Australia has outperformed most advanced economies during the global financial crisis. As a result Australia’s unemployment rate is very low by international standards after increasing by much less than originally feared during the GFC. Australia’s outperformance reflects starting point of strong growth ahead of the GFC and also a strong policy response – both fiscal and monetary as well as sound financial systems.
There were a number of factors that assisted Australia during the GFC – some of the key factors that assisted in the recovery included the strong growth in Australia ahead of the GFC and also a sound financial system. The Australian financial system came through the GFC in relatively good shape compared to the US and European systems. But a key driver was a the v-shaped recovery of our trading partners from slowdown that turned out to be quite shallow. This compares a much sharper downturn in the OECD.
This growth outperformance by our trading partners reflects an important structural change with Australia’s economy is now increasingly tied to Asia. The share of Australian trade with Asia has increased from around 40% to closer to 70% over the last few decades. This is mainly due to a sharp increase in trade with China, which is now our number 1 trading partner. While China gets most of the attention, ASEAN countries are also a significant trading partners Importantly this structural change in our trading partners means the G7 outlook is becoming less meaningful and that the focus of policy makers in Australia will increasingly on the Asian region. < \svrau100qsm01.oceania.corp.anz.comCFSEC GRPECshareMACROChartsBOP & TradeAustralia's trade partners.xls>
\Svrau020mps02.oceania.corp.anz.comCFSIBSHAREAMC equestsWarren's Charts 1_7_2010.xls Another important factor has been the evolution of commodity prices and the positive outlook given the rise of China and the broader Asian region as the engine of world growth. Copper prices are a good indicator of broader demand for commodities and there is a long history of prices which show that cycles which can last for many years. Australia is in a fortunate position to benefit from this on-going demand through the supply of not just copper but a broad range of commodities including coal, iron ore and LNG.
This trend of rising commodities has also contributed to a very strong investment outlook. This chart shows there are now 17 projects in excess of $1 billion underway across Australia. Some surveys suggest that $100 billion worth of projects will be started in the next 12 to 18 months. Most of these are in Queensland and Western Australia. The Government’s Resources Tax is creating some uncertainty for the mining industry but we don’t expect a big impact on investment in the short-term, but could dampen investment after 2012.
\svrau100qsm01.oceania.corp.anz.comCFSEC GRPECshareMACROChartsBus investmentCapex Survey chart.xls \svrau100qsm01.oceania.corp.anz.comCFSEC GRPECshareMACROForecastingGDPBusiness investmentEngineering construction.xls Just to quantify the impact in the shortun, we can see that mining investment is expected to rise 40% next year with a 20% increase in investment overall. We can already see the start of this huge pipeline of work in engineering construction series which measures investment in mining infrastructure such as roads, pipelines and site preparation.
Australia’s Challenges in a Commodity Boom Grant Turley Senior FX Strategist 15 September 2010
Australia has outperformed most advanced economies during the global financial crisis Sources: Bloomberg and ANZ Unemployment rates
Australia was assisted by a sharp rebound in trading growth compared to the OECD
Australia and the world For Australia, the G7 outlook is less and less meaningful - China is now our number 1 trade partner Source: ANZ, RBA ASEAN 6: Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam Other Asia: HK & Taiwan Australian two-way trade weights World Asia
Industrial commodity prices move in long wave (25-40 year) cycles Real copper price Sources: Bloomberg; ANZ.
Australia is now poised for an investment boom The proposed Resource Super Profits tax is impacting investment planned for 2012-19 ABARE Advanced Mining and Energy Projects Source: ABARE
Infrastructure requirements and mining drive an investment boom Investment is expected to surge in late 2010 Sources: ABS and ANZ Engineering construction Capital expenditure expectations
Inflation has not been to the bottom of the target band in 10 years The current forecast leaves little room for upside surprises Sources: RBA and ANZ RBA’s Core Inflation Forecasts
Australia has been supported by the GFC fiscal response Now we are looking for a transition to the private sector Sources: ANZ, ABS Australian GDP
The household sector is likely to be the casualty of this mining boom because the capacity-constrained Australian economy can’t accommodate all sectors firing Retail sales Building approvals
In August the RBA expected the savings rate to rise The Q2 GDP figures revealed a further decline in the saving rate Household savings ratio Sources: ABS
Population growth vs. dwelling completions Annual dwelling completions (rhs) Annual population gain (lhs) Strong population gains drive an undersupply of housing This will put a floor under house prices and construction but upward pressure on rents and inflation ‘ 000 ‘ 000 Sources: ABS, ANZ Economics and Markets Research
Market expectations do not reflect policy risks Even modest further tightening is not priced-in Source: ANZ & Bloomberg RBA cash rate and market expectations
Australia - “Making room for the mining boom MkII” <ul><li>The Australian economic outlook is strong </li></ul><ul><ul><li>We forecast growth to accelerate to 3¾ - 4% next year </li></ul></ul><ul><ul><li>The new peak in the terms of trade is set to drive an investment and export boom. </li></ul></ul><ul><ul><li>In the short-term, it could be a bumpy ride as the economy transitions from public to private demand drivers </li></ul></ul><ul><ul><li>A disruption to global credit markets and a hard landing in Chinese property are the main external risks </li></ul></ul><ul><li>Inflation has more than likely bottomed in 2Q10 </li></ul><ul><ul><li>We are on cusp of investment boom and capacity is already stretched in product and labour markets </li></ul></ul><ul><ul><li>Strong demand and limited supply flexibility points to a pick up in inflation </li></ul></ul><ul><li>Households must accommodate the investment boom </li></ul><ul><ul><li>With a boom in mining investment ‘locked in’ a subdued household is required </li></ul></ul><ul><ul><li>This prospect seems unlikely with falling unemployment and rising wealth </li></ul></ul><ul><ul><li>The RBA will need to step in to restrain the household </li></ul></ul><ul><li>The return of the two-speed economy </li></ul><ul><ul><li>Divergent prospects for different sectors suggest the split between the resource and non-resource States may sharply widen </li></ul></ul>
Australian dollar outlook If commodity prices remain elevated so too will the Australian dollar Source: Bloomberg, ABS and ANZ Terms of trade and A$TWI
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