Economics, interest rates and currencies chart pack

Economics, interest rates and currencies chart pack

5th March 2008

Saul EslakeChief Economist

Charts prepared for ANZ Senior Management

2

Summary of economic forecasts

4¼44.44.6Unemployment rate (year-end, %)

1½2.12.4Japan GDP growth (%)

21½1.62.6Europe GDP growth (%)

2¼1¼2.22.9US GDP growth (%)

86867263Oil prices (US$ per barrel)

World economy

33½3.63.0‘Underlying’ inflation (year-end, %)

2¾3½4.02.8Real GDP growth (%)

Australian economy

3½3½4.64.7World GDP growth (%)

99¾11.410.7China GDP growth (%)

New Zealand economy

9½1216.514.2Credit growth (%)

-4-4½-5.9-5.5Current account deficit (% of GDP)

9

-6½

3

4

1½

2008f

13.6

-8.6

2.6

3.8

1.6

2006

12.8

-8.0

3.2

3.4

3.0

2007e

8¾

-6¾

2¾

4¼

2½

2009f

Credit growth (%)

Current account deficit (% of GDP)

‘Underlying’ inflation (year-end, %)

Unemployment rate (year-end, %)

Real GDP growth (%)

3

Summary of financial market forecasts

New Zealand markets

5.345.285.886.436.2810-year bond yield (% pa)

6.756.757.508.258.25RBNZ cash rate (% pa)

1.261.311.301.211.14AS-NZ$

0.620.640.690.780.77NZ$-US$

Australian markets

Yuan – US$

US$ - ¥

1.261.381.471.541.52€ - US$

3.753.503.504.004.00ECB refi rate (% pa)

3.503.253.754.003.55US 10-year T-note yield (% pa)

3.002.002.002.253.00US Fed funds rate (% pa)

International markets

5.505.005.756.406.3310-year bond yield (% pa)

7.707.707.757.857.2590-day bill yield (% pa)

0.790.850.910.960.88A$-US$

7.50

Dec 08

7.50

Jun 09

7.50

Jun 08

6.75

Mar 08

7.50

Dec 09

RBA cash rate (% pa)

4Australia’s economy is at the intersection of two very powerful global forces

The crisis in global credit markets

– resulting from the bursting of the credit market ‘bubble’ which built up during the middle years of this decade

– triggered by, but no longer confined to, the US sub-prime mortgage market

– resulting in substantial declines in the value of a wide range of securities and derivatives

– threatening to lead to a global ‘credit crunch’

– and possibly to a recession in the US and other large industrialized economies

The on-going rapid growth and industrialization of China and other emerging economies

– putting continued upward pressure on a wide range of commodity prices

– as well as heightening concerns about climate change

Australia is exposed to both of these forces

– financing the world’s fourth largest current account deficit predominantly through borrowing means Australia is exposed to the risk of a global ‘credit crunch’

– but the commodities boom is also adding directly and indirectly to inflationary pressures within Australia, and putting upward pressure on the A$

Australia’s short- to medium-term macroeconomic prospects will largely depend on the relative strength of these two forces

5The current global financial crisis stems from the bursting of a‘credit market bubble’

From this …

Cheap andeasy money

Increased appetite for risk

Increased capacity for leverage

New forms of

‘financialengineering’

Rising asset prices

To this ….

Falling asset prices

Reduced appetite for risk

Distrust of new forms of finance

Slowing economy

Reduced capacity for leverage

6The credit market crisis was triggered by the bursting of the UShousing ‘bubble’ beginning in mid-2006

US housing starts

-15-10-505

10152025

90 93 96 99 02 05 08

% change from year earlier

(Case-Shiller index)

US house prices US unsold homes

US housing market

US mortgage delinquencies

1.0

1.5

2.0

2.5

3.0

3.5

90 93 96 99 02 05 08

% 'seriously delinquent'

456789

1011

90 93 96 99 02 05 08

Months' supply

Actual

Trend

Sources: S&P; US Commerce Department; US National Association of Realtors; US Mortgage Bankers’ Association.

0.751.00

1.251.50

1.752.00

2.25

90 93 96 99 02 05 08

Mns (annual rate)

Actual

Trend

7

ABX index of prices of US mortgage-backed securities

Dramatic declines in the value of mortgage-backed securities have led to substantial losses incurred by big global banks

2.5Royal Bank of Scotland

2.3Deutsche Bank

1.7Wells Fargo

3.2JPMorgan Chase

3.2Canadian Imperial (CIBC)

2.7Barclays

2.6Bear Sterns

141.0TOTAL*

7.9Bank of America

9.4Morgan Stanley

10.7HSBC

18.3UBS

22.1Citigroup

24.5Merrill Lynch

4.7

4.9

6.5

Total (US$ bn)

Wachovia

Credit Agricole

Washington Mutual

Bank

Losses announced by major banks since mid-2007

* incl. smaller banks not shownseparately.

Source: Bloomberg.

30405060708090

100

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

AAArated

AA rated

0

20

40

60

80

100

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

BBB-(sub-prime)

A

8These losses (and fears of more to come) have made banks reluctant to lend to one another

Inter-bank borrowing rates and overnight index swap (OIS) rates

2.02.53.03.54.04.55.05.56.0

Dec-06 Jun-07 Dec-07 Jun-08

% pa3-mth Libor

OIS

Fed funds rate

United States

3.0

3.5

4.0

4.5

5.0

5.5


% pa

3-mth Libor

OISECB refi rate

Euro area

4.5

5.0

5.5

6.0

6.5

7.0


% pa

3-mth Libor

OISBoE repo rate

United Kingdom

5.5

6.0

6.5

7.0

7.5

8.0

8.5


% pa3-mth Libor

OIS

RBA cash rate

Australia

* The OIS is an indicator of market expectations of future movements in cash rates.Sources: Thomson Financial; Bloomberg.

9

Spreads between short-term (90-day) inter-bank borrowing rates and expected official cash rates

0

20

40

60

80

100

120

Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08

Basis points (5-daymoving average)

US

UK

Euro area

Australia

Note: ‘expected official cash rates’ proxied by overnight index swaps (OIS).Sources: Thomson Financial; Bloomberg.

Banks short-term funding spreads are widening again (for the third time since mid-2007)

10Worsening stresses in credit markets also apparent from widening CDS spreads

Credit default swap (CDS) spreads

0255075

100125150175200


Basis points

Citigroup

Wachovia

HSBC

US & European banks

US brokers

US corporates

Sources: Thomson Financial; Bloomberg.

0255075

100125150175200


Basis points

GoldmanSachs

Merrill Lynch

0255075

100125150175200


Basis points

AT&T

IBM

HomeDepot

Australian banks

0

25

50

75

100

125

150


Basis pointsiTraxxindex for4 majorbanks

11Sharply diminished investor appetite for securities has forced banks to take large volumes of assets onto their balance sheets

US banks’ business lending

1.0

1.1

1.2

1.3

1.4


US$trn

Governmentsecurities

Othersecurities

US banks’ securities holdings

1.1

1.2

1.3

1.4

1.5


US$trn

US banks’ commercial& industrial loans

-10-505

10152025

88 92 96 00 04 08


* Ratio of banks’ assets to difference between assets and liabilities for domestically chartered US banks(at best a rough proxy for capital, and no allowance for risk weights). Sources: US Federal Reserve.

US bank capital adequacy*

6789

10111213

88 92 96 00 04 08

%

12Banks in the US and the euro area are tightening credit standards

US banks

-40-20

020

4060

80

00 01 02 03 04 05 06 07 08

Net balance tightening standards (%)

Large

Small

Commercial & industrial loans

Mortgage and consumer loans

-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08


Mortgage*

Consumer

Euro area banks

-20-10

01020304050

00 01 02 03 04 05 06 07 08


Loans to enterprises

Mortgage and consumer loans

-10-505

10152025

00 01 02 03 04 05 06 07 08


Housepurchase

Consumer

* Weighted average of prime & sub-prime after June 2007Sources: US Federal Reserve and European Central Bank surveys of loan officers.

13The tightening in lending standards will lead to slower growth in bank lending and to slower economic growth

-10

-5

0

5

10

15

20

25

90 94 98 02 06 10

-30

-20

-10

0

10

20

30

40

50

60

70

Net balancetightening

(%)

Banks' C&Ilending(left scale)

Lending standards

for largeC&I loans18 mthsforward

(inverted;right scale)

% changefrom year earlier

Bank credit standards and growth in C&I* lending

* Commercial and industrial.Sources: US Federal Reserve; US Bureau of Economic Analysis.

-10

-5

0

5

10

15

20

25

90 94 98 02 06 10-2

-1

0

1

2

3

4

5

6% changefrom year

earlier

Banks' C&Ilending(left scale)

Real GDP(right scale)

% changefrom year earlier

Bank lending and economic growth

14January’s panic selling has ceased, but equity markets remain vulnerable to earnings downgrades and other shocks

Equity markets

1300

1400

1500

1600


US – S&P 500

Japan - Nikkei

UK – FTSE 100

Australia – ASX All Ords

1200013000140001500016000170001800019000


5500

6000

6500

7000


5000

5500

6000

6500

7000


Source: Thomson Financial.

15A number of high-profile composite indicators suggest the US economy may be in, or heading for, a recession

Purchasing managers’ indices

Conference Board leading indicators

Composite indicators of US economic activity

Note: Shaded areas denote recessions as defined by the National Bureau of Economic Research. Sources: Institute of Supply Management (ISM); The Conference Board; Federal Reserve Banks of Chicago and Philadelphia.

Philadelphia Fed activity index

Chicago Fed activity index

-10

-5

0

5

10

15

80 84 88 92 96 00 04 08

% ch from year earlier (trend)

-40

-20

0

20

40

80 84 88 92 96 00 04 08

Net balance (%, trend)

-3

-2

-1

0

1

2

80 84 88 92 96 00 04 08

% deviation from trend

3540455055606570

80 84 88 92 96 00 04 08

Net balance (%, trend)

16The US housing market looks worse, on most indicators, than it did prior to the last two recessions

Housing starts

8090

100110120130140150

0 6 12 18 24 30 36

Prior market peak= 100

From Mar 2000

From Jun 2006 Months from market peak

From Dec 1989

Housing prices Established home sales

US housing market indicators in three cycles

Sources: S&P; US Commerce Department; US National Association of Realtors; ANZ.

5060

7080

90100

110

0 6 12 18 24 30 36

Prior market peak= 100 (trend)

From Mar 2000


From Dec 1989

456789

1011

0 6 12 18 24 30 36

Months' sales(trend)

From Mar 2000

From Jun 2006

Months from market peak

From Dec 1989

Unsold homes

70

80

90

100

110

120

0 6 12 18 24 30 36

Prior market peak= 100 (trend) From Mar 2000


From Dec 1989

17So far, however, the US labour market is not deteriorating as quickly as it did prior to the last two recessions

3.0

4.0

5.0

6.0

7.0

8.0

0 6 12 18 24 30 36

%

From Mar 2000

From Jun 2006


From Dec 1989

Unemployment rate

98

99

100

101

102

0 6 12 18 24 30 36


From Mar 2000

From Jun 2006


From Dec 1989

Non-farm payroll employment

US labour market indicators in three cycles

Sources: US Bureau of Labor Statistics; Challenger; ANZ.

Initial claims for unemployment benefits

250

300

350

400

450

500

0 26 52 78 104 130 156

'000 per week(4-wk movingaverage)

From Mar 2000

From Jun 2006 Weeks from market peak

From Dec 1989

Layoff announcements

0

50

100

150

200

250

0 6 12 18 24 30 36

'000s per mth(3-mth movingaverage) From Mar 2000

From Jun 2006Months from market peak

18The US non-financial sector is in a strong financial position, and isn’t retrenching in the way it has done in past recessions

After-tax corporate profits†

Debt-equity ratio†

US business finances and activity in three cycles

† Non-financial corporations * Excluding aircraft. Sources: US Bureau of Economic Analysis; Federal Reserve; Commerce Department; ANZ.

3.0

4.0

5.0

6.0

7.0

0 6 12 18 24 30 36

% of GDP

From Mar 2000

From Jun 2006


From Dec 1989

5075

100125

150175

200

0 6 12 18 24 30 36

%

From Mar 2000From Jun 2006


From Dec 1989

Non-defence capital goods orders*

70

80

90

100

110

0 6 12 18 24 30 36


From Mar 2000

From Jun 2006


From Dec 1989

Manufacturing inventories

85

90

95

100

105

110

0 6 12 18 24 30 36


From Mar 2000

From Jun 2006


From Dec 1989

19Household finances are likely to play a larger role in shaping the current cycle than in previous recessions

Real consumer spending

Sources: US Bureau of Economic Analysis; Federal Reserve; ANZ.

98

100

102

104

106

108

0 6 12 18 24 30 36


From Mar 2000

From Jun 2006


From Dec 1989

Personal net worth

Real personal disposable income

98100

102104

106108

110

0 6 12 18 24 30 36

Prior market peak= 100 From Mar 2000

From Jun 2006


From Dec 1989

450

500

550

600

650

0 6 12 18 24 30 36

% of annual disposableincome

From Mar 2000

From Jun 2006


From Dec 1989

Personal saving ratio

-1012345678

0 6 12 18 24 30 36

% of disposable income (trend)

From Mar 2000


From Dec 1989

US household finances and spending in three cycles

20Rising exports, aided by a weaker US$, have more than offset the impact on GDP growth of falling housing construction

Real exports of goods and services

Trade-weighted value of US$ Exports and housing

-200

-150

-100

-50

0

50

100

150

200

Jun-06 Dec-06 Jun-07 Dec-07 Jun-08

Cumulative change since Q2 2006(US$bn at annual rate)

Exports ofgoods & services

Residentialconstruction

US dollar, exports and housing

Sources: Thomson Financial; US Bureau of Economic Analysis; ANZ.

80

90

100

110

120

130

0 6 12 18 24 30 36


From Mar 2000

From Jun 2006


From Dec 1989

859095

100105110115120

0 6 12 18 24 30 36


From Mar 2000


From Dec 1989

21The US may not experience outright recession, but growth there and in other advanced economies will slow sharply in 2008

Major advanced economies – real GDP growth

United States

-2-1

01

23

4

01 02 03 04 05 06 07 08 09

% change fromyear earlier

Japan

0

1

2

3

4

01 02 03 04 05 06 07 08 09


Euro zone

0

1

2

3

4

5

01 02 03 04 05 06 07 08 09


United Kingdom

Sources: national statistical agencies; ANZ.

0

1

2

3

4

5

01 02 03 04 05 06 07 08 09


22The Fed and BoE have been willing to downplay inflation risks; other central banks haven’t

United States*

Euro area

0

1

2

3

4

5

01 02 03 04 05 06 07 08


'Headline'

Excl. food & energy

United Kingdom

Australia†

Consumer price inflation

0

1

2

3

4

01 02 03 04 05 06 07 08


'Headline'

Excl. food & energy

0

1

2

3

4

5

6

01 02 03 04 05 06 07 08


'Headline'

Excl. food & energy

0

1

2

3

4

5

01 02 03 04 05 06 07 08


'Headline'

'Underlying'#

* Personal consumption expenditure deflator. † excludes GST impact in 2001. # Average of RBA’s two preferred measures. Sources: US Bureau of Economic Analysis; Eurostat; UK Office of National Statistics; ABS; RBA.

23

0.01.02.03.04.05.06.07.0

01 02 03 04 05 06 07 08 09

% pa

0.0

2.0

4.0

6.0

8.0

01 02 03 04 05 06 07 08 09

% pa

0.01.02.03.04.05.06.07.0

01 02 03 04 05 06 07 08 09

% pa

So far the US Federal Reserve has cut rates the most; the ECB hasn’t cut at all; and Australia has lifted rates three times

Monetary policy interest rates

US federal funds rate

European Central Bank refi rate Reserve Bank of Australia cash rate

Sources: Federal Reserve; Bank of Japan; European Central bank; Bank of England; ANZ.

0.0

1.0

2.0

3.0

4.0

5.0

01 02 03 04 05 06 07 08 09

% pa

Bank of England repo rate

24

100

105

110

115

120

125

130

135

140

01 02 03 04 05 06 07 08 09

¥ per US$0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.6001 02 03 04 05 06 07 08 09

US$ per € (inverted)

If US interest rates bottom at 2% by July, the US dollar will likely reach a trough around then as well

US dollar vs euro and yen

US dollar vs euro

Sources: Federal Reserve; Bank of Japan; European Central bank; Bank of England; ANZ.

US dollar vs yen

25

0

2

4

6

8

10

12

01 02 03 04 05 06 07 08 09


Major developing countries should continue to experience relatively strong growth, albeit a little slower than in 2006-07

Major developing economies – real GDP growth

China

0

2

4

6

8

10

12

01 02 03 04 05 06 07 08 09


India

0

2

4

6

8

01 02 03 04 05 06 07 08 09


Other East Asia

-2

0

2

4

6

8

01 02 03 04 05 06 07 08 09


Brazil

0

2

4

6

8

01 02 03 04 05 06 07 08 09


South Africa

0

2

4

6

8

10

01 02 03 04 05 06 07 08 09


Russia


26Most developing countries are more worried about rising inflation than slowing growth

Major developing economies – consumer prices

China

India

Other East Asia

Brazil

South Africa

Russia


-2

0

2

4

6

8

01 02 03 04 05 06 07 08


012

3456

78

01 02 03 04 05 06 07 08


0

1

2

3

4

5

6

01 02 03 04 05 06 07 08


0

5

10

15

20

25

01 02 03 04 05 06 07 08


-202468

10121416

01 02 03 04 05 06 07 08


0

5

10

15

20

25

30

01 02 03 04 05 06 07 08


27China’s and India’s growth has been predominantly driven by domestic demand, not by net exports

Contributions to China’s real GDP growth

-2

0

2

4

6

8

10

12

00 01 02 03 04 05 06

Domestic demand Net exports

% pts

Source: China National Bureau of Statistics, CEIC.

-4

-2

0

2

4

6

8

10

12

01 02 03 04 05 06

Domestic demand Net exports

% pts

Contributions to India’s real GDP growth

28Australia’s economy is at the intersection of two very powerful global forces

The crisis in global credit markets

– resulting from the bursting of the credit market ‘bubble’ which built up during the middle years of this decade

– triggered by, but no longer confined to, the US sub-prime mortgage market

– resulting in substantial declines in the value of a wide range of securities and derivatives

– threatening to lead to a global ‘credit crunch’

– and possibly to a recession in the US and other large industrialized economies

The on-going rapid growth and industrialization of China and other emerging economies

– putting continued upward pressure on a wide range of commodity prices

– as well as heightening concerns about climate change

Australia is exposed to both of these forces

– financing the world’s fourth largest current account deficit predominantly through borrowing means Australia is exposed to the risk of a global ‘credit crunch’

– but the commodities boom is also adding directly and indirectly to inflationary pressures within Australia, and putting upward pressure on the A$

Australia’s short- to medium-term macroeconomic prospects will largely depend on the relative strength of these two forces

29Australian debt markets have seen similar increases in spreads as in the US

Swap spreads

United States

Australia

Note: spreads are to government bond yields of comparable maturities.Sources: Thomson Financial; Bloomberg; Reserve Bank of Australia.

0

25

50

75

100

125

01 02 03 04 05 06 07 08

Monthly average(basis points)

5 years

2 years

-50-25

0255075

100125

01 02 03 04 05 06 07 08

Monthly average(basis points)

5 years

2 years

United States

Australia

0255075

100125150175

01 02 03 04 05 06 07 08

Monthly average(basis points) A-rated

AAA-rated

050

100150200250300350

01 02 03 04 05 06 07 08

Monthly average(basis points) A-rated

AAA-rated

Corporate bond yield spreads

30In Australia, as in the US, the debt securities markets have almost completely closed to non-bank borrowers

Note: excludes government debt securities. Source: Reserve Bank of Australia

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08

$ bn

Mortgages

All loans

Securitizers’ loan assets

Australian non-government debt securities issued offshore

0

50

100

150

200

250

00 01 02 03 04 05 06 07 08

$ bn Banks & otherfinancial corporations

Other

Short-term debt securities issued in Australia

0100

200300

400500

600

00 01 02 03 04 05 06 07 08

$ bn

Banks & otherfinancial corporations

Other

Long-term debt securities issued in Australia

050

100150

200250

300

00 01 02 03 04 05 06 07 08

$ bn

Banks &other financialcorporations

Other

31With debt securities markets largely closed, credit demand is returning to the banking system – straining banks’ capital

Australian financial intermediaries’business lending

-5

0

5

10

15

20

25

30

83 88 93 98 03 08


Total (incl.securitizations)

'Narrow credit(excl. securitizations)

* Under APRA regulations, banks must maintain total base capital in excess of 8% of their risk-weighted assets,half of which must be in the form of ‘Tier 1’ capital (paid-up capital, disclosed reserves and retained earnings). Sources: Reserve Bank of Australia; Australian Prudential Regulation Authority.

Australian banks’ capitaladequacy ratios

0

2

4

6

8

10

12

14

88 93 98 03 08

% of 'risk weighted' assets

Total capital base ratio

'Tier 1' capital ratio

Minimum prudentialcapital ratio*

32Reliance on banks’ overseas borrowings to finance the deficit leaves Australia exposed to abrupt shifts in global markets

Financing Australia’s current account deficit

-40

-20

0

20

40

60

80

100

00 01 02 03 04 05 06 07

Net equity Banks' net borrowing

Other net borrowing Other (incl. reserves)

A$ bn - 4-qtr moving total

Current account deficit

Methods of financing

Maturity structure of net foreign debt

1015

2025

3035

40

00 01 02 03 04 05 06 07

% of total

< 28 days

-20

0

20

40

60

80

100

88 92 96 00 04 08

% of total% of total Private sectorfinancial corporations

Private sector non-financial corporations

Public sector

Net foreign debt, by borrower

Sources: Australian Bureau of Statistics; ANZ.

33Australian and US economic cycles have not been closely correlated this decade, and are diverging further now

Real GDP growth

Australian and US economic indicators

Unemployment

3

4

5

6

7

8

00 01 02 03 04 05 06 07 08

%

US

Australia

House prices

-15-10-505

10152025

00 01 02 03 04 05 06 07 08


US

Australia

Sources: Australian Bureau of Statistics; US Bureau of Economic Analysis; US Bureau of Labor Statistics; S&P.

-2

0

2

4

6

00 01 02 03 04 05 06 07 08

% change from year earlierAustralia

US

Terms of trade

80

100

120

140

160

00 01 02 03 04 05 06 07 08

Ratio of export to importprices (2000 = 100)

Australia

US

34Australia is much less directly dependent on the US and other OECD export markets than it used to be

Australia’s major export markets

0

5

10

15

20

25

30

88 92 96 00 04 08

% of total (12-mth moving average)

US

Japan

NZ

EU

Sources: Australian Bureau of Statistics.

Advanced economies

0

2

4

6

8

10

12

14

16

18

20

88 92 96 00 04 08

% of total (12-mth moving average)

China

Other North-East Asia(Korea, Taiwan, HK)

India

ASEAN

GCC

Developing economies

35

75

100

125

150

175

200

225

250

275

300

90 92 94 96 98 00 02 04 06 08

2001-02 = 100(US$ terms)

All items

Expected rises in coal and iron ore export prices will deliver afurther leg upwards in the commodity price cycle in 2008-09

Australian export commodity prices

50

60

70

80

90

100

110

120

130

60 66 72 78 84 90 96 02 08

2005-06 = 100

All items

Note: “terms of trade” is the ratio of average export to average import prices.Sources: Reserve Bank of Australia; ABS; ANZ.

Australia’s “terms of trade”

36

-2

-1

0

1

2

3

4

5

6

7

8

01 02 03 04 05 06 07 08

Real % change fromyear earlier

Real GDP(output)

Real gross domesticincome (GDI = GDPadj. for changesin terms of trade)

This will boost Australia’s income by another 2% in 2008-09, on top of 11% from terms of trade gains already so far this decade

Australia’s real gross domestic income and output


Expected rise in coal & iron ore

prices will add 2% to Australia’s

income in 2008-09

37Income will continue to be re-cycled from the business sector to households through the Budget, boosting total spending

Australian incometax collections

11.0

11.5

12.0

12.5

13.0

13.5

00 01 02 03 04 05 06 073.0

3.5

4.0

4.5

5.0

5.5

6.0% of GDP % of GDP

Companies(right scale)

Individuals(left scale)

Net saving by sectors ofthe Australian economy

-3

-2

-1

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07

% of GDP (4-qtrmoving average)

Households

Government

Business


38Business investment is expected to keep rising strongly, despiteglobal uncertainties and deteriorating financial conditions

Mining

Manufacturing

Other industries

Total excl. farm and finance

Actual and projected capital expenditure

Note: Data are for financial years ended 30 June. Projections for 2007-08 and 2008-09 are based on expected levels of capital expenditure reported to the ABS in its January-February 2008 survey, adjusted for the extent to which expectations in this survey have been realized over the five years to 2006-07. Sources: ABS; ANZ.

0102030405060708090

01 02 03 04 05 06 07 08 09

% change(current prices)

-20

-10

0

10

20

30

01 02 03 04 05 06 07 08 09


-505

1015202530

01 02 03 04 05 06 07 08 09


-10-505

1015202530

01 02 03 04 05 06 07 08 09


39

100

120

140

160

180

200

00 01 02 03 04 05 06 07 08

'000s (annual rate)

Completions

Underlying demand

0

1

2

3

4

00 01 02 03 04 05 06 07 08

%

Average forall capitals

The Australian housing market is likely to remain characterized by excess demand – a stark contrast to the US housing market

Housing supply and demand

Rental vacancy rates

Capital city house prices

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08


Capital city dwelling rents

0

2

4

6

8

10

00 01 02 03 04 05 06 07 08


Australian housing market fundamentals

Sources: Australian Bureau of Statistics; Real Estate Institute of Australia; ANZ.

40After more than 16 years of continuous economic growth, Australia’s economy has run into serious capacity constraints

Unemployed persons per job vacancy

Indicators of ‘spare capacity’ in the Australian economy

05

1015

2025

30

88 92 96 00 04 08

No unemployed per job vacancy

Businesses reporting labour shortages

05

101520253035

88 92 96 00 04 08

% of businesses nominating 'suitable labour' as a constrainton output

Capacity utilization rate

7476

7880

8284

86

88 92 96 00 04 08

%

Office vacancy rates

0

5

10

15

20

25

88 92 96 00 04 08

%

Sources: Australian Bureau of Statistics; nabCapital; Property Council of Australia.

41

0

1

2

3

4

5

00 01 02 03 04 05 06 07 08

%

Businesses in many sectors have been able to increase profit margins in these circumstances despite rising costs

Retailing

Manufacturing

Wholesaling

Transport and storage

Profit margins* in selected industries

* Defined as gross operating profits as a % of sales and shown as a 4-quarter moving average.Sources: Australian Bureau of Statistics; ANZ.

8

9

10

11

12

00 01 02 03 04 05 06 07 08

%

01

23

45

6

00 01 02 03 04 05 06 07 08

%

6

8

10

12

14

16

00 01 02 03 04 05 06 07 08

%

42

2

3

4

5

01 02 03 04 05 06 07 08

% pa

Actual

Trend

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

01 02 03 04 05 06 07 08 09

% change from year earlier'Headline

'Underlying'(weightedmedian)

Underlying inflation is at its highest level since 1991 – and the RBA is particularly concerned at rising inflation expectations

Consumer prices

Reserve Banktarget band

Measures of labour costs

01234567

01 02 03 04 05 06 07 08 09


Wage cost index

Compensationper employee

Household inflation expectations

Sources: Australian Bureau of Statistics; Reserve Bank of Australia; Westpac-Melbourne Institute; ANZ.

43In a fully employed economy if some sectors are to grow rapidly then others have to shrink

After more than 16 years of continuous growth Australia’s economy is running out of ‘spare capacity’

As a result, increases in aggregate demand in excess of the growth rate of the economy’s ‘supply potential’ will inevitably lead to higher inflation, a larger current account deficit, or both

If, in this situation, some sectors (eg mining) are to grow rapidly in order to meet global demand, other sectors have to grow more slowly (or shrink) if these consequences are to be avoided

Similarly if some regions (eg WA and Qld) are being pushed towards faster growth then other regions must of necessity grow at a slower rate

In practice, the ‘room’ required by faster growth in particular sectors or regions is being created by a combination of

– rising interest rates

– a stronger exchange rate

– and rising costs

Inevitably, these will disproportionately impact households with a mortgage, and sectors such as manufacturing and tourism

Over the medium-to-longer term the only way to avoid this situation is through policies which expand the economy’s ‘supply’ potential

44Resources boom benefits north and west more than the south-east, but the gap between the two is now narrowing a bit

Employment

-20-10

010

2030

40

01 02 03 04 05 06 07 08

Real % change from yearearlier (trend) Qld, WA

& NT

Rest of Australia

Business investment

02468

101214

01 02 03 04 05 06 07 08

% change from yearearlier (trend) Qld, WA & NT

Rest of Australia

Retail sales

-10

0

10

20

30

40

01 02 03 04 05 06 07 08

Real % change from yearearlier (trend)

Brisbane, Perth& Darwin

Other capitals

House prices

Resource-rich vs other States and Territories


01

23

45

6

01 02 03 04 05 06 07 08

% change from yearearlier (trend) Qld, WA & NT

Rest of Australia

45

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

01 02 03 04 05 06 07 08 09

% pa

RBA officialcash rate

90-daybank bill yield

Reserve Bank will hike rates at least twice more to ‘slow demand’ and bring inflation back within the target range

Short-term interest rates 10 interest rate increases since mid-2002 have had little lasting impact in restraining growth in domestic demand –largely because they’ve been offset by commodity-related income gains, repeated rounds of tax cuts etc.The RBA now says that ‘a significant slowing in domestic demand … is likely to be necessary to reduce inflation over time’ …… and that unless something else happens to produce such a slowdown (for example, sharply weaker global growth, tighter credit conditions, changes in fiscal policy etc. ) ..… ‘monetary policy is likely to need to be tighter in the period ahead’ (ie, rates will rise some more) In other words – there will be a ‘signi-ficant slowing in demand’, what is not clear is how high rates will have to go in order to procure it

Sources: Thomson Financial; ANZ.

46

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

01 02 03 04 05 06 07 08 09-100

0

100

200

300

400

500

600US ¢

A$ vs US$(left scale)

Spread betweenAustralian & US

90-day interest rates(right scale)

2001-02 = 100

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

01 02 03 04 05 06 07 08 0975

100

125

150

175

200

225

250

275

300US ¢

A$ vs US$(left scale)

RBA index ofcommodity pricesin US$(right scale)

2001-02 = 100

Commodity prices and interest rate spreads likely to continue supporting the A$ into the second half of this year

A$ and commodity prices A$ and interest rate spreads

Sources: Thomson Financial; Reserve Bank of Australia; ANZ.

47

Two alternative scenarios for interest rates

Scenario 1

An inter-related combination of falling share prices, declining business and consumer confidence, and significantly tighter conditions in domestic credit markets could lead to an earlier and more marked slowdown in domestic spending than in our ‘base case’ forecast

In those circumstances the Reserve Bank would reverse course abruptly, cutting rates once it was clear that domestic demand was slowing and unemployment was rising

The A$ would likely fall sharply in such a scenario

Scenario 2

Domestic demand could continue to be surprisingly resilient to further interest rate hikes, and tightening domestic credit conditions (because of rising commodity incomes, tax cuts etc)

In those circumstances the Reserve Bank could continue raising interest rates (beyond our ‘base case’ of 7½%) until domestic demand began slowing abruptly

Once clear signs that the business cycle had turned decisively became apparent, the RBA would start cutting rates (but from a higher level than in our ‘base case’

The A$ would initially rise further than in our ‘base case’, but subsequently fall more sharply

48

05

1015

2025

30

00 01 02 03 04 05 06 07 08 09


Credit growth is expected to slow over the next two years reflecting both demand and supply influences

Business

Total

Credit growth

Sources: RBA; ANZ.

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09


Housing

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09


Other personal

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09


49

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

01 02 03 04 05 06 07 08 092

3

4

5

6

7

8% change fromyear earlier

Unemployment(right scale)

Employment(left scale)

%

-2

-1

0

1

2

3

4

5

6

7

8

01 02 03 04 05 06 07 08 09

Real % change fromyear earlier

GDP(output)

Domesticfinal demand

Higher interest rates will eventually squeeze domestic spending although it may take a while yet

Spending and output


Employment and unemployment

50NZ economy has shown remarkable resilience in the face of high interest rates and a persistently strong NZ dollar

Sources: Statistics NZ; NZIER; RBNZ

01

23

45

6

01 02 03 04 05 06 07 08

Real % change from year earlier

Real GDP growth

Key indicators of New Zealand economy

3.03.5

4.04.5

5.05.5

6.0

01 02 03 04 05 06 07 08

% of the labour force

Unemployment

8889

9091

9293

94

01 02 03 04 05 06 07 08

%

Capacity utilization

0

1

2

3

4

5

01 02 03 04 05 06 07 08


Headline Underlying

RBNZ target range

Inflation

51The impact of rising cash rates on households has been delayed by the spread of fixed-rate mortgages

Source: Reserve Bank of New Zealand

Mortgage rates Cash vs mortgage rates

6

7

8

9

10

11

05 06 07 08

% pa Floating

2-yearFixed

Floating vs fixed rate mortgages

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

01 02 03 04 05 06 07 08

% pa

Effective mortgage rate(+147bp since Feb 02)

Official cashrate (+350bpsince Feb 02)

20

30

40

50

60

70

80

05 06 07 08

% pa

Floating

Fixed

52However some of the key factors supporting growth in the NZ economy appear to be weakening

Sources: REINZ; Statistics NZ; ANZ National Bank.

House prices

House sales

150

200

250

300

350

400

01 02 03 04 05 06 07 08

$NZ'000

4

6

8

10

12

01 02 03 04 05 06 07 08

'000s

Trend

Net immigration

-20-10

01020304050

01 02 03 04 05 06 07 08

'000 (12-mth moving total)

Export commodity prices

100125

150175

200225

250

01 02 03 04 05 06 07 08

July 86 = 100

53Business confidence has declined once again at the beginning of 2008

Headline confidence Own activity

Investment

-100

102030405060

95 97 99 01 03 05 07

Net %

Sources: ANZ National

-80-60-40-20

0204060

95 97 99 01 03 05 07

net %

Employment

-10

0

10

20

30

95 97 99 01 03 05 07

Net %

-10

0

10

20

30

95 97 99 01 03 05 07

Net %

54Indicators for 2008 suggest momentum is slowing

Equity market bearish

-3

0

3

6

9

88 90 92 94 96 98 00 02 04 06 08

97.5

98.5

99.5

100.5

101.5

Annual %

GDP (LHS)

Financial conditions (adv 9-mths, RHS)

IndexOCR introduced

Financial conditions tight Business confidence falling

Drought conditions likely to weigh on agricultural production

048

1216

East

Coa

st

Hawke

's Ba

yW

airar

apa

Nelson

Marlb

orou

gh

Cant

erbu

ryOta

goBa

y of

Plen

tyW

aikat

oTa

rana

ki

Manaw

atu

Sout

hlan

d

Drought weeks

Serious(relative to median)

Severe(relative to

median)

Very severe(relative to median)

-3

0

3

6

9

89 91 93 95 97 99 01 03 05 07 09-20-10010203040506070Annual %

GDP (LHS)

NBBO own activity(adv 6 mths, RHS)

Net %

Sources: ANZ National, Statistics NZ, REINZ, NIWA

3000

3500

4000

4500

Jan-07 Mar-07 Jun-07 Sep-07 Dec-07

Index

NZX 50

55Credit is surpassing inflation as the biggest issue facing the economy at present

Funding is no longer cheap

4060

80100

120140

160

98 99 00 01 02 03 04 05 06 07 08

basis points (3-mth avg)

Spread between 2-yr carded mortgage and 2-yr swap rate

Average 1998-2003

Average 2004-present

Cheap funding allowed aggressive pricing previously

Corporate spreads are increasing

Higher funding costs are being passed on

8.5

9.0

9.5

10.0

10.5

11.0

Floating 6 mths 1-yr 2-yr 3-yr 4-yr 5-yr

%

Mortgage rate curve

Dec-2007

Current

020406080

100120140

1-yr 2-yr 3-yr 4-yr 5-yr 7-yr 10-yr

basis points

28 Sep 07

31 Dec 07

22 Feb 08Spread between NZ corporate

(A rated) and relative swap rate

Sources: ANZ National, Bloomberg, www.interest.co.nz

0

20

40

60

80

100

Jun-06 Oct-06 Feb-07 Jun-07 Oct-07 Feb-08

Index

Australian iTraxx averagefour "big banks"

56Although inflation pressures remain elevated and persistent

Sources: ANZ National, RBNZ, NZIER, Statistics NZ

RBNZ’s inflation projections exceed 3% for most of next year

Inflation expectations remain elevated

Resource pressures remain tight Food prices heading skywards

0

1

2

3

4

5

95 97 99 01 03 05 07 09

Annual %

Sep MPS

Dec MPSTop of the target band

0

1

2

3

4

5

95 97 99 01 03 05 07

Annual %

RBNZ 2-yr ahead inflation expectations

CPI inflation

0

1

2

3

4

5

93 95 97 99 01 03 05 070.85

0.87

0.89

0.91

0.93Annual %

Capacity utilisation (adv 3 qtrs, RHS)

%Non-tradable inflation (LHS)

-2

0

2

4

6

8

91 93 95 97 99 01 03 05 07 09-35-25-15-55152535Annual %

ANZ NZD commodity prices (adv 9 mths, RHS)

Annual %

Food prices (LHS)

57The economy is very dependent on late-cycle support from the labour market and fiscal policy

Employment intentions remain robust

2

4

6

8

10

12

93 96 99 02 05 08

% of labour force

Unemployment rate at record lows

Wage growth at record highs

Fiscal policy set to become more expansionary

-2.6-1.8-1.0-0.20.61.42.23.0

96 98 00 02 04 06 08 10 12

% of GDP

Expansionary

Half year fiscal update 2007

Contractionary

Sources: ANZ National, Statistics NZ, NZIER, Treasury

-2

0

2

4

6

94 96 98 00 02 04 06 08-40-30-20-10010203040Annual %

Employment growth (LHS)

QSBO employment intentions(past 3 mths, RHS)

Net %

0

1

2

3

4

5

93 96 99 03 05

Annual %

LCI private sector ordinary time wage and salaries

58

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

01 02 03 04 05 06 07 08 09

1.00

1.05

1.10

1.15

1.20

1.25

1.30

1.35

US$ per NZ$ NZ$ per A$(inverted scale)

NZ$/US$(left scale)

A$/NZ$(right scale;

inverted)

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

01 02 03 04 05 06 07 08 09

% pa

RBNZ's cash rate

90-daybank bill yield

RBNZ won’t react to slowing growth until inflation has peaked, but NZ$ will anticipate rate cuts and easing commodity prices

Short-term interest rates

Sources: Thomson Financial; ANZ.

New Zealand dollar

59

0

5

10

15

20

25

30

00 01 02 03 04 05 06 07 08 09

Annual %

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09

Annual %

New Zealand credit growth is expected to slow over the next 18 months

Sources: ANZ National, RBNZ

Housing credit

Business credit - other

Business credit - agriculture

Total credit

-5

0

5

10

15

20

25

00 01 02 03 04 05 06 07 08 09

Annual %

0

5

10

15

20

00 01 02 03 04 05 06 07 08 09

Annual %

Documents

Economics, interest rates and currencies chart pack