THE AUSTRALIAN ECONOMY: CURRENT STATE OF PLAY & OUTLOOK BIANNUAL REVIEW OF MACROECONOMIC FORECASTS ISSUED: 12th JANUARY 2016 All historical data used in this report are the latest available as at 14th January 2016. External forecast data from the IMF, OECD, commercial banks et al are the latest available.
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SUMMARY OF KEY ECONOMIC FORECASTS The latest internal forecasts for key macroeconomic variables are compared and contrasted with the current market consensus view: Real GDP Growth MYEFO=Mid-Year Economic & (Financial Year Average) Real GDP Growth: Under the auspices of low interest rates and a low A$, Fiscal Outlook (Dec. 2015) modest improvement in the growth outlook is expected as economic 4.0% Telstra forecasts (as at Dec. 2015) Federal Budget (MYEFO) 2015 rebalancing progresses. Risks to growth now more evenly balanced. Long-term trend post-1990 Current market consensus • 3.5% Export-led economic growth forecast to continue over 2016 and 2017 while growth in domestic demand expected to remain subdued. 3.0% • The current pace of expansion in the non-mining economy is encouraging but likely to remain sluggish during the early part of the forecast horizon. 2.5% • A softer commodity market outlook, high under-employment, and constrained spending capacity by consumers and businesses expected to weigh on the 2.0% short-term growth outlook. 3.1% 1.5% 2.9% 2.9% 2.6% 2015-16e 2016-17f 2017-18f 2018-19f 1.0% Telstra 2.6% 2.9% 3.1% 2.9% 0.5% Market 2.3%-2.7% 2.7%-3.2% - - 0.0% 2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f) CPI Inflation: With labour market slack expected to persist over the coming Consumer Price Index Outlook year given soft demand conditions, CPI inflation should remain subdued due to (Financial Year Average) * Budget forecast through- absence of ‘demand-pull’ price pressures. But upward risks posed by lower A$. the-year to June quarter. 3.5% 2015-16e 2016-17f 2017-18f 2018-19f Telstra forecasts (as at Dec. 2015) Federal Budget (MYEFO) 2015* Long-term trend (1990-current) Current market consensus Telstra 2.2% 2.5% 2.6% 2.6% 3.0% Market 1.8%-2.8% 2.3%-2.7% - - 2.5%
Unemployment rate: Surprising resilience in employment growth over 2015 V4 masks excess capacity reflected in high full-time un/N. If the 2016 growth 2.0% PPT EL T | outlook unfolds as expected, the un/N rate is likely to peak at a lower level.
2.5% 2.6% 2.6% A BET 2.2% E U 2015-16e 2016-17f 2017-18f 2018-19f 1.5% BL 3X4 E AT Telstra 6.1% 5.9% 5.7% 5.6% PL 1.0% EM T A 2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f) R Market 5.8%-6.4% 5.6%-6.1% - - ST EL T Source: Australian Bureau of Statistics; RBA; OECD, EIU; IMF; various commercial banks forecasts; Economics@Telstra. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 | 2
KEY CHANGES IN GDP & CPI FORECASTS Dec. 2015 Forecasts: Key Revisions Since June 2015 Forecast revisions 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f) (Year average % point change) Real GDP June 2015 2.7% 2.9% 3.1% 3.0% Points December 2015 2.6% 2.9% 3.1% 2.9% 0.2% 0.2% % pt change -0.1% 0.0% 0.0% -0.1% 0.1% 0.1% 0.1% 0.1% Consumer June 2015 2.7% 2.9% 3.0% 3.0% 0.1% Spending December 2015 2.8% 3.0% 3.1% 2.9% 0.0% % pt change 0.1% 0.1% 0.1% -0.1% 0.0% Business June 2015 -7.1% -2.3% 3.8% 4.7% 0.0% 0.0% Capex December 2015 -8.9% -2.5% 2.1% 5.2% -0.1% -0.1% % pt change -1.8% -0.2% -1.7% 0.5% -0.1% % point chg in 2015-16 expectation -0.2% -0.2% Short-term inflation forecasts downgraded Exports June 2015 7.7% 7.2% 6.8% 5.2% % point chg in 2016-17 forecast given extent of global disinflation risk; December 2015 6.4% 7.3% 5.6% 4.3% low commodity prices; weak wage % pt change -1.3% 0.1% -1.2% -0.9% -0.3% % point chg in 2017-18 forecast growth; and subdued domestic demand. Employment June 2015 1.5% 1.9% 1.7% 1.6% -0.3% -0.4% December 2015 1.9% 1.8% 1.8% 1.7% Real GDP Consumer Spending CPI Inflation Unemployment Rate % pt change 0.4% -0.1% 0.1% 0.1% 2015-16 & 2016-17 Economic Outlook Unemployment June 2015 6.2% 5.7% 5.6% 5.6% Rate (period end) December 2015 6.1% 5.9% 5.7% 5.6% 1. The short-term growth outlook effectively unchanged reflecting drag on growth from lower business capex and lack of durable offset by other parts of the economy such as household spending and non-mining business capex. Exports a key growth driver. % pt change -0.1% 0.2% 0.1% 0.0% 2. The unemployment rate now expected to peak at slightly lower level (~6.1% in 2016) but remain close to this level for longer than CPI (FY average) June 2015 2.5% 2.7% 2.6% 2.6% previously thought. A key downside risk to growth in wages, household disposable income and consumption. December 2015 2.2% 2.5% 2.6% 2.6% 3. Subdued domestic demand conditions sustaining low inflation in the short-term. Supports RBA 'low for longer' rate scenario. % pt change -0.3% -0.2% 0.0% 0.0% The major revisions to the growth outlook effected in this forecast update (relative to previous) are to: 1. Decrease business capex in line with the sharp downturn in the mining sector as growth in the Chinese economy moderates sustaining sharply lower commodity prices; 2. Frontload some public spending including by states; and 3. Modestly lower near-term export growth forecasts even though the ramp-up in mining production and output will sustain elevated levels of resource exports. Consumer spending forecasts largely unchanged. The outlook for consumer spending is influenced by the evolution of fiscal and monetary policy; a more resilient performing labour market than previously expected; improved household balance sheets given focus on debt consolidation and hi gher asset prices; and moderating
V4 support from housing construction (as activity slows). Weak wage growth, high savings & subdued confidence key factors weighing on the spending outlook in 2016. PPT EL T With respect to the outlook for inflation, the downgrade to the 2015-16 (and to a lesser extent 2016-17) outlook largely reflects: | A BET 1. Expectations that the economy will continue to operate with a non-trivial degree of spare capacity keeping growth in labour costs low; and E U BL 3X 2. Sustained low demand-pull price pressures in the short-term given the patchwork nature of domestic growth. But structural cost pressures in health, education 4 E AT and utilities likely to keep cost-push inflation 'sticky‘ which, combined with a lower US$/A$, will bias overall inflation risks upwards. PL EM T A While domestic demand conditions are expected to gradually improve and strengthen in 2016 and 2017, it is likely that overall inflationary pressures will see the R ST headline rate oscillate around the middle of the RBA target range (2%-3%) over the medium-term. EL T MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 | 3
KEY CHANGES IN OTHER ECONOMIC VARIABLES Consumer Spending, Household Income Employment Growth & Unemployment Rate (Financial Year Average) & Unemployment Rate Unemployment rate 6.5% Employment growth 8% Real Consumer Spending 6.0% Long-term trend in N growth Nominal Household Disposable Income 5.5% 7% Unemployment Rate 5.0% 6% 4.5% 4.0% 5% 3.5% 4% 6.1% 3.0% 5.9% 5.7% 5.6% 2.5% 3% 2.0% 2% 1.5% 1.0% 1% 0.5% 0% 0.0% 2011-12 2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f) Factors limiting consumer demand in the short-term include the likely gradual pick-up in Reflecting labour market slack, rising demand for labour is likely to be met by increased employment as labour demand is initially met by increased hours worked (i.e. converting hours worked suggesting that the translation of output and employment growth into wage part-time employees to full-time where appropriate) which in turn is constraining wage inflation is likely to remain muted; at least in the short-term. Consequently wage growth is growth and spending capacity; the savings ratio likely to sustain above pre-GFC levels likely to persist around decade lows in 2016-17. reflecting ongoing cautious household behaviour and balance sheet repair; and only soft household debt uptake (especially relative to pre-GFC and despite low interest rates). Latest Economic Forecasts: Key Components of GDP & CPI Inflation in 2016-17 (FY Average % Change; Market forecasts as at Dec. 2015) 7.3% Latest macro 2.8% 3.0% 3.3% 2.9% 2.5%
forecasts for 2016-17 1.9% V4 PPT EL broadly in line with T | A BET E market consensus U Low market forecast Average forecast (Consensus) BL 3X -2.5% 4 High market forecast Telstra forecast E AT PL EM T A Consumer Housing Business Domestic Exports Imports Real GDP CPI Inflation R Spending Investment Capex Demand ST EL T MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 | 4
GLOBAL ECONOMIC TRENDS & OUTLOOK Global growth conditions continue to be challenging and projected to remain modest relative to pre-GFC trends. The recent moderate pace of growth in the global economy is likely to continue in 2016. Differential prospects for moderate growth persist across advanced and developing economies. The short-term growth outlook is also weighed down by intensifying geo-political risks in the Middle East, and socio-economic risks such as the European refugee crisis and elevated terrorism threat. Sharply lower global oil prices, the downturn in key commodity markets sustaining low commodity prices, and factory-gate deflation in China are conspiring with subdued demand conditions in keeping global inflation restrained. Cyclically benign and below-target inflation among major advanced economies as well as China underscores expectation that monetary policy will remain accommodative for a considerable time even as growth recovers. The weaker outlook for emerging market growth especially in Asia has resulted in the International Monetary Fund (IMF) lowering its macro forecasts for global growth. As per its latest October 2015 update, the IMF expects global GDP to expand by 3.1% in 2015 (down from a July forecast of 3.3%) before accelerating to around 3.6% in 2016 (down from a July forecast of 3.8%). Importantly the IMF now views as ‘more pronounced’ the downside risks to the global growth outlook compared to its assessment in July. Further, it believes that the return to robust and synchronised growth ‘remains elusive’. The IMF expects the US economy to post growth of 2.6% in 2015 and 2.8% in 2016 (up 0.1% point and down 0.2% points on the July forecast, respectively) supported by low energy prices, an improved housing market, labour market strength and less fiscal drag. With Asian growth cooling in 2015, growth is expected to exhibit a modest rebound in 2016 and 2017 driven by gains in domestic and external demand (esp. as US growth improves). Growth in developing Asia and the ASEAN-5 should accelerate to around 4.5% and 4.9%, respectively in 2016. Against the backdrop of ‘low-flation’ and downside risks to global economic growth, a non-synchronised outlook for global monetary policy remains firmly in place (i.e., US monetary policy being gradually and cautiously normalised over coming years while asset buying programs (or quantitative easing (QE)) to be maintained in Japan and the Euro zone in 2016). Divergent monetary policy in the US and other major economies likely to underscore a high degree of volatility in financial markets over the short- term forecast horizon. In turn, this will impact emerging market economies via uncertainty and volatility in international capital flows. In addition, emerging market currency depreciation and FX volatility (as the US$ strengthens) poses upside risk to inflation and compromises growth in these economies.
Global Economy Advanced Economies Emerging Market Annual GDP V4 PPT Economies EL Growth Rates T | 3.6 3.8 4.6 A
3.4 3.1 4.0 4.5 4.9 BET The IMF expects robust & E U 1.8 2.0 2.2 2.2 BL synchronised growth b/w 3 X 4 E advanced & emerging AT PL market economies to EM T A ‘remain elusive’. R 2014 2015e 2016f 2017f 2014 2015e 2016f 2017f 2014 2015e 2016f 2017f ST EL T Source: International Monetary Fund (IMF); charts produced by Economics@Telstra. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 | 5
GLOBAL ECONOMIC TRENDS & OUTLOOK (cont.) IMF, World Economic Outlook (October 2015 Update) Note: A forecast update by the IMF is due in late January 2016. Modest revisions are expected but the main themes remain in place. Real GDP Growth 2014 2015f 2016f Global growth outlook weighed World Output 3.4% 3.1% 3.6% down by weaker emerging market Change from previous forec asts (July 2015) - 0.2% - 0.2% growth. A robust and synchronised growth recovery remains ‘elusive’. Advanced Economies 1.8% 2.0% 2.2% Change from previous forec asts (July 2015) - 0.1% - 0.2% United States 2.4% 2.6% 2.8% US growth forecasts favourable tempered by exposure to softer Euro Area 0.9% 1.5% 1.6% Asian growth outlook. Japan -0.1% 0.6% 1.0% United Kingdom 3.0% 2.5% 2.2% Australia 2.7% 2.4% 2.9% Change from previous forec asts (July 2015) - 0.4% - 0.2% Emerging & Developing Economies 4.6% 4.0% 4.5% China growth outlook unchanged Change from previous forec asts (July 2015) - 0.2% - 0.2% but IMF remains concerned about Emerging & Developing Asia 6.8% 6.5% 6.4% downside risks as leverage-fuelled China 7.3% 6.8% 6.3% asset market excesses unwind. Change from previous forec asts (July 2015) 0.0% 0.0% India 7.3% 7.3% 7.5% ASEAN-5 growth outlook resilient impacted by weaker terms-of-trade. ASEAN-5 4.6% 4.6% 4.9% • The global growth outlook has deteriorated compared to the last forecast update in mid-2015 with risks
V4 PPT skewed to the downside. EL T | A • Among advanced economies, the IMF expects growth to strengthen in the US over 2016 consistent with BET E U BL recent partial economic indicators while the growth recovery in the Euro zone and Japan more cautious.
3 X 4 E AT • China’s growth trajectory is forecast to continue to slow as economic rebalancing proceeds. PL EM T A • R Growth in Australia to improve and remain below-trend in 2016, consistent with internal and consensus view. ST EL T Source: International Monetary Fund (IMF); table produced by Economics@Telstra. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 | 6
CURRENT STATE OF PLAY: AUSTRALIAN TRENDS Following a multi-year mining investment boom which has now ended, Australia's Growth Momentum Sub-Trend the Australian economy continues to go through a difficult transition Exports Key Growth Driver w/ Domestic Demand Subdued period as it seeks to rebalance growth drivers. 8% 8% (All data are real, seasonally adjusted) Net exports (% pt cont. to qtrly GDP) Against the backdrop of low interest rates and a lower A$, domestic 7% 7% GDP (annual % chg) data flow over 2015 indicates that the necessary rebalancing of the 6% Domestic demand (annual % chg) 6% economy post-mining boom is occurring only gradually. 5% 5% As a result, GDP growth is likely to remain below-trend in 2016 until the 4% 4% shock of a substantial decline in mining investment and global 3% 3% commodity prices is fully absorbed, which is unlikely for a few years. 2% 2% Sub-par economic growth in Australia observed in H1 2015 continued in 1% 1% the September quarter (latest data available). Headline GDP increased 0% 0% by 0.9% in the three months to September on the back of strong net -1% -1% exports, pushing the annual rate of growth higher to a still sluggish 2.5% -2% -2% (up from 1.9% at end-June). Sep-1999 Sep-2001 Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015 The latest GDP data have highlighted the difficulty in transitioning away from mining-led growth to broader-based growth, with the economy’s Real GDP, Domestic Demand, CPI Inflation & RBA Cash Rate growth momentum unbalanced and lacking depth. Only net exports provided a solid contribution to September quarter growth with domestic 8% GDP growth improved in Q3 Annual growth in Real GDP 2015 while domestic demand demand remaining subdued. 7% RBA Cash Rate weakened. Below-trend growth & soft demand vindicates RBA Headline CPI inflation Labour market trends have been broadly favourable over the past year 6% commitment to ongoing stimulus. Annual growth in domestic demand despite the economy growing at a below-trend pace over this period. 5% While slack in the labour market persists evidenced by low wage growth 4% and constraints on full-time employment growth, the unemployment rate has remained broadly flat. 3%
V4 2% PPT Risks to short-term growth skewed to the downside with the outlook for EL T | 1% A non-mining business capex and employment undermined by lingering BET E U uncertainty over the economic outlook overlayed by political ‘noise’. 0% BL 3X4 E -1% AT PL Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 EM T Headline GDP growth masks weakness in the domestic A R Source: Australian Bureau of Statistics; Economics@Telstra. ST economy. Supports the RBA’s conditional easing bias. EL T MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 | 7
RECENT TRENDS IN CONSUMER SPENDING Growth in consumer spending remains on a tentative upswing after being The resilience of aggregate consumer spending (in real terms) sluggish in recent years. Drawdown in savings partly financing spending. continues to underscore GDP growth with the quarterly pace of Consumer Spending, Household Income and Savings spending observed in September (+0.7% q/q & 2.7% y/y) slightly above (Annual % Change) the average rate observed over 2014 and H1 2015. 14% Savings (% HDI) Real Consumer Spending Household Disposable Income Decent employment growth, a positive housing wealth effect and a 12% modest downward trend in the household saving ratio over the past year 10% (with the latter now 9.0% cf. a 2014 average of 9.5%) have played a key role in supporting household expenditure. 8% Growth in household disposable income (HDI) continues to be resilient 6% despite soft nominal wage growth over 2015. In the September quarter, 4% HDI increased by 0.5% (with growth over 2015 at 2.8% cf. 3.6% over 2% 2014). On an annual basis, HDI growth stabilised at around 4% - down on its recent 10-year average (6.3%). 0% In an outcome consistent with the moderate pace of growth in consumer -2% Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015 spending, retail sales increased 0.4% in November 2015 (up 4.3% Source: Australian Bureau of Statistics; Economics@Telstra. across the year; the latest data available). Moderation in HDI growth due to low wage inflation. Weak wage growth creating new According to the ABS, the latest national retail sales data suggest that jobs (though full-time unemployment remains high) & sustaining current employment levels. aggressive price discounting continues to buoy retail activity with Household Disposable Income & Employment consumers having limited capacity to lift spending further. (Annual Growth) The outlook for consumer spending is influenced by the evolution of 13% Wage growth fiscal and monetary policy with the latter expected to remain stimulatory 12% 11% Employment growth in 2016 and 2017; a resilient labour market aided by low wage growth; 10% HDI improved household balance sheets mainly driven by high asset prices 9% (esp. housing); and further gains in housing activity. 8%
V4 7% PPT EL T 6% | A 5% BET Consumer spending is resilient, but growing at a E U 4% BL 3 lacklustre pace. Subdued consumer confidence, X 4 3% E AT slow wage growth & concerns about the outlook 2% PL EM T 1% A key factors weighing on spending propensity. R ST 0% EL T Sep-2001 Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015 MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 8 |
WESTPAC-MI CONSUMER CONFIDENCE Confidence among consumers effectively at a neutral level. While recently improved, Volume growth in retail & total spending holding up well buoyed by low price sentiment continues to be weighed down by high un/N rate and weak wage growth. inflation. But confidence levels remain broadly subdued weighing on demand. Consumer Confidence & Household Spending The latest Westpac-Melbourne Institute research has shown that (Quarterly data; Annual Growth Rates) consumer sentiment levels in December consolidated most of the Index Number previous month’s gain. 8% 130 Consumer Confidence (Index) (6-month lead) (RHS) Real Consumer Spending (LHS) Real Domestic Demand Real (Volume) Retail Sales 7% Possible structural changes to the GST, concern over heightened job 120 6% insecurity, moderating trends in housing, and limited spending capacity given weak wage growth, are key issues weighing on confidence. 5% 110 4% The index of consumer confidence in December fell marginally from 101.7 to 100.8 (down 0.8% m/m but up 10.6% y/y), and remains broadly 3% 100 neutral (an index reading below 100 means pessimists outnumber 2% optimists). 1% 90 The weight of negative factors impacting consumer confidence remains 0% a non-trivial threat to the outlook for consumer spending in 2016 likely -1% 80 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 sustaining below-trend growth therein. Source: Australian Bureau of Statistics; Westpac-Melbourne Institute; Economics@Telstra. The unemployment rate remains a key factor impacting consumer confidence. The RBA can only do so much to support confidence. “Animal spirits” need to lift. Consumer Confidence & Unemployment Rate Consumer Confidence & Monetary Policy Index Number (Annual % Change) Per Cent 125 4.0 50% -60% Westpac-MI Consumer Confidence (LHS) 4.5 120 -50% 40% RBA Cash Rate - Inverted (RHS) 5.0 115 -40% 5.5 110 30% 6.0 -30% 105 6.5 20% -20% 100 7.0 -10%
10% V4 95 7.5 0% PPT EL 90 8.0 T 0% | 10% A 8.5 85 BET 9.0 -10% 20% E U 80 BL 9.5 3 30% X 75 4 -20% E 10.0 Consumer Confidence (Index) (LHS) 40% AT 70 PL 10.5 Unemployment Rate (Inverted) (RHS) -30% EM 50% T 65 11.0 A R ST 60 11.5 -40% 60% EL T Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15 MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 9 |
RECENT TRENDS IN BUSINESS INVESTMENT Current trends in business capex highlight the significant decline in mining and The changeover in the economy from mining-led to broad-based growth mining-related capex in line with prior outcomes. continues to play out slowly. Capex growth now at lowest since early 1990’s recession. The latest ABS business capex data for the September quarter confirms Real Business Capital Expenditure that relative to its 2012-13 peak, mining investment is approximately 35% 35% 50% through its multi-year decline. In an outcome well below market 30% 30% forecasts, aggregate business capex decreased by 9.2% q/q, to be down 25% 25% 20.0% y/y (a ‘recessionary’ level). 20% 20% 15% 15% The quarterly contraction in business capex (in real or volume terms) 10% 10% highlights the fact that the economy continues to go through a difficult 5% 5% transition period. 0% 0% -5% -5% After a multi-year mining capex boom, the rotation of growth drivers -10% -10% away from mining (down 10.4% q/q and 29.6% y/y) towards higher levels -15% Quarterly Growth -15% of investment in the services sector (down 10.0% q/q and 10.5% y/y) -20% Annual Growth -20% remains elusive. -25% -25% Sep-89 Sep-91 Sep-93 Sep-95 Sep-97 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 While partly boosted by stronger activity in the housing market and the Source: Australian Bureau of Statistics; Economics@Telstra. property-related services sector, a challenging environment for non- mining capex persists despite the RBA’s accommodative monetary Non-mining capex esp. in services has weakened with the outlook to remain subdued. policy settings and the lower key US$/A$ cross rate. Real Business Capex by Industry: Post-GFC The tepid outlook for business capex was confirmed by the ABS’ fourth (Annual % Change) estimate for business capex in 2015-16 which was 20.9% lower than the 90% comparable fourth estimate for 2014-15. But estimate 4 is 4.0% higher 80% Total industry Mining than estimate 3 for 2015-16. 70% Manufacturing Other industries 60% As the economy moves away from capital-intensive mining and 50% 40%
manufacturing sectors towards more labour-intensive, services-based V4 30% PPT sectors which tend to have lower average levels of investment, it is EL T 20% | A expected that growth in aggregate business capex will be slower than in 10% BET E U previous episodic RBA easing cycles. This will sustain below-trend GDP 0% BL 3X -10% 4 growth in 2016. E AT -20% PL EM -30% T A R Business capex is weak and will remain a drag on -40% ST EL Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 T economic growth in 2016 and 2017. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 10 |
NAB BUSINESS CONFIDENCE & CONDITIONS Recent NAB business survey highlights resilience in non-mining business But the improvement in business conditions & growth in domestic demand non- conditions which continues to gain traction from accommodative RBA policy. synchronised. Highlights dominant impact of mining downturn via capex decline. Domestic Demand Growth & NAB Business Conditions Despite lower commodity prices and a loss of domestic growth (Quarterly Data) momentum in Q3 2015, the latest NAB monthly business survey for Annual Growth Index Number November revealed resilience in both business confidence and business 8% Annual Growth in Domestic Demand (Real) (LHS) 25 NAB Business Conditions (Net Balance, 1 qtr lead) (RHS) conditions. 7% 20 6% In November, the index of business confidence remained favourable and 15 5% above its recent 10-year average (+3.4) rising from an index reading of 10 4% +3 points to +5 points. At the same time, the index of business 5 3% conditions has consolidated well above its recent 10-year average level 0 2% (+4) stabilising at +10 index points. -5 1% While underlying growth momentum in the domestic economy remains -10 0% weak as evidenced by the latest GDP data, the services sector -15 -1% continues to report favourable business conditions. -2% -20 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Sep-13 Sep-15 The survey also highlights the growing gap between deteriorating mining Source: Australian Bureau of Statistics; NAB; Economics@Telstra. and manufacturing sectors, and expanding services sector activity. Business confidence & conditions both above their respective 10-year averages. Further gains in business confidence from stimulatory monetary policy limited. NAB Business Confidence & Business Conditions Business Confidence & Change in RBA Cash Rate (Monthly Data) Index Number Index Number Basis Points 30 75 25 25 20 20 50 15 15 10 10 25 5 5
0 0 0 V4 PPT -5 -5 EL T | -10 -10 -25 A -15 BET Monthly basis point change in E -15 U Business confidence index -20 RBA Cash Rate (RHS) -50 BL 3 -20 X 4 -25 E Business conditions index NAB Business Confidence AT -25 -30 (Index) (LHS) -75 PL EM -30 T -35 A R -35 -40 -100 ST EL T Nov-03 Mar-05 Jul-06 Nov-07 Mar-09 Jul-10 Nov-11 Mar-13 Jul-14 Nov-15 Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 11 |
OUTLOOK FOR AUSTRALIAN GDP GROWTH Thematically, the main macro trends remain unchanged with output (ex. Australian GDP & CPI Inflation Outlook mining), demand, employment and wages expected to continue to grow (Year average % change) at a soft pace in 2016 assisting in containing inflation. 4.0% Real GDP CPI Inflation Long-term GDP growth rate The cyclical downturn in the global commodity market and sharp drop-off 3.5% in mining capex expected to be largely offset by higher mining production 3.0% and export volumes. New lower 2.5% trend rate?? Export-led economic growth is thus forecast to continue over most of the 2.0% forecast horizon while growth in domestic demand could remain subdued. 3.1% 1.5% The export phase of the mining boom is less labour intensive compared 2.9% 2.9% 2.6% to the recent multi-year investment phase so should boost labour 1.0% productivity but do little to lift economy-wide income growth. 0.5% Under the auspices of low interest rates and a lower US$/A$, the 0.0% transition away from mining-led growth to broad-based growth such as 2012-13 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f) consumer spending and housing is proceeding, albeit slower than desired. Contributions to Annual GDP Growth Points Accordingly, the outlook for short-term growth is somewhat pessimistic as Consumer spending, housing & net exports key growth drivers over 4% the early/middle forecast period offsetting drag from weaker mining the economy struggles back towards its trend rate (which is arguably capex (and to a lesser extent, fiscal consolidation). structurally lower). Indeed, with population growth slowing in recent years 3% 3.1% due to lower levels of net migration, this will weigh on economic growth 2.9% 2.9% 2.6% going forward. 2% Where previously the potential trend growth rate was estimated at around 1% 3.25%, many analysts (inc. the RBA and Treasury) now consider the
potential growth rate being closer to 2.75%-3.0% (see top chart). V4 0% PPT EL T Risks to short-term growth remain skewed to the downside with the | Net exports Housing A outlook for non-mining business capex and employment undermined by -1% BET E Consumer spending Business capex U BL lingering uncertainty over the economic outlook. RBA monetary policy is 3 GDP X 4 E likely to remain accommodative and on hold through this year. -2% AT 2013-14 2014-15 2015-16(e) 2016-17(f) 2017-18(f) 2018-19(f) PL EM T A R Growth forecast to improve by end-2016 though ST EL T significant headwinds and risks persist. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 12 |
CPI PRICE INFLATION: Q3 2015 The modest rise in headline inflation in the September quarter 2015 (up Consumer Price Index: Headline & RBA Core Inflation 0.5% q/q and 1.5% y/y) was below market and internal forecasts. 6% Underlying CPI Annual 'core' or 'underlying' rate is The economy’s soft growth pulse, sluggish domestic demand and weak steady in lower-half average of RBA's weighted median & of RBA target zone Annual headline % change trimmed mean measures wage growth given labour market slack are holding down demand-pull 5% inflationary pressures. The current era of ‘low RBA Target Range: 2%-3% -flation’ and a sustained annual rate (on average) 4% negative output gap are key factors weighing on the outlook for nominal across the economic cycle and real GDP growth. 3% The underlying rate of inflation (i.e., ex-energy and food prices), and a 2% key focus of policymakers, rose by 0.3% in the September quarter, resulting in the annual rate stepping down from 2.3% to 2.2%. Trends in 1% underlying inflation are critical for monetary policy deliberations as they 0% provide a better gauge of fundamental price pressures in the economy. Quarterly headline % change -1% In terms of annual price increases, elevated price pressures evident Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015 across key areas including household contents and services (+1.8% cf. post-GFC avg. of +0.9%) and recreation (+1.1% cf. post-GFC avg. of Australian Economy: Estimated Output Gap* & CPI +0.4%). Structural price pressures remain in health and education. (*Output Gap = Actual GDP Growth less Potential (Trend) GDP Growth) Consumer Price Index: Q3 2015 Quarterly % Annual % 3-year 3% Component (weight in CPI basket) Q2 2015 Q3 2015 Q2 2015 Q3 2015 CAGR Output Gap (% points) Food (16.8%) -0.2% 0.1% 1.3% 0.2% 1.0% 2% CPI A% (Deviation from post-1990 average) Alcohol & Tobacco (7.1%) 1.2% 1.3% 4.8% 5.0% 5.4% Clothing & Footwear (4.0%) 1.3% -1.1% -0.9% -1.0% -1.0% Housing (22.3%) 0.7% 0.6% 2.5% 2.7% 3.0% 1% Household contents (9.1%) 1.0% 0.8% 1.4% 1.8% 0.7% Health (5.3%) 2.7% 0.3% 4.3% 4.8% 4.5% Transport (11.6%) 3.4% 0.1% -2.4% -2.2% 0.2% 0% Communication (3.1% ) -0.6% -2.0% -3.4% -4.1% -1.4%
A Actual output is less than -2% BET Headline CPI 0.7% 0.5% 1.5% 1.5% 2.0% full-capacity output Negative output gap E U RBA Underlying CPI* 0.6% 0.3% 2.3% 2.2% - tames inflation BL 3X * Average of weighted median & trimmed mean measures. 4 E -3% AT Sep-2003 Sep-2005 Sep-2007 Sep-2009 Sep-2011 Sep-2013 Sep-2015 PL Cyclically benign inflation in Australia underscoring a EM T A R Source: Australian Bureau of Statistics; RBA; Economics@Telstra. ‘lower for longer’ interest rate scenario to support the ST EL T 2016 and 2017 growth outlook. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 13 |
OUTLOOK FOR INFLATION & MONETARY POLICY Inflationary pressures in the short-run are likely to remain subdued given little sign that demand is improving and moving onto a sustainable basis. Even under a modest export-driven GDP growth scenario in 2016 and 2017 broader excess capacity is likely to persist given the patchwork nature of the economy. Consequently the Australian economy is starting this moderate growth recovery/upswing with more spare capacity than in previous upswings. This would limit upward pressure on the cost of labour, equipment and materials supporting the non-problematic inflation outlook. The monetary policy transmission mechanism in the current easing cycle continues to only slowly impact broader activity (ex. housing) given the difficulty in transitioning away from mining-led growth to broader-based growth. The downturn in mining capex is becoming more entrenched with limited offset from other parts of the economy. This is sustaining a pace of growth that remains unbalanced and lacking depth. In the second half of 2015, the RBA maintained a neutral/marginally dovish policy bias against the backdrop of sluggish domestic growth and cyclically benign inflation, a posture retained at its latest December meeting. While the RBA has not signalled an end to the rate cut cycle (the last 25bps rate cut was effected in May 2015), the likelihood that it will act on its conditional easing bias remains 50/50 according to some market analysts. Arguably, the RBA is unlikely to act on this bias unless the labour market deteriorates significantly. The commencement of policy normalisation in the US in December 2015 (albeit subject to a very cautious and gradual pace) will limit the need for additional monetary stimulus in Australia given the downward pressure likely to be exerted on the US$/A$ - a lower exchange rate acts as a de facto interest rate cut. Accordingly, the current stance of monetary policy is likely to be maintained over the coming year. It should be noted that the extent of policy normalisation that does eventuate in the US will be from a lower end-rate (0.0% to 0.25%) and be more gradual than likely effected in Australia. As such, the interest rate differential support for the A$ will only erode very gradually. Below are latest RBA forecasts for growth and inflation as per its latest Statement on Monetary Policy (SMP). GDP & CPI FORECASTS Latest Forecasts for year-ended ... RBA November 2015 SMP (actual) Dec. 2015 June 2016 Dec. 2016 June 2017 Dec. 2017 Real GDP (Q3, 2015) 2.5% 2.25% (2.5%) 2%-3% 2.5%-3.5% 2.75%-3.75% (3%-4%) 3.0%-4.0% (3%-4.5%) CPI inflation (Q3, 2015) 1.5% 1.75% (2.5%) 1.5%-2.5% (2.0%-3.0%) 2.0%-3.0% 2.0%-3.0% 2.0%-3.0% Underlying CPI (Q3, 2015) 2.2% 2.0% (2.5%) 1.5%-2.5% (2.0%-3.0%) 2.0%-3.0% 2.0%-3.0% 2.0%-3.0%
V4 Telstra (December 2015) (TLS forecasts in y/y% terms) PPT EL T | Real GDP 2.5% 2.4% 2.7% 3.1% 3.2% 3.4% A BET E CPI inflation 1.5% 1.8% 2.2% 2.6% 2.6% 2.7% U BL 3X4 Actuals and forecasts are in y/y% change terms. RBA November 2015 SMP. Downgraded RBA forecasts in red. Source: RBA; Table produced by Economics@Telstra. E Previous forecasts (where revised) in brackets. TLS forecasts presented elsewhere in the pack are FY averages. AT PL EM T A R While the short-term growth outlook has improved, the RBA ST EL T is likely to maintain a conditional easing bias in 2016. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 14 |
DETAILED MACROECONOMIC FORECASTS
V4 PPT EL T | A BET E U BL 3X4 E AT PL EM T A R ST EL T * All forecasts are year average % change unless otherwise specified. MACROECONOMIC FORECASTS| MARK KOOYMANS | JAN. 2016 15 |