Economic Perspectives from Global to Local What It Could Mean for - - PowerPoint PPT Presentation

Economic Perspectives from Global to Local

What It Could Mean for Your Business

Dean Pearson Head of Industry Analysis, NAB

November 29, 2011

Global Economy

3 3

Global share markets & commodity prices

Equity markets have been extremely volatile amid mounting fears that the world economy is facing a return to recession - generally 15% down compared to

• June. But at the height of GFC (Sept-Nov 2008) they fell 30-35%. That is

because commodity prices not reacting as if a global crunch is underway….albeit recent weakness in iron ore prices needs to be watched.

Change in Equity Markets since 1 June 2011

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10 1/06/2011 8/06/2011 15/06/2011 22/06/2011 29/06/2011 6/07/2011 13/07/2011 20/07/2011 27/07/2011 3/08/2011 10/08/2011 17/08/2011 24/08/2011 31/08/2011 7/09/2011 14/09/2011 21/09/2011 28/09/2011 CHINA JAPAN UK USA AUSTRALIA GFC Sept - Dec USA

4 4

Global industrial production

The industrial slowdown is quite synchronised across the world. The fundamental problem is shown in the 2nd chart - the world's richest economies are in the doldrums. Beyond debt, the problem is a lack of economic growth.

5 5

Europe government bond spreads and net debt

EURO looks like now entering a mild recession (Q4 2011 & Q1 2012). Clearly

markets now very much focused on risk of European default. Initial phase of the crisis was on risk of disorderly default by Greece, Portugal, Ireland. Focus really turning to Italy. European rescue fund simply not enough for Spain and especially Italy.

5 10 15 20 25 30 35

Jan-10 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

Greece Portugal Ireland Italy Spain

Benchmark 10-year bond yields: daily (bps)

Source: Datastream Sovereign debt panic mark I Sovereign debt panic mark II

3 4 5 6 7 8

Jan-10 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

Italy Spain

6 6

Emerging market economies

Emerging economies continue to out-perform. While “Big 3” developed economies at best only just back to pre GFC levels, developing world much

• stronger. That said, with the outlook for the developed world deteriorating,

growth will slow in most emerging economies.

70 80 90 100 110 120 130 140 150

Sep-05 Sep-07 Sep-09 Sep-11 Sep-05 Sep-07 Sep-09 Sep-11

US Japan Euro area China India Brazil

GDP: Sep qtr 2007 = 100

Developed world Emerging world

Sources: OECD Main Economic Indicators, CEIC, NAB Global liquidity crisis Global liquidity crisis

7 7

Why China & India are so important

Industrialisation and urbanisation in China and India are following a familiar

• path. The Chinese economy is however 4 times the size of India's. Already

China accounts for 50% of global steel.

20 40 60 80 1950 1960 1970 1980 1990 2000 20 40 60 80 Japan South Korea China India

Relative Economic Development

GDP per capita relative to advanced economies, equivalent prices % %

Source: Maddison database

Australia

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Global food demand to be driven by China & India

Emerging market economies are becoming more dependent on imports of

• staples. Food security is now a hot political issue in developing world.

Protein Consumption and GDP

20 40 60 80 100 120 140 10000 20000 30000 40000 50000

GDP per capita Protein Consumption (g per person per day) Source: WHO, UN FAO, World Bank, NAB Economics India China

• As average incomes increase
• ver time, there is a tendency to

consume more protein, especially meat.

• Over the years ahead, this switch

in diets is likely to generate strong underlying growth in demand for a wide range of agricultural commodities.

9

Is China a threat or a promise for agribusiness?

Australia has a comparative advantage in terms of land intensive agribusiness: broad-acre crops, cattle, dairy and sheep. But we are now much more vulnerable to Chinese growth.

• Key developing economies have

a comparative advantage in more labour intensive sectors: – mainly pork and poultry, horticulture and meat processing.

Land Mass per Capita (sq kms)

0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 China Indonesia Malaysia United States Brazil Canada Australia

Source: World Bank, NAB Economics

Australian Economy

11 11

Australian business conditions & confidence

Conditions recover and businesses take comfort from better sales, a lower AUD and talk of interest rate cuts. Global uncertainty still weighing on near- term activity indicators. Business confidence improving after recent battering during Greece crisis.

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10 20 IV I II III IV I II III IV I II III IV 2008 2009 2010 2011 Seasonally adjusted Trend Conds 1990s recn

Business conditions (net balance)

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10 20 IV I II III IV I II III IV I II III IV 2008 2009 2010 2011 Seasonally adjusted Trend Conf 1990s recn

Business confidence (net bal., s.a.)

12 12

New ASX300 business survey - September qtr

Business conditions for ASX300 firms declined further in Q3, narrowing the gap to the broader economy. Confidence among large firms has turned negative and is weaker than average.

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10 20 Q1 2011 Q2 2011 Q3 2011 Q1 2011 Q2 2011 Q3 2011 Conditions Confidence

NAB QBS ASX300

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10 20 ASX 300 NAB QBS ASX 300 NAB QBS ASX 300 NAB QBS Q2 2011 Q3 2011 Q4 2011

Trading conditions Profitability Employment

Expectations Actuals

13 13

Business conditions by state

Business conditions (seasonally adjusted) deteriorated across all states in October, with the exception of Queensland, where they were marginally

• higher. Trend conditions trend conditions remain strongest in WA, followed

by NSW, and were weakest in SA, Tasmania and Victoria.

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10 20 30 40 IV I II III IV I II III IV 2009 2010 2011 Australia NSW VIC

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10 20 30 40 IV I II III IV I II III IV 2009 2010 2011 Australia QLD WA

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10 20 30 40 IV I II III IV I II III IV 2009 2010 2011 Australia SA TAS

14

Labour market

Labour market job growth still slowing – reflecting basically a flat H1 2011. While employment growth has slowed, hours worked are still robust – reflects shedding in weak and much stronger hours in strong sectors. Hours data shows labour market not as weak as rising unemployment suggests. Manufacturing has lost over 100,000 jobs in 3 years.

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Dec 2007 Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 2013 Dec 4 3 2 1

• 1

6.5 6.0 5.5 5.0 4.5 4.0

Austral alian an l lab abour m mar arket et

Sources: ABS, NAB forecasts

Employment (12-months-to, LHS) Unemployment rate (%, RHS) Sep 2009 Sep 2010 2011 Sep 250 200 150 100 50

• 50
• 100
• 150

Empl ploy

• yment

nt c cha hange nge

• cum. c

chan ange p e pas ast 3 y 3 year ears ( ('000) 000) Mining Manufacturing Education & training Health care & social assistance

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Unemployment by region

There are big disparities between unemployment both within and across Australian regions. Some suburbs and towns have clearly missed out on the boom.

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QLD NSW V I C SA WA TAS

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Population growth and net interstate migration

In recent years, the population has been growing by >2%, outstripping the Philippines, Malaysia, India, Indonesia & Vietnam. However, growth slowed to 1.5% in 2010, with net migration -35%. Victoria’s population growth has increased notably since the turn of the century. This trend softened significantly last year.

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Australia

• 60000
• 40000
• 20000

20000 40000 60000 1982 1987 1992 1997 2002 2007 1982 1987 1992 1997 2002 2007 VIC QLD NSW WA SA Annual Net Interstate Migration Persons

Source: ABS, NAB Economics

17

Carbon tax

In the near term net negative to GDP & boost to inflation. But, overall impact

• moderate. Some sectors better off, some worse. Modelling by Commonwealth

Treasury suggests the largest negative impact on output growth for coal fired electricity generators (-10% by 2020). Also a marginal negative impact on

• utput of some metal and cement manufacturers and coal miners.
• Inflation - accept 0.7% increase in 2012/13
• Growth - around 0.3% off GDP in 2012/13.

Reflects lower consumption from falling real wages and lower business investment reflecting uncertainty and increased cost of capital.

• Employment - not enough to change

unemployment much but net negative to near term jobs growth.

• Costs of living - dangers re cost of living

increases feeding into wage pressures. The rise likely to be most apparent by mid 2012.

• Longer run - suspect more negative than current

modelling (wages are not fully flexible).

Output Growth by Sector, 1990 to 2050

• 1

1 2 3 4 5 6 7

• 1

1 2 3 4 5 6 7 Medium global action 90s 00s 10s 20s 30s 40s

per cent per cent Agriculture Mining Manufacturing Construction Services

18 18

Australia’s GDP profile

Australia is slowing to a touch below trend with multi speed economy becoming more pronounced as restructuring occurs. Longer run we see accelerating growth but significant rebalancing challenges. In the near term, the carbon tax is a net negative to GDP & boost to inflation. But, overall impact

• moderate. For 2011 we have growth of 1 3/4% and around 4% in 2012.

19 19

Financial markets - interest rates

RBA has been surprised by the softness in local domestic orientated sector. Global uncertainties have also mounted. A very low core CPI gave them the scope to cut rates in November. Unusual for RBA to go only once and probably we will get another in early 2012 (Feb) . But….forecasts don’t point to aggressive cuts being needed – so not really in a period of significant cuts.

2 3 4 5 6 7 8 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 %

Source: RBA, NAB Economics Forecasts

20 20

Financial markets - exchange rates

$A a proxy for global (& especially Chinese) growth. So far AUD volatility not like GFC. Our model says AUD good value USD 1.05c (+/- 5c). We see AUD around 1.02 by late 2011, then back to 1.05 by mid 2012. Long run around 95c (late 2013).

0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95 1 1 15 29 43 57 71 85 99 0.7 0.75 0.8 0.85 0.9 0.95 1 1.05 1.1 GFC JULY TO NOV 2008 FROM 1 JUNE 2011

Days from peak to trough AUD V USD - LAST 3 months v GDC Model AUD and Forecasts v Actuals

0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 Feb-85 Feb-86 Feb-87 Feb-88 Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 ACTUAL Plus 1 std error Less 1 std error

NASDAQ BUBBLE

Industry Conditions

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Industry share of state production

When comparing conditions across states, important to review the contribution of industry sectors to each economy! It is easy to bundle Queensland in with WA as a resource state, but it has a much more diversified economy. VIC is clearly vulnerable to the multi-speed economy. While the VIC economy is largely service based, we also have a larger than average share in manufacturing.

NSW VIC QLD SA WA TAS Australia

Agriculture

1 2 3 5 3 7 2

Mining

4 2 15 4 32 2 10

Manufacturing

9 11 8 13 7 12 9

Construction

6 7 8 7 10 6 8

Wholesale Trade

5 6 5 5 3 3 5

Retail Trade

4 5 5 5 3 5 5

Finance & Insurance

16 13 7 9 5 10 11

Property & Business Services

13 14 10 10 10 6 12

Other

40 39 39 43 27 47 39 2009/10 Share of State Production (%) Source: ABS

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Value chain for food in Australia, 2009-10

The food industry is one of Australia's major manufacturing industries. Food and beverage processing, grocery and fresh produce generate a turnover of in excess of $100bn. But, Australia is a net importer of food and grocery products, with a trade deficit of $A1.8bn in 2009/101.

Source: Department of Agriculture, Fisheries & Forestry

24 24

Business conditions by industry sector

Industry conditions provide stark evidence of a multi-speed economy, with conditions strongest in mining and weakest in manufacturing, construction, &

• retail. The surprise has been that the weak are getting weaker. The economy is
• restructuring. And…the strong are not just mining - professional services, health

and personal services also strong.

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10 20 30 40 IV I II III IV I II III IV 2009 2010 2011 Mining Manuf Constn

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10 20 30 40 IV I II III IV I II III IV 2009 2010 2011 Retail Wsale Transp

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10 20 30 40 IV I II III IV I II III IV 2009 2010 2011 Fin, bus, prop Rec, pers

Mining strongest; manufacturing still weakest

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ASX300 conditions and confidence by industry – September qtr

Business conditions remain mixed by industry with large mining particularly strong and large manufacturing the weakest overall. The range of confidence by industry is narrower – with large retail, recreation and manufacturing among the weakest.

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Business Conditions Business Confidence

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20 40 60 MIN MFG CON RET WHL FBP REC TUC TOTAL

ASX300 Previous ASX300 NAB QBS

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20 40 60 MIN MFG CON RET WHL FBP REC TUC TOTAL

ASX300 Previous ASX300 NAB QBS

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Capital expenditure by industry

The terms of trade boom is reshaping the Australian economy. The commodity price boom sparks is lifting mining profits and investment (particularly in WA) - but not much elsewhere.

5 10 15 20 1990 1994 1999 2003 2008 1990 1995 1999 2004 2008 5 10 15 20

WA QLD NSW VIC SA Mining Manufacturing

Capital Expenditure by Industry*

Proportion of Total Australian Capital Expenditure, annual sum

* Data not available for Tasmania Source: ABS, NAB % %

10 20 30 Primary Metal Machinery Chemicals TCF Transport Equipment Furniture Total 10 20

Export Orientation

Exports as a proportion of total sales, 2007

30 Source: ABS % %

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Tourism

Some segments clearly struggling under high AUD. Signs that occupancy rates have been a concern in Qld & Tasmania for several years. Short- term visitor arrivals are stagnating. Remember, domestic tourism still makes up three quarters of the sector.

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60 61 62 63 64 65 66 67 68 69 70

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Australia Queensland Room occupancy rate (%, s.a.)

Source: ABS

0.4 0.5 0.6 0.7

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Short-term visitor arrivals Short-term resident departures

Tourism movements (millions per month)

Source: ABS

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House prices and expectations

Flat to falling housing prices don’t help. Professionals expect further falling

• prices. Victoria has fallen sharply with poor outlook. WA the strongest.

Broadly we see flat markets – but regional differences.

Source: NAB Quarterly Australian Residential Property Survey

House Price Expectations

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1 2 3 4 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Australia Victoria NSW Qld SA/NT WA % Expectations

House Price Expectations (next 12 months)

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1 2 Victoria Qld Australia NSW SA/NT WA Mar-11 Jun-11 Sep-11 %

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Housing price dynamics

Fundamental to house prices is the chronic under supply of housing market. Currently under built by around 250,000 (or nearly 2 years worth at existing take up). Overseas arrivals now declining as global economy improves, but shortage likely to underpin housing prices in future. Also other demands on construction sector from infrastructure and mining.

1.0 1.5 2.0 2.5

Jun-99 Jun-02 Jun-05 Jun-08 Jun-11 Dwellings Population 15+

Dwelling stock & civilian population (% growth p.a.)

Sources: ABS, NAB

1.02 1.03 1.04 1.05 1.06

Sep-96 Sep-01 Sep-06 Sep-11

2.45 2.50 2.55 2.60 2.65

Adults (LHS) Persons (RHS)

Population per dwelling

Sources: ABS, NAB

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Business conditions - cyclical sectors

Survey suggests that retail overall is experiencing extremely weak conditions Consumers are more cautious and we don’t see this changing significantly

• ver the next year or so. As a result, the saving ratio has moved up
• significantly. But consumers they are happy to spend on personal services.

30

• 4
• 2

2 4 6 8 10 12 14

Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

Trend Seasonally adjusted Household saving ratio (% of household income)

Source: ABS

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10 20 IV I II III IV I II III IV 2009 2010 2011 Retail Manuf Constn All

Business conditions (net bal., trend)

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Retail trade turnover - by sector

Sector 2010/11 % chg – 2009/10 v 10/11 % chg – 5 year average % chg – 10 year average Food retailing 98,429.1 3.2 6.0 6.2 Household goods retailing 42,830.2 0.7 3.0 5.4 Clothing, footwear & accessories 19,175.1

• 0.6

3.5 5.0 Department stores 18,432.8

• 1.3

2.1 3.1 Cafes, restaurants & takeaway food 32,044.9 5.0 6.7 6.6 Other retailing 34,321.8 4.5 5.3 5.2 Total Retail Turnover 245,240.4 2.5 4.9 5.6

Retail Trade Turnover by Sector ($ millions)

Mar Sep 2010 Mar 2011 Sep 1.5 1.0 0.5 0.0

• 0.5
• 1.0
• 1.5

Retail t tur urnov nover ( (cur urrent nt pr prices)

monthly t trend nd, % % c change

Source: ABS

Food Household goods Clothing, footwear & accessories Dec Mar Jun Sep Dec 2010 Mar Jun 2011 Sep 1.5 1.0 0.5 0.0

• 0.5
• 1.0
• 1.5

Retail t tur urnov nover ( (cur urrent nt pr prices)

monthly t trend nd, % % c change

Source: ABS

Department stores Cafes, restaurants & takeaway food Other

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