outlook for asia1,532 1,723 1,966 2,211 2,225 2,292 2,893 2,895 ... south africa 20 532 korea 12...

Outlook for Asia Amy Auster

Head of International EconomicsMarch 2006

0

1

2

3

4

5

6

7

88 90 92 94 96 98 00 02 04 06 08

Real GDP % annual change ANZforecasts

0

1

2

3

4

5

6

7

88 90 92 94 96 98 00 02 04 06 08

Real GDP % annual change

Real GDP

ANZforecasts

Note: GDP based on 50 countries aggregated using ‘purchasing power pa rity’ weights. Inflation based on CPI in the G7 countries aggregated on a PPP basis.Sources: National agencies, Datastream, OECD and Economics@ANZ.

Global annual growth

30 year average

G7 annual headline CPI

30 year average

Global economy has enjoyed strong growth, low inflation

15 year average

- 2 -

As developing countries have contributed more

Contribution to global growth

Source: Datastream, Economics@ANZ

0

10

20

30

40

50

60

1980s 1990s 2000s

USEuropeJapanDeveloping countries

% of total

-10

0

10

20

30

40

50

60

1980s 1990s 2000s

Brazil Russia India

China Korea Indonesia

% of total

- 3 -

0

1,000

2,000

3,000

4,000

5,000

1995 1998 2001 2004 2007 2010 2013

0

10

20

30

40

50

60

1995 1998 2001 2004 2007 2010 2013

Asia is set to be the global leader in the long term

PopulationMillions of people

Real GDPUS$ trillion

Rankings of economies by GDPRanking and GDP in US$ billions, PPP terms

GDPRankGDPRank

20

19

18

17

16

15

14

13

12

11

10

9

8

7

6

5

4

3

2

1

2015

750

788

883

920

938

959

1,352

1,531

1,532

1,723

1,966

2,211

2,225

2,292

2,893

2,895

4,722

6,763

16,816

17,795

1,02614Spain

1,06413Mexico

57018Turkey

62917Taiwan

63816Australia

55919Thailand

51223Poland

86315Indonesia

53220South Africa

1,09912Korea

1,5529Brazil

1,6948Italy

2,4985Germany

1,8256United Kingdom

1,8117France

1,58510Russia

4,0093Japan

3,6024India

12,3321United States

8,0912China

2005

Developing country population

Industrialised country population

Developing country GDP

Industrialised country GDP


- 4 -

China’s integration has been a key driver

81 85 89 93 97 '01 '05

10

15

20

25

Share of global exports

0

2

4

6

8

10

12

14

Jan-90

Sep-93

May-97

Jan-01

Sep-04

Share of global economy

% of total (market basis)

USA

Germany

Japan

China

Source: Datastream, IMF

% of total (PPP basis)

0

5

10

15

20

25

0

5

USA

EU

Japan

China

India

- 5 -Source: World Trade Organisation, Datastream, Economics@ANZ

0

20

40

60

80

100

120

140

160

180

1950 1962 1974 1986 1998

1995=100

Volume

Value

World merchandise exports

Effect #1: Competition depresses CPI

Producers competing globally

China’s deflationary impact on manufactures exports…

-4

-2

0

2

4

6 % YOY

Core CPI

ULC PPIUSA

-2

0

2

4

6

92 96 00 04

%

Core CPI

ULC

PPIAustralia

- 6 -

20

60

100

140

00 01 02 03 04 05 06 07

US$ / tonne

Coking coal

Steaming coal

Effect #2 – Commodity price inflation

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

98 00 02 04 06

Annual change (mn bbl/day)

Global oil demand

36% of increase due

to China

20-year average

-150

-100

-50

0

50

100

150

200

250

96 98 00 02 04

Annual change (mtoe)

Global coal demand

78% of increase due

to China

20-year average

0

20

40

60

80

00 01 02 03 04 05 06 07

US$/bbl

Futures curve

WTI oil prices

Source: BP Energy Handbook, 2005, Bloomberg, Economics@ANZ

Coal prices

- 7 -

Oil consumption has further to grow in Asia

Oil consumption per capita

Source: BP Energy Handbook, 2005

- 8 -Sources: IMF, BIS, Bloomberg

Effect #3 - Swings in savings / investment balances

Stock of inbound FDI Total foreign private capital flows

0

20

40

60

1990 2003 2015Developed Developing

% of GDP

0

100

200

300

400

1996 1998 2000 2002 2004

All developing countries Asia ex-Japan

25

30

35

40

1990-99

2000-02

2003 2004 2005-15

Saving Investment

Asia ex-Japan S/I rates

US$ bn

% GDP

0

1

2

3

4

90-99 00-02 2003 2004

% of GDPJapan net lending

- 9 -Sources: IMF, BIS, Bloomberg

0

1

2

3

4

5

'98 '99 '00 '01 '02 '03 '04

US$ tr

Leading to low long term yields

Global FX reserves

China and Japan hold 47% of all global FX reserves

0

5

10

15

20

88 92 95 99 03 06

% per annumAustralia

10-yr gov’t bond yield

0

5

10

15

88 92 95 99 03 06

% per annumUS

30 year average

15 year average

30 year average

15 year average

- 10 -

05

101520253035

98 99 00 01 02 03 04 05

%

05

101520253035

98 99 00 01 02 03 04 05

%

05

101520253035

98 99 00 01 02 03 04 05

% AUD/USD

Sources: Bloomberg; Economics@ANZ

USD/EUR USD/JPY

AUD/JPY

1-month currency options current pricing against long-term average

12.5%

10.5% 11.0%

Effect #4 – Financial market stability

05

101520253035

98 00 01 02 03 04 05

%

10.6%

- 11 -

China’s growth revision puts it into #6 on MER basis


Nominal GDP, US$ bn Real GDP growth

0

3

6

9

12

Q11995

Q21997

Q31999

Q42001

Q12004

Q22006

Q32008

% YOY

New series

Old series

1,6401,4952003

1,0839911999

1,0199461998

1,3241,1752001

1,1981,0802000

1,4531,5582002

2004

1997

1996

1995

1994

1993

666602

621620

855824

721693

951897

1,9311,702

New seriesOld series

- 12 -

Growth driven mostly by investment, less by exports

Sources: UN Statistics Database, Economics@ANZ

Gross fixed capital formation

10

15

20

25

30

35

40

45

50

1970 1978 1986 1994 2002

Contribution to GDP (%)

US

AustraliaJapan

China

India

0

5

10

15

20

25

30

35

40

45

50

1970 1978 1986 1994 2002

Contribution to GDP (%)

US

Australia China

Germany

Japan

India

Exports

- 13 -

Whereas consumption has played a lesser role

Sources: UN Statistics Database, Datastream, Economics@ANZ

Household consumption % GDP

40

45

50

55

60

65

70

75

80

85

90

1970 1978 1986 1994 2002

Contribution to GDP (%)US

Australia

Japan

China

India

0

5

10

15

20

25

Jan-04 Jul-04 Jan-05 Jul-05

% YOY, 3mma

Retail sales

- 14 -

Local gov’ts have been significant investment source

FAI by ownership

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1981 1987 1993 1999

State-owned units Collective unitsIndividual units Others

% of total

FAI by source of funds

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1981 1987 1993 1999State budget Domestic loansForeign funds Self-financeOthers

% of total


- 15 -

0

5

10

15

20

25

30

95 96 97 98 99 00 01 02 03 04 05-10

-5

0

5

10

15

20

25$US billion

Exports (LHS)

ex-factory prices (RHS)

yoy%

China’s machinery & electronics

0.00.5

1.01.52.02.5

3.03.5

4.0

95 96 97 98 99 00 01 02 03 04 05-10

-5

0

5

10

15

20$US billion

ex-factory clothing prices (RHS)

Exports (LHS)

yoy%

0102030405060708090

100

95 96 97 98 99 00 01 02 03 04 05-8

-4

0

4

8

12

16$US millionMotor vehicles & parts

exports (LHS)

ex-factory prices light industry (RHS)

yoy%

0200

400600800

1000

12001400

1600

95 96 97 98 99 00 01 02 03 04 05-20

-10

0

10

20

30

40

50$US million

Average steel products prices (RHS)

Exports (LHS)

yoy%

China’s light industry

China’s steel productsChina’s textiles

Allowing economies of scale to be achieved


- 16 -

Real exchange rate vs USD

60

80

100

120

140

160

180

200

22087 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Jan 96=100

China

Japan

Korea

On both charts an upward movement indicates an appreciation of t he ‘foreign’ currency against the ‘home’ currency (USD or JPY). Any implied % shift is measured as a prop ortion of the home currency. Sources: Datastream, Economics@ANZ

Exchange rate may have helped, but not much since ‘93

- 17 -

China’s cost comparisons – crude steel

Average global cost of production: US$228/tonne

• Labour US$20.09

• Energy & reductants US$ 72.14

• Ferrous raw materials US$88.76

• Other US$47.98

China cost US$227/tonne

• Labour US$9.01 (44% of global)

• Energy and reductants US$76.44 (105% of global)

• Ferrous raw materials US$99.99 (112% of total)

• Other US$42.07

Russia US$149/ tonne Brazil US$171 / tonne Australia US$191 / tonne

S Korea US$226 / tonne Japan US$252 / tonne USA US$265 / tonne

France US$282 / tonne

But labour is 10% or less of production cost ….cost of capital is missing from this equation

•Cheap money

•Land breaks

•Tax breaks, duty exemptions

•Energy subsidies – oil and electricity

Source: AME publications

- 18 -

Authorities re-focusing on quality and equity of growth

Sources: Datastream, China Statistical Yearbook, Economics@ANZ

Retail sales

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000

1978 1983 1988 1993 1998 2003

RMB, annual

Disposable per capita income, urban family

Net per capita

income, rural family

Personal income

0

5

10

15

20

25


% YOY, 3mma

Urban

Rural

- 19 -

But this doesn’t change investment outlook

0

10

20

30

40

50

60

70

80

Feb-03 Nov-03 Sep-04 Jul-050

10

20

30

40

50

60

70RMB bn

Annual growth (RHS)

% YOY

Cumulative FAI

Fixed asset investment

0

10

20

30

40

50

60

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06

% YOY 3mma

Industrial production

Exports

Exports and IP


- 20 -

Little question that there is significant excess capacity

-6

-4

-2

0

2

4

6

8

Oct-02 Sep-03 Aug-04 Jul-05

% YOY

Construction ex-factory price index

Manufacturing ex-factory price index

CPI

Lack of pricing power

Sources: Datastream, IMF, Economics@ANZ

113.3

59.1

48.0

47.5

121.7

M2 / GDP

4.7

98

7.8

1.1

4.7

M2 / reserves

112.5

76.7

65.1

24.1

40.0

Credit / GDP

%

620India

36,627Japan

40,050USA

14,120Korea

1,324China

GDP per capita

US$

High liquidity

- 21 -

External surpluses symptomatic of regulatory distortions

FDI

0

200

400

600

800


5

10

15

20

25US$ bn % YOY

M2 (RHS)

Int'l reserves (LHS)

Trade balance

Sources: Datastream, IMF, Economics@ANZ

Reserves and money base

-5

0

5

10

15

Jan-90 Jan-94 Jan-98 Jan-02 Jan-06

US$ bn

0

5

10

15

Jan-00 Jan-02 Jan-04

US$ bn

- 22 -Sources: Bloomberg, Economics@ANZ

7.70

7.80

7.90

8.00

8.10

8.20

8.30

8.40

8.50

Jan-05 Feb-05 Apr-05 Jun-05 Jul-05 Sep-05 Nov-05 Dec-05 Feb-06Cross ceiling US$ ceiling Spot rate US$ floor Cross floor

US$/CNY

Midpoint of the band established at initial 2.1% appreciation against US$, while trading band is widened to 0.3% on either side of the midpoint

Old trading band of +/-.03% with US$ "peg" trading inside the band

The old and new band

Revaluation part of effort to release pressures

- 23 -

China (and others) have experienced this before

-5

0

5

10

15

20

25

30

1980 1986 1992 1998 2004

% annual change

GDP growth

Inflation

Sources: Datastream, JETRO, Economics@ANZ

0.28Korea

76-90

0.44Taiwan

76-90

0.34Japan

56-72

0.25China

91-04

Investment efficiency

Average p.a.

GDP and inflation Investment efficiency

Investment efficiency is the rate of contribution to GDP growth of a 1% increase in GFCF

- 24 -

Another downturn would reduce import demand

1070

130190250310370

1965 1973 1981 1989 1997

mn tonnes

10

210

410

610

810

1010

1965 1973 1981 1989 1997

mtoeOil consumption Coal consumption

0

10

20

30

40

US Eurozone Japan China India

Bank deposits

Gov't debt

Corporate debt

Equities

Regional composition global financial stock, 2003 US$ tr

Sources: BP Energy Statistics Yearbook, 2005; McKinsey Quarterly Report Nov 2005

- 25 -

0

10

20

30

40

50

60

70

80

1 5 9 13 17 21 250

2

4

6

8

10

12

1 5 9 13 17 21 25

% %

Source: Datastream, Angus Maddison The World Economy on OECD database

Japan1957-1986

China1980 - present

Japan1957-1980

China1980 - present

Long-term outlook: Rising wealth in China

Share of world merchandise exports

GDP/capita as a % of US GDP/capita

- 26 -

-2

-1

0

1

2

3

4

Q1 01 Q3 02 Q1 04 Q3 05 Q1 07

Real GDP % YOY

Real

Inventories

Final domestic demand

Net exports

Japan an important renewed centre of demand

Contribution to GDP growth Consumer confidence

30

35

40

45

50

55

01 02 03 04 05

Net balancejudging "good" (%) Tokyo

All Japan

Sources: Datastream, Economics@ANZ

- 27 -

3.84.35.14.1Taiwan

7.17.47.88.4Vietnam

4.53.54.87.3Hong Kong

4.24.34.54.6Thailand

2008200720062005

% change in real GDP from previous year

World

East Asia excl Japan

Cambodia

Indonesia

Korea

China

New Zealand

Australia

Euro area

Japan

United States

3.22.51.52.7

N/a6.46.46.9

7.27.57.88.1

3.23.82.92.5

2.11.91.91.3

1.82.03.12.8

3.02.73.33.5

3.34.75.34.0

8.89.09.49.9

5.36.14.85.6

3.93.94.34.3

* Weighted by GDP in US$ at purchasing power parity exchange rat es. Sources: National agencies; IMF; Economics@ANZ.

World growth forecasts

- 28 -

Commodity prices remain on track with growth story

Oil Gold

US$/t Coking Coal Iron Ore

010203040506070

02 03 04 05 06 07

US$/bbl

WTI

forecast

200250300350400450500550

02 03 04 05 06 07

forecastUS$/oz

020406080

100120140

02 03 04 05 06 07

forecast

20304050607080

02 03 04 05 06 07

forecastUS$/t


- 29 -

-10

-5

0

5

10

15

95 96 98 99 01 02 04 05

PPI among 3 of 4 major exporters picking up

US PPI Germany PPI

Japan PPI China PPI

% YOY

-4-202468

95 96 98 99 01 02 04 05

% YOY

-4-3-2-101234

95 96 98 99 01 02 04 05

% YOY

-8

-4

0

4

8

12

95 96 98 99 01 02 04 05

% YOY


- 30 -

US example – as yet limited pass through

Correlation btwn US CPI and tradables prices seems to be improving

-6

-4

-2

0

2

4

6

8

90 92 94 96 98 00 02 04 06

% YOY

US headlineCPI

US import inflation ex-petrol


- 31 -

Historically import prices held down by Japan

US import price index by country

85

90

95

100

105

110

115

120

125

130

94 95 96 97 98 99 00 01 02 03 04 05 06

Jan 1994=100

US import prices from Euroland

US import prices from Japan

US import prices ex-petrol


- 32 -

0

5

10

15

20

25

30

95 96 97 98 99 00 01 02 03 04 05-10

-5

0

5

10

15

20

25$US billion

Exports (LHS)

ex-factory prices (RHS)

yoy%

China’s machinery & electronics

0.00.5

1.01.52.02.5

3.03.5

4.0

95 96 97 98 99 00 01 02 03 04 05-10

-5

0

5

10

15

20$US billion

ex-factory clothing prices (RHS)

Exports (LHS)

yoy%

0102030405060708090

100

95 96 97 98 99 00 01 02 03 04 05-8

-4

0

4

8

12

16$US millionMotor vehicles & parts

exports (LHS)

ex-factory prices light industry (RHS)

yoy%

0200

400600800

1000

12001400

1600

95 96 97 98 99 00 01 02 03 04 05-20

-10

0

10

20

30

40

50$US million

Average steel products prices (RHS)

Exports (LHS)

yoy%

China’s light industry

China’s steel productsChina’s textiles

We are now relying on China margin squeeze


- 33 -

Inflation accelerating more rapidly in Asia than G7

G7 inflation

0

1

2

3

4

5

6

Jan-90

Jan-94

Jan-98

Jan-02

Jan-06

% YOY

Core

Headline

Asia inflation

-2

3

8

13

18

90 94 98 02 06

Asia ex Japan and China

Asia ex-China

Asia ex-Japan

% YOY


- 34 -

Early Warning Indicator results

ASIAN Average

0

20

40

60

80

100

120

00 01 02 03 04 05 06

Jan99=100CHINA

40

60

80

100

120

00 01 02 03 04 05 06

Jan99=100

INDONESIA

0

20

40

60

80

00 01 02 03 04 05 06

Jan99=100

Source: Economics@ANZ

- 35 -

Early Warning Indicator results

THAILAND

20

40

60

80

100

120

00 01 02 03 04 05 06

Jan99=100 SINGAPORE

20

40

60

80

100

120

00 01 02 03 04 05 06

Jan99=100

JAPAN

0

20

40

60

80

100

120

140

99 00 01 02 03 04 05 06

Jan99=100HONG KONG

0

20

40

60

80

100

120

99 00 01 02 03 04 05 06

Jan99=100

Source: Economics@ANZ

- 36 -

0

1

2

3

4

5

6

Aug-02 Feb-04 Aug-05 Feb-07

% pa

USFed funds

JapanDiscount rate

EuroEUR refi rate

Policy rates – US, EUR, JPY Policy rates – AU, NZD

Source: Datastream, Bloomberg, Economics@ANZ

Inflation is main risk to assumption of neutral policy

0

1

2

3

4

5

6

7

8


% pa

New Zealand

Australia

- 37 -

Japan deleveraging in private sector has already begun

Credit growth

85

1085

2085

3085

4085

5085

6085

7085

8085

9085

10085

1980 1983 1986 1989 1992 1995 1998 2001 2004

Domestic credit Domestic credit: claims on private sector

¥ trillion


- 38 -

More rapid Japan process is a risk to LT yields

Source: Bloomberg

US 10 year gov’t bonds Australia 10 year gov’t bonds

UK 10 year gov’t bonds NZ 10 year gov’t bonds

0

2

4

6

8

01 02 04 05 07

% pa

0

2

4

6

8

01 02 04 05 07

0

2

4

6

8

01 02 04 05 07

% pa

% pa

0

2

4

6

8

01 02 04 05 07

- 39 -

Policy rates – North Asia


0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0


% pa

New Zealand

Taiwan

Singapore

Hong Kong

Australia

Philippines

China

Korea

AUD/NZD rate premium is declining relative to Asia

- 40 -

50

75

100

125

150

175

200

225

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070.2

0.4

0.6

0.8

1

1.2

1.4

1.6

RBA Commodities ANZ Derived ex-coal & Iron Ore (LHS)

RBA Commodities ANZ Derived series (LHS)

Australian Dollar (RHS)

AUD/USD2001/02=100

Relationship between AUD and commodities

Source: ABS, Bloomberg, Economics@ANZ

- 41 -

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007-2

-1

0

1

2

3

4

2 year Spread fwd 18 months (RHS)

Australian Dollar (LHS)

AUD/USD Spread %

Relationship between AUD and rate differentials

Source: Bloomberg, Economics@ANZ

- 42 -

AUD/USD and NZD/USD

AUD/NZD

0.00

0.20

0.40

0.60

0.80

1.00

00 01 02 03 04 05 06 07

US$

AUD/NZD

NZD/USD

0.66

0.53

30

60

90

120

150

00 01 02 03 04 05 06 07

JPY

USD/JPY

AUD/JPY

1.00

1.20

1.40

1.60

00 01 02 03 04 05 06 07

A$

USD/JPY and AUD/JPY


Still expecting general USD weakness & softer A$, NZ$

0.00

0.30

0.60

0.90

1.20

00 01 02 03 04 05 06 07

EUR

USD/EUR

AUD/EUR

EUR/USD and AUD/EUR

- 43 -

Real exchange rate vs USD Real exchange rate vs JPY

80

100

120

140

160

180

200

220

240

00 01 02 03 04 05 06

Jan 96=100

China

Japan

Asean 5

Australia

HK

60

80

100

120

140

160

180

20000 01 02 03 04 05

Jan 96=100

Asean 5

China

Korea

HK

Australia

On both charts an upward movement indicates an appreciation of t he ‘foreign’ currency against the ‘home’ currency (USD or JPY). Any implied % shift is measured as a prop ortion of the home currency. Sources: Datastream, Economics@ANZ

Asian currencies will follow strong yuan and yen

- 44 -

.58

.68

1.27

1.69

1.25

108

4.80

3.00

0.25

5.75

5.00

Dec 2006

.55

.68

1.21

1.82

1.30

102

4.50

3.00

0.50

5.75

4.00

Dec 2007

5.55.5RBA cash rate

.740.733AUD – US$

.64.68NZD – US$

1.361.31US$ - SwFr

1.671.72£ - US$

3.002.25European Central Bank refi rate

4.754.39US 10-year bond yield

118117.5US$ - ¥

1.17

0.00

4.25

Dec 2005*

1.18

0.00

5.00

Jun 2006

€ - US$

Bank of Japan call rate

US Fed funds rate

* actual

Regional financial market forecasts

- 45 -

45.5

15 918

53.0

1.63

3.75

7.75

41.0

9 831

32.8

1 007

8.07

117

Dec 2005*

43.0

16 250

51.25

1.60

3.71

7.79

38.0

9 000

31.4

980

7.94

118

Jun 2006

42.0

16 400

50.8

1.58

3.68

7.78

37.0

8 750

30.5

995

7.78

108

Dec 2006

16 728US$ - Dong

50.0US$ - Peso

29.0US$ - NT$

990US$ - Won

36.3US$ - Baht

8 580US$ - Rupiah

3.50US$ - Ringgit

7.74US$ - HK$

42.8

1.56

7.55

102

Dec 2007

US$ - Rupee

US$ - S$

US$ - Yuan

US$ - ¥

* actual

Asia currency forecasts vs US$

- 46 -

33.0

11 664

38.9

1.22

2.77

5.68

30.1

7 203

24.1

740

5.91

86.3

Dec 2005*

31.1

11 250

36.1

1.13

2.61

5.48

27.5

6 336

22.1

690

5.59

83.8

Jun 2006

29.4

10 910

34.5

1.07

2.50

5.29

25.5

5 950

20.4

677

5.29

73.4

Dec 2006

10 997 AUD - Dong

34.0AUD - Peso

19.7AUD - NT$

673AUD – Won

24.7AUD - Baht

5 834 AUD - Rupiah

2.38AUD - Ringgit

5.26AUD - HK$

28.6

1.06

5.13

69.4

Dec 2007

AUD - Rupee

AUD - S$

AUD - Yuan

AUD - ¥

* actual

Asia currency forecasts vs AUD

outlook for asia1,532 1,723 1,966 2,211 2,225 2,292 2,893 2,895 ... south africa 20 532 korea 12...

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