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1
Spiros Papadopoulos
Senior Economist, Global Markets Research
October 2012
Global concerns continue.
RBA to cut again
Global economy: US, China, India slowing; Europe in recession
2
US GDP
Source: NAB Global Markets Research, Reuters EcoWin
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
09 10 11 12
Perc
ent
-5
-4
-3
-2
-1
0
1
2
3
Annual % change
Annual % change
Quarterly % change
Euro-zone GDP
Quarterly % Annual %Source: NAB Capital Research, Reuters EcoWin
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
09 10 11 12
Perc
ent
-5
-4
-3
-2
-1
0
1
2
3
Eurozone GDP indexed to Dec 2006=100
Source: NAB Global Markets Research, Reuters EcoWin
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
06 07 08 09 10 11 12
84
86
88
90
92
94
96
98
100
102
104
106
108
110
Netherlands
Spain
Greece
Ireland
Germany
France
Italy
Portugal
UK
Real GDP, annual % change
Source: NAB Global Markets Research, Reuters EcoWin
01 02 03 04 05 06 07 08 09 10 11 12
Perc
ent
0
5
10
15
Perc
ent
0
5
10
15
China
India
Fiscal austerity weighing on growth
3
171
126121 119
9793
90
111
1924
0
20
40
60
80
100
120
140
160
180
Greece Italy Ireland Portugal Spain UK Germany US China Australia
% of GDP
General Government Gross Debt - 2013 Estimates
Source: IMF Fiscal Monitor Update, July 2012
% of GDP
Australian Government still aiming for Surplus in 2012-13
4
-60
-50
-40
-30
-20
-10
0
10
20
30
1991/92 1995/96 1999/00 2003/04 2007/08 2011/12 2015/16
$Bn $Bn
Australian Federal Budget Balance
Source: 2012-13 MYEFO
(f)
Central banks have taken further action to ease policy
5
● US Fed has launched QE3, $40bn per month
● ECB has cut interest rates and unveiled bond buying plan
● UK BoE has expanded its QE purchases by £50bn to £375bn
● China has cut interest rates, cut RRR, fiscal boost
● Korea and Brazil have cut interest rates
● RBA has cut in May, June and October
Only some central banks can ease policy significantly
6
Central bank policy interest rates
Australian rates attuned to Asia's prospects
Source: NAB Global Markets Research, Reuters EcoWin
02 03 04 05 06 07 08 09 10 11 12
Perc
ent
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
ECB refi
India repo rate
RBA cash
BoE repo
Fed funds target
China one year lending rate
Korea base rate
7
Fiscal tightenings (US, Europe) mean lower global growth.
Emerging markets remain solid, but slowing
Ann Avg
GDP2009 2010 2011 2012 (f) 2013 (f)
Australia 1.4 2.5 2.1 3.3 2.5
US -3.1 2.4 1.8 2.1 2.4
Japan -5.5 4.5 -0.7 2.2 1.5
UK -4.0 1.8 0.8 -0.4 1.0
Eurozone -4.3 1.9 1.5 -0.7 0.1
India 7.6 8.2 7.5 5.2 5.8
China 9.2 10.4 9.2 7.5 7.9
World -0.3 5.2 3.9 3.0 3.3
Australian GDP to average 2.5% in 2013
8
Australian GDP
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Perc
ent
-1
0
1
2
3
4
5
6
Perc
ent
-1
0
1
2
3
4
5
6
Annual GDP
Quarterly GDP Growth
Domestic Demand
(f)
Mining investment driving strong growth in WA and QLD
9
State Final Demand
NSW VIC QLD WA Tasmania SASource: Reuters EcoWin
04 05 06 07 08 09 10 11 12
Annual P
erc
ent
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
Annual P
erc
ent
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
Resource investment to peak in 2013
10
$0bn
$10bn
$20bn
$30bn
$40bn
$50bn
$60bn
$70bn
$80bn
$90bn
$100bn
2012 2013 2014 2015 2016 2017 2018 2019 na
Source: Bureau of Resource & Energy Economics, NAB Credit Research
Estimated Annual Capital Expenditure
Feasibility/Pre Feas
FID/FEED/Reg Approval
Underway
The multi-speed economy
11
-40
-30
-20
-10
0
10
20
30
40
50
60
70
Sep-08 Sep-09 Sep-10 Sep-11 Sep-12
Source: NAB Business Survey
NAB Business Conditions indexes
Manufacturing
Source: NAB Business Survey
NAB Business Conditions indexes
Source: NAB Business Survey
(sa, 3-mth moving averages)
NAB Business Conditions indexes
Business Services
Source: NAB Business Survey
NAB Business Conditions indexes
Retail
Source: NAB Business Survey
NAB Business Conditions indexes
Source: NAB Business Survey
(sa, 3-mth moving averages)
NAB Business Conditions indexes
Mining
Household Services
Construction
Transport
Confidence levels in the economy still soft
12
Australian Confidence
Source: Reuters EcoWin, NAB Business Survey
01 02 03 04 05 06 07 08 09 10 11 12
Net bala
nce
-40
-30
-20
-10
0
10
20
30
Net bala
nce
75
80
85
90
95
100
105
110
115
120
125
130
Business Confidence
Business Conditions
Business ConfidenceBusiness ConfidenceBusiness Confidence
Business Confidence (RHS)
Consumer Confidence (LHS)
Consumers still saving and reducing debt.
Retail sales growth weaker after May/June Gov’t handouts
13
% of Household Disposable Income
Household Saving
Source: NAB Global Markets Research, Reuters EcoWin
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Perc
ent
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
Perc
ent
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
17.5
Annual % change, $ sales
Retail sales
Australia VictoriaSource: Reuters EcoWin
03 04 05 06 07 08 09 10 11 12
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
Perc
ent
-2
-1
0
1
2
3
4
5
6
7
8
9
10
11
12
14
One positive sign is higher house prices in recent months
300
350
400
450
500
550
600
650
700
750
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
$'000Capital City - Median House Prices
Sydney Houses
Melbourne Houses
Perth Houses
Australia
Brisbane Houses
Adelaide Houses
Source: RP Data Rismark
15
Inflation contained, trending back to the middle of RBA’s target
RBA's Inflation Forecasts
Headline CPI Average Underlying CPISource: Reuters EcoWin
04 05 06 07 08 09 10 11 12 13 14
%Y
oY
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
%Y
oY
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
(f)
16
RBA to cut the cash rate again in November
RBA Cash Rate
Source: Reuters EcoWin
92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Perc
ent
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
Perc
ent
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
(f)
17
Markets pricing in another 75bps in cuts by the RBA
Market now pricing risk for abnormal disturbance/ global recession
RBA cash target and "what's priced in"
Source: NAB Global Markets Research, Reuters EcoWin
03 04 05 06 07 08 09 10 11 12
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
3 year swap yield, wholesale market
RBA cash rate
RBA cash rate "priced in", four quarters ahead
Actual RBA cash rate target3yr benchmark
swap rate
AUD still high despite interest rate cuts and global events
18
AUD to trend lower:
1. Global growth outlook weak. China slowing and commodity prices declining
2. Australia’s yield differential narrowing with RBA cutting rates
AUD Crosses
Source: Reuters EcoWin
07 08 09 10 11 12
0.30
0.40
0.50
0.60
0.70
0.80
0.90
0.30
0.40
0.50
0.60
0.70
0.80
0.90
AUD/EUR
AUD/GBP
AUD/USD
Source: Reuters EcoWin
07 08 09 10 11 12
0.6
0.7
0.8
0.9
1.0
1.1
1.2
0.6
0.7
0.8
0.9
1.0
1.1
1.2
Commodity prices are falling...but wheat prices soaring
19
RBA commodity price measures
Source: NAB Global Markets Research, Reuters EcoWin
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Index (
SD
R term
s)
25
50
75
100
125
150
175
Index (
SD
R term
s)
25
50
75
100
125
150
175
Non-Rural
Rural Commodities
RBA commodity price index
‘Fair value’ model – AUD overvalued vs historical fundamentals
20
Central banks diversifying into AUD.
Australian CGBs also in high demand. 80%+ of CGBs foreign owned
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12
AUD/USD Spot
+1 Std Dev Present Value Model
-1 Std Dev Present Value Model
Source: Bloomberg, National Australia Bank. Note Based on weekly 2-yr swap yield spread, JoC industrial metals prices, risk-appetite index and gold price.
AUD/USD
Summary: Further easing to come from the RBA
● Global growth continues to slow, constrained by fiscal tightening
● Chinese economy has slowed
● Australian mining investment to peak in 2013
● Retail and construction sectors still weak
● Confidence levels remain subdued, AUD still high
● RBA to cut again
21
22
Important Notices