SME Networking Evening: An Economic Update

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An insight into the current economic outlook for Australia’s small and medium businesses. The presentation will focus on what the economic indicators predict for Victoria, Australia and World
economies in 2012 and recent developments in the global and domestic financial markets.

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SME Networking Evening: An Economic Update

  1. 1. Welcome to the Australian Institute ofCompany Directors SME Networking Evening: An Economic Update Tuesday 21 February 2012Speaker:• Rob Brooker, Head of Australian Economics & Commodities, National Australia Bank
  2. 2. Important informationDISCLAIMER: “[While care has been taken in preparing this material,] National AustraliaBank Limited (ABN 12 004 044 937) does not warrant or represent that the information,recommendations, opinions or conclusions contained in this document (“Information”) areaccurate, reliable, complete or current. The Information has been prepared for disseminationto professional investors for information purposes only and any statements as to pastperformance do not represent future performance. The Information does not purport tocontain all matters relevant to any particular investment or financial instrument and allstatements as to future matters are not guaranteed to be accurate. In all cases, anyoneproposing to rely on or use the Information should independently verify and check theaccuracy, completeness, reliability and suitability of the Information and should obtainindependent and specific advice from appropriate professionals or experts.To the extent permissible by law, the National shall not be liable for any errors, omissions,defects or misrepresentations in the Information or for any loss or damage suffered bypersons who use or rely on such Information (including by reasons of negligence, negligentmisstatement or otherwise). If any law prohibits the exclusion of such liability, the Nationallimits its liability to the re-supply of the Information, provided that such limitation is permittedby law and is fair and reasonable. The National, its affiliates and employees may hold aposition or act as a price maker in the financial instruments of any issuer discussed withinthis document or act as an underwriter, placement agent, adviser or lender to such issuer.”2
  3. 3. International economic outlookGlobal growth slowing to below trend (not a recession)European financial instability continuing > United States > Japan • Modest to moderate growth • Recovery from tsunami slowing • Generally improving • Higher ¥ & global trade • Risks from housing market, slowdown fiscal tightening, deleveraging > China > Europe • Growth slowing but still • Germany, France weak but fastest growing major holding up economy • Periphery in deep recession • Risks from property market from austerity programs • Continuing financial instability3
  4. 4. Growth driven by emerging economiesChina now 13% of world economy GDP: Sep qtr 2007 = 100 Developed world Emerging world 150 140 Global liquidity crisis Global liquidity crisis 130 120 110 100 90 80 70 Dec-05 Dec-07 Dec-09 Dec-11 Dec-05 Dec-07 Dec-09 Dec-11 US Japan Euro area China India Brazil Sources: OECD Main Economic Indicators, CEIC, NAB4
  5. 5. Financial market volatility subsidingBut risks of contagion remain from periphery Europe &banking vulnerability CBO SPX volatility index (VIX): daily 100 Liquidity panic 80 Sovereign debt Sovereign debt panic mark I panic mark II 60 40 20 0 Jan-07 Sep-07 May-08 Jan-09 Oct-09 Jun-10 Mar-11 Nov-115 Source: Datastream, Chicago Board Options Standard & Poors
  6. 6. Fixing EuropeNeed for Greek debt to be brought under controlInvolves „effective‟ but not technical default > Current negotiations involve large private sector banks accepting up to 70% write-off on Greek bonds • Continues to use bailout funds from European Fiscal Stability Facility - Next large Greek bond repayment due 20 March • Avoids technical default that would spark potential global contagion & insurance claims • Greece to implement austerity program > Risk of GFC Mark II now reduced by ECB LTRO > New fiscal compact signed by 25 nations: stricter fiscal rules > Permanent European Stability Mechanism (€500 billion) from July 2012 > Additional support from IMF (€150 billion provided by Europe) > Prospect of Greek election in April adds to uncertainty
  7. 7. Implications for AustraliaDepends on containment of financial shockNot out of woods yet > Peripheral European default with no contagion: • Short-term exchange rate instability against $US and Euro • Potential short-term share market instability • Otherwise not large given our connection with China > Contagion: • International capital markets plunged into disarray • Impacts spilling into China and India - Although China has policy flexibility • Commodity prices vulnerable • Much more serious scenario for Australia
  8. 8. Why China is importantIndustrialisation & urbanisation Relative economic development> China and India represent 40% of GDP per capita: % of US global population 100> China now accounts for half of world steel production 80> China GDP per capita (relative to 60 US) now same as Japan in 1950 40> India perhaps a decade behind 20> Ongoing industrialisation & 0 urbanisation is shifting global economic balance of power to east 1950 1960 1970 1980 1990 2000 2010 and south Asia China India Korea Japan> Potential demand for global Sources: Maddison database resources
  9. 9. China‟s development strategyEconomic reform will be needed in China> Competitiveness preserved by • Management of exchange rate • Subsidies to state-owned enterprises • Directed bank lending at low interest rates> Leads to imbalances • Rising foreign reserves, high investment, low consumption> Capitalist sector still at formative stage • Property rights & contract enforceability issues> US continuing to exert pressure on China to reform • Trans-Pacific Partnership initially excludes China • Resuming military presence near South China Sea
  10. 10. Global economic forecastsGDP growth rates IMF 2010 2011 2012 2013 weight United States 20 3.0 1.7 2.3 3.1 Euro zone 15 1.8 1.5 -0.6 1.3 Japan 6 4.5 -0.9 2.8 2.1 China 13 10.4 9.2 8.0 8.2 Asian Tigers 4 7.7 4.3 3.6 3.9 Global total 5.2 3.7 3.2 3.7 Australia 2 2.6 2.1 3.7 3.410
  11. 11. Australian economic outlookMining, $A and re-inventing the economyIs there a fraction too much friction?> Labour & capital pouring out of manufacturing into mining & services • Chinese demand keeping commodity prices & $A high • Heavy investment expected in mining & infrastructure • Will eventually underpin minerals export volumes> Consumers cautious • Discretionary spending weak & saving rates high • Retail, wholesale & small transport under pressure> Inflation under control & interest rates „neutral‟ 11
  12. 12. Re-inventing the Australian economyManufacturing has lost almost 150,000 jobs in 3 yearsBut more than offset by gains in mining, health & education Employment Change since March 2008 000 000 200 200 Health care & social assistance 150 150 100 100 Mining 50 50 Education & training 0 0 -50 -50 Manufacturing -100 -100 -150 -150 2008 2009 2010 2011 2012 Sources: ABS; NAB
  13. 13. Wide & persistent sector variationsManufacturing, retail, wholesale, construction weakMining, transport, finance, services strong Business conditions Business conditions (net balance, s.a) (net balance, s.a)60 6040 4020 20 0 0-20 -20-40 -40 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Manufact Constn Retail Wholesale Mining Transp Finance Rec & pers Source: NAB business survey Source: NAB business survey 13
  14. 14. Business confidence stableBusiness sentiment buffeted by Europe, $A, interest rates Business confidence Business confidence (net balance, s.a) (net balance, s.a)20 2010 10 0 0-10 -10-20 -20 Mfg Const Retail Wsale Mining Transp Finance Rec/pers Nov-11 Dec-11 Jan-12 Nov-11 Dec-11 Jan-12 Source: NAB business survey Source: NAB business survey 14
  15. 15. Regional variations accentuatedStill multi-speed economyWA generally leading on conditions & confidence Business conditions Business confidence (net balance, s.a.) (net balance, s.a.) 20 20 10 10 0 0 -10 -10 -20 -20 NSW VIC QLD SA WA AUL NSW VIC QLD SA WA AUL Nov-11 Dec-11 Jan-12 Nov-11 Dec-11 Jan-12 Source: NAB business survey Source: NAB business survey 15
  16. 16. Hard commodity prices still robustFurther evidence that global outlook is still solidDespite recent fluctuations in spot iron ore prices Metals prices $US Energy & iron ore prices $US Index Sep qtr 2007 = 100.0 Index Sep qtr 2007 = 100.0 300 150 200 100 50 100 0 0 Sep-07 Sep-09 Sep-11 Sep-13 Sep-07 Sep-09 Sep-11 Sep-13 Aluminium Copper Lead Oil Thermal coal Nickel Zinc Iron ore Metal coal Sources: Datastream, NAB forecasts Sources: Datastream, NAB forecasts16
  17. 17. Consumer cautionStructural shift in household saving behaviour Household saving rate (%) 14 12 10 8 6 4 2 0 -2 -4 Sep-99 Sep-01 Sep-03 Sep-05 Sep-07 Sep-09 Sep-11 Trend Seasonally adjusted Source: ABS17
  18. 18. RBA more cautious about outlook50/50 chance of cut in MayExchange rate may edge down Cash rate (end of quarter) Exchange rate (end of quarter) (% p.a.) ($US/$A) 8 1.1 1.0 6 0.9 0.8 4 0.7 2 0.6 Dec-06 Dec-08 Dec-10 Dec-12 Dec-06 Dec-08 Dec-10 Dec-12 Actual Forecast Actual Forecast Source: ABS, NAB forecasts Sources: ABS, NAB forecasts18
  19. 19. Australian economic forecasts 2011-12 2012-13 2011 2012 2013 GDP 3.3 3.5 2.1 3.7 3.4 Employment 0.6 1.2 1.6 0.7 1.6 Unemployment rate* 5.2 5.2 5.2 5.2 5.0 CPI underlying 2.2 2.6 2.6 2.7 2.6 (ex carbon)** RBA cash rate* 4.00 4.00 4.25 4.00 4.25 $US/$A* 1.02 0.96 1.02 1.01 0.95 * at end of period; ** through-year growth19
  20. 20. 20Thank you for your attendance. SME Briefing Creating a Culture of Innovation Thursday 22 March 2012 NFP Briefing Crisis Management Thursday 8 March 2012 We look forward to seeing you at the next event.

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