A global economic and market outlook
Dr Chris CatonFebruary 2014
2
QE matters– the Fed buys bonds, investors buy stocks
Euro-area government bond spreads (to German bonds)
3
The two that matter continue to improve(long-term bond yields (%))
4
5
Emerging markets have massively underperformed
Source: Datastream
Developed Index Asian Emerging Markets Index
Asian Emerging Markets Index (RHS)
World Developed Index (LHS)
6
2014 Growth Forecasts (%)
Month of Forecast
F-13 M-13 A-13 M-13 J-13 J-13 A-13 S-13 O-13 N-13 D-13 J-14
Australia 3.1 3.0 3.0 3.0 2.8 2.7 2.6 2.6 2.6 2.7 2.7 2.7
New Zealand
2.9 2.9 3.0 3.0 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.2
US 2.8 2.8 2.7 2.7 2.7 2.7 2.6 2.7 2.6 2.6 2.6 2.8
Japan 1.2 1.2 1.3 1.5 1.5 1.5 1.5 1.7 1.7 1.6 1.6 1.7
China 8.2 8.0 8.0 7.9 7.8 7.6 7.5 7.4 7.4 7.5 7.5 7.5
Germany 1.7 1.7 1.7 1.6 1.6 1.6 1.7 1.7 1.7 1.7 1.8 1.8
UK 1.7 1.6 1.6 1.6 1.7 1.7 1.9 2.1 2.2 2.3 2.5 2.6
“World” 3.3 3.2 3.2 3.2 3.2 3.1 3.1 3.1 3.1 3.1 3.0 3.1
Source: Consensus Economics
7
Financial Market Forecasts
Now (12 Feb)
End-Jun2014
End-Dec2014
AUD/USD 0.903 0.85 0.82
Official cash rate (%) 2.50 2.75 3.00
10 Year Bond yield (%) 4.18 4.30 4.60
ASX 200 5285 5400 5700
8
The Australian Dollar and US Trade Weighted Index
Source: Datastream
64
84
103
122
142
161
180
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
0.40
0.52
0.64
0.76
0.88
1.00
1.12Index AUD/USD
US TWI inverted (LHS)
AUD/USD (RHS)
The volatility of the currency has been quite low
9
10
Real GDP growth in Australia and the US
Source: Datastream
-5
-2.5
0
2.5
5
7.5
10
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
USAustralia
Year to % change
The terms of trade should continue to decline (2010/11 average=100)
11 Source Deloitte Access Economics
12
Unemployment has risen significantly
Source: ABS
8500
9000
9500
10000
10500
11000
11500
12000
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5000’s %
Employment (LHS)
Unemployment Rate (RHS)
Two speeds or not two speeds, that is the question
13
14
Australian Inflation has risen
Source: ABS
0
1
2
3
4
5
6
7
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
Headline CPI Underlying inflation
%
BT Forecasts
GST Effect
Household financial ratios
15
House Prices - Australia v Brisbane
Source: ABS
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13100
150
200
250
300
350
400
450
500
550
600
650
700 Index (1987 = 100)
We are very expensive compared with the United States
17
But not otherwise!
18
19
House prices are rising everywhere, particularly in Sydney and Melbourne
20
House price growth in the past decade has been moderate
21
Gross Domestic Product
Source: ABS
-3
-2
-1
0
1
2
3
4
5
6
7
8
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Qtly growth Year-to growth Non-farm year-to growth
%
BT Forecasts
GST Effect
Queensland’s problem—the bigger the binge the bigger the hangover?
22
Dwelling approvals are on the rise (but GC is down a long way from its peak)
23
Brisbane office vacancy rates very high. Gold Coast recovering slowly.
24
25
Australia simply doesn’t have a government debt problem (general govt debt as a proportion of GDP)
26 Source: Consensus Economics
GDP Inflation
Australia 2.9 2.6
New Zealand 2.6 2.2
United States 2.5 2.2
Norway 2.5 1.9
Canada 2.2 1.9
Sweden 2.2 1.6
United Kingdom 2.1 2.6
Switzerland 1.8 1.1
Spain 1.7 1.9
Germany 1.4 1.9
France 1.4 1.7
Netherlands 1.3 2.1
Japan 1.3 1.3
Eurozone 1.2 1.8
Italy 0.8 1.8
Global Medium-Term Economic Growth and Inflation Prospects (2013-2023)
27
Asia-Pacific Medium-Term Economic Growth and Inflation Prospects (2013-2023)
GDP Consumer Prices
India 6.8 6.4
China 6.7 2.9
Indonesia 5.6 5.1
Philippines 5.4 3.8
Malaysia 5.1 2.8
Thailand 4.6 3.0
Singapore 4.2 2.7
Taiwan 3.5 1.9
Hong Kong 3.5 3.2
South Korea 3.4 2.6
Australia 2.9 2.6
New Zealand 2.6 2.2
Japan 1.3 1.3
Source: Consensus Economics
28
Australian Share market Performance – ASX200
Source: Bloomberg
1000
1500
2000
2500
3000
3500
4000
4500
5000
5500
6000
6500
7000
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
29
The Australian market is now close to fair value
30
There’s no sign of a bubble in global markets
31
We are in almost perfect sync with the United States market
32
A comparison with previous “big ugly bears”
33
Summary
Tapering of quantitative easing in the US has added to market volatility.
Eurozone debt is a serious issue; it will drag on for a long time but is unlikely to end in catastrophe.
We will always worry about China.
The Australian economy should continue to experience only moderate growth. The mining investment boom has ended but the downside may not be too steep.
The cash rate probably won’t fall again.
The exchange rate may continue to fall.
The Australian share market is close to fair value.
34
Disclaimer
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