Professional Documents
Culture Documents
Global 35
Q u a rte rly
35
30 M o n th ly 30
• There are signs that global economic activity is starting to 25 C o n d i ti o n s 25
20 20
stabilise in a range of national business surveys, trade and 15 15
industrial production data. While equity and commodity markets 10 10
have eased back a touch recently that probably reflected 5 5
0 0
markets getting somewhat ahead of still poor fundamentals. At -5 -5
this stage we see no reason to revise our global 2009 forecast of -10 -10
-1¾% in 2009 and a moderate 2¼% in 2010. Recovery will be -15 -15
Sep-01
Oct 08
Sep-89
Sep-97
Sep-99
Sep-07
Sep-92
Sep-93
Sep-02
Sep-03
Feb-09
Sep-90
Sep-94
Sep-95
Sep-96
Sep-98
Sep-00
Sep-04
Sep-05
Sep-06
Sep-08
Feb 08
investment.
* Se a s o n a l l y a d ju s te d b y N a ti o n a l
Australia
• While the Survey points to some upside to current levels of activity we have not changed our Australian GDP forecast for 2009 of –
½%. That in part reflects some scepticism as to the recorded strength in Q1 national accounts (especially in the expenditure
estimates) but, more fundamentally, given the extent of recent wealth destruction we still expect very low growth in consumption
especially after the cash bonuses wash out and unemployment increases. Also private investment is expected to continue to
deteriorate significantly given reduced spending and lower incomes through the terms of trade. Notwithstanding very strong public
spending we see final demand falling by 1½% in 2009. For 2010 we have also maintained our forecast of +1%. As a result we still
see unemployment reaching 7% by end 2009 and 8% by late 2010.
• At the margin, the stronger current business results have changed the RBA’s balance of risks. With an economy holding up better
than expected we now see the RBA on hold, watching for longer. While the deteriorating labour market might well see further
moderate rate cuts in late 2009, we now marginally see the RBA more likely to try to tough it out – notwithstanding rising
unemployment and sub target inflation. Rate increases are clearly a story for the second half of 2010 – with a target of around 3¾%
by year end.
Embargoed until 11.30am Tuesday 14 July, 2009
Key Monthly Business Statistics - 3 Months to June, 2009
Apr May Jun Apr May Jun
2009 2009 2009 2009 2009 2009
Business Confidence -14 -2 4 Forward Orders -11 -14 0
Business Conditions -10 -14 -2 Stocks -16 -15 -10
Trading -3 -7 3 Labour Costs (% q/q) -0.6 -0.4 0.1
Profitability -10 -9 -2 Purchase Costs (% q/q) -0.1 0.0 0.2
Employment -18 -25 -7 Final Products prices(% q/q) -0.1 0.2 -0.3
Export Sales -4 -27 -11 Capacity Utilisation Rate (%) 79.7 79.2 79.3
*All data is seasonally adjusted, except purchase costs and export sales. Cost and prices data are percentage changes expressed at a quarterly rate. All other data are net balance indexes, except capacity
utilisation, which is an average rate, expressed as a percentage. See Quarterly Business Survey for more details on technical data specifications. Time series data are available by subscription. Fieldwork for this
Survey was conducted from June 24 to June 30 and covered over 400 firms across the non-farm business sector.
20 20 20 20
Trend (SA)
10 10 10 10
Average
0 Ave rage 0 0 0
Trend (SA)
Se as onally adjus te d*
Seasonally adjusted*
-20 -20 -20 -20
Jun 09
Jun-99
Jun-02
Jun-07
Jun-00
Jun-03
Jun-05
Jun-06
Jun-04
Jun 08
Dec-01
Dec 07
Dec-99
Dec-02
Dec-03
Dec-00
Dec-04
Dec-05
Dec-06
Dec-08
Jun-01
Jun 09
Jun-99
Jun-02
Jun-07
Jun-00
Jun-03
Jun-05
Jun-06
Jun-04
Jun 08
Dec-01
Dec-99
Dec 07
Dec-02
Dec-00
Dec-03
Dec-05
Dec-06
Dec-04
Dec-08
All components of the business conditions index improved significantly (see chart below left hand panel). Trading and
profits (up 10 and 7 points respectively) are now around levels last seen in December 2008 – at the time of the first
government cash handout. That is not insignificant, as there is little doubt that the second round of cash handouts
together with the extension of the first home owners grant and the investment allowance, has impacted significantly on
the June readings. That is also suggested by the sharp improvements in manufacturing, construction and wholesaling
in June – together with ongoing out performance in retail. Easing in global financial markets at the same time has
helped the finance sector. That said perhaps the most surprising aspect of the Survey was the much improved labour
market outcomes. The monthly increase of 18 points in June is the largest monthly movement in the Survey’s history.
In brief, the Survey suggests that the better trading and profits has seen business significantly slow the rate of labour
shedding.
Overall, based on the average of recently Monthly Survey results for both business conditions and forward orders, the
Survey suggests domestic demand growth of around ½% or nearly 2% at an annualised rate (see chart below right
hand panel). While the Survey results for the March quarter were less negative than the Statistician’s actual estimates
for demand, a relatively flat outcome in the first half of 2009 would be an extremely credible performance.
While the Survey clearly points to much better than expected outcomes, the real question is whether this improvement
can be sustained into the second half of 2009 as the impact of cash handouts and the first home owners grants start to
fade. Here we are less certain – albeit increased infrastructure spending will clearly boost public sector demand.
Overall we are still very much in the camp that, however welcome the current strength might be, it will not be able to
be sustained. Clearly much depends on that judgment and future Survey results will need to be closely watched.
-2-
Embargoed until 11.30am Tuesday 14 July, 2009
Trading , Profits & Em ploym e nt
Monthly, s e as onally adjus te d 3 m onth m oving ave rag e *
Forward Orders (Change & Level) As an Indicator of Domestic Demand
Inde x Inde x - 6 Mthly Annualised % in Demand
30 30
10 10
25 Trading 25
8 8
20 20
15 15 6 6
Profits
10 10
4 4
5 5
0 0 2 2
-5 -5
0 0
-10 -10
-15 -15 -2 -2
DEMAND 6Mthly Annualised
-20 -20 Forward Orders
Employment -4 -4
-25 -25
-30 -30 -6 -6
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Jul-01
Jul-06
Jun 09
Jun-99
Jan-99
Jun-04
Jan-09
Jan-04
Nov-99
May-07
May-02
Dec-01
Aug-03
Nov-04
Oct 07
Aug-98
Mar 08
Aug-08
Apr-00
Oct-02
Mar-03
Apr-05
Feb-01
Dec-06
Sep-00
Sep-05
Feb-06
In terms of some of the more forward looking indicators in the Survey, the very sharp jump in forward orders is
encouraging - see chart below (left hand panel). While retail forward orders are clearly the strongest (helped by the
Government’s cash hand outs) and motor vehicle retailing orders surged on the back of the investment allowance
(contributing by itself 3 of the 14 point increase) the bottom line is orders in other cyclical sectors have also moved off
their previously extreme lows. That said, and allowing for one off elements, the trend level of orders has again
returned to levels around that of September 2008. Also it appears that higher general confidence levels have helped
temporarily increase investment spending (albeit again the investment allowance has had an impact) – see chart
below right hand panel. Whether that translates into an upward revision to longer term investment intentions is more
doubtful – with information on that issue to be released in the full Quarterly Business Survey in a few weeks time.
New Forward Orde rs Index
Capital Expenditure: Monthly, Quarterly & Annual
Inde x Index
Inde x Monthly Original
50 50
15 15
Jun '07 to Jun '09
10 10 40 40
Annual Expectations - LHS
Tre nd
5 5 30 30
Ave rag e
0 0
20 20
Monthly Trend
-5 -5
10 10
-10 -10 Qtrly Acutal - LHS
0 0
-15 -15
-10 -10
-20 -20 Qtrly Expectations - LHS
Jun-09
Jun-08
Jun-01
Dec-91
Dec-01
Oct-07
Jun 09
Oct-08
Jun-02
Jun-07
Jun-00
Jun-03
Jun-05
Jun-06
Jun 08
Dec-92
Dec-97
Dec-99
Dec-02
Dec-07
Dec-09
Jun-04
Dec-93
Dec-03
Dec-90
Dec-94
Dec-95
Dec-96
Dec-98
Dec-00
Dec-04
Dec-05
Dec-06
Dec-08
Feb-09
Feb-08
Exports
Inde x Monthly Inde x
15 15
Orig inal
10 10
Tre nd
5 5
Jun 09
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun 08
-3-
Embargoed until 11.30am Tuesday 14 July, 2009
Against all the positives, it was notable that the level of capacity utilisation in the economy overall did not really
improve much – with the aggregate level of capacity in June at 79.3% compared with 79.2% last month (see chart
below left hand panel). In broad terms there was little change across industry – albeit with some evidence of a
bottoming at very low levels in (especially) manufacturing and construction. Retail and wholesale capacity utilisation
rates have not really changed much in recent months. It appears – as evidenced by the aggregate stock index see
chart below right hand column – that recent improved trading has been very much driven by further de-stocking (with
the aggregate index still around -10 points). Indeed the de-stocking indices are especially large in manufacturing (-
24), construction (-32) retail (-17) and wholesale (-15).
85 15 15
84 10 10
Trend Average
83 5 5
82 0 0
Trend (SA)
81 -5 -5
-15 -15
79 Seasonally adjusted*
-20 -20
78
Jun-01
Jun 09
Jun-99
Jun-02
Jun-07
Jun-03
Jun 08
Jun-00
Jun-04
Jun-05
Jun-06
Dec-01
Dec 07
Dec-99
Dec-02
Dec-00
Dec-03
Dec-05
Dec-06
Dec-04
Dec-08
Jun-01
Jun 09
Jun-07
Jun-99
Jun-02
Jun 08
Jun-00
Jun-03
Jun-05
Jun-06
Jun-04
Since late 2008 we have included a question asking how businesses view the availability of credit. As shown by the
chart below there has been a slight decrease in difficulty in accessing credit – with 15% of respondents reporting
tougher credit availability (22% last month). Further, those not requiring credit rose to 43% in May (33% last month).
As such, the key driver of slowing growth in credit in Australia (unlike overseas) still remains slower demand for credit
– rather than credit rationing.
40
%of firms
30
20
10
0
Significantly Slightly No Change Slightly Significantly No
more more easier easier Borrowings
difficult difficult reqd
-4-
Embargoed until 11.30am Tuesday 14 July, 2009
B u s in e s s C o n fid e n c e b y I n d u s try
M o n th ly , S e a s o n a lly A d ju s te d 3 m o n th M o v in g A v e ra g e *
I n d e x I n d e x
40 40
30 30
20 20
10 10
0 0
-10 -10
-20 -20
-30 -30
-40 -40
Jun-07
Jun 09
Jun-06
Jun 08
Jun-07
Jun 09
Jun-06
Jun 08
Mar-07
Mar-09
Mar 08
Mar-07
Mar-09
Mar 08
Dec 07
Dec-06
Sep-07
Dec-08
Sep-06
Sep 08
Dec 07
Dec-06
Sep-07
Dec-08
Sep-06
Sep 08
Mfg Retail Trans & Util Fin Bus & Prop
Construction Wholesale Mining Rec&Pers
The trend improvement in business conditions is also broad based – with the exception of recreational services. Retail
continues to lead the way on the back of cash handouts while mining has also strengthened noticeably on the back of
a less bleak global outlook. Most sectors appear to have bottomed – with manufacturing still at very depressed levels.
B u s i n e s s C o n d itio n s b y I n d u s try
M o n th l y , S e a s o n a ll y A d ju s te d 3 m o n th M o v i n g A v e ra g e *
I n d e x In d e x
50 50
40 40
30 30
20 20
10 10
0 0
-10 -10
-20 -20
-30 -30
-40 -40
Jun 09
Jun-07
Jun-06
Jun 08
Jun-07
Jun 09
Jun-06
Jun 08
Mar-07
Mar-09
Mar 08
Mar-07
Mar-09
Mar 08
Dec 07
Dec-06
Dec08
Sep-07
Dec 07
Sep-06
Dec-06
Sep 08
Sep-07
Dec-08
Sep-06
Sep 08
Across states the trend improvement in confidence has also been broad based and consistent – in keeping with
economy wide influences – such as fiscal initiatives and lower interest rates. There is hence little difference in
confidence across the states. Turning to business conditions, it is notable the previous power states of Western
Australia and Queensland are reporting the weakest conditions – albeit the differences are not large. Most states are
however sharing in the recent improvement in conditions. That said NSW and South Australia continue to report the
least negative outcomes - albeit business conditions in all states remain poor.
Business Confidence by State Business Conditions
40
30
30
20
20
10
Index, sa 3mma
Index, sa 3mma
10
0
0
-10
-20
SA NSW -10
WA Queensland
Queensland WA Australia NSW
-20
-30 Victoria SA
Australia Victoria
-30
-40
Aug-07
Aug-08
Jun-07
Jun-08
Jun-09
Apr-08
Apr-09
Feb-08
Feb-09
Oct-07
Dec-07
Oct-08
Dec-08
Aug-07
Aug-08
Jun-07
Apr-08
Jun-08
Apr-09
Jun-09
Feb-08
Feb-09
Oct-07
Dec-07
Oct-08
Dec-08
-5-
Embargoed until 11.30am Tuesday 14 July, 2009
Cost and Price Trends
NAB’s Survey suggests that the still softening labour market is being reflected in further slowing in labour costs (a
wage bill measure). Indeed, as shown in the charts below, employers are continuing to reduce labour costs with the
year on year growth rate of labour costs falling sharply in all sectors. In June, total labour costs were unchanged and
the annual growth in labour costs slowed to only1.8% (2.1% last month).
oya % Wage growth Wage growth
oya %
10 10
Mining Rec etc All Wholesaling Retail
Construction FBP ALL Mfg Trans
9 9
8 8
7 7
6 6
5 5
4 4
3
3
2
2
1
1
0
0
Jun-06
Jun-07
Jun-08
Jun-09
Sep-06
Dec-06
Mar-07
Sep-07
Dec-07
Mar-08
Sep-08
Dec-08
Mar-09
Jun-06
Jun-07
Jun-08
Jun-09
Mar-07
Mar-08
Mar-09
Sep-06
Dec-06
Sep-07
Dec-07
Sep-08
Dec-08
Purchase costs are also continuing to ease – with no growth in June. As a result the 12-months-to rate of increase
decelerated to 4.7% – down from a 5.5% increase in May and from a peak of 7.2% increase as recently as January
2009. Economy-wide price pressures are also easing – with a decline of -0.3% in June, bringing the annual rate down
significantly to 2.2% (2.7% last month).
Retail prices have however been somewhat stickier. In June retail prices increased by 0.3% on a 3 month seasonally
adjusted rate. While well down from 0.7% in May and 1.2% in April, these readings still point to the probability of an
underlying CPI result in the June quarter of 0.7% or above. As a result the 12-months-to retail inflation rate remained
surprisingly high at 4.1% (4.3% last month). This is not to say that core retail inflation will not fall going forward, but
the lags may cause some consternation in the near term.
C o s ts & P ric e s
1 2 M o n th s e n d e d , o rig in a l d a ta
A n n u a l -% A n n u a l -%
8 8
7
P u rc h a s e c o s ts 7
6 6
5 L a b o u r c o s ts 5
4 4
3 E c o n o m y -w id e p ric e s 3
2 2
R e ta il p r ic e s
1 1
0 0
Jun-01
Jun 09
Jun-07
Jun-02
Jun-03
Jun 08
Jun-00
Jun-05
Jun-06
Jun-04
Dec-01
Dec 07
Dec-02
Dec-03
Dec-00
Dec-04
Dec-05
Dec-06
Dec-08
-6-
Embargoed until 11.30am Tuesday 14 July, 2009
The most timely indicators of global economic activity suggest that conditions could finally be stabilizing after the most
severe downturn of the postwar period. The pace of decline in global industrial output has settled at around 15% yoy
through the first four months of the year which suggests that the level of production could have stabilized at a very low
level. The CPB measure of world export volumes shows a similar picture with the drop in volumes settling at almost
20% yoy through March and April and the pace of decline tapering off quite sharply in the recent monthly numbers.
Our forecast for the global economy involves a slowing in the rate of decline and then stabilisation in activity by the
end of the September quarter, followed by the commencement of modest economic growth toward the end of the year.
So far, that looks on track and we have not changed our global forecasts.
The various national purchasing managers’ surveys bottomed out around the turn of the year and have become
steadily less negative since then. Most survey results still fall short of the 50 mark that signifies expansion but the rate
of decline is steadily slowing and a few of the June results even show that modest expansion has resumed in a few
industries and markets. An alternative set of business surveys (the US Philadelphia Fed, the UK CBI, the French
INSEE and the German IFO) show current activity declining less rapidly, consistent with industry nearing the bottom of
the cycle. On the other hand, business expectations for 6 months or so into the future have become much more
optimistic in the last few months and business thinks that activity will be growing by the end of the year.
Sustained recovery, however, requires ongoing growth in final demand, particularly private demand. Our forecasts are
for a rather weak recovery from the current deep recession. Several deep recessions in the postwar period have been
followed by rapid recoveries, producing V-shaped profiles for economic activity. For instance, global growth reached
almost 5½% in 1976, after the mid-1970s recession, and 4½% in 1984, after the early 1980s downturn. The milder
recessions seen in the early 1990s and at the start of this decade were followed by more moderate upswings in global
economic activity. We expect global output to fall by almost 1¾% this year, the first decline of the postwar period and
easily the worst outcome since the Great Depression. However, we are only expecting a fairly subdued recovery with
growth of 2¼ % next year and it is only in 2011 that growth gets back to the 3½% trend seen in the last 40 years.
This rather muted upturn is the outcome of opposing forces. Large amounts of stimulus are coming from economic
policies around the world with near zero interest rates in several key economies and budget balances shifting heavily
-7-
Embargoed until 11.30am Tuesday 14 July, 2009
into deficit, even after allowing for the impact of the downturn on the fiscal bottom line. Normally, such powerful policy
stimulus would lead to a very strong upturn in economic activity. However, there are structural factors that should limit
the impact of these policies. Household balance sheets became over-extended during the previous boom and there is
likely to be a prolonged period of increased savings and lower borrowing as consumers seek to cut their debt/income
ratios and restore their asset/liability positions in the wake of big reductions in wealth. Large parts of the international
banking system are likely to take a more cautious approach to lending and that should limit credit growth and allow the
pricing of risk to be more appropriate than it was before 2007. Finally, the legacy of the downturn will be much higher
unemployment and large amounts of idle capacity and that should limit incentives and ability to spend among
households and business. Taken overall, the powerful policy stimulus puts a floor under global economic activity and
gets the recovery started but private sector imbalances and fragilities limit the extent of the upturn.
The synchronised nature of the global downturn means that no region has emerged unscathed but there are big
differences between them in the extent to which output has suffered. Initially it appeared as if the spending, borrowing
and importing economies like the US and UK would suffer the most in the recession as the imbalances and
vulnerabilities appeared most obvious there. In the event, however, it is the exporting and saving driven economies
like Japan and Germany that have suffered the sharpest downturns as activity levels in their export-oriented
manufacturing sectors fell sharply. Recently Japanese output has started rising again but it is still well below year-
earlier levels.
The charts below show how industrial output declined sharply in virtually all areas of the world after the collapse of
Lehmann Brothers last September. The main exception is China where output probably fell through late last year but
year on year growth was maintained. Even big closed economies like India and Brazil, where there had been some
expectation that they might not see too much impact from a US/UK focused recession, found themselves caught up
when the downturn became deeper and world-wide. The pace of decline in industrial output has been slowing across
East Asia and Latin America but there is no sign yet of an upturn in production.
Just as the downturn was synchronised with all regions being affected, the upturn should be synchronised too. There
will, however, still be significant differences between economies in the timing and extent of recovery. The US and
China should be among the first to emerge from the downturn, largely reflecting the extent of stimulus to domestic
demand in both economies. Chinese economic growth has slipped from a peak of 14% yoy in mid-2007 to just over
6% yoy by early 2009 as exports and real estate turned down. The Chinese economy should bottom-out in the first
half of 2009 with growth accelerating through 7% by the end of this year and reaching almost 8% by the end of 2010.
The US economy should continue to shrink, but at a declining rate, until September quarter with growth resuming in
the final months of the year. Year-average growth should swing from almost -3% in 2009 to nearly 1½% next year.
-8-
Embargoed until 11.30am Tuesday 14 July, 2009
IMF ANNUAL GROWTH TOTALS
WEIGH TS 2006 2007 2008 2009 2010 2011
GDP US 0.213 2.8 2.0 1.1 -2.9 1.3 2.5
GDP JAPAN 0.066 2.0 2.3 -0.7 -8.0 0.8 2.5
EURO GDP 0.161 3.0 2.6 0.6 -4.6 0.4 1.8
UK GDP 0.033 2.9 2.6 0.8 -4.1 0.8 2.5
nonjap asia 0.046 5.4 5.6 2.2 -4.9 2.4 4.5
latin america 0.083 5.3 5.4 4.2 -1.3 1.6 3.8
china 0.108 11.0 11.8 9.5 6.6 7.7 8.5
canada 0.02 3.1 2.7 0.8 -3.0 1.0 2.5
India 0.046 9.9 9.3 7.5 5.4 5.3 6.0
Africa 0.03 6.1 6.3 5.2 3.4 4.0 5.0
CIS 0.045 8.2 8.6 6.0 -5.0 2.0 3.0
E Europe 0.04 6.7 5.7 3.2 -3.5 2.2 2.8
Middle East 0.038 5.7 5.9 6.4 3.9 2.0 4.0
Other advanced 0.07 4.5 4.7 1.9 -3.0 2.2 2.5
GLOBA L TOTAL 0.999 5.0 4.9 3.1 -1.8 2.3 3.5
The weakness in economic activity and commodity prices has flowed into producer and consumer price inflation,
facilitating the reduction of central bank policy interest rates to historically low levels. The sharp decline in industrial
output has been paralleled by a steep decline in capacity utilisation rates and the percentage of capacity lying idle
across the US, Japan, Canada and big Eurozone economies has risen from around 15% in late 2007 to almost 35% in
mid-2009. Unemployment is also rising rapidly with the jobless rate across that same group of big economies
increasing from around 5½% in late 2007 to almost 9% by mid-2009 and rates of over 10% seem likely by the end of
the year.
This is clearly a very difficult environment to seek wage and price rises and all the main measures show sharp
declines in inflation or even the onset of deflation. The collapse in headline inflation is shown in the chart below of G7
price changes with the rate of increase of the headline CPI dropping from a peak of almost 4½% yoy in mid-2007 to a
tiny fall in prices by April 2009 and at least temporary deflation is expected in some economies for parts of the year.
Stripping out the volatile energy and food components on consumer prices, however, shows a more modest reduction
in price pressures with the G7 core CPI inflation rate dipping from a peak of around 2½% yoy in mid-2007 to just under
1¾% yoy in April 2009.
There is now a great deal of debate and uncertainty over the inflation outlook with opinion split between those who see
the massive increase in central bank balance sheets and the return of the “printing of money” as a harbinger of higher
inflation to come and those who focus on widespread unemployment and idle capacity as factors keeping prices down.
Our view of ongoing modest inflationary pressures depends critically on both monetary and fiscal authorities
withdrawing their current emergency policy stance. That process will however be gradual with consumers less willing
to take on debt and banks generally more risk adverse. Globally interest rates will remain quite low through the next
few years.
Australian Outlook
-9-
Embargoed until 11.30am Tuesday 14 July, 2009
While the Survey (and other data) points to an improved growth momentum domestically we have not fundamentally
changed our view of the economic outlook over the next 18 months or so.
That reflects a number of factors relevant here:
• The first relates to some skepticism as the reported growth in GDP in the first quarter of 2009 – and in
particular the very strong GDP(E) measures driven by net exports. Indeed the gap between the average
measure of GDP and GDP(P) - which many including ourselves see as probably the more reliable measure
– is the largest since September 1982.
1.5
0.5
-0.5
-1
-1.5
-2
Jun-82
Jun-86
Jun-90
Jun-94
Jun-98
Jun-02
Jun-06
• While the Survey itself suggests acceleration in demand recently the actual demand estimates in the national
accounts were even weaker than implied by the survey. If we combine both quarters we suspect the bottom
line is an economy that has at least stalled if not gone backwards in the first half of 2009.
• Beyond that we see elements of pull forward in the recent data – e.g. via the investment allowance and first
home buyers scheme – or stimuli that will not be there in the second half of 2009 – e.g. cash hand outs to
consumers and continuing strength in net exports.
• That suggests that the second half of 2009 will see negative growth with the turning point either in late 2009
or early 2010.
This means, that while the pattern of growth between quarters may change, the bottom line in key aggregates does
not – at least in calendar year terms
• Thus in calendar 2009 we still expect GDP to fall by around ½% and then grow by around 1% in 2010.
• For the financial year however the forecasts have been raised to ¾% in 2008/09 and -1/2% (unchanged) in
2009/10.
Looking forward it is hard to see the pace of consumption being maintained in the face of less cash handouts, rising
unemployment and the damage done to household balance sheets. Indeed the chart below (left hand panel) shows
how robust consumption has been relative to what might have been expected without Government special
measures. Equally, while interest rates have no doubt helped, we see the current improvement in construction as
very much more tied to the boost to the first home owner’s scheme which is due to be phased out over the next 6
months. Nor are we convinced that business investment – post some bring forward from investment allowances –
will do anything other than continue to fall significantly. Currently the forecasts imply falls of around 20% during
2009.
- 10 -
Embargoed until 11.30am Tuesday 14 July, 2009
Real Consumption - Annual Growth Underlying Business Investment - Actual v Model Forecasts
35 35%
Forecasts
30 30%
6.0 6%
25 25%
20 20%
4.0 4% 15
15%
10
10%
2.0 2% 5
oya
5%
0
0%
-5
0.0 0% -5%
-10
-15 -10%
Jun-90
Jun-91
Jun-92
Jun-93
Jun-94
Jun-95
Jun-96
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
In a fundamental sense we still expect exports to fall around 5% over the next year and the terms of trade to decline
by another 12%. Of course public demand will be very strong – likely on current estimates to increase by around 3%
in 2009 rising to around 5% in 2010. Against that private sector demand is likely to fall by more than 2% in 2009.
Domestic Demand - Private & Public Australia's Terms of Trade
1.3
7% 7%
1.2
Index of Export to Import Prices
4% 4%
1.1
Annual % change
2% 2% 1.0
0.9
-1% -1%
0.8
-4% Underlying Public Demand -4% Average - 1985 to 2000
Private Demand 0.7
-6% -6%
0.6
Dec-86
Dec-87
Dec-88
Dec-89
Dec-90
Dec-91
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Source: ABS, &, NAB Economics
As shown below with GDP likely to go backwards in the second half of 2009 and not return to trend growth till late
2010 unemployment continues to rise – approaching 7% by late 2009 and around 8% by late 2010 – forecasts that,
not surprisingly, remain unchanged.
2.0% 10.0
4%
9.5
1.5% 9.0
3%
% c h a n g e - 1 2 m o n th s to
8.5
2% 8.0
1.0%
% - ra te
7.5
1% 7.0
0.5%
6.5
0%
6.0
0.0%
5.5
-1%
5.0
-0.5%
-2% EMPLOYMENT - LHS 4.5
UNEMPLOYMENT RATE - RHS 4.0
-1.0%
-3% 3.5
D ec-84
D ec-85
D ec-86
D ec-87
D ec-88
D ec-89
D ec-90
D ec-91
D ec-92
D ec-93
D ec-94
D ec-95
D ec-96
D ec-97
D ec-98
D ec-99
D ec-00
D ec-01
D ec-02
D ec-03
D ec-04
D ec-05
D ec-06
D ec-07
D ec-08
D ec-09
D ec-10
D e c-8 5
S e p -8 6
Ju n -8 7
M a r-8 8
D e c-8 8
S e p -8 9
Ju n -9 0
M a r-9 1
D e c-9 1
S e p -9 2
Ju n -9 3
M a r-9 4
D e c-9 4
S e p -9 5
Ju n -9 6
M a r-9 7
D e c-9 7
S e p -9 8
Ju n -9 9
M a r-0 0
D e c-0 0
S e p -0 1
Ju n -0 2
M a r-0 3
D e c-0 3
S e p -0 4
Ju n -0 5
M a r-0 6
D e c-0 6
S e p -0 7
Ju n -0 8
M a r-0 9
D e c-0 9
S e p -1 0
Finally, on inflation, the Survey continues to show sharply slowing levels of wages growth and lower capacity
utilisation. In the near term (i.e. the June quarter) core inflation may remain higher than expected – but that largely
reflects lags. Over the forecast period however we see core inflation falling back to the RBA‘s target by early 2010
and moving sharply lower through the rest of the year. Inflation targeting suggests that interest rates should be
adjusted according to where inflation is expected to be in 12 months time - both our and the RBA forecasts have
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Embargoed until 11.30am Tuesday 14 July, 2009
inflation at the bottom of the 2-3% target (see chart below) at this horizon and going lower into 2011. Against that,
Taylor’s rule would suggest that current rates should be around appropriate.
Inflation (CPI) - Nab's Headline & Core v RBA Forecast & Target Australian Cash Rate
20
Through the year percentage change
5.0 18 Cash - Taylor's rule dd
%
3.0
8
Sep-85
Sep-86
Sep-87
Sep-88
Sep-89
Sep-90
Sep-91
Sep-92
Sep-93
Sep-94
Sep-95
Sep-96
Sep-97
Sep-98
Sep-99
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec-
02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10
On interest rates:
¾ We now see the RBA in data watching mode and they are clearly comfortable at the current cash rate;
¾ The RBA will continue to be on hold for some time assessing the impact of what it has already done and the
impact of the Government Budget. It will also want time to assess whether recent improvements in the
global outlook will be sustained.
¾ If the RBA is to move in the next 3-6 months it will be down. The key drivers here are the extent of the
deterioration in activity in the second half of 2009 and the labour market. If these deteriorate more than
expected the RBA can use the scope provided by a lower than target inflation forecast to provide additional
stimulus;
¾ Against that the RBA clearly sees the current cash rate as significantly below a sustainable medium term
outcome – and will wish to raise it back to more normal levels once recovery becomes entrenched. That
timing could see the upward adjustment process starting, moderately, in late 2009;
¾ While it is still a very close call the current improved growth momentum probably gives the RBA enough
solace to sit out the next 6 months. And hence we have removed our previous expectation of additional 50
points of cuts in late 2009. Clearly however this judgment is very data dependent;
¾ We have the RBA starting to moderately tighten around September 2010 with the cash rate around 3¾% by
years end and continuing into 2011 to reach neutral (5 to 5 ½%) by late 2011.
For more information contact:
Alan Oster
Chief Economist
03 8634 2927
0414 444 652
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Embargoed until 11.30am Tuesday 14 July, 2009
- 13 -
Embargoed until 11.30am Tuesday 14 July, 2009
Michael Lee Senior Economist – Modelling and Econometric Support +(61 3) 8634 8562
New Zealand
Tony Alexander Chief Economist – BNZ +(64 4)474 6744
Stephen Toplis Head of Market Economics - BNZ +(64 4) 474 6905
Craig Ebert Market Economist - BNZ +(64 4) 474 6799
Mark Walton Market Economist – BNZ +(64 4) 474 6799
London
Tom Vosa Head of Market Economics - Europe +(44 20) 7710 1573
David Tinsley Market Economist – Europe +(44 20) 7710 2910
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- 14 -