economic & financial market outlook - finpro · – weak income growth the main downside risk...

FINPRO Presentation

Melbourne

CBA Global Markets Research

Economic & Financial Market Outlook

John Peters

Director, Economics

+(612) 9117 0112

25-26 May 2017

1

Overview

Global growth to remain sub-trend in 2017 & 2018

• advanced economies on a two-speed path – US

to outperform EZ, UK & Japan;

• Fed to raise rates very slowly – Two more ¼%

moves to 1¼%-1½% range in 2017;

• China facing a structural slowdown but policy

stimulus should see cyclical pick up (6.5%pa).

Economic policy and markets

• Central Banks to keep monetary policy settings

in easing bias mode (except USA) as world tries to

escape from deflation.

Key Global Risks

• Geopolitical Crisis e.g. escalating conflict in South

China Sea (China vs US & Asian Allies).

• US President Trump implementing mercantilist

agenda i.e. anti free trade measures etc.

• China economic/financial meltdown and or China

RMB devaluation

• Failure of quantitative easing in Europe & Japan

2

Our View (cont)

.

Australian growth transition proceeds unevenly - mining sector non-mining activity

– economy dealing with the mining capex downturn quite well at the aggregate level;

– resource exports delivering a significant growth boost;

– the consumer and non-mining exports are sources of upside risk;

– weak income growth the main downside risk – commodity prices and wages the keys;

– the economy’s potential growth rate has stepped down (to ≈ 2¾%pa).

– Budget’s increase in infrastructure spending will help boost growth in medium term

Economic policy and markets

– RBA has a neutral bias – RBA concerns about house prices will see the next policy move

a rate hike.;

– We see RBA lifting the cash rate by ¼% to 1¾% in QIV 2018.

– RBA preference for stimulus via lower AUD/Infrastructure spending – infrastructure

prospects improved but more fiscal policy action needed as there is plenty of “fiscal

space”. Net government debt <20% of GDP.

– AUD to remain under downward pressure as US Fed lifts rates and RBA stays benched.

3

CBA TEI & THE CASH RATE

3.8

4.4

5.1

5.7

6.4

7.0

Jul-97 Jul-99 Jul-01 Jul-03 Jul-05

-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa

* Deviat ion from trend

CBA forecasts envisage sub-trend

global growth continues, although

the pace of growth should lift.

Expected outcomes would provide

a relatively benign backdrop for the

Australian economy.

EM economies to outperform AE’s.

China should do better than the

consensus. Ending of recessions

in Brazil and Russia help.

Higher commodity prices to help

commodity and oil exporters.

Brexit to weigh on the UK and, to a

lesser extent, the EZ.

Expansionary policies may see the

US surprise on the upside.

CBA Global Economic Forecasts

CBA Global Growth Forecasts

2015(a)

2016(f)

2017(f)

2018(f)

World 2.9 2.7 3.2 3.4

United

States2.6 1.7 2.4 2.7

Japan 1.2 1.0 0.9 0.6

Eurozone 1.9 1.6 1.7 1.7

United

Kingdom2.2 1.9 1.6 1.6

Canada 0.9 1.2 2.1 2.1

China 6.9 6.8 6.8 6.6

India 7.3 7.2 7.0 7.6

New

Zealand2.5 3.2 3.5 3.6

4

The centre of economic gravity is shifting back east.

The speed of transition is exceptional (88 miles per year).

The shifting centre of economic gravity

Income Opportunities

5

Real Global GDP Growth by Economic Grouping

IMF forecasts Australian economy likely to post average annual GDP growth of 2.9%

between 2016-2020 – the highest among major advanced economies which are likely to

grow on average by 2% in 2016-2020.

Global Growth

China’s Growth

Australia’s Growth

Emerging Economies

Advanced Economies

6

Australia has completed 25 years of

uninterrupted economic growth.

The IMF worries about the downside

risks to its global growth forecasts:

– but those for Australia left unchanged

in latest estimates.

Public finances and the financial system

remain in reasonable shape:

– the AAA rating remains.

Policy makers are prepared to use their

remaining firepower if needed.

The generational benefits of the

resources boom and the Asian

emergence continue.

The economy is into its 26th

year of continuous growth

Australia In Perspective

-3

0

3

6

-3

0

3

6

1959/60 1971/72 1983/84 1995/96 2007/08

% %

AUSTRALIA: ECONOMIC GROWTH(annual % change)

25 years

7


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa


Australia In Perspective

Growth outperformance since the GFC ….. and from 2005!

8

Budget Overview

Key numbers Underlying cash deficit for 2017/18 put at

$29.4bn (1.6% of GDP) a reasonable

improvement on the deficit of $37.6bn (2.1%

of GDP) now expected in 2016/17.

Underlying cash deficit narrows from here,

achieving a small surplus of $7.4bn (0.4% of

GDP) by 2020/21.

The net operating balance reaches surplus a

year earlier, in 2019/20.

Net debt peaks (as a share of GDP) in

2018/19 at 19.8%.

The outcomes require rising revenues and

significant spending restraint.

-6

-3

0

3

-6

-3

0

3

1996/97 2001/02 2006/07 2011/12 2016/17 2021/22

FISCAL INDICATORS (deficit(-) / surplus(+))% of

GDP% ofGDP

Budget(f)

Underlying cash balance

NetOperatingbalance

9

Budget Overview

Key themes

Adherence to the medium-term fiscal strategy:

– Fiscal discipline will return Budget to surplus and then allow debt reduction.

Infrastructure:

– Large transport investment outlays will lift growth, jobs and productivity.

Housing affordability:

– Affordability will marginally improve by a limited lift in assistance to First Home Buyers,

grants to lift new supply, reductions in investor tax deductions and the “ghost tax”.

Company tax cuts:

– Lower company tax with higher write-offs will lift investment.

Education:

– Needs-based funding for all schools. Higher education students face higher fees.

Higher taxation

– Higher Medicare levy, foreigner investors to pay more, higher levy on foreign workers, a

new levy on banks.

10

Budget Overview

Infrastructure

Ramping up infrastructure spending is a major Budget theme.

The Government’s infrastructure plan involves investing $75 billion in transport

infrastructure between 2017/18 and 2026/27.

The aim is to boost growth and productivity.

The main infrastructure projects to get the go ahead are:

– Western Sydney Airport - up to $5.3 billion committed for the Badgerys Creek Airport,

commencing works in 2018;

– Inland rail - $8.4 billion to connect Brisbane with Melbourne;

– $1 billion infrastructure package for Victoria; and

– $1.6 billion for new Western Australian projects.

“Good” debt to be used to fund projects. The Government is currently using equity and

debt financing for a number of major infrastructure projects.

11

Budget Overview

New Revenue & Saving Measures

Over the next four years, four key revenue

and savings measures will save $20.1bn.

Measures include:

– Increase in the Medicare levy –

estimated to raise $8.2bn over the next

four years;

– Major bank levy – estimated to raise

$6.2bn over the next four years;

– HECS reform – estimated to save

$3.7bn over the next four years;

– Jobs for families package – estimated to

save $2.0bn over the next four years. 0

2

4

6

8

0

2

4

6

8

2017/18 2018/19 2019/20 2020/21

$bnBUDGET REVENUE & SAVINGS

($ per year)$bn

Jobs for families

HECS reform

Major bank levyIncreasedmedicare levy

12

Judging The Budget

Budget 2017 shows an upgrade to budget projections for the first time in a number

of years.

Nevertheless, the planned surplus for 2020/21, if achieved, would still represent the

most drawn out period of Budget repair in at least 60 years.

Is the medium-term fiscal strategy on track?

-6

-3

0

3

-6

-3

0

3

-2 0 2 4 6 8 10Years from peak deficit

FISCAL CONSOLIDATION(% of GDP)

Current(2009/10)

1975/76 1983/

84

% %

1992/93

13

Judging The Budget

The Budget projects wages growth to run at

2.5% in 2017/18. This looks credible.

But wages growth is forecast to

progressively accelerate and to be running

at 3.75% in 2020/21. This is an optimistic

assumption and represents a best case

scenario.

Wages outcomes have undershot Budget

forecasts over the past six years

Risks are skewed to the downside given

there is elevated slack in the labour market

and underutilisation (i.e. unemployment

plus underemployment) is high.

Are the wage assumptions plausible?

-6

-2

2

6

-0.4

0.0

0.4

0.8

Jun 00 Dec 04 Jun 09 Dec 13

%

Underemployment (LHS)

Wage momentum (reflects inflation and inflation expectations)

(LHS)

PRIVATE SECTOR WPI GROWTH%

Contributions to wages model relative to average

WPI fitted model (RHS)

WPI actual (RHS)

14

Judging The Budget

Does the focus on “good” and “bad” debt help?

The government has livened up the fiscal

debate by introducing the idea of “good”

and “bad” debt.

Beyond the theatrics, this distinction

should prove useful in shifting the debt-is-

evil mindset and allowing a sensible debate

on how to fund the day-to-day running

costs and longer-term infrastructure needs.

We have argued this proposition for a

while.

But the focus must be more than just

physical infrastructure. And not all infra-

structure is good. The quality of spending

matters.

The ratings agencies will focus on total

debt – good and bad.

0

100

200

300

400

500

0

100

200

300

400

500

2006-07 2009-10 2012-13 2015-16

$bn $bn

"Good"debt

GOVERNMENT DEBT(share of CGS on issue)

Source: CBA approx

"Bad"debt

15

Infrastructure: a missed opportunity – low interest rates?

Judging The Budget

Exceptionally low borrowing rates are an

attraction for more infrastructure

spending.

Borrowing and paying interest is an

effective way of sharing the cost of long-

life assets among the users over time.

16


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa


Ongoing deficits plus an infrastructure push mean Commonwealth net debt will climb

further to 19.5%of GDP in 2017/18 before peaking at 19.8%of GDP in 2018/19 thereafter

tracking lower to 17.6% of GDP by 2020/21.

This number will remain the focus of attention by policymakers, markets and rating

agencies.

Judging The Budget

Where is the debt?

0

50

100

0

50

100

Publicsector

Privatebusiness

Households

%

Common-wealth

%

AUSTRALIAN GROSS DEBT IN 2016(% of GDP)

Source: Treasury

States

Publiccorporations

-7

0

7

14

21

-7

0

7

14

21

1974/75 1984/85 1994/95 2004/05 2014/15

COMMONWEALTH BUDGET(% of GDP)% %

Budget(f)

NetDebt

Budgetbalance

17

Australian Economic & Financial Market Outlook- 2017 & 2018

` Direction of Risk

Global Growth World economy to grow by 3.4% pa.

Domestic Growth Local economy to grow by 2¾-3¼% pa.

Dwelling Investment Record low interest rates support housing activity.

Monetary Policy RBA has cut rates to record low 1½% - likely

cyclical low. No rates hikes likely in 2017 or HI 2018.

Underlying CPI CPI at 2.1%pa in QI2 017. QI Core CPI 1.8% pa.

RBA sees core inflation below 2-3% target until 2018.

Unemployment Unemployment is 5.7% - peaked for

cycle at 6.4% in early 2015. Unemployment to track

lower toward 5½% over 2017 & 2018.

AUD Outlook Trade mostly in US$0.71-US$0.78 zone in 2017 & 2018.

18

Australian Economy: GDP Grew 1.1% and 2.4%pa 2016 in QIV 2016

.

-15

0

15

30

-15

0

15

30

Sep-07 Sep-09 Sep-11 Sep-13 Sep-15

% %GDP(annual % change)

Consumer spending

Housing

Business Investment

Gov't

Net Exports(cont. to growth)

% ch Contrib. (ppts)

GDP

Of which:

Consumer spending 0.9 0.5

Dwelling invest. 1.2 0.1

Business invest. 1.6 0.2

Public spending 1.5 0.3

Inventories ~ -0.2

Gross National Expenditure

1.0 1.0

Imports 1.4 -0.3

Exports 2.2 0.5

19

GDP Growth: Drivers & Restraints

Tailwinds/Positive Drivers

Record low interest rates

Firm Population growth

Strong residential construction upswing

China: strong export volume growth

Lower AUD – 35% below MOST recent peak of USD1.10

Rising wealth (super, housing, equities)

Commodity prices have bottomed, now rising again (Terms of Trade)

20

GDP Growth: Drivers & Restraints

Headwinds/Restraints

Sharp contraction in mining investment

Weak non-mining investment

Soft business confidence

Relatively high household savings ratio

Record low wages growth

Diffident consumers

Global risks/fears

21

Australian Economy: GDP to Grow by 2¾-3¼% in 2017 & 2018

STRONGEST GROWTH OUTLOOK

• LNG projects, construction & exports. Iron ore exports.

• Mining operation, related equipment & services.

• Infrastructure – roads, rail, water, power, utilities.

• related construction, engineering & services.

• Housing construction, alts & adds.

• Household goods/ services, education & health services.

• Domestic & Inbound tourism.

MODERATE TO LOW GROWTH OUTLOOK

• Staples – groceries, food, hardware, communications

• Outbound tourism & internet buying, imported car sales.

• Cafes, restaurants etc;

• Defence.

• Commercial construction, rentals (?) & fit-outs

• Discretionary retail – clothing/shoes, cosmetics, a/visual.

• Manufacturing – high tech, mining, metals/wood related.

SECTORS WITH DOWNSIDE RISK

• Coal & iron ore mining –construction & exploration.

• Retail exposed to internet-based alternatives.

• Manufacturing – car industry, textiles & food groups.

22

No surprises…

Consumers still cautious

Consumer spending grew by a touch

under 3% (i.e. 2.9%) in 2016.

Spending has run well below the pre-

financial-crisis period where growth

around 4-5%pa was seen as normal.

The factors that produced that early

2000s period of robust growth –

sustained rises in wealth and leverage –

are unlikely to be repeated.

But other forces are at work that may see

consumers fill some of the gap left by

weaker than expected non-mining capex.

These include: ongoing jobs growth as

well as very low rates and rising house

prices, especially in Eastern State capital

cities.

-3

0

3

6

9

12

-3

0

3

6

9

12

Sep-98 Sep-01 Sep-04 Sep-07 Sep-10 Sep-13 Sep-16

CONSUMER INDICATORS

Saving ratio(rhs)

%pa %

Consumerspending

(lhs)

23

Dwelling starts are at record highs. The

≈225k starts in 2015 and 2016 were well

above “normal” levels around 155k.

A residential construction boom was the

inevitable outcome of the background

conditions in 2012:

– strong population growth;

– rising student and foreign investor

demand;

– pent-up demand from the earlier period

of underbuilding;

– falling mortgage rates lifting affordability

and increasing the attractiveness of

housing as an investment.

These drivers have now eased back.

An extreme boom

Growth Tailwinds Easing

100

150

200

100

150

200

Sep-86 Sep-95 Sep-04 Sep-13

Dwellingcommencements

'000 '000DWELLING CONSTRUCTION

(rolling annual total)

Buildingapprovals

24

Slower population growth means less housing demand at a time of rising supply.

The accumulated or pent-up demand for housing at the national level is now satisfied.

Slower population growth & satiated demand


0

150

300

450

0

150

300

450

1949/50 1964/65 1979/80 1994/95 2009/10

POPULATION DRIVERS'000 '000

Netmigration

Naturalincrease

-100

0

100

200

-100

0

100

200


Demand

Supply

'000

Pent-updemand

Excesssupply

CBA: HOUSING DEMAND & SUPPLY

'000

25


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa


The transition to non-mining led

growth is proceeding at varying

speeds.

A residential construction boom is

underway but there are fears the

boom is nearing a peak.

Non-mining capex has failed to lift

as planned.

And weak public infrastructure

spending has not helped economic

growth.

What’s Not

Missing links in the growth transition

60

80

100

120

60

80

100

120

Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

IndexIndex

Residentialconstruction

Non-miningcapex

Governmentcapex

TRANSITION DRIVERS(end 2012=100)

Source: ABS

26

CBA Forecasts

Dwelling commencements hit a record

high in 2016.

The peak is at hand but construction

activity to remain well above the 155k

“normal” level.

CBA dwelling starts forecasts:

– 2012: 153k

– 2013: 170k

– 2014: 202k

– 2015: 226k

– 2016: 232k

– 2017: 211k

– 2018: 193k


130

155

180

205

230

130

155

180

205

230

1998 2002 2006 2010 2014 2018

'000

Th

ou

san

ds

'000

Th

ou

san

ds

Average 2005-12 (ex 2010 stimulus

boost)

Boosted by government

stimulus package

DWELLING COMMENCEMENTS

CBA(f)

27

Housing Outlook

Issues & Drivers of Domestic Property Markets in 2017

■ Economic Growth + Positive for Property

■ Monetary Policy + + Record low interest rates positive for property

■ Underlying CPI + In check for now - very positive

■ Unemployment + To head down towards 5½% in 2016 & 2017.

■ AUD Outlook + Lower AUD makes real estate attractive to foreigners.

■ Population growth + Strong growth via immigration – unequivocal positive

■ Lucrative tax breaks + + Boosts local housing investor demand substantially.

■ RBA/APRA measures - - Macro-prudential measures capping investor loans

28

From “bubble” to “bust”?

Some New Challenges

For a bubble, rising dwelling prices

need to be accompanied by:

– rapid growth in housing credit over

short periods;

– easing lending standards; and

– expectations of ongoing price gains.

Equally, for a bust falling dwelling

prices need to be accompanied by:

– higher interest rates; and

– higher unemployment.

0

30

60

90

0

10

20

30


%%pa

Housingcredit(lhs)

HOUSING BUBBLE INDICATORS

House price expectations

(net % expecting higher prices, rhs)

New home loans with LVR>80%(% of total, rhs)

Low doc loans(% of total, rhs)

29

Building approvals easing in March (in January)

Global Markets Research | Economics: Update

Table 1: Residential Building Approvals – March 2017

ABS data sa NSW Vic Qld SA WA Tas ACT trend NT trend Aust

Level, no. 5089 5433 2853 876 1587 190 308 49 16484

%chg mth -25.8 -1.0 -21.3 0.3 -1.9 13.1 -7.2 -18.3 -13.4

% ann chg -18.4 -6.6 -37.2 -27.3 -18.9 10.5 -35.4 -60.2 -19.9

Ann total

‘000s

74.2 67.9 42.8 11.2 20.6 2.1 5.6 1.1 225.4

2

4

6

8

10

12

2

4

6

8

10

12

Jan-09 Jan-11 Jan-13 Jan-15 Jan-17

DWELLING APPROVALS(monthly, sa)

Multi-unit

Houses

'000 '000

0

20

40

60

80

0

20

40

60

80

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

RESID. BLDG APPROVALS(rolling annual total)

'000

SA

WA

QLD

NSW

VIC

ROA

'000

30

Labour Market Has Been Under Pressure As Economy Transitions!

Employment growth in Australia was estimated to be running at 1.6%pa) in April.

Jobs currently being created are part-time rather than full-time positions and this dynamic

underlines the continuing spare capacity in the labour market despite the low 5.7%

unemployment rate.

38

40

42

44

46

48

50

8

12

16

20

Jun-79

Jun-84

Jun-89

Jun-94

Jun-99

Jun-04

Jun-09

Jun-14

EMPLOYMENT TO POPULATION RATIO% %

Full-time employment

to population, rhs

Part-time employment

to population, lhs

0

5

10

15

20

0

5

10

15

20

Aug 79 Aug 85 Aug 91 Aug 97 Aug 03 Aug 09 Aug 15

%%

UnemploymentrateUnderemployment

rate

LABOUR FORCE(% of total)

Underutilisationrate

-30

0

30

60

90

-1.0

0.0

1.0

2.0

3.0

Jan-10 May-11 Sep-12 Jan-14 May-15 Sep-16

EMPLOYMENT GROWTH

Employmentgrowth

(3mnth average, rhs)

Employment growth %pa (lhs)

% '000

31 31

Australia: OZ Services Sector To Continue Expand Strongly In Years Ahead!

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Health

Prof serv

Mining

Prop & Bus

Education

EGW

Pers & oth

Gov admin

Transp

Cult. & Rec.

Rental

Admin

Accomm

Construct

Fin & insur

Wholesale

Agri

Communic

Retail

Manufact

% CHG IN SHARE 2007 to 2016

%

http://www.rba.gov.au/speeches/2014/images/sp-dg-251114-graph7.gif

http://www.rba.gov.au/speeches/2014/images/sp-dg-251114-graph7.gif

32

Inflation Outlook: Tame Prices Outlook: Comatose Prices

Inflation: core measures still very well behaved

■ Underlying inflation (the RBA target) was

running at 1.8%pa in QI 2017;

■ Headline inflation was 2.1%pa in QI 2017 – just

above low point of RBA’s 2-3% target.

■ Solid productivity growth is damping down unit

labour costs.

■ A lower AUD could ultimately pressure

tradables inflation higher over time.

■ Wages growth is 1.8%%pa.

■ Wages trends provide a major input to

structural inflation in the Australian economy.

There are clear compressions in wages

outcomes across industry sectors.

0

2

4

0

2

4


CONSUMER PRICES(annual % change)% %

Headlineinflation

(exc GST)

Underlyinginflation

0

5

10

15

20

25

0

5

10

15

20

25

Sep-72 Sep-80 Sep-88 Sep-96 Sep-04 Sep-12

CORE INFLATION(annual % change)

% %

33

Domestic inflation is mainly about

services – so labour costs are a key

driver of domestic inflation.

The RBA believes that wages growth

will remain very subdued on the back

of a softish labour market:

Wages growth KEEPS TRACKING

LOWER.

The slowdown in wages growth has

been broad based.

Not a great positive dynamic for a

pickup in consumer spending.

Wage Pressures Negligible – Very Positive For Domestic Inflation Outlook.

-1

0

1

2

3

1

2

3

4

5

Dec-97 Dec-01 Dec-05 Dec-09 Dec-13 Dec-17

WAGE PRICE INDEX(annual % change)

PublicPrivate

% %

Public - Private

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7


WAGES & CPI(annual % change)

CPI

% %

WCI

34 34

Projection of the global middle class by region, persons

Asia Pacific Growth Outlook

0

0.5

1

1.5

2

2.5

3

bn3.5

North Asi a Cent/South AfricaAmerica

EuropePacific America Middle

East

2010

2020

2030

Year

Global Middle Class Projections to 2030

35


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa



More students & more tourists

Leading indicators of education and tourism flows are already lifting.

-20

0

20

40

60

0

90

180

270

360

2002/03 2006/07 2010/11 2014/15

% ch'000

Number of visas issued

(lhs)

EDUCATION VISAS ISSUED

Growth in visas issued

(rhs)0.0

0.5

1.0

1.5

0.0

0.5

1.0

1.5

Jan 02 Jan 05 Jan 08 Jan 11 Jan 14

Mn

Th

ou

san

ds

Mn

Th

ou

san

ds

China

India

SHORT TERM OVERSEAS ARRIVALS(rolling annual total)

NewZealand

Japan

UK

36


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa


Chinese tourists spend the most.

They like to shop.


China at the top

- 3,000 6,000 9,000

China

Switzerland

Italy

France

Scandinavia

Taiwan

Canada

Other Europe

Korea

Hong Kong

Germany

Netherlands

UK

USA

A$

AVERAGE TOURIST SPEND(2014/15)

AVERAGE TOURIST SPEND(2014/15)

Source: Tourism Research Australia

0 500 1 000 1 500

China

UK

New Zealand

US

Japan

A$

AVERAGE SHOPPING EXPENDITURE(2014/15)

Source: Tourism Research Australia

37

Asia Pacific Growth Outlook

Areas of Great Potential for Australia in coming years and decades

Mining will remain robust as Asia continues to develop/industrialise/urbanise

New waves of strong growth/prosperity in the following areas:

Agribusiness;

Gas;

Tourism;

International Education;

Wealth Management

Health Services;

Transport Services;

Aged Care Services

5

7

9

11

13

15

5

7

9

11

13

15

1994 1999 2004 2009 2014

CHINA GDP GROWTH & TARGET(annual % change) %%

RealGDP

5-Year Average Outcome

Five Year PlanTarget

38

Summary

Consumer Housing Capex Trade Labour Market Inflation

VIC Consumer

spending growth

lifted solidly in

QIV 2016 and is

the strongest

across states.

Firm population

growth and

strong

employment

growth is

supporting

household

consumption.

Spending growth

should continue

to outperform

against most

states in 2017.

Total dwelling

commencements

expected to be

60k in 2017.

Strong population

growth and

foreign investor

demand are

supporting

dwelling prices.

But record levels

of residential

construction

means that there

is a risk, albeit

small, of

apartment

oversupply.

Capex in

Victoria picked

up in HII 2016

after a soft H1.

We expect

capex to

continue to rise

modestly over

coming quarters

driven by strong

population

growth and the

need to lift the

capital stock.

Major exports

include tourism,

education and

some agriculture.

Car

manufacturing

closures will

negatively impact

export growth

over 2017.

Consumer goods

imports to remain

firm on strong

population

growth.

Employment

growth is strong

but the

unemployment

rate remains

stuck near 6%.

Jobs growth has

been supported

by strong

population

growth. The

services sector

continues to

drive jobs

growth.

Mild downward

pressure should

be applied to the

unemployment

rate over 2017.

Melbourne

CPI running in

line with the

national rate.

Rental

inflation

should soften

as supply

increases.

Overall

inflation

pressures to

be contained

over 2017

39

Forecasts – Gross State Product

Gross State Product Forecasts

2015/16 2016/17 2017/18

% (a) (f) (f)

NSW 3.5 2.6 2.8

VIC 3.3 2.5 2.8

QLD 2.0 3.0 3.8

SA 1.9 1.3 2.3

WA 1.9 0.5 2.3

TAS 1.3 1.8 2.3

NT 2.7 1.0 5.0

ACT 3.4 2.0 2.8

AUST 2.8 2.1 3.4

-32.0

-16.0

0.0

16.0

32.0

0

4

8

12

16

NSW VIC QLD SA WA TAS NT ACT AUST

GSP(by state, chain volumes)% %

16/17annual growth (f)

(lhs)

share of economy(rhs)

17/18annual

growth (f)(lhs)

40

Demographics

Population growth rates are coming off peak levels in the mining States via lower net overseas

migration.

Interstate migration flows shows a lift in Vic and QLD and a fall in NSW and WA.

0.0

1.0

2.0

3.0

4.0

0.0

1.0

2.0

3.0

4.0


POPULATION GROWTH(annual % change)

Tas

Qld

WA

SA

%pa

NSW

Vic

%pa

-10

-5

0

5

10

15

-10

-5

0

5

10

15

Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Mar-15

INTERSTATE MIGRATION(quarterly)

Qld

WA

SA

NSW

Vic

'000s '000s

41

Forecasts – Employment

Employment Forecasts

2015/16 2016/17 2017/18

% (a) (f) (f)

NSW 3.8 0.6 1.7

VIC 2.7 3.4 2.0

QLD 1.6 -0.5 2.0

SA 0.5 1.5 1.0

WA 0.2 -0.7 0.5

TAS -0.2 -0.1 1.0

NT 1.2 4.0 1.0

ACT 1.1 2.2 1.5

AUST 1.1 1.1 1.7

-32.0

-16.0

0.0

16.0

32.0

0

3

6

9

12


Employment(by state)% %

16/17annual growth (f)

(lhs)

share of economy(rhs)

17/18annual

growth (f)(lhs)

42

Forecasts – Unemployment Rate

Unemployment Rate Forecasts

2015/16 2016/17 2017/18

% (a) (f) (f)

NSW 5.4 4.9 4.8

VIC 5.9 5.7 5.5

QLD 6.2 6.0 6.0

SA 7.2 6.7 6.3

WA 6.0 6.5 6.2

TAS 6.5 6.2 6.1

NT 4.3 3.7 4.0

ACT 4.6 3.7 3.7

AUST 5.6 5.6 5.3

2

5

8

2

5

8


Unemployment Rate(by state, annual average)% %

2016/17(f)

2017/18(f)

43

Forecasts – Consumer Price Index

0.0

0.5

1.0

1.5

2.0

2.5

0.0

0.5

1.0

1.5

2.0

2.5

Syd

ney

Melb

ourn

e

Brisb

an

e

Ade

laid

e

Pert

h

Ho

ba

rt

Da

rwin

Ca

nb

err

a

AU

ST

CPI(by capital city, annual average)% %

2016/17 (f)

2017/18(f)

Consumer Price Index Forecasts

2015/16 2016/17 2017/18

% (a) (f) (f)

Sydney 1.5 2.2 2.2

Melbourne 1.6 1.9 2.1

Brisbane 1.6 1.8 2.1

Adelaide 0.9 1.6 1.9

Perth 1.0 0.9 1.3

Hobart 1.4 1.8 2.0

Darwin 0.1 0.5 0.8

Canberra 0.7 2.0 2.3

AUST 1.4 1.8 1.9

44

Housing Lending

Lending growth to owner-occupiers has been softening in trend terms in recent months in most States. In annual terms,

lending growth to owner-occupiers has fallen solidly in NSW and WA. It is down modestly in Vic while it is up by 7.5% in QLD.

Lending growth to investors slowed considerably across all States in late 2015 and early 2016 due to some measures

introduced by a number of domestic banks to slow lending growth to investors. But it has started to accelerate in NSW and

Vic largely due to rate cuts in May and August.

0

5

10

15

20

0

5

10

15

20

Jan-08 Jan-10 Jan-12 Jan-14 Jan-16

OWNER-OCCUPIER LOANS(number, monthly)

NSW

VIC

QLD

WA

SA

TAS

'000s '000s

0

20

40

60

80

0

20

40

60

80

Dec-01 Dec-05 Dec-09 Dec-13

INVESTOR LOANS(moving annual total)

NSW

QLD

VIC

WA

SA

$bn $bn

45

Capital Expenditure

Capex in WA continues to decline due to the downturn in mining investment. This will continue over 2016/17.

The capex fall in QLD looks to be closer to completion.

Across the non-mining States, non-residential construction has trended higher and cushioned the impact of

falling engineering construction (particularly in NSW).

Government infrastructure commitments (particularly on road and rail infrastructure projects) make up the

majority of the engineering construction pipeline in the non-mining States.

0

5

10

15

0

5

10

15


STATES: CAPEX(real $ per qtr)

$bn $bn

WA

NSWVic

SA

Qld

0

1

2

3

4

0

1

2

3

4

Mar-00 Mar-06 Mar-12 Jun-00 Jun-06 Jun-12

NSW

SA

VIC

Non-res build. const. Engineering

NSW

$bn$bn

STATE BUSINESS INVESTMENT(Volumes, $bn, quarterly)

VIC

SA

TAS TAS

46

A Budget & Debt Emergency?

But public debt levels would remain low on any historical or global comparison.

A structural problem – not an emergency

PUBLIC DEBT(% of GDP)

-30

0

30

60

90

120

2007 2012 2017 2022 2027

% of GDP

2012

Advanced economies

Australian Commonwealth

47

Australian Government Debt Crisis? False Alarm.

48

Size of foreign agricultural land interests by source country top 10 (‘000 ha)

Agricultural land owned by foreigners – What’s the problem?

0

10

20

30

40

50

60

70

UnitedKingdom

UnitedStates

Netherlands Singapore China Philippines Switzerland Jersey Indonesia Japan

Foreign Owned Agricultural Land - Australia %

UK & US interests own 77% of Total

Chinese interests own <3%

49

Australia (since 1788) has relied heavily on foreign investment for national development.


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa


Historically US, UK &EU have provided

the large bulk of total foreign

investment in Australia. And continues

to do so (61.6% of total).

Asian investment (including from

China) as % of total is 16.6%.

Chinese investment = 2.3% of total

investment.

But Asian investment is likely to rise in

coming years.

Foreign Investment in Australia (Foreign Investment Review Board)

0%

7%

14%

21%

28%

35%

0%

7%

14%

21%

28%

35%

2001 2003 2005 2007 2009 2011 2013 2015 2017

UK (17.5%)

US (27.0%)

FOREIGN INVESTMENT IN AUSTRALIA (% of Total Investment)

China (2.3%)EU (ex. UK) (17.1%)

Total Asia (16.6%)(incl. China)

50

As inflation has declined, the RBA’s views on the “neutral” rate have DROPPED .

CBA view: neutral is NOW 3%.

What is neutral? – whatever the RBA says

The RBA & Monetary Policy

0

5

10

15

20

0

5

10

15

20

Sep-60

Sep-66

Sep-72

Sep-78

Sep-84

Sep-90

Sep-96

Sep-02

Sep-08

Sep-14

THE CASH RATE% %

0

5

10

15

20

25

0

5

10

15

20

25


CORE INFLATION(annual % change)

% %

51

Long Term AUD/USD Chart, 1983 to 2016.

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12 Jan-16

USD USD

52


3.8

4.4

5.1

5.7

6.4

7.0


-8

-5

-2

2

5

8

Cash

rate

(lhs)

CBA TEI*

(adv 9 mnths ,rhs)

%pa %pa


CBA Australian Economic Forecasts

Fiscal Years Calendar Years

2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2012 2013 2014 2015 2016 2017 2018

(a) (a) (a) (f) (f) (f) (a) (a) (a) (a) (f) (f) (f)

Economic Activity

Private final demand 1.6 1.2 0.8 1.0 2.1 2.3 4.4 1.4 1.5 1.0 0.7 1.6 2.2

Of which: Household spending 2.7 2.6 2.9 2.4 2.7 2.8 2.3 1.7 2.8 2.7 2.7 2.5 2.7

Dwelling investment 4.8 7.8 10.6 3.3 0.9 -2.5 -6.3 2.3 6.8 10.0 7.9 1.2 -0.4

Business investment -3.6 -6.4 -10.8 -6.0 0.1 3.2 16.1 -0.8 -4.9 -8.8 -10.1 -2.2 1.8

Public final demand 0.2 0.7 3.4 4.1 3.0 2.9 3.4 -1.6 0.3 2.3 4.8 3.0 3.0

Domestic final demand 1.3 1.1 1.4 1.7 2.3 2.5 4.1 0.7 1.3 1.3 1.6 2.0 2.4

Inventories (contrib to GDP) -0.4 0.3 -0.1 0.1 -0.1 0.1 0.0 -0.4 0.1 0.1 0.1 -0.1 0.1

GNE 1.0 1.4 1.3 1.8 2.2 2.6 4.1 0.3 1.3 1.3 1.7 1.9 2.5

Exports 6.0 6.7 6.7 7.3 6.6 6.2 5.7 5.8 6.9 6.0 7.6 6.8 6.5

Imports -2.2 1.2 -0.3 3.9 3.3 4.5 5.5 -2.2 -1.1 2.0 0.4 4.3 3.7

Net exports (contrib to GDP) 1.6 1.0 1.4 0.7 0.7 0.0 -0.2 1.5 1.5 0.7 1.4 0.5 0.0

GDP 2.6 2.4 2.7 2.0 3.1 3.1 3.6 2.1 2.8 2.4 2.5 2.4 3.3

Prices & Incomes

CPI 2.7 1.7 1.4 1.8 1.9 2.3 1.8 2.4 2.5 1.5 1.3 2.0 2.1

Underlying CPI 2.6 2.3 1.8 1.6 1.9 2.3 2.2 2.5 2.5 2.2 1.6 1.7 2.2

WPI 2.6 2.4 2.1 1.9 2.5 2.6 3.6 2.8 2.6 2.2 2.0 2.2 2.6

Nominal GDP 4.2 1.6 2.3 5.6 3.9 4.8 3.4 3.4 3.0 1.8 3.6 5.6 3.9

Real h/hold disposable income 3.1 1.6 1.4 1.0 2.0 2.5 1.3 2.2 2.5 0.7 1.8 1.2 2.3

Labour Market

Employment 0.5 1.2 2.2 1.2 1.7 1.8 1.2 0.9 0.7 1.9 1.6 1.4 1.8

Unemployment rate 5.8 6.2 5.9 5.8 5.5 5.2 5.2 5.7 6.1 6.1 5.7 5.7 5.3

External Accounts

Current Account: $bn -46.8 -58.9 -73.3 -15.5 -18.9 -15.4 -62.2 -49.8 -46.3 -77.3 -44.6 -11.2 -17.0

% of GDP -2.9 -3.6 -4.4 -0.9 -1.0 -0.8 -4.1 -3.2 -2.9 -4.7 -2.6 -0.6 -0.9

53

CBA Australian Financial Forecasts

USD versus

End Period Cash

Rate

90-day

Bank

Bill

180-day

Bank

Bill

3-year

Bond

10-year

Bond

AUD JPY EUR GBP NZD

Dec-10 4.75 5.04 5.23 5.30 5.55 1.02 81.1 1.34 1.56 0.78

Mar-11 4.75 4.93 5.01 5.07 5.49 1.03 83.1 1.42 1.60 0.76

Jun-11 4.75 5.03 5.07 4.78 5.21 1.07 80.6 1.45 1.61 0.83

Sep-11 4.75 4.92 4.68 3.61 4.22 0.97 77.1 1.34 1.56 0.76

Dec-11 4.25 4.48 4.43 3.07 3.67 1.02 76.9 1.30 1.55 0.78

Mar-12 4.25 4.34 4.33 3.45 3.98 1.03 82.9 1.33 1.60 0.82

Jun-12 3.50 3.49 3.44 2.39 3.04 1.02 79.8 1.27 1.57 0.80

Sep-12 3.50 3.37 3.32 2.35 2.99 1.04 78.0 1.29 1.62 0.83

Dec-12 3.00 3.07 3.01 2.67 3.27 1.04 86.8 1.32 1.63 0.83

Mar-13 3.00 3.10 3.12 2.86 3.41 1.04 94.2 1.28 1.52 0.84

Jun-13 2.75 2.82 2.84 2.78 3.76 0.91 99.1 1.30 1.52 0.77

Sep-13 2.50 2.60 2.59 2.86 3.81 0.93 98.3 1.35 1.62 0.83

Dec-13 2.50 2.64 2.66 3.00 4.24 0.89 105.3 1.37 1.66 0.82

Mar-14 2.50 2.70 2.73 3.05 4.08 0.93 103.2 1.38 1.67 0.87

Jun-14 2.50 2.71 2.72 2.69 3.54 0.94 101.3 1.37 1.71 0.88

Sep-14 2.50 2.74 2.78 2.74 3.48 0.87 109.7 1.26 1.62 0.78

Dec-14 2.50 2.77 2.83 2.10 2.74 0.82 119.8 1.21 1.56 0.78

Mar-15 2.25 2.23 2.22 1.66 2.32 0.76 120.1 1.07 1.48 0.75

Jun-15 2.00 2.15 2.26 2.08 3.01 0.77 122.5 1.11 1.57 0.68

Sep-15 2.00 2.18 2.26 1.78 2.61 0.70 119.9 1.12 1.51 0.64

Dec-15 2.00 2.38 2.48 2.04 2.88 0.73 120.2 1.09 1.47 0.68

Mar-16 2.00 2.29 2.45 1.88 2.49 0.77 112.6 1.14 1.44 0.69

Jun-16 1.75 1.96 2.12 1.49 1.98 0.75 103.2 1.11 1.33 0.71

Sep-16 1.50 1.74 1.97 1.45 1.91 0.77 101.4 1.12 1.30 0.73

Dec-16 1.50 1.82 2.05 2.04 2.77 0.72 117.0 1.05 1.23 0.69

Mar-17 1.50 1.80 2.00 1.95 2.70 0.76 111.4 1.07 1.26 0.70

Jun-17 1.50 1.60 1.70 2.15 3.00 0.75 110.0 1.08 1.28 0.70

Sep-17 1.50 1.60 1.70 2.15 3.05 0.76 109.0 1.10 1.29 0.71

Dec-17 1.50 1.60 1.70 2.20 3.10 0.77 108.0 1.12 1.30 0.72

Mar-18 1.50 1.60 1.70 2.30 3.20 0.78 107.0 1.14 1.31 0.73

Jun-18 1.50 1.60 1.70 2.40 3.30 0.78 106.0 1.15 1.31 0.74

Interest Rates Exchange Rates

For

ecas

t

54

The Budget & Politics

Will the Budget navigate the Senate political shoals?

The Coalition Government has 29 seats - well short of the 39 seats needed for an overall

majority (of total 76 Senate seats) needed to pass legislation or support motions in Senate.

The votes of Labor (26 seats) and Greens (9 seats) combined (ie 35 seats) are not sufficient

to block or pass legislation, or support motions.

Since the July 2016 double dissolution election, the balance of power rests with an

increased pod of populist independents and minor parties. Complicating matters has been

the extinction of PUP at the election and its replacement by 4 One Nation Party Senators.

To this political potpourri add 3 Xenophon Senators, Australian Conservatives’ Bernardi

and Independent Senators Lambie, Hinch and Gichuhi (previously Family First) and you

have a very mixed bag of 12 Senators with conflicting ideas and ideologies. So

negotiations on contested Budget Measures will be complex.

If Labor and Greens oppose Coalition legislation, 10 of the 12 crossbench Senators will be

required to support a Coalition bill or motion. Up to 9 of these 12 cross benchers are

needed to defeat non-government motions including motions of disallowance.

Like all Federal Budgets since 2008, a substantial degree of negotiation or horse trading

will likely be required to ensure key government fiscal measures are “greenlighted” by the

upper house. The stance of the Independents on many issues is not yet clear and remains

a “work in progress”.

55


45th Senate Makeup as at May 2017

Coalition 29

Australian Labor Party 26

Australian Greens 9

One Nation 4

Nick Xenophon Team 3

Liberal Democrats 1

Jacqui Lambie Network 1

Derryn Hinch’s Justice

Party1

Australian

Conservatives 1

Independent Gichuhi

(prev. Family First) 1

Total Senate 76

Will the Budget navigate the Senate political shoals?

Source: Hawker Brittan:

How the Senate has voted

Apr’17 The government has had some success

in navigating legislation through the

Senate.

56


Where they Stand? Likely Senate Crossbench positions on key issues

Labor Greens XenophitesOne

Nation

Other 3

Indep.

Australian

Conservative

Party

Liberal

Democrat

Party

Infrastructure spending

• Badgery’s Creek, Sydney

Airport

yes yes yes yes yes yes ?

• Brisbane – Melbourne

Inland Rail yes yes yes yes

probable

yesyes ?

• Energy- Snowy River

Scheme 2.0yes yes yes yes yes yes ?

Health

• Medicare package/

changes

• Medicare levy changes

yes

yes

yes

yes

yes

yes

yes

yes

?

?

?

?

?

?

• PBS package/new

measures.yes yes yes yes yes yes yes

Black Economy

• Measures to claw tax from

black economy


57

The Budget & Politics (cont)


Labor Greens Xenophites One NationOther 3

Indep.

Australia

Conserv.

Party

Liberal

Democrats

Personal Tax

• Removal of

Temporary Budget

Repair Levy

yes ? ? ? ? yes yes

Education Reforms

• University funding

cuts

• 7.5%lift in student

fees & changes in

student debt

repayment rules

• Gonski Mark II:

rejigged school

funding

no

no

probable

yes

no

no

probable

yes

no

no

probable

yes

?

?

yes?

?

?

?

yes

yes

yes

yes

yes

?

Housing Affordability

• Negative gearing

measures to limit

deductibles

• First home super

saver scheme

yes

yes

yes

yes

yes

yes

yes

?

yes

?

yes

?

yes

?

58

The Budget & Politics (cont)


Labor Greens Xenophites One

Nation

Other 3

Indep.

Australian

Conservativ

e Party

Liberal

Democrat

Party

Welfare Savings

• Tightened compliance

measures

no no no? yes no yes yes

Company Tax Cuts

• Large Companies

(turnover>$50mn)

no no no no ? yes yes

Bank Tax/Levy

• 4 Majors & Macquarie

on deposits/liabilities

>$250k

yes yes yes yes ? ? ?

Skilled Aust. Funds Levy yes yes yes yes ? ? ?

Tax measures

• re multinational

companies.


59

Judging The Budget

Concessions: from little things, big things grow

Tax expenditures are potential tax lost via

concessional treatment of items, like super

contributions or earnings, or the GST-free

status of fresh food, health and education.

Tax revenues are $124bn lower per year

(outlined in Table A1 of Statement 5) via:

– Superannuation concessions ~ $34bn

– CGT exemption on housing ~ $62bn

– GST widening ~ $20bn;

– Negative Gearing ~ $4bn ;

– Family Tax Benefit – untaxed ~ $2bn

– Diesel fuel rebate costs ~$5bn.

Incremental changes to concessions and

GST exemptions can make significant

contributions to revenue growth and fiscal

stability over coming years.

0 5 10 15 20 25 30 35

Super'n, earnings concess.

Super'n, contrib'n concess.

CGT discount on home

CGT exemption on home

GST fresh food

GST education

GST health

GST financial services

FTB parts A&B

TAX EXPENDITURES 2017/18f(for one year, $bn)

Total $124bn

$bn

60

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