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The economic ‘big picture’

The economic ‘big picture’. Saul Eslake Chief Economist Bank of America Merrill Lynch Australia. Australia’s major tourism markets. Visitor arrivals by country of origin, 2011-12. Source: ABS. Economic risks high in ‘advanced’ world. Probability of recession Q2 2012 – Q1 2013.

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The economic ‘big picture’

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  1. The economic ‘big picture’ Saul Eslake Chief Economist Bank of America Merrill Lynch Australia

  2. Australia’s major tourism markets Visitor arrivals by country of origin, 2011-12 Source: ABS.

  3. Economic risks high in ‘advanced’ world Probability of recession Q2 2012 – Q1 2013 Probability of deflation Q4 2013 Source: International Monetary Fund, World Economic Outlook, October 2012

  4. Public debt weighs on most ‘advanced’ economies Net public debt, 2012 * Gross debt. Source: IMF, World Economic Outlook database, October 2012.

  5. Europe already in ‘double dip’ recession Euro zone real GDP Euro zone unemployment Sources: Eurostat; Bank of America-Merrill Lynch Global Research.

  6. Euro Central Bank has a plan … but will it work? 10-year government bond yields • The European Central Bank has signalled its preparedness to support the debt of heavily indebted Euro member nations – despite German reservations • But they (Spain and perhaps Italy) must still formally apply for a ‘bailout’ – which they have thus far been reluctant to do • Even assuming they eventually do, fiscal austerity will act as a drag on European growth for most of this decade • And Europe still baulks at other ‘pro-growth structural reforms Source: Thomson Reuters Datastream

  7. The US looks better than Europe US real GDP US unemployment Sources: US Bureau of Economic Analysis; US Bureau of Labor Statistics; Bank of America-Merrill Lynch Global Research.

  8. US housing market looks to be turning US house prices US housing starts Sources: Standard & Poor’s; US Commerce Department.

  9. Shale gas is making a difference to the US US natural gas production US natural gas prices Sources: US Energy Information Administration; IMF.

  10. But the ‘fiscal cliff’ looms as a major risk US Federal budget balance Change in budget balance 2012 to 2013 US$bn 180 • Expiry of Bush tax cuts • Non-indexation of alternative minimum tax (AMT) thresholds • Expiry of payroll tax cut • Other tax measures • Expiry of extended unemployment benefits • Other expiring spending • Automatic spending cuts mandated by last year’s deal on the debt ceiling • Other measures 120 120 50 40 60 110 40 Total 720 (4.6% of GDP) Sources: US Congressional Budget Office; BofA Merrill Lynch Global Research.

  11. Japan’s ‘lost decade’ continues into another Japan real GDP Japan ‘core’ inflation Sources: Japan Economic & Social Research Institute; Japan Home Ministry; BofA Merrill Lynch Global Research.

  12. China has not had a ‘hard landing’ … China real GDP China inflation Sources: China National Statistics Bureau; BofA Merrill Lynch Global Research.

  13. … but growth will slow for ‘structural’ reasons China fixed asset investment as % of GDP China working age (15-64) population Sources: United Nations; CEIC.

  14. Indonesia & Philippines stand out in other Asia Real GDP growth Korea Hong Kong Malaysia Indonesia Taiwan Singapore Thailand Philippines Sources: National statistics agencies & central banks; BofA Merrill Lynch Global Research

  15. India needs renewed reform India real GDP India inflation Sources: India Central Statistical Office; BofA Merrill Lynch Global Research.

  16. Asia’s middle class will increase by 1.2bn this decade The global middle class Notes: Lower bound of ‘middle class’ is the average poverty line in Portugal and Italy. Source: H Kharas & G Gertz, ‘The New Global Middle Class: A Cross-over from West to East’, reproduced in Australian Government, Budget Statement No. 4 ‘Opportunities and Challenges of an Economy in Transition’, 2011-12 Budget Paper No. 1, Budget Strategy and Outlook (Canberra, 2011).

  17. New Zealand staging a slow recovery NZ real GDP NZ housing approvals NZ unemployment Source: Statistics New Zealand

  18. Australia’s economy has done very well … Real GDP Unemployment rate Sources: Australian Bureau of Statistics; US Bureau of Economic Analysis; Japan Economic &Social Research Institute; Eurostat; UK Office of National Statistics; Statistics Canada; US Bureau of Labor Statistics; Japan Home Ministry; Statistics New Zealand.

  19. … partly on the back of the ‘resources boom’… Resources industry construction work Resources export commodity prices Sources: RBA; ABS; BofA Merrill Lynch Global Research

  20. … without triggering double-digit inflation Consumer price index Sources: ABS; BofA Merrill Lynch Global Research

  21. The strong A$ has played a major role in this A$ vs US$ Consumer prices Sources: Thomson Financial Datastream; ABS.

  22. But tourism has been one of the casualties Short-term arrivals and departures Trade balance on travel-related services Sources: ABS.

  23. The A$ seems to be defying ‘fundamentals’ Commodity prices and the A$ Interest rate differentials and the A$ Sources: RBA; ABS; Thomson Financial Datastream.

  24. … perhaps due to its new ‘safe haven’ status FX reserves held in ‘non-traditional’ currencies Foreign holdings of Australian Government securities Sources: IMF; RBA.

  25. Firms searching harder for productivity gains … Labour productivity Unit labour costs Source: ABS.

  26. … heightening household fears about jobs Unemployment and household expectations regarding unemployment Employment growth Ratio people expecting higher to people expecting lower unemployment (right scale) Source: ABS; Westpac-Melbourne Institute.

  27. Households have suffered big wealth losses … House prices Household net worth-income ratios Share prices Sources: ABS; US Federal Reserve: UK Office of National Statistics; Standard & Poors; Thomson Financial Datastream.

  28. … which has prompted them to save more Household perceptions of their own financial situation Household saving rates Sources: Westpac-Melbourne Institute; ABS; US Bureau of Economic Analysis; UK Office of National Statistics.

  29. Conclusions • Near-term risks to global economy remain tilted to the downside • Euro area recession will persist into next year • post-election ‘fiscal cliff’ is a major risk to the US outlook • growth across Asia has slowed partly reflecting weakness in ‘advanced’ economies • Medium term growth prospects much brighter for Asia than for ‘advanced’ economies • US prospects better than Europe partly thanks to cheap energy and better demographics • but growth in all major ‘advanced’ economies constrained by need for ‘fiscal consolidation’ • by contrast Asian economies (except for Japan and to some extent India) are not burdened by unsustainable public debt • Australia approaching a major growth ‘transition’ • with commodity prices now past their peak, and the peak in resources investment likely to occur within the next 18 months, growth will need to be driven by other areas eg housing • persistent A$ strength may complicate this task, forcing interest rates lower • Australian households will take time to ‘consolidate’ their balance sheets after the sharp fall in wealth in recent years, and will maintain high saving rates for some years yet economies • All of which makes for a challenging environment for Australian tourism

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