the economic outlook cameron bagrie chief economist september 2012

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The Economic Outlook Cameron Bagrie Chief Economist September 2012 Slide 2 1 Theres a lot going on >Deleveraging >Rebalancing >Global scene >China / Asia >Christchurch } Payback Slide 3 2 Deleveraging has a way to go Private sector credit Slide 4 3 Not keeping great company: shhh dont tell Slide 5 4 Four years into a financial crisis what has changed globally? >Private debt down, public up: total debt higher >Banking crisis has morphed into a sovereign debt crisis >Baton being passed back and forth >Financial volatility extreme Slide 6 5 Europes challenges >The 3 ins Indebted Inflexible Incapable politically Slide 7 6 Uncle Sam These are trillions of dollars, let's convert closer to an average family by taking off eight zeros Source: Santelli Report, CNBC 14 Dec 2011 And then theres Japan. Slide 8 7 The pattern so far: the CRIC cycle >Crisis: debt metrics >Response: money printing >Improvement: relief >Complacency: Q. What has changed? A. Nothing >Crisis.and the spiral is in motion Slide 9 8 Why cant policymakers sort the problem out? The prisoners dilemma 6 mths > 0 and 5 > 2 so optimal strategy in terms of minimising jail time is to defect Natural equilibrium we end up need not be optimal!!!!! But what happens if you starting playing with an irrational player? Optimal solution Actual outcome Example PD payoff matrix Cooperate (lie)Defect Cooperate (lie)6 mths, 6 mths5, 0 Defect0, 52, 2 Slide 10 9 Whats the way out? >Default banking crisis >Deleverage/austerity social / political consequences, and often too late >Go for growth how exactly? >Monetise it inflation and distortion >Repression how to kill your financial sector for a decade We need fiscal / Government leadership in conjunction with central bank support Slide 11 10 What does it all mean for NZ? Its all about the Cs Slide 12 11 The Cs >Confidence National Bank Business Outlook confidence easing Slide 13 12 Confident enough to get by but not stellar Slide 14 13 >Confidence >Contagion NZ current account deficit 5% of GDP Net foreign debt still very large Fiscal books need to be good reading Government needs to show credibility and competency and remain whiter than white National Bank Business Outlook confidence easing The Cs Slide 15 14 >Confidence >Contagion >Commodity prices National Bank Business Outlook confidence easing The Cs Slide 16 15 A cyclical correction and currency challenges.. Slide 17 16 Amidst a structural boom. Who is going to feed China? >China is become richer, more middle class and more urban >And shopping patterns are changing, away from local markets and toward supermarkets >Food consumption will accelerate going forward and Chinas endowment of fresh water is limited >Big picture: China will need to import goods with embodied water from the rest of the world Slide 18 17 Sources: USDA, ANZ Commodity Strategy Milk Powder = Whole & Skim Milk Powder Sugar Animal ProteinGrains Oilseeds China Net Trade Flows China shifting to a net importer in recent years Slide 19 18 >Confidence >Contagion >Commodity prices >Currency National Bank Business Outlook confidence easing The Cs Slide 20 19 Currency beauty contest Slide 21 20 Investors are starting to view the world differently Slide 22 21 >Confidence >Contagion >Commodity prices >Currency >Cost of funds National Bank Business Outlook confidence easing The Cs Slide 23 22 Improvements, but still expensive OCR cuts? OCR hikes? Slide 24 23 >Confidence >Contagion >Commodity prices >Currency >Cost of funds >China (and Australia) National Bank Business Outlook confidence easing The Cs Slide 25 24 China slowing officially and more aggressively unofficially 24 Slide 26 25 > Collapsed Iron Ore and Coal prices > Two-speed economy quite extreme > Very exposed to a China slowdown > Housing market still looks overvalued > AUD looks very overvalued Key issues: Australia is our largest trading partner. NZD/AUD if RBA cutting rates? Fewer mining jobs = more NZers returning and an easing brain drain Australia Slide 27 26 >Confidence >Contagion >Commodity prices >Currency >Cost of funds >China >Capital (resources) National Bank Business Outlook confidence easing The Cs Slide 28 27 Who is the lucky country? Slide 29 28 A few local considerations too >Fiscal straight-jacket 2.8% fiscal contraction over next 2 years. Big shoes to fill. >An earthquake rebuild Timing / cost / resourcing? Offset by fiscal policy. >Proprietary gauges suggest mediocre growth at best Getting used to 2% growth. Rebalancing still not occurring. >Inflation is low Can the RBNZ ease? It could. But what about the housing market? >Auckland property market A fundamental shortage of houses. Slide 30 29 The four Vs >Volatility is the new normal in the CRIC cycle >Veracity: issues will not disappear suddenly >Vision Leadership over populism NZs resource endowment a must to unlock >Subdued velocity best performing firms will have stronger microeconomic foundations Slide 31 30 All up >OCR hike off the agenda. Cuts cant be ruled out. >NZD unlikely to be as weak as wed like. >Grumpy growth in NZ for a while yet. >Bumpy road in Europe for next 10+ years. Accident pending. >NZ not a bad place to be. Slide 32 31 Disclaimer IMPORTANT NOTICE: The distribution of this document or streaming of this video broadcast (as applicable, publication) may be restricted by law in certain jurisdictions. 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