1. travel
2. tourist destinations
3. australia and new zealand

GDP +3% in 2012
World growth firmer
AUD peaking?
Australian Industry Group
April 2012
Melbourne
www.research.commbank.com.au
Michael Workman
Senior Economist
Commonwealth Bank of Australia - (612) 9118 1019
[email protected]
1
Important Information
This advice has been prepared without considering your objectives, financial situation or needs, and
before acting on the advice, you should consider its appropriateness to your circumstances.
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services undertakes financial transactions with many corporate entities in Australia. This may include any
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a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and a
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prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of
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2
Economic Forces in Conflict
Relative Prices/
High AUD
- More low cost imports
- Wary consumers
- Job losses
- Split sharemarket
Resources boom & Asia
Household shifts
- Record investment & profits
- Exports boom
- Jobs growth
- Skilled labour shortages
- Population growth
-Strong income growth
- Caution lifts savings
- Weak discretionary retail
- Weak borrowing
- Debt reduction
Macro outlook
Monetary Policy
Structural change
- Manufacturing shrinks
- Retail changing
- Domestic tourism shrinks
- Sharemarket?
Growth
Profits
Investment
Jobs
Household spending
Fiscal Policy
Technology change
- Internet drives change
- Technology costs high
- Productivity gains
- Industry winners
3
Our View
 Asian trading partners to outperform advanced economies.
– US in weak recovery, but positive for shares.
– China’s growth in 8 to 9% range, iron ore & coal demand still firm, prices lower.
– EU debt problems are source of volatile markets.
– Composition of global growth still good for Australian exports in 2012 & beyond.
 Australia’s economy mixed, GDP expected to be +3% in 2012!
–
–
–
Asian skew, capex boom and policy flexibility are growth supportive;
30% of economy OK…. but 70% has weak profitability & cost (ie jobs) focus;
High AUD & slower consumer spending are major downside risks.
 Economic policy and markets
– RBA likely to cut again because of low inflation and wobbly EU markets.
– Bond & swap yields to rise a little, the curve to steepen, spreads to remain wide;
– AUD to edge higher as world growth outlook turns positive.
4
Australia: 2012 GDP: +3%
STRONGEST GROWTH OUTLOOK
AUSTRALIA: GDP
%
% change
%
5
5
CBA
forecast
4
3
Annual
2
4
3
2
Qtr
1
1
0
0
-1
-1
Mar '12f = 0.7%
-2
Jun-09
Jun-10
Jun-11
Jun-12
Iron ore, coal & LNG mining, construction & exports.
Mining construction, equipment & services.
Infrastructure – roads, rail, water, power, utilities.
-related construction, engineering & services.
Outbound tourism & internet buying.
-2
Jun-13
MODERATE TO LOW GROWTH OUTLOOK
Staples – groceries, food, hardware
Cafes, restaurants, communications
Health, defence & education.
Commercial construction, rentals (?) & fit-outs
Discretionary retail – clothing/shoes, cosmetics, a/visual.
Manufacturing – metals & wood related.
New car sales. Housing construction, alts & adds.
SECTORS WITH DOWNSIDE RISK
Retail exposed to internet-based alternatives
Manufacturing – local car industry, textiles
Domestic & Inbound tourism. Some education.
5
Jobs growth by sector.
JOBS GROWTH BY SECTOR
'000s
-60
-40
-20
0
20
40
Accomm
 High AUD
Transp
Retail
 Weak consumer spending
Wholesale
Manufact
Cult. & Rec.
Admin
60
 Jobs losses are in sectors
exposed to:
Year to
FEB.2012
+22k
 Eg tourism, transport,
manufacturing, retail
Construct
EGW
Prof serv
Communic
Agri
Fin & insur
Education
PBS
Rental
Pers & oth
Gov admin
 Gains are in
 Resources
 Government
 Spending on services:
health
Mining
Health
6
China’s growth – drives Australia
%pa
CHINA, US & AUST - GDP
$b
%pa
16
16
80
GOODS EXPORTS MARKETS
(annual)
80
China
12
Greater
China
12
60
8
$bn
(Original)
12
12
WA
10
10
8
Japan
40
4
STATE EXPORTS
$bn
60
8
Australia
$b
40
4
8
6
Qld
ASEAN
NSW
4
20
0
0
-4
Jun-95
-4
Jun-99
Jun-03
Jun-07
Jun-11
4
20
EU
Vic
North America
US
6
2
India
0
Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
0
0
Jan-03
2
SA
Jan-05
Jan-07
Jan-09
0
Jan-11
Australia’s links to China
China is number 1 trading partner - takes 25% of national, & 70% of WA’s goods exports.
About half of Australia’s exports of $255bn were from WA.
China’s GDP growth is 8%pa, and 2nd largest economy in the world.
Demand for energy & raw materials is strong. Drives inter-Asian trade.
7
The 3 Speed Economy
STATE GROWTH
Index
Index
Sep 08 = 100
120
120
STATE BUS. INVESTMENT
Index
140
Sep 08 = 100
Index
140
WA
STATE RES. CONSTR'N
Index
130
130
120
120
110
110
100
100
100
90
90
90
80
80
70
70
60
Mar-08
130
Sep 08 = 100
Index
130
VIC
120
WA
120
110
VIC
110
110
NSW
NSW
110
100
VIC
WA
90
NSW
100
100
QLD
80
90
Mar-08
Mar-09
Mar-10
Mar-11
90
Mar-12
70
Mar-08
QLD
Mar-09
Mar-10
Mar-11
80
70
QLD
Mar-09
Mar-10
Mar-11
60
Mar-12
 3 speeds by region….. and by sectors. The high AUD adds to the mix.
 WA , Qld & NT will have fastest growth rates in next few years. Then SA.
 Vic, NSW & Tas will have growth rates at or below the national figure.
8
Australian Interest Rates – one more rate cut likely.
%
10
9
8
INTEREST RATES 2006 - 2012
10
Basic
mortgage rate
9
Variable mortgage
rate
7
4
3
8
7
3 yr
swap
6
5
%
6
5
3 mth
Cash
4
■
RBA cut cash to 4.25%.
■
Markets see 2 more rate cut by end year.
■
Australian 3 month bills down to 4.0% in 2012.
■
Markets see weak US growth, EU recession.
■
Cash rate has averaged 5.1% since 2000.
3
2
2
Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
9
Australian Swap Rates – higher.
%
SWAP RATES, 1992 to 2012
11
%
11
Averages:
1992 to 2012
Cash 5.5%
3mth 5.6%
5 yr swap 6.5%
10
9
%
6.0
SWAP RATES - 2011 to 2012
%
6.0
10
9
8
5.5
8
5 Yr Swap
7
7
6
6
3mth
5.0
5.0
5yr
4.5
5
5.5
RBA cash
4.5
5
90 Day Bills
4
4
3
Cash
2
Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
■
■
■
4.0
4.0
3
2
3yr
3.5
Jan 11
3.5
Jul 11
Jan 12
Swap rates rising as US growth outlook improves. Supply & inflation issues emerging.
Flow of news has improved on the global growth outlook.
Risks remain in EU………..with occasional “bursts of pessimism” likely.
10
Interest Rate Forecasts
90 Day
Interest rate Cash Rate Bank Bill
Sep-11
4.75
4.92
Dec-11
4.25
4.48
Mar-12
4.25
4.36
Jun 12(f)
4.00
4.15
Sep 12(f)
4.00
4.15
Dec 12(f)
4.00
4.10
Mar 13(f)
4.00
4.10
3 Year
Swap
4.10
3.95
4.26
4.25
4.40
4.40
4.50
5 Year
Swap
4.45
4.30
4.47
4.50
4.65
4.65
4.70
10 Year
Swap
4.80
4.60
4.85
4.85
4.95
4.95
5.00
10 Year
Bond
4.24
3.72
4.05
4.25
4.40
4.40
4.50
11
Retail Spending: Ability v Willingness
 Ability to spend is strong
– Household incomes, up 6%pa. Wages & jobs growth helps.
– Spending on services rising twice as fast as retail spending.
– Overseas travel up 15% on a year ago.
– Retail spending is about 30% of ALL spending on goods and services.
 Willingness is in doubt
– Consumer caution prevails.
– Driven by lots of bad news from EU & US.
– Jobs market performance will be the major positive in 2012.
– Appears to be differences between women & men about outlook.
 Spending leakages were also important
– Utilities costs, rents, petrol & interest rates up.
– Bank deposits up.
– More overseas travel, less inbound tourism. More internet sales (5% of total?).
– Higher AUD means falling goods prices.
12
Consumer Caution – deposits up 15%pa to $650bn
CREDIT CARD ACTIVITY
(annual % change)
$bn
700
DEPOSIT ACCOUNTS
$bn
700
10
10
8
8
600
600
6
500
500
%
20
SAVING RATIO
%
20
Households
15
15
10
10
5
5
0
0
-5
-5
Balances
6
4
4
400
2
300
0
200
-2
100
400
Avge bal.
per card
2
Total
Accounts
0
Corporates
300
200
RBA
-2
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
100
Sep-72 Sep-80 Sep-88 Sep-96 Sep-04
 Consumers using credit cards less….debit cards more.
 Higher cash deposits shows precautionary savings rising.
 Saving ratio at 10%, highest since 1980s.
13
Consumer Shift: Tourism & AUD/USD
AUD/USD & DEPARTURES
USD
1.1
'000s
700
AUD/USD, rhs
 650k/mth go O/S as high AUD makes
overseas travel relatively cheap.
650
1
 Means less retail spending here.
600
0.9
 Departures are 45% higher than 2009,
Departures, lhs
550
0.8
arrivals are flat.
Arrivals, lhs
500
450
Jan-09
0.7
 Trends could continue if AUD stays high.
0.6
Jan-10
Jan-11
Jan-12
14
Jobs slowing………..unemployment rate to rise.
EMPLOYMENT
%
'000
'000
8250
3750
Full-time
(lhs)
%
8
7
7
3500
Part-time
(rhs)
3250
6
6
Australia
5
5
4
4
WA
3
3
7500
Jan-09
3000
Jan-10
8
SA
8000
7750
UNEMPLOYMENT RATES
Jan-11
Jan-12
2
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
2
Jan-12
 Jobs growth has stalled over the past year.
 Unemployment rate likely to rise towards 5.7% over 2012.
15
But PAYE Still Firm
JOBS & PAYG TAX
(% annual chg)
%
16
%
5
ABS & RBA
PAYG, lhs
8
3
0
1
Jobs, rhs
-8
Jan 06
-1
Jan 08
Jan 10
Jan 12

PAYE tax collections stronger than ABS jobs trends………..something has to give.

Jobs trends have not been as poor as expected in mid 2011.
16
House prices lower. Lending weak.
HOUSE PRICES
$000s
CBA median house price
$000s
900
900
12
'000s
VIC. HOUSING LOANS*
$bn
4.0
Syd
800
800
700
700
Perth
600
10
Value, rhs
600
Adel
Bris
500
500
8
400
2.0
400
Number, lhs
Hob
Melb
300
300
200
Mar-04
200



3.0
Mar-08
Mar-12
Dec-06
Dec-10
* ex refinancing, 3mth avge
6
Jan-08
1.0
Jan-09
Jan-10
Jan-11
Jan-12
Median house price for Perth, on CBA data, was $600k, in Dec 2011.
Perth house prices down 7% on a year ago.
Arrears levels rising in areas of higher unemployment eg SE Qld.
17
Shares….ASX underperforms.
SHARE MARKETS
2000
S&P 500 & ASX200
8000
1500
4800
S&P500
(lhs)
1500
1400
4550
1300
4300
6000
S&P 500, lhs
1000
4000
1200
ASX200
(rhs)
ASX200, rhs
500
2000
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
1100
11-Oct-11
4050
3800
6-Dec-11
31-Jan-12
27-Mar-12
 Share markets wobbly. ASX200 expected to be 4375 in June 2012.
 Mining & energy & finance sectors should perform better than others.
 But credit markets still difficult…..inter-bank risk premiums rising again.
18
The AUD Cycles 1983 - 2012
Average Annual Trading Range
AUD/USD, 1983 - 2011: 13USc
1.2
USD
1.1
1.0
0.9
0.8
12 December 1983:
AUD floats at
USD0.9090
0.5
3 May 06 5.75
Oil prices hit
2 Aug
6.0
$142/bbl
6 Nov
6.25
Mineral
AUD at 30 year
8 Aug 07 6 .50
commodity
high of 1.108,
7 Nov
6.75
prices at
27 July 2011.
5 Feb 08 7.0
50yr highs AUD collapses
5 Mar
7.25
as USD rises on
3 Sep 08 7.0
24 Nov 07
Sub-prime crisis
8 Oct
6.0
Rudd Gov’t Commodity
5 Nov
5.25
elected
prices
3 Dec
4.25
RBA lifts
slump.
USD
weaker
4 Feb 09 3.25
rates
Fed
cuts
rates
8 Apr
3.0
Oct 09 to Nov 10
7 Oct 09 3.25
4 Nov
3.5
Commodities
US & EU
US sub-prime
2 Dec
3.75
& shares
growth data
Problems
3 Mar 10 4.0
recover
weakens, USD
Aug 07 on
7 Apr 10 4.25
strongly
up.
3 May 10 4.5
RBA cuts
3 Nov 10 4.75
rates on ! Nov
1 Nov 11 4.50
&
6 Dec 11 4.25
Oil prices
USD falls6as
Dec. 2011
hit $75/bbl
9 Oct ‘04
Fed does
Aug 07
Howard Gov’t
Quantitative
re-elected
March ‘03
Easing, Mar 09
recover
RBA lifts
S&P
April 99
rates 5 Nov ‘03 RBA cuts
June 1997:
Y2K related upgrades
& 3 Dec.’ 03
Asia crisis begins,
rates
selling
Australia
20 October 1987:
Commodity
THB floats
3 Sep 08, to
Oct 99
to AAA
Stockmarket crash26 February 1992:
prices rising
RBA lifts rates 3 times
8 Apr 09
RBA lifts
in Australia
One Nation
Oil
prices
from 4.75% to 7.5%,
rates: Nov USD
Statement
IMF packages for Asia:
September 1986 :
spike until
from July to Dec 1994.
Markets rally, Jan 98 1999,
First downgrade of Australian
weakens
Gulf War 2
Commodity
Feb,
April,
Lehman Bros
sovereign debt rating
as US
ends 10
prices rising
May &
collapse Sep
shares
April 2003
August
08, US Fed
July 1998:
fall
Uridashis
October 1993:
2000
cuts to zero,
28 July 1986:
Metals prices reach
lift AUD
Metals prices reach
Dec 08.
Oct ‘02
Keating changes
record lows. AUD low
record lows. AUD low
WTC 11 Sep 01
AUD low of
Moody’s upgrades
foreign investment
of USD 0.5815
of USD 0.6410
AUD
dip,
USD0.6010
Australia to Aaa
rules and RBA raises
Japan in recession:
0.4840
on 27 Oct
rediscount rate to 16%.
RBA lifts
S&P Sovereign Debt
JPY & AUD weaken
08
AUD hits record low of
rates in May
Rating changes
USD 0.5712 during day
& June ‘02
Russian debt crisis
AA+ 6 Dec 86
and closes at
AUD falls to USD0.5075
Ruble devalued
AA 24 Oct 89
USD0.6155
Gold falls to USD273/ozas USD rises.
AA+ 17 May 99
AUD low of USD0.5530 US stockmarkets fall.
AAA 17 Feb 03
Oil hits $37/bbl
on 28 Aug ‘99.
AUD low of USD0.4775
LTCM on 23 Sept 98
on 2 April 2001
14 February 1989:
Keating comments
talk down AUD
5 March
1983
1 Dec 1984
AUD peaks at USD0.9653
11 July 1987
on 16 March 1984
24 March 1990
AUD floats 12 Dec83 at USD0.9090
13 March 1993
5 March 1983:
16 March 1996
Labor Party wins election.
3 Oct 1998
8 March 1983:
October 1989 :
10 Nov 2001
AUD devalued
Second downgrade of
9 Oct 2004
10% to USD 0.8549 Sovereign debt rating
24 Nov 2007
World bond
Strong USD & AUD
21 August 2010
markets sell-off on
Kuwait
Oil
falls
US inflation fears
invaded by
prices
March 1996
Rising interest
Iraq Aug 90 spike in
Howard
rates and
Gulf War I
May 1999
Gov’t
higher commodity
S&P Upgrade
elected
prices
August 1991:
6-8 February 1985:
Interest rates cut
Failed Russian
MX Missile Crisis
15 times from
Interest rates cut
coup
Jan 1990 to Dec 1993,
5 times from
from 18% to 4.75%
Commodity prics
July 1996 to July 1997,
19 December 1991:
falling from June 97 from 7.5% to 5.0%
Keating becomes
Prime Minister
Commodities
0.7
0.6
RBA cash rate changes
14 May 1986
Keating “Banana
Republic”
comment on radio
Commodity prices
at record lows
0.4
Jan-84
Jan-87
April 2012
Jan-90
Federal election dates:
Jan-93
Jan-96
Jan-99
Jan-02
1.2
USD
Jan-05
Jan-08
1.1
1.0
0.9
0.8
0.7
0.6
0.5
0.4
Jan-11
19
AUD Forecasts – to USD1.10 in 2012
Exchange rat AUD/USD AUD/JPY AUD/EUR AUD/GBP AUD/NZD AUD/CHF
Sep-11
Dec-11
Mar-12
Jun 12(f)
Sep 12(f)
Dec 12(f)
Mar 13(f)
0.97
1.02
1.04
1.08
1.08
1.09
1.10
74
79
86
92
97
100
105
0.72
0.79
0.78
0.85
0.82
0.81
0.80
0.62
0.66
0.65
0.69
0.68
0.67
0.67
1.27
1.31
1.27
1.27
1.26
1.24
1.22
0.88
0.96
0.95
1.03
0.99
0.98
0.99
20
AUD/EUR & AUD/JPY.
AUD/JPY & AUD/USD
110
JPY
USD
GBP
AUD/GBP & AUD/EUR
EUR
1.10
AUD/GBP, lhs
AUD/JPY, lhs
90
1.00
0.65
0.80
0.55
0.70
0.90
0.80
AUD/EUR, rhs
70
0.70
AUD/USD, rhs
50
Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
0.45
0.60
0.35
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
0.50
0.60
0.50
 AYD expected to be near AUD/EUR0.75 and AUD/JPY78 in mid 2012.
 EU and UK have weak growth outlooks with official interest rates at 1.5% & 0.5%.
 JPY expected to stay firm against the JPY in AUD/JPY80 to 85 range.
21
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the subject company of this report. The compensation of analysts who prepared this report is determined exclusively by research management and senior management
(not including investment banking). No inducement has been or will be received by the Group from the subject of this report or its associates to undertake the research or
make the recommendations. The research staff responsible for this report receive a salary and a bonus that is dependent on a number of factors including their
performance and the overall financial performance of the Group, including its profits derived from investment banking, sales and trading revenue.
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