 2007 to 2016

%

32

Inflation Outlook: Tame Prices Outlook: Comatose Prices

Inflation: core measures still very well behaved

■

Underlying inflation (the RBA target) was running at 1.8%pa in QI 2017;

■

Headline inflation was 2.1%pa in QI 2017 – just above low point of RBA’s 2-3% target.

■

Solid productivity growth is damping down unit labour costs.

■

A lower AUD could ultimately pressure tradables inflation higher over time.

■

Wages growth is 1.8%%pa.

■

Wages trends provide a major input to structural inflation in the Australian economy. There are clear compressions in wages

• utcomes across industry sectors.

2 4 2 4 Sep-98 Sep-02 Sep-06 Sep-10 Sep-14

CONSUMER PRICES

(annual % change)

% % Headline inflation (exc GST) Underlying inflation 5 10 15 20 25 5 10 15 20 25 Sep-72 Sep-80 Sep-88 Sep-96 Sep-04 Sep-12

CORE INFLATION

(annual % change)

% %

33

 Domestic inflation is mainly about services – so labour costs are a key driver of domestic inflation.  The RBA believes that wages growth will remain very subdued on the back

• f a softish labour market:

 Wages growth KEEPS TRACKING LOWER.  The slowdown in wages growth has been broad based.  Not a great positive dynamic for a pickup in consumer spending.

Wage Pressures Negligible – Very Positive For Domestic Inflation Outlook.

• 1

1 2 3 1 2 3 4 5 Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17

WAGE PRICE INDEX

(annual % change)

Public Private % % Public - Private 1 2 3 4 5 6 7 1 2 3 4 5 6 7 Sep-98 Sep-02 Sep-06 Sep-10 Sep-14

WAGES & CPI

(annual % change)

CPI % % WCI

34

34

Projection of the global middle class by region, persons

Asia Pacific Growth Outlook

0.5 1 1.5 2 2.5 3 bn 3.5 North Asi a Cent/South Africa America Europe Pacific America Middle East 2010 2020 2030 Year

Global Middle Class Projections to 2030

35

Income Opportunities

More students & more tourists

 Leading indicators of education and tourism flows are already lifting.

• 20

20 40 60 90 180 270 360 2002/03 2006/07 2010/11 2014/15 % ch '000 Number of visas issued (lhs)

EDUCATION VISAS ISSUED

Growth in visas issued (rhs) 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 Mn Thousands Mn Thousands China India

SHORT TERM OVERSEAS ARRIVALS

(rolling annual total)

New Zealand Japan UK

36

 Chinese tourists spend the most.  They like to shop.

Income Opportunities

China at the top

• 3,000

6,000 9,000 China Switzerland Italy France Scandinavia Taiwan Canada Other Europe Korea Hong Kong Germany Netherlands UK USA A$

AVERAGE TOURIST SPEND

(2014/15)

AVERAGE TOURIST SPEND

(2014/15)

Source: Tourism Research Australia

500 1 000 1 500 China UK New Zealand US Japan A$

AVERAGE SHOPPING EXPENDITURE

(2014/15)

Source: Tourism Research Australia

37

Asia Pacific Growth Outlook Areas of Great Potential for Australia in coming years and decades

• Mining will remain robust as Asia continues to develop/industrialise/urbanise
• New waves of strong growth/prosperity in the following areas:
• Agribusiness;
• Gas;
• Tourism;
• International Education;
• Wealth Management
• Health Services;
• Transport Services;
• Aged Care Services

5 7 9 11 13 15 5 7 9 11 13 15 1994 1999 2004 2009 2014

CHINA GDP GROWTH & TARGET

(annual % change)

% % Real GDP 5-Year Average Outcome Five Year Plan Target

38

Summary

Consumer

Housing Capex Trade

Labour Market

Inflation

VIC Consumer spending growth lifted solidly in QIV 2016 and is the strongest across states. Firm population growth and strong employment growth is supporting household consumption. Spending growth should continue to outperform against most states in 2017. Total dwelling commencements expected to be 60k in 2017. Strong population growth and foreign investor demand are supporting dwelling prices. But record levels

• f residential

construction means that there is a risk, albeit small, of apartment

• versupply.

Capex in Victoria picked up in HII 2016 after a soft H1. We expect capex to continue to rise modestly over coming quarters driven by strong population growth and the need to lift the capital stock. Major exports include tourism, education and some agriculture. Car manufacturing closures will negatively impact export growth

• ver 2017.

Consumer goods imports to remain firm on strong population growth. Employment growth is strong but the unemployment rate remains stuck near 6%. Jobs growth has been supported by strong population

• growth. The

services sector continues to drive jobs growth. Mild downward pressure should be applied to the unemployment rate over 2017. Melbourne CPI running in line with the national rate. Rental inflation should soften as supply increases. Overall inflation pressures to be contained

• ver 2017

39

Forecasts – Gross State Product

Gross State Product Forecasts 2015/16 2016/17 2017/18

%

(a) (f) (f) NSW 3.5 2.6 2.8 VIC 3.3 2.5 2.8 QLD 2.0 3.0 3.8 SA 1.9 1.3 2.3 WA 1.9 0.5 2.3 TAS 1.3 1.8 2.3 NT 2.7 1.0 5.0 ACT 3.4 2.0 2.8 AUST 2.8 2.1 3.4

• 32.0
• 16.0

0.0 16.0 32.0 4 8 12 16 NSW VIC QLD SA WA TAS NT ACT AUST

GSP

(by state, chain volumes)

% % 16/17 annual growth (f) (lhs) share of economy (rhs) 17/18 annual growth (f) (lhs)

40

Demographics

 Population growth rates are coming off peak levels in the mining States via lower net overseas migration.  Interstate migration flows shows a lift in Vic and QLD and a fall in NSW and WA.

0.0 1.0 2.0 3.0 4.0

0.0 1.0 2.0 3.0 4.0 Sep-00 Sep-03 Sep-06 Sep-09 Sep-12 Sep-15

POPULATION GROWTH

(annual % change)

Tas Qld WA

SA %pa

NSW Vic

%pa

• 10
• 5

5 10 15

• 10
• 5

5 10 15 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15

INTERSTATE MIGRATION

(quarterly)

Qld WA SA NSW Vic '000s '000s

41

Forecasts – Employment

Employment Forecasts 2015/16 2016/17 2017/18

%

(a) (f) (f) NSW 3.8 0.6 1.7 VIC 2.7 3.4 2.0 QLD 1.6

• 0.5

2.0 SA 0.5 1.5 1.0 WA 0.2

• 0.7

0.5 TAS

• 0.2
• 0.1

1.0 NT 1.2 4.0 1.0 ACT 1.1 2.2 1.5 AUST 1.1 1.1 1.7

• 32.0
• 16.0

0.0 16.0 32.0 3 6 9 12 NSW VIC QLD SA WA TAS NT ACT AUST

Employment

(by state)

% % 16/17 annual growth (f) (lhs) share of economy (rhs) 17/18 annual growth (f) (lhs)

42

Forecasts – Unemployment Rate

Unemployment Rate Forecasts 2015/16 2016/17 2017/18

%

(a) (f) (f) NSW 5.4 4.9 4.8 VIC 5.9 5.7 5.5 QLD 6.2 6.0 6.0 SA 7.2 6.7 6.3 WA 6.0 6.5 6.2 TAS 6.5 6.2 6.1 NT 4.3 3.7 4.0 ACT 4.6 3.7 3.7 AUST 5.6 5.6 5.3

2 5 8 2 5 8 NSW VIC QLD SA WA TAS NT ACT AUST

Unemployment Rate

(by state, annual average)

% % 2016/17 (f) 2017/18 (f)

43

Forecasts – Consumer Price Index

0.0 0.5 1.0 1.5 2.0 2.5 0.0 0.5 1.0 1.5 2.0 2.5 Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra AUST

CPI

(by capital city, annual average)

% % 2016/17 (f) 2017/18 (f)

Consumer Price Index Forecasts 2015/16 2016/17 2017/18

%

(a) (f) (f) Sydney 1.5 2.2 2.2 Melbourne 1.6 1.9 2.1 Brisbane 1.6 1.8 2.1 Adelaide 0.9 1.6 1.9 Perth 1.0 0.9 1.3 Hobart 1.4 1.8 2.0 Darwin 0.1 0.5 0.8 Canberra 0.7 2.0 2.3 AUST 1.4 1.8 1.9

44

Housing Lending

 Lending growth to owner-occupiers has been softening in trend terms in recent months in most States. In annual terms, lending growth to owner-occupiers has fallen solidly in NSW and WA. It is down modestly in Vic while it is up by 7.5% in QLD.  Lending growth to investors slowed considerably across all States in late 2015 and early 2016 due to some measures introduced by a number of domestic banks to slow lending growth to investors. But it has started to accelerate in NSW and Vic largely due to rate cuts in May and August.

5 10 15 20 5 10 15 20 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

OWNER-OCCUPIER LOANS

(number, monthly)

NSW VIC QLD WA SA TAS '000s '000s 20 40 60 80 20 40 60 80 Dec-01 Dec-05 Dec-09 Dec-13

INVESTOR LOANS

(moving annual total)

NSW QLD VIC WA SA $bn $bn

45

Capital Expenditure

 Capex in WA continues to decline due to the downturn in mining investment. This will continue over 2016/17. The capex fall in QLD looks to be closer to completion.  Across the non-mining States, non-residential construction has trended higher and cushioned the impact of falling engineering construction (particularly in NSW).  Government infrastructure commitments (particularly on road and rail infrastructure projects) make up the majority of the engineering construction pipeline in the non-mining States.

5 10 15 5 10 15 Sep-89 Sep-95 Sep-01 Sep-07 Sep-13

STATES: CAPEX

(real $ per qtr)

$bn $bn WA NSW Vic SA Qld 1 2 3 4 1 2 3 4 Mar-00 Mar-06 Mar-12 Jun-00 Jun-06 Jun-12 NSW SA VIC Non-res build. const. Engineering NSW $bn $bn

STATE BUSINESS INVESTMENT

(Volumes, $bn, quarterly)

VIC SA TAS TAS

46

A Budget & Debt Emergency?

 But public debt levels would remain low on any historical or global comparison.

A structural problem – not an emergency

PUBLIC DEBT

(% of GDP)

• 30

30 60 90 120 2007 2012 2017 2022 2027 % of GDP 2012 Advanced economies Australian Commonwealth

47

Australian Government Debt Crisis? False Alarm.

48

Size of foreign agricultural land interests by source country top 10 (‘000 ha)

Agricultural land owned by foreigners – What’s the problem?

10 20 30 40 50 60 70

United

Kingdom

United

States

Netherlands Singapore China Philippines Switzerland Jersey Indonesia Japan

Foreign Owned Agricultural Land

• Australia

%

UK & US interests own 77% of Total Chinese interests own <3%

49

Australia (since 1788) has relied heavily on foreign investment for national development.

 Historically US, UK &EU have provided the large bulk of total foreign investment in Australia. And continues to do so (61.6% of total).  Asian investment (including from China) as % of total is 16.6%.  Chinese investment = 2.3% of total investment.  But Asian investment is likely to rise in coming years.

Foreign Investment in Australia (Foreign Investment Review Board)

0% 7% 14% 21% 28% 35% 0% 7% 14% 21% 28% 35% 2001 2003 2005 2007 2009 2011 2013 2015 2017 UK (17.5%) US (27.0%)

FOREIGN INVESTMENT IN AUSTRALIA

(% of Total Investment)

China (2.3%) EU (ex. UK) (17.1%) Total Asia (16.6%) (incl. China)

50

 As inflation has declined, the RBA’s views on the “neutral” rate have DROPPED .  CBA view: neutral is NOW 3%.

What is neutral? – whatever the RBA says

The RBA & Monetary Policy

5 10 15 20 5 10 15 20 Sep- 60 Sep- 66 Sep- 72 Sep- 78 Sep- 84 Sep- 90 Sep- 96 Sep- 02 Sep- 08 Sep- 14

THE CASH RATE

% % 5 10 15 20 25 5 10 15 20 25 Sep-72 Sep-80 Sep-88 Sep-96 Sep-04 Sep-12

CORE INFLATION

(annual % change)

% %

51

Long Term AUD/USD Chart, 1983 to 2016.

0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16 USD USD

52

CBA Australian Economic Forecasts

Fiscal Years Calendar Years 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2012 2013 2014 2015 2016 2017 2018 (a) (a) (a) (f) (f) (f) (a) (a) (a) (a) (f) (f) (f) Economic Activity Private final demand 1.6 1.2 0.8 1.0 2.1 2.3 4.4 1.4 1.5 1.0 0.7 1.6 2.2 Of which: Household spending 2.7 2.6 2.9 2.4 2.7 2.8 2.3 1.7 2.8 2.7 2.7 2.5 2.7 Dwelling investment 4.8 7.8 10.6 3.3 0.9

• 2.5
• 6.3

2.3 6.8 10.0 7.9 1.2

• 0.4

Business investment

• 3.6
• 6.4
• 10.8
• 6.0

0.1 3.2 16.1

• 0.8
• 4.9
• 8.8
• 10.1
• 2.2

1.8 Public final demand 0.2 0.7 3.4 4.1 3.0 2.9 3.4

• 1.6

0.3 2.3 4.8 3.0 3.0 Domestic final demand 1.3 1.1 1.4 1.7 2.3 2.5 4.1 0.7 1.3 1.3 1.6 2.0 2.4 Inventories (contrib to GDP)

• 0.4

0.3

• 0.1

0.1

• 0.1

0.1 0.0

• 0.4

0.1 0.1 0.1

• 0.1

0.1 GNE 1.0 1.4 1.3 1.8 2.2 2.6 4.1 0.3 1.3 1.3 1.7 1.9 2.5 Exports 6.0 6.7 6.7 7.3 6.6 6.2 5.7 5.8 6.9 6.0 7.6 6.8 6.5 Imports

• 2.2

1.2

• 0.3

3.9 3.3 4.5 5.5

• 2.2
• 1.1

2.0 0.4 4.3 3.7 Net exports (contrib to GDP) 1.6 1.0 1.4 0.7 0.7 0.0

• 0.2

1.5 1.5 0.7 1.4 0.5 0.0 GDP 2.6 2.4 2.7 2.0 3.1 3.1 3.6 2.1 2.8 2.4 2.5 2.4 3.3 Prices & Incomes CPI 2.7 1.7 1.4 1.8 1.9 2.3 1.8 2.4 2.5 1.5 1.3 2.0 2.1 Underlying CPI 2.6 2.3 1.8 1.6 1.9 2.3 2.2 2.5 2.5 2.2 1.6 1.7 2.2 WPI 2.6 2.4 2.1 1.9 2.5 2.6 3.6 2.8 2.6 2.2 2.0 2.2 2.6 Nominal GDP 4.2 1.6 2.3 5.6 3.9 4.8 3.4 3.4 3.0 1.8 3.6 5.6 3.9 Real h/hold disposable income 3.1 1.6 1.4 1.0 2.0 2.5 1.3 2.2 2.5 0.7 1.8 1.2 2.3 Labour Market Employment 0.5 1.2 2.2 1.2 1.7 1.8 1.2 0.9 0.7 1.9 1.6 1.4 1.8 Unemployment rate 5.8 6.2 5.9 5.8 5.5 5.2 5.2 5.7 6.1 6.1 5.7 5.7 5.3 External Accounts Current Account: $bn

• 46.8
• 58.9
• 73.3
• 15.5
• 18.9
• 15.4
• 62.2
• 49.8
• 46.3
• 77.3
• 44.6
• 11.2
• 17.0

% of GDP

• 2.9
• 3.6
• 4.4
• 0.9
• 1.0
• 0.8
• 4.1
• 3.2
• 2.9
• 4.7
• 2.6
• 0.6
• 0.9

53

CBA Australian Financial Forecasts

USD versus End Period Cash Rate 90-day Bank Bill 180-day Bank Bill 3-year Bond 10-year Bond A UD JPY EUR GBP NZD Dec-10 4.75 5.04 5.23 5.30 5.55 1.02 81.1 1.34 1.56 0.78 Mar-11 4.75 4.93 5.01 5.07 5.49 1.03 83.1 1.42 1.60 0.76 Jun-11 4.75 5.03 5.07 4.78 5.21 1.07 80.6 1.45 1.61 0.83 Sep-11 4.75 4.92 4.68 3.61 4.22 0.97 77.1 1.34 1.56 0.76 Dec-11 4.25 4.48 4.43 3.07 3.67 1.02 76.9 1.30 1.55 0.78 Mar-12 4.25 4.34 4.33 3.45 3.98 1.03 82.9 1.33 1.60 0.82 Jun-12 3.50 3.49 3.44 2.39 3.04 1.02 79.8 1.27 1.57 0.80 Sep-12 3.50 3.37 3.32 2.35 2.99 1.04 78.0 1.29 1.62 0.83 Dec-12 3.00 3.07 3.01 2.67 3.27 1.04 86.8 1.32 1.63 0.83 Mar-13 3.00 3.10 3.12 2.86 3.41 1.04 94.2 1.28 1.52 0.84 Jun-13 2.75 2.82 2.84 2.78 3.76 0.91 99.1 1.30 1.52 0.77 Sep-13 2.50 2.60 2.59 2.86 3.81 0.93 98.3 1.35 1.62 0.83 Dec-13 2.50 2.64 2.66 3.00 4.24 0.89 105.3 1.37 1.66 0.82 Mar-14 2.50 2.70 2.73 3.05 4.08 0.93 103.2 1.38 1.67 0.87 Jun-14 2.50 2.71 2.72 2.69 3.54 0.94 101.3 1.37 1.71 0.88 Sep-14 2.50 2.74 2.78 2.74 3.48 0.87 109.7 1.26 1.62 0.78 Dec-14 2.50 2.77 2.83 2.10 2.74 0.82 119.8 1.21 1.56 0.78 Mar-15 2.25 2.23 2.22 1.66 2.32 0.76 120.1 1.07 1.48 0.75 Jun-15 2.00 2.15 2.26 2.08 3.01 0.77 122.5 1.11 1.57 0.68 Sep-15 2.00 2.18 2.26 1.78 2.61 0.70 119.9 1.12 1.51 0.64 Dec-15 2.00 2.38 2.48 2.04 2.88 0.73 120.2 1.09 1.47 0.68 Mar-16 2.00 2.29 2.45 1.88 2.49 0.77 112.6 1.14 1.44 0.69 Jun-16 1.75 1.96 2.12 1.49 1.98 0.75 103.2 1.11 1.33 0.71 Sep-16 1.50 1.74 1.97 1.45 1.91 0.77 101.4 1.12 1.30 0.73 Dec-16 1.50 1.82 2.05 2.04 2.77 0.72 117.0 1.05 1.23 0.69 Mar-17 1.50 1.80 2.00 1.95 2.70 0.76 111.4 1.07 1.26 0.70 Jun-17 1.50 1.60 1.70 2.15 3.00 0.75 110.0 1.08 1.28 0.70 Sep-17 1.50 1.60 1.70 2.15 3.05 0.76 109.0 1.10 1.29 0.71 Dec-17 1.50 1.60 1.70 2.20 3.10 0.77 108.0 1.12 1.30 0.72 Mar-18 1.50 1.60 1.70 2.30 3.20 0.78 107.0 1.14 1.31 0.73 Jun-18 1.50 1.60 1.70 2.40 3.30 0.78 106.0 1.15 1.31 0.74 Interest Rates Exchange Rates Forecast

54

The Budget & Politics

Will the Budget navigate the Senate political shoals?

 The Coalition Government has 29 seats - well short of the 39 seats needed for an overall majority (of total 76 Senate seats) needed to pass legislation or support motions in Senate.  The votes of Labor (26 seats) and Greens (9 seats) combined (ie 35 seats) are not sufficient to block or pass legislation, or support motions.  Since the July 2016 double dissolution election, the balance of power rests with an increased pod of populist independents and minor parties. Complicating matters has been the extinction of PUP at the election and its replacement by 4 One Nation Party Senators.  To this political potpourri add 3 Xenophon Senators, Australian Conservatives’ Bernardi and Independent Senators Lambie, Hinch and Gichuhi (previously Family First) and you have a very mixed bag of 12 Senators with conflicting ideas and ideologies. So negotiations on contested Budget Measures will be complex.  If Labor and Greens oppose Coalition legislation, 10 of the 12 crossbench Senators will be required to support a Coalition bill or motion. Up to 9 of these 12 cross benchers are needed to defeat non-government motions including motions of disallowance.  Like all Federal Budgets since 2008, a substantial degree of negotiation or horse trading will likely be required to ensure key government fiscal measures are “greenlighted” by the upper house. The stance of the Independents on many issues is not yet clear and remains a “work in progress”.

55

The Budget & Politics

45th Senate Makeup as at May 2017

Coalition 29 Australian Labor Party 26 Australian Greens 9 One Nation 4 Nick Xenophon Team 3 Liberal Democrats 1 Jacqui Lambie Network 1 Derryn Hinch’s Justice Party 1 Australian Conservatives 1 Independent Gichuhi (prev. Family First) 1

Total Senate 76

Will the Budget navigate the Senate political shoals? Source: Hawker Brittan: How the Senate has voted Apr’17

 The government has had some success in navigating legislation through the Senate.

56

The Budget & Politics

Where they Stand? Likely Senate Crossbench positions on key issues Labor Greens Xenophites

One Nation Other 3 Indep. Australian Conservative Party Liberal Democrat Party

Infrastructure spending

• Badgery’s Creek, Sydney

Airport yes yes yes yes yes yes ?

• Brisbane – Melbourne

Inland Rail yes yes yes yes probable yes yes ?

• Energy- Snowy River

Scheme 2.0 yes yes yes yes yes yes ? Health

• Medicare package/

changes

• Medicare levy changes

yes yes yes yes yes yes yes yes ? ? ? ? ? ?

• PBS package/new

measures. yes yes yes yes yes yes yes Black Economy

• Measures to claw tax from

black economy yes yes yes yes yes yes ?

57

The Budget & Politics (cont)

Where they Stand? Likely Senate Crossbench positions on key issues Labor Greens Xenophites One Nation Other 3 Indep. Australia Conserv. Party Liberal Democrats

Personal Tax

• Removal of

Temporary Budget Repair Levy yes ? ? ? ? yes yes Education Reforms

• University funding

cuts

• 7.5%lift in student

fees & changes in student debt repayment rules

• Gonski Mark II:

rejigged school funding no no probable yes no no probable yes no no probable yes ? ? yes? ? ? ? yes yes yes yes yes ?

Housing Affordability

• Negative gearing

measures to limit deductibles

• First home super

saver scheme yes yes yes yes yes yes yes ? yes ? yes ? yes ?

58

The Budget & Politics (cont)

Where they Stand? Likely Senate Crossbench positions on key issues Labor Greens Xenophites One Nation Other 3 Indep. Australian Conservativ e Party Liberal Democrat Party Welfare Savings

• Tightened compliance

measures no no no? yes no yes yes Company Tax Cuts

• Large Companies

(turnover>$50mn) no no no no ? yes yes Bank Tax/Levy

• 4 Majors & Macquarie
• n deposits/liabilities

>$250k yes yes yes yes ? ? ? Skilled Aust. Funds Levy yes yes yes yes ? ? ? Tax measures

• re multinational

companies. yes yes yes yes yes yes ?

59

Judging The Budget

Concessions: from little things, big things grow

 Tax expenditures are potential tax lost via concessional treatment of items, like super contributions or earnings, or the GST-free status of fresh food, health and education.  Tax revenues are $124bn lower per year (outlined in Table A1 of Statement 5) via: – Superannuation concessions ~ $34bn – CGT exemption on housing ~ $62bn – GST widening ~ $20bn; – Negative Gearing ~ $4bn ; – Family Tax Benefit – untaxed ~ $2bn – Diesel fuel rebate costs ~$5bn.  Incremental changes to concessions and GST exemptions can make significant contributions to revenue growth and fiscal stability over coming years.

5 10 15 20 25 30 35 Super'n, earnings concess. Super'n, contrib'n concess. CGT discount on home CGT exemption on home GST fresh food GST education GST health GST financial services FTB parts A&B

TAX EXPENDITURES 2017/18f

(for one year, $bn)

Total $124bn $bn

60

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