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The Australian Economy in 2015/16 –

Rebalancing with low rates and a low AUD

Gareth Aird

Senior Economist

+(612) 9118 1100

12 November 2015

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3

The global economy

0

2

4

6

8

0

2

4

6

8

Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

OFFICIAL INTEREST RATES% %

Canada

US

UK

Euro

Japan

NZ

Australia

Advanced economies on a two-speed path.

China’s growth to slow a little (6½% in 2016).

Commodity prices to remain under pressure on

supply/demand imbalance.

Inflation to remain low globally.

Global low interest rate environment to

continue.

But US to raise interest rates late 2015/early

2016.

Emerging markets to remain under pressure

4

The global economy

0

4

8

12

0

4

8

12

Jan 05 Jan 07 Jan 09 Jan 11 Jan 13 Jan 15

%%

UK

Eurozone

Source: CEIC

UNEMPLOYMENT RATE

US

Japan

Australia

Unemployment rates coming down in the

Eurozone, US, and UK.

US and UK unemployment rates near the ‘full

employment’ level.

Strength in the US and UK labour markets

underpin expectations of eventual rate rises.

Eurozone economy to continue to struggle.

USD and GBP have outperformed.

Australia’s long period of labour market

outperformance is over.

5

The Chinese economy

2%

7%

12%

17%

22%

27%

35

40

45

50

55

60


Manufacturing PMI (lhs)

CHINA INDUSTRIAL PRODUCTION (annual % change, real)

Industrial Production (rhs) 0

10

20

30

40

0

10

20

30

40

Jan-00 Jul-02 Jan-05 Jul-07 Jan-10 Jul-12 Jan-15

EXPORT SHARES(% share of annual exports)

% %

Japan

China

ASEAN

North America

EU

The Chinese economy needs to rebalance away from investment led growth and towards consumption

led growth.

Industrial production growth has slowed which has had an impact on commodity prices.

We expect GDP growth in China to ease to 6½% in 2016.

6

Australian economy - growth still positive despite headwinds

Australia is in its 24th of uninterrupted economic

growth.

But growth running a little below trend (potential

growth).

RBA has some firepower on the interest rate

front.

AAA credit rating looks pretty sound.

-1.0

2.5

6.0

-1

3

6

1979/80 1986/87 1993/94 2000/01 2007/08

% %REAL GDP

(annual % change)

Actual GDP

Potential Growth

7

But income growth has been a problem

Economic growth is important for jobs.

Income growth is important for living standards and spending power.

0.0

4.0

8.0

0.0

4.0

8.0

Jun91 Jun95 Jun99 Jun03 Jun07 Jun11 Jun15

VIC ECONOMY(% change, financial years)

Economic Growth

Income Growth

0.0

4.0

8.0

0.0

4.0

8.0

Jun91 Jun95 Jun99 Jun03 Jun07 Jun11 Jun15

VIC ECONOMY(% change, financial years)

Economic Growth

Real Income Growth

8

Key commodity price falls have weighed on income growth

The prices of Australia’s two biggest exports, iron ore and coal, have fallen sharply after the past few

years.

Australia’s terms of trade has fallen significantly from its peak.

30

60

90

120

30

60

90

120

Mar-90 Mar-98 Mar-06 Mar-14

THE TERMS OF TRADEIndex Index

0

150

300

450

0

150

300

450

Sep 98 Sep 02 Sep 06 Sep 10 Sep 14

IndexIndex

Source: CBA

CBA COMMODITY PRICE INDEX(USD terms)

9

The mining capex ‘boom’ is over

Declining mining investment the biggest

headwind to growth.

Mining investment will continue to fall over the

next few years.

Job losses to continue to come out of the

mining sector.

The impact is being felt on a number of regional

economies.

Non-mining investment growth has been weak.

0

3

6

9

0

3

6

9

1989/90 1994/95 1999/00 2004/05 2009/10 2014/15

%%MINING CAPEX

(% of GDP)

CBA(f)

10

Fiscal and monetary policy response – and AUD response

0.55

0.70

0.85

1.00

0.55

0.70

0.85

1.00

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

AUD/USD

USD AUDUSD

0

2

4

6

8

0

2

4

6

8


RBA CASH RATE % %

The RBA has cut rates to a record low of 2.0%

The Federal Government has let the economy drive the budget.

The AUD has fallen sharply against the USD and most other major currencies.

-6

-3

0

3

-6

-3

0

3

1996/97 2001/02 2006/07 2011/12 2016/17

COMMONWEALTH BUDGET% ofGDP

% ofGDP

Underlying cash balance

Fiscalbalance

11

GDP growth – 2.7% in 2015/16

Economic growth in Australia to run a little below trend in 2015/16.

Growth to be driven by consumption, net exports and dwelling investment.

Business investment (largely mining investment) to be a drag on growth.

-1.6 -0.8 0.0 0.8 1.6

Net Exports

Public spend.

Business invest.

Dwelling invest.

Consumption

GDP 2015/16(contribution to growth)

percentage point

%

-9

-4.5

0

4.5

9

-9.0

-4.5

0.0

4.5

9.0

Co

nsu

mp

tion

Dw

elli

ng

inve

st.

Busin

ess

invest

.

Pub

lic s

pen

d.

Impo

rts

Exp

ort

s

Tota

l

GDP 2015/16(% growth) %

12

Consumer spending

Consumer spending is being supported by:

- wealth effects (i.e. dwelling prices);

- low interest rates

- population growth;

- lower AUD; and

- modest jobs growth

The headwinds on consumer spending are:

- consumer sentiment (job security fears);

- an elevated savings rate; and

- soft wages growth.

-5

-3

-1

1

3

-4.0

-1.4

1.3

3.9

6.5

Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

%%pa

Consumerspending

(lhs)

CBA HSI(momentum)

(rhs)

CBA H/HOLD SPENDING INDICATOR

Source: CBA

13

Dwelling prices – two years of exceptional growth

250

400

550

700

850

1000

250

400

550

700

850

1000


DWELLING PRICESIndexIndex

Sydney

Brisbane

IndexIndex

Source: CoreLogic RP Data

Melbourne

Perth

Adelaide Regional

Dwelling price growth has been fuelled by low interest rates, investor demand, foreign

investment, strong population growth and some supply/demand imbalances.

-10

0

10

20

-10

0

10

20


DWELLING PRICES(annual %ch)

%%

Melbourne

Source: CoreLogic RP Data

Australia

14

Credit growth has picked up due to low interest rates

0

28

55

83

110

0

28

55

83

110

Sep-82 Sep-88 Sep-94 Sep-00 Sep-06 Sep-12

CREDIT(% of GDP)

Household

% %

Business

Low interest rates have fuelled demand for housing particularly from the investor segment.

Credit growth faster than income growth means leverage lifting

3

9

15

3

9

15


HOUSING LOAN APPROVALS$bn $bn

Owner-occupier

Investor

15

Auction clearance rates down – a leading indicator of price growth

Low auction clearance rates are

consistent with cooling activity in the

housing market.

Dwelling price growth should

moderate over 2015/16.

-6

-1

5

10

15

20

38

55

73

90

Mar-09 Mar-11 Mar-13 Mar-15

AUCTION CLEARANCES & PRICES

Auctionclearance

rate(lhs, 12 mnth lead)

Dwellingprices

% %pa

Source: CoreLogic RP

16

Residential construction to continue to lift

A big lift in residential construction is underway and more to come.

Apartments are driving the lift in dwelling construction.

0

15

30

45

60

75

0

15

30

45

60

75


RESID. BLDG APPROVALS(mov. annual total)

'000

SA

WA

QLDNSW

VIC

ROA

'000

2

4

6

8

10

2

4

6

8

10


DWELLING APPROVALS

Multiunit

Houses

'000 '000

17

Robust population growth in Victoria

Population growth has slowed in

Australia – in line with softness

in the labour market.

Population growth in Victoria is

the strongest.

0

1

2

3

4

0

1

2

3

4

Sep-00 Sep-03 Sep-06 Sep-09 Sep-12

POPULATION GROWTH(annual % change)

Tas

Qld

WA

SA

%pa

NSW

Vic

%pa

18

Wealth effects have been positive for consumer spending.

Wealth effects and low interest rates have had a positive impact on consumer spending

-3

8

18

-2

5

12


House* Prices(rhs)

*Source: CoreLogic RP Data

%pa %paHOUSE PRICES & RETAIL

TRADE

Retail Trade(lhs)

-3.0

0.0

3.0

6.0

9.0

-3.0

0.0

3.0

6.0

9.0


RETAIL TRADE(% change) %%

AUS

VIC

19

Tourism boosted from lower AUD – will continue through 2016

Arrivals from China will continue to grow at a strong pace.

Growth in arrivals has recently picked up from US and UK – trend to continue.

Departures growth to slow.

0.55

0.69

0.83

0.96

1.10-300

0

300

600

900


Tourismtrade balance

(lhs)

AUD/USD(inverse, rhs)

$mn AUD & TOURISM ($mn, level)

USD

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

Th

ou

san

ds

Mn

Th

ou

san

ds

China

India

SHORT TERM OVERSEAS ARRIVALS(rolling annual total)

NewZealand

Japan

UK

20

Consumer confidence has been fragile – job security concerns remain

Consumer sentiment tracking a little below the key 100 level.

Concerns over job security remain elevated despite a flat unemployment rate.

70

85

100

115

130

70

85

100

115

130


CONSUMER CONFIDENCE

*Source: Melbourne Institute

Index Index

60

100

140

180

60

100

140

180

Jul-05 Jul-07 Jul-09 Jul-11 Jul-13 Jul-15

JOB SECURITY FEARS

Source: Melbourne Institute/WBC

Index Index

21

Consumer caution means a higher savings ratio

-5

0

5

10

15

20

-5

0

5

10

15

20

Sep-72 Dec-80 Mar-89 Jun-97 Sep-05 Dec-13

SAVING RATIO% % Savings rate is elevated, largely due to

consumer caution.

But it has recently started to trend lower as

rising asset prices encourage spending.

Further falls in the savings ratio will boost

consumer spending.

22

Business investment - a need to boost the non-mining capital stock

Low interest rates are yet to simulate a material lift in non-mining business investment – hurdle rates

have not adjusted to the low interest rate environment.

There is a growing need to boost the non-mining capital stock.

0

8

16

24

0

8

16

24

1979/80 1988/89 1997/98 2006/07

% %CAPITAL STOCK

(annual % change)

Mining

Total

Non-mining

-30

-15

0

15

30

30

40

50

60

70

BUSINESS CONDITIONS% Index

NAB(lhs)

PSI (rhs)

23

Business investment has been weak, but conditions are positive

CBA and official business lending data has recently picked up a little.

But business conditions have recently moved into favourable territory.

-60

0

60

120

-20

0

20

40


*Smoothed

CBA INVESTMENT INDICATOR(annual % change) %

Capex(ex mining)

(lhs)

CBA indicator*(adv 5 mnths, rhs)

%

-3

0

3

6

9

12

-3

0

3

6

9

12

Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

%%

Investorhousing

Otherpersonal

CREDIT GROWTH(annual % change)

Source: RBA

Owner-occhousing

Business

24

Public investment – rhetoric vs reality

3

4

5

6

7

3

4

5

6

7

Sep-96 Sep-00 Sep-04 Sep-08 Sep-12

PUBLIC CAPEX(% of GDP) %%

Despite the rhetoric, public infrastructure

spending is yet to lift.

Capital works programs need to be at record

highs given population growth continues.

State Budgets imply a modest contribution to

GDP growth in 2015/16.

25

Net Exports

-20

0

20

40

60

0

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

5

10

15

0

5

10

15

1998/99 2004/05 2010/11 2016/17

%%

RESOURCE EXPORTS(% of GDP)

0.7

0.9

1.1

1.3

1.5

0.7

0.9

1.1

1.3

1.5


TOURIST DEFICIT(arrivals to departures)ratio ratio

Resource exports will continue to lift, particularly once LNG plants become fully operational.

Tourism exports to continue to lift due to a lower AUD.

Education to also benefit from a lower AUD and rise of the Chinese middle class.

26

Unemployment rate has stabilised at a little over 6%

Employment growth has been sufficient to keep the unemployment rate flat over the past year.

-15

0

15

30

45

-15

0

15

30

45


CBA JOBS INDICATOR(implied jobs growth*)'000 '000

*smoothed 3 month change

MidOct

3.5

4.5

5.5

6.5

7.5

3.5

4.5

5.5

6.5

7.5


UNEMPLOYMENT RATES% %

AUS

Vic

27

Jobs growth has largely been in professional services, health, construction and education.

Leading indicator of jobs

-30

-15

0

15

-2.2

-0.2

1.7

3.7

Jul 06 Jul 08 Jul 10 Jul 12 Jul 14

Employment (lhs)

Labour hiring plans*(net % expecting a rise)(advanced 6 month, rhs)

%pa %

* Source: NAB Business Survey

EMPLOYMENT & JOB PLANS

-25 0 25 50 75 100

Prof Services

Health & comm serv

Accomm, caf etc

Admin services

Education

Cultural & rec

Transp & stor

Gov admin

Construct

Wholesale

Pers & other

Manufact

EGW

Communic

Rental, hiring & Real Estate

Mining

Fin & insur

Agric

Retail

JOBS GROWTH BY SECTOR

'000s

Year to Aug.2015+242K or 2.1%pa

28

Wages growth has slowed sharply

Wages growth has been sliding as the

unemployment rate lifts.

Wages growth is compressing across sectors.

Wages growth at its slowest pace since the

1990s recession.

But slowing wages growth has supported the

labour market and has capped the rise in the

unemployment rate.

Wages growth to remain around current levels

for the next few quarters.

1

2

3

4

5

1

2

3

4

5


WAGE PRICE INDEX(annual % change)% %

Post-GSTslump /

"tech wreck"

Globalfinancial

crisis

WCI 15-year averageWCI

29

Inflation has slowed due to spare capacity in the economy

Inflation has slowed in Australia.

Lower wages growth is keeping a lid on

consumer price inflation.

And lower petrol prices have also contributed to

lower inflation.

Underlying inflation a little higher than headline

inflation.

RBA’s target inflation band is 2-3%pa.

Inflation to remain benign over the next year.

0

2

4

0

2

4


CONSUMER PRICES(annual % change)% %

Headlineinflation

(exc GST)

Underlyinginflation

30

Interest rates at record lows and will stay low

Market pricing another cut.

We see the RBA on hold at 2.0%.

0

2

4

6

8

0

2

4

6

8


RBA CASH RATE% %

CBA (f)

1.50

1.75

2.00

2.25

1.50

1.75

2.00

2.25

1 m 3 m 5 m 7 m 9 m 11 m 13 m 15 m 17 m

%

OIS CASH RATE PRICING%

Source: Bloomberg

Current

1 month ago

3 monthsago

31

AUD – likely to trend a little lower, but not too much more

0.55

0.70

0.85

1.00

0.55

0.70

0.85

1.00


AUD/USD

USDAUD

USD Our forecasts have the AUD drifting a little

lower due to:

- US Federal Reserve raising interest rates;

- some further downward pressure on

commodity prices as Chinese economy

rebalances; and

- financial markets pricing the chance of

further RBA policy easing.

32

Summary - Australian Economy Outlook

Themes over the next year

Economic growth to run a little below trend as Australian economy rebalances.

Income growth will be constrained due to softer commodity prices, but should start to lift off

the back of a lower AUD.

The AUD to go a little lower which will assist exporters.

Unemployment rate to stay around its current level.

Wages growth below long-run average which will support the labour market.

Interest rates to stay low.

Federal government budget pressures to continue.

33

Questions

CBA TEI & THE CASH RATE

3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa

* Deviat ion from trend

CBA Australian Economic Forecasts

2012/13(a)

2013/14(a)

2014/15(a)

2015/16(f)

2016/17(f)

2012(a)

2013(a)

2014(a)

2015(f)

2016(f)

Economic Activity

Private final demand 2.1 0.9 1.0 1.0 1.4 4.5 1.0 1.0 1.1 1.0

Of which: H/hold spending 1.9 2.2 2.5 2.7 2.9 2.5 1.7 2.4 2.6 2.8

Dwelling investment -3.8 5.3 8.3 7.9 2.3 -6.1 0.4 8.0 9.7 4.4

Business investment 4.1 -5.2 -6.2 -8.5 -4.8 15.8 -1.6 -5.8 -7.8 -7.9

Public final demand -0.2 1.6 0.5 1.7 1.4 3.2 -1.4 1.4 1.8 1.3

Domestic final demand 1.6 1.0 0.9 1.2 1.4 4.2 0.5 1.1 1.2 1.0

Inventories (contrib to GDP) -0.1 -0.3 0.2 0.1 0.1 0.0 -0.4 0.0 0.1 0.2

GNE 1.5 0.7 1.1 1.3 1.5 4.2 0.1 1.1 1.3 1.2

Exports 6.0 5.8 6.6 5.3 8.2 6.0 6.2 6.7 5.3 6.9

Imports 0.7 -1.8 -0.4 -1.5 0.9 6.2 -1.8 -1.7 0.6 -1.8

Net exports (contrib to GDP) 1.0 1.5 1.4 1.4 1.6 -0.2 1.6 1.7 1.0 1.9

GDP 2.5 2.5 2.4 2.7 3.1 3.6 2.1 2.7 2.4 3.0

Prices & Wages

CPI 2.3 2.7 1.7 2.3 2.8 1.8 2.4 2.5 1.6 2.8

Underlying CPI 2.4 2.6 2.4 2.7 2.9 2.2 2.5 2.5 2.5 2.8

Wage Price Index 3.3 2.6 2.4 2.7 3.0 3.6 2.9 2.5 2.4 2.9

Nominal GDP 2.2 4.1 1.7 3.8 5.3 3.3 3.3 3.1 2.2 4.9

Real h/hold disposable

income 0.8 1.6 1.6 1.8 2.3 2.0 1.6 1.4 1.6 2.2

Labour Market

Employment 1.2 0.6 1.2 2.0 1.9 1.2 0.9 0.7 1.8 1.9

Unemployment rate 5.4 5.8 6.2 6.1 5.8 5.2 5.7 6.1 6.2 6.0

External Accounts

Current Account: $bn -59.4 -51.2 -57.2 -59.8 -42.2 -64.1 -53.3 -48.5 -64.8 -50.8

% of GDP -3.9 -3.2 -3.6 -3.6 -2.4 -4.3 -3.4 -3.0 -4.0 -3.0

CBA TEI & THE CASH RATE

3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa

* Deviat ion from trend

CBA forecasts envisage sub-trend

global growth continues, although the

gap should narrow in 2016.

Advanced economies supported by

solid growth/pick ups in the US, UK

and Canada.

EZ to fare better than previously

expected.

China to slow further but should do a

little better than the consensus.

CBA Global Economic Forecasts

CBA Global Growth Forecasts

2013(a)

2014(a)

2015(f)

2016(f)

World 2.9 3.0 2.8 3.1

United

States2.2 2.4 2.6 2.6

Japan 1.5 -0.1 0.7 0.9

Eurozon

e-0.4 0.9 1.4 1.4

United

Kingdom1.7 2.6 2.5 2.4

Canada 2.0 2.5 1.0 2.0

China 7.7 7.3 7.0 6.5

India 6.9 7.4 7.3 7.5

CBA FX Forecasts

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

Majors

AUD 0.68 0.66 0.65 0.67 0.69

EUR 1.10 1.08 1.05 1.08 1.10

JPY 119 118 117 115 118

GBP 1.52 1.52 1.51 1.54 1.57

CAD 1.34 1.36 1.40 1.38 1.35

NZD 0.62 0.60 0.58 0.59 0.60

CHF 0.95 0.99 1.00 0.98 0.97

Selected Cross Rates

EUR-JPY 131 127 123 124 130

EUR-GBP 0.72 0.71 0.70 0.70 0.70

EUR-CHF 1.05 1.07 1.05 1.06 1.07

End-Period Forecasts

Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

AUD Cross Rates

AUD-NZD 1.10 1.10 1.12 1.14 1.15

EUR/AUD 1.62 1.64 1.62 1.61 1.59

AUD-JPY 81 78 76 77 81

GBP/AUD 2.24 2.30 2.32 2.30 2.28

AUD-CAD 0.91 0.90 0.91 0.92 0.93

AUD-CHF 0.65 0.65 0.65 0.66 0.67

AUD-CNY 4.39 4.32 4.26 4.36 4.42

AUD-SGD 0.97 0.95 0.97 0.95 0.92

TWI 59.4 58.4 57.2 58.1 59.1

East Asia

USD-CNY 6.45 6.55 6.55 6.50 6.40

USD-SGD 1.42 1.44 1.42 1.42 1.42

End-Period Forecasts

Forecasts – Gross State Product

Gross State Product Forecasts

2014/15 2015/16 2016/17

% (f) (f) (f)

NSW 2.5 2.7 2.8

VIC 2.3 2.5 2.8

QLD 2.0 4.0 4.5

SA 2.0 1.7 1.9

WA 3.3 2.0 3.2

TAS 1.8 2.5 2.0

NT 4.5 4.5 3.0

ACT 1.3 1.5 2.3

AUST 2.4* 2.7 3.1

* Actual

-32.0

-16.0

0.0

16.0

32.0

0

4

8

12

16

NSW VIC QLD SA WA TAS NT ACT AUST

GSP(by state, chain volumes)% %

14/15 annual growth (f)

(lhs)

share of economy(rhs)

15/16 annual

growth (f)(lhs)

QLD GSP pushed significantly higher by LNG exports

the australian economy in 2015/16 rebalancing with low ... · the bank provides, these are set out...

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