VICTORIAN TRADE OUTLOOK

Geelong briefing4 May 2017

IMF: global growth will accelerate to 3.5% in 2017 up from 3.1% in 2016

- Stronger growth is expected in advanced economies, namely the US

- Growth in emerging and developing countries is forecast to strengthen led by Brazil and Russia

- Growth prospects in Asia remain solid

But the IMF has a history of downgrading its forecasts

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Global growth—picking up steam in 2017

Global trade growth—shaking off a horrid 2016

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Trade growth has struggled to recover since the GFC—both in absolute terms and

relative to GDP growth

- IMF estimates that weakness in economic activity accounts for up to three quarters of the slowdown

- Structural factors account for the remainder—on-shoring, protectionism, global shift to services trade

Trade growth forecast to strengthen considerably: from 2.2% in 2016 to 3.8% in 2017

US growth is forecast to accelerate in 2017 and 2018

- Solid household consumption supported by a firming labour market

- Expectation of fiscal stimulus through tax cuts and infrastructure spending over the coming years

- US business investment is on the rise

Can Trump deliver?

- Political gridlock

US outlook—the Trump effect

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Manufacturing dominates Victoria’s merchandise exports to the US

- Pharmaceuticals and aviation have been strong performers over much of the last decade

Manufacturing exports supported by: positive sentiment amongst US manufacturers,

elevated USD, and a firming growth outlook

But protectionist trade polices are a risk

- The border adjustment tax could be negative short term, but stronger USD would help restore

competitiveness of Australian exports

Pharmaceutical exports will benefit from aging population in the US

Victorian exports to the US—manufacturing is on the up

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Despite policy support, China grew 6.7% in 2016—its slowest pace since 1990

- Drags include: substantial excess capacity, declining productivity growth, ageing population

Stimulus has been an effective anaesthetic to short term volatility, but risks are mounting

- Activity boosted by more public investment and consistent/transparent exchange rate management

- But unsustainable debt accumulation + misallocation of resources = ‘a key fault line’

China outlook—rebalancing in fits and starts

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Victorian exports to China—middleclass driving the outlook

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Chinese consumers ‘have the potential to reshape global consumption just as the baby-

boomer generation of the West—the richest generation in history—did’

McKinsey Global Institute, April 2016

China’s economy is rebalancing

- Away from commodity-intensive, investment-driven growth, towards a consumption-based model

The growing middleclass has caused agriculture exports to China to rise from A$930m in

2006 to A$3.4b in 2016

- Chinese working-age consumers will grow by 100m people over 2015-30

- Share of urban households considered ‘upper middle class’ or ‘affluent’ to increase to 63% by 2022

Victorian exports to the China—middleclass driving the outlook

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Chinese demand for Victoria’s processed agricultural products have been particularly robust

Household consumption will more than double to US$6.7tn in 2030

1. Robust income growth—IMF forecasts wages growth to remain over 8% p.a. over the next 5 years

2. Low household debt—around 40% of GDP (half that of US households)

3. Financial optimism and an improving social safety net—which entices a higher propensity to spend

4. Urbanisation—China aims to lift the proportion of its population living in cities to 60% by 2020

The AUD on a trade weighted basis has appreciated over much of the last 12 months

- Appreciation driven by a rebound in commodity prices and Australia's robust export performance

The outlook for the AUD will depend on

- Commodity prices and export receipts more broadly

- Relative interest rates with major global economies

- Investor risk appetite

Exchange rate—AUD trended higher in 2016

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