Global & euro zone update Am ber Rabinov Senior Economist ANZ - - PowerPoint PPT Presentation

Global & euro zone update

Am ber Rabinov Senior Economist ANZ Research March 2 0 1 2

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Global econom ic outlook

• ANZ forw ard indicators of the global econom y stabilised in late 2 0 1 1 and are now

picking up.

• Advanced econom ies face headw inds - fiscal austerity, deleveraging by households and

financial institutions. I nflation pressures w ill be m uted am id sizable spare capacity. Policy rates w ill be near zero for a long tim e. – The US recovery will remain vulnerable to setback and shocks without a fully fledged housing

• recovery. There are some signs US housing is improving but there is a long way to go yet.

– Europe’s problems continue. Recent policy actions (eg. ECB’s LTRO) appear to have got some traction with a positive impact on sovereign yields and auctions. Activity has stabilised, but unemployment continues to rise.

• Em erging econom ies w ill be the m ain driver of global grow th. Policy settings are such

that there is plenty of scope to support grow th if need be. – China has slowed (“soft landing”) as desired by the authorities. This has growth on a sustainable path.

• Europe rem ains the biggest risk to the outlook. W ith the banking crisis of 2 0 0 8 still fresh

investor m inds, even a sm all chance of a significant financial event w ill ham per risk appetite for the foreseeable future. – That said, a rising risk (particularly for the US outlook) is the recent rise in oil prices (WTI).

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Em erging m arkets rem ain m ain driver of global grow th

I ndustrial production W orld trade W orld GDP Contribution to w orld GDP

Source: Bloomberg, CPB Netherlands, ANZ

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• 2

2 4 6 8 1 0 1 2 9 1 9 3 9 5 9 7 9 9 0 1 0 3 0 5 0 7 0 9 1 1 1 3

W o r ld Ea st A sia e x - Ja p a n G 7

( An n . % c h a n g e ) Fo re c a st

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2 4 6 0 0 0 1 0 2 0 3 0 4 0 5 0 6 0 7 0 8 0 9 1 0 1 1 1 2 1 3 ( % ) A sia e x Ja p a n G 7 O th e r W o r ld 70 80 90 100 110 120 130 140 150 92 94 96 98 00 02 04 06 08 10 12 55 85 115 145 175 205 235 World, lhs Advanced, lhs Em erging, rhs (I ndex) (I ndex)

80 100 120 140 160 180 00 01 02 03 04 05 06 07 08 09 10 11 12 (I ndex)

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ANZ lead indicators point to a pick up in global m acro conditions

ANZ inventory pulse ANZ Lead indicator and global I P ANZ Lead indicator and risk appetite ANZ lead indicator and inventory pulse

Source: Bloomberg, BoAML, ANZ

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• 1

1 2 3 2008 2009 2010 2011 Dev 12 mth trend

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• 3
• 2
• 1

1 2 3 Dev 12 mth trend US new ords/ invent ory EU new ords/ inventory Japan new orders/ invent ory China new ords/inventory

• 1 0 %
• 5 %

• 3
• 2
• 1

• 2.5
• 2.0
• 1.5
• 1.0
• 0.5

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Lead indicators – picking up

Broad regional PMI s Asian PMI ‘Strong’ Europe PMI ‘W eak’ Europe PMI

Source: Bloomberg, ANZ

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Spain C anada NZ India Korea Hong Kong Singapore Belgium Denmark Greece Ireland Italy J apan P

• rt ugal

US Germany France U K Australia China Taiwan Indonesia

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• 20

20 40 60 80 100 120 140 160

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2 4 6 8 10 12 Fiscal Deficit % GDP, 2012f Net Debt % GDP, 2012f

Advanced econom ies face substantial headw inds – large fiscal debts and sizable consolidation programs Fiscal & Debt position

Source: IMF, ANZ

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A broadening US recovery is a key pre-requisite for better global prospects – w e are cautiously optim istic

Source: Bloomberg

Household credit grow th

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5 10 15 20 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 (% y/ y)

Housings starts and NAHB

400 800 1200 1600 2000 2400 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 10 20 30 40 50 60 70 80 90 Housing starts, lhs NAHB housing index, rhs ('000, saar) (I ndex)

Sm all business optim ism

80 85 90 95 100 105 110 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 (I ndex)

I SM - m anufacturing

20 30 40 50 60 70 05 06 07 08 09 10 11 (I ndex) Com posite New orders

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The US labour m arket is continuing to im prove, particularly in term s

• f private sector job creation

Non-farm payrolls Unem ploym ent and participation rates Non-farm payrolls and tem porary help Jobless claim s

Source: Bloomberg, ANZ

• 80
• 40

40 80 120 160 200 240 280 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Privat e Public LT avg privat e LT avg public (m/ m '000) 2 4 6 8 10 12 01 02 03 04 05 06 07 08 09 10 11 12 63 64 65 66 67 68 Unemployment rat e, lhs Part icipat ion rat e, rhs (%) (%) 1 1.3 1.6 1.9 2.2 2.5 2.8 91 93 95 97 99 01 03 05 07 09 11 100 110 120 130 140 Temporary help, lhs Non- farm payrolls, rhs (mn) (mn) 300 400 500 600 700 Jan- 08 Jul- 08 Jan- 09 Jul- 09 Jan- 10 Jul- 10 Jan- 11 Jul- 11 Jan- 12 Act ual 8 week m.a. ('000)

8

How do you solve a problem called the euro zone?

Gross governm ent debt

Source: IMF, Bloomberg

20 40 60 80 100 120 140 160 180 200 90 92 94 96 98 00 02 04 06 08 10 12 14 16 % of GDP Italy Greece Portugal Germany Spain France Ireland Australia New Zealand IMF forecasts

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How w ill Europe’s unsustainable public debt be funded?

Source: IMF, Bloomberg

1 0 -year sovereign bond yields 2 4 6 8 10 12 14 16 18 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 5 10 15 20 25 30 35 40 Ireland Italy Portugal Spain Germany Greece (RHS) % %

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• 1.5
• 1.0
• 0.5

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• nly to decline

The ‘solution’ – grow your w ay out – highly unlikely. Forced deleveraging – yes. Policy support – yes. Austerity vs m onetary reflation

Forced deleveraging

Source: ECB, Bloomberg

Slow econom ic grow th Unem ploym ent rates

Germ an business conditions

4 6 8 10 12 00 01 02 03 04 05 06 07 08 09 10 11 12 (% ) 6 10 14 18 22 Germ any France I taly Spain, rhs (% )

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‘Misery’ indices am ongst European nations

Source: Eurostat, Bloomberg, ANZ Research

3 4 5 6 7 8 9 10 11 12 13 14 15 00 01 02 03 04 05 06 07 08 09 10 11 12 5 10 15 20 25 30 Euro zone Germany France Italy Austria Netherlands Spain, rhs unemployment rate plus inflation rate unemployment rate plus inflation rate

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Decoupling am ongst European PMI s

30 35 40 45 50 55 60 Jan- 01 Jan-04 Jan-07 Jan-10 Strong Europe Weak Europe

Source: ECB, Bloomberg

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W eak Europe is not large

Sources: Bloomberg, ANZ

10 20 30 40 50 60 70 EM+ other US Euro- strong Japan Euro-weak World PPP weights

14

China - Property Price I ndex (y/ y)

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2 4 6 8 10 12 14 16 18 2005 2006 2007 2008 2009 2010 2011 Official Property Price Index ANZ Property Price Index

China’s GDP grow th slow ed to below potential in Q4 2 0 1 1 We view that the bounce in China’s December PMI is the start of a rebound in activity; a hard landing in the property market is the biggest risk.

2 4 6 8 10 12 14 16 18 20 2005 2006 2007 2008 2009 2010 2011 y/y q/q, saar

China – GDP Grow th

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5 10 15 20 01 02 03 04 05 06 07 08 09 10 11 Consumption Investment Net Exports GDP, y/y

China – Contributions to GDP Grow th

35 40 45 50 55 60 2005 2006 2007 2008 2009 2010 2011 2012 Official PMI HSBC PMI

China – PMI s

Sources: Bloomberg, CEIC, and ANZ

China – Property Price I ndex

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China - ANZ Activity I nde x

90 95 100 105 110 115 120 05 06 07 08 09 10 11 12 4 6 8 10 12 14 16 ANZ China Activity Index GDP, y/y (RHS)

I nflationary pressures continue to ease despite food price gains. Market has priced in “m onetary easing”; m ore RRR cuts are expected. Policy to support a soft landing.

4 6 8 10 12 14 16 18 20 22 24 2005 2006 2007 2008 2009 2010 2011 2012

China – Reserve Requirem ent Ratio China – Bond Yields

1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Apr 10 Aug 10 Dec 10 Apr 11 Aug 11 Dec 11 1- year 3- year 5- year 7- year 10- year (y/ y)

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1 2 3 4 5 6 7 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Food Housing Medical Other CPI

New Weights

China – Contributions to I nflation

Sources: Bloomberg, CEIC, and ANZ

China – ANZ Activity I ndex

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Upbeat grow th usually takes place during the Party Congress

Provinces w ith leadership change in 2 0 1 0 -2 0 1 1

China - Political Business Cycle

8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 2 Years Before 1 Year Before Year of CPC 1 Year After 2 Years After Average GDP Grow th in Previous Cycles (1980-2009) GDP Grow th in Current Cycle (2009-2014)

2010 2011

China - Prov incia l GDP Grow t h ( Ranked by GDP)

2 4 6 8 10 12 14 16 18

G D J S S D Z J H e N H e B L N S C S H H u B H u N F J B J A H N M H L S N G X J X T J S X J L C Q Y N X J G Z G S H N N X Q H X Z

2011 Grow t h 2012 Target 2011 Average Grow t h

Sources: Bloomberg, CEIC, and ANZ

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Australia & NZ

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Australia faces grow ing headw inds, but still has a num ber of factors in its favour, w hich should once again provide decent insulation from current troubles

Headw inds

• European-led financial system disruption
• An independent slowdown in China
• Domestic fiscal drag
• Accelerated structural change
• Persistently high AUD

I nsulators

• Policy ammunition

– Both monetary and fiscal

• Strong government finances

– AAA-rated

• A healthy banking sector

– Ample liquidity and reduced call on wholesale debt markets

• Relatively limited direct trade and financial exposures to Europe

– Euro area is just 4% of Australian merchandise exports – Direct exposure of Australian banks to Euro area is just 2.7% of total assets

• Simultaneous stimulus from the resources boom

– An unprecedented (and so far uninterrupted) investment pipeline

19

Australia is increasingly part of Asia

Source: ANZ, RBA ASEAN 6: Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam Other Asia: HK & Taiwan

Australian tw o-w ay m erchandise trade w eights

10 20 30 40 50 60 70 80 70 75 80 85 90 95 00 05 10 US Europe UK Asia I ndex 5 10 15 20 25 30 70 75 80 85 90 95 00 05 10

Japan China Korea ASEAN 6 Other Asia

I ndex Asia W orld

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50 60 70 80 90 100 110 120 130 140 60 70 80 90 00 10 Index Forecasts New f/c

I t’s all about the term s of trade

Source: ABS, RBA and ANZ

Term s of trade since 1 9 60 Term s of trade and 5 -yr MA since 1 8 6 0

60 80 100 120 140 160 180 200 220 1870 1890 1910 1930 1950 1970 1990 2010 Index, 2003 = 100

21

Australian grow th is set to accelerate

Source: ABS and ANZ

GDP grow th Business investm ent vs. consum ption

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1 2 3 4 5 6 7 90 92 94 96 98 00 02 04 06 08 10 12 % yearly change Forecast s

48 50 52 54 56 58 60 62 90 93 96 99 02 05 08 11 8 10 12 14 16 18 20 22 Household consumpt ion (left ) Business invest ment (right ) % of GDP Forecasts % of GDP

22

A solid lift in m ining, energy and infrastructure investm ent has com m enced

Source: Access Economics and ANZ Forecast Major Project Investment ($Abn) 3 1 3 .6 5 8 .4 7 7 .3 7 7 .2 6 0 .9 3 9 .8 Total 205.3 32.8 50.1 51.2 44.4 26.8 Energy 108.3 25.6 27.2 26.0 16.5 13.0 Mining Total 2015 2014 2013 2012 2011 Forecast Major Project Investment ($Abn) 3 1 3 .6 5 8 .4 7 7 .3 7 7 .2 6 0 .9 3 9 .8 Total 205.3 32.8 50.1 51.2 44.4 26.8 Energy 108.3 25.6 27.2 26.0 16.5 13.0 Mining Total 2015 2014 2013 2012 2011

20 40 60 80 100 120

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Communications Hospitals Water Supply & Sewerage Manufacturing Electricity Gas Pipelines Mining Energy Airports Rail Ports Roads

$Abn

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The bad new s – outside of m ining and related industries, the outlook has w orsened

Sources: ABS and ANZ

Non-residential building approvals 1 2 3 4 5 6 7 8 9 10 01 02 03 04 05 06 07 08 09 10 11 12

Private sector public sector $ billion per quarter (rolling 3m sum )

Public sector: 'nation-building' programs spike Private sector: pre-GFC construction spike

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Reflecting the increasingly ‘patchw ork’ econom y

Source: NAB

NAB business conditions

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20 40 60 80 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Mining Manufacturing Construction Retail Wholesale Transport Finance, business, property Recreation & personal I ndex (3m ma)

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Key risk: The cost and supply of credit Risk not as heightened as 2008, but could still get very worse very quickly (leaving a current account deficit country like Australia exposed)

Source: ANZ and Bloomberg

Australian bank funding costs

50 100 150 200 250 300 350 400 450 500 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 5yr Bank Funding 3yr Bank Funding 5-yr Aust. I traxx (index)

Spread to 90d BBSW Lehm an Bros file for bankruptcy Greece initial dow ngrade

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Household spending – unusual trends and conflicting drivers

Source: ABS, RBA and ANZ

Retail sales survey vs total retail spending Consum er Confidence

Disposable incom e and household consum ption Spending on goods vs services

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The unem ploym ent rate forecast to head above 5 ½ % .

Labour m arket, m onthly trend grow th

Source: ABS and ANZ

• 5

Em ploym ent by industry, largest six sectors

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Retail sales volum es and retail em ploym ent

Vacancy rates by industry

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Australian rates m arkets: Still pricing for m any of the global risks to unfold

RBA cash rate: ANZ forecasts vs. m arket pricing

Source: Bloomberg and ANZ

2 3 4 5 6 7 8 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 per cent RBA Cash Rate ANZ Forecast Current Cash Rate Futures Cash Rate Futures (Nov-11) average since 1995

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NZ econom ic update

• The im pact of a w eak and uncertain global scene on the NZ econom y rem ains m odest. W e continue

to assess 6 channels. – Credibility. It is essential the Government sticks to its fiscal austerity script. This is occurring. – Confidence. Down but respectable and now stable from month to month as opposed to easing. – Commodity prices. Down 8% from their peak, but recent lifts in dairy prices suggest an encouraging

• floor. Good volumes providing an offset to weaker prices. NZD prices still very elevated.

– China. Slowing such that policymakers are now re-engaging in support by lowering the RRR. – Cost of funds. Elevated. Unlikely to change. Lower wholesale rates providing an offset. Deposit rates are key to watch. – The currency. Flip-flopping but acting as a shock absorber to global events.

• Relative to global peers New Zealand continues to show a degree of resilience. How ever,

indicators are becom ing increasingly polarised.

• W e have pencilled in 2 .5 % grow th in calendar 2 0 1 2 and the unem ploym ent rate to drift gradually

low er. How ever, a soft patch in early 2 0 1 2 beckons and the risk profile is skew ed dow nw ard. Core pillars of our econom ic assessm ent, nam ely a sluggish trend grow th rate and heightened period of uncertainty and volatility, rem ain.

• The OCR w ill not be m oving up until the global scene stabilises. This looks a w ay off. Technically

w e are calling a higher OCR from Decem ber 2 0 1 2 but the spirit of the view is rates w ill not be m oving up for a considerable period. The hurdle to a rate cut looks high.

• The election has been and gone w ith few surprises. W e expect the pace of structural reform to

accelerate in H1 2 0 1 2 . Areas such as education are likely to be focal points.

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Mixed signals continue to perm eate on how the NZ econom y is perform ing. Grow th is m odest, but increasingly scratchy

Financial conditions rem ain supportive

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2 4 6 8 90 92 94 96 98 00 02 04 06 08 10 12 97.8 98.2 98.6 99.0 99.4 99.8 100.2 Annual % change GDP (LHS) FCI (adv 10 mont hs, invert ed, RHS) Index 830 880 930 980 1030 1080 1130 02 03 04 05 06 07 08 09 10 11 12 27 28 29 30 31 32 33 34 35 36 Jan04 = 1000 Mont hly ANZ Truckomet er advanced 6 mont hs (LHS) GDP (RHS)

Real 95/96 $bn

Monthly ANZ Truckom eter and GDP levels

500 1000 1500 2000 2500 3000 3500 4000 04 05 06 07 08 09 10 11 12 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 $ million Value of mort gage approvals (2- mt h ave, RHS) Housing t urnover (LHS)

$ million

Mortgage approvals and housing turnover

10 20 30 40 50 60 70 90 92 94 96 98 00 02 04 06 08 10 12 2 4 6 8 10 12 '000

Unem ploym ent rate (RHS, inverted scale) Sim ple sum of newspaper and internet job ads (LHS) Newspaper job ads (LHS)

Percent

Total job ads and unem ploym ent rate

Sources: ANZ, National Bank, Statistics NZ, RBNZ, Seek, Trade Me, NZ Herald, The Press, Dominion Post, Manawatu Standard, ODT, Waikato Times, Hawkes Bay Today, Bloomberg

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