A global economic and market outlook

Dr Chris CatonMarch 2015

2

2015 Growth Forecasts (%)

Month of Forecast

A-14 M-14 J-14 J-14 A-14 S-14 O-14 N-14 D-14 J-15 F-15 M-15

Australia 2.9 2.9 3.0 2.8 2.9 2.9 2.9 2.9 2.8 2.7 2.7 2.6

New Zealand

3.0 3.0 3.0 3.0 3.0 3.0 2.9 3.0 3.0 3.1 3.0 2.9

US 3.0 3.1 3.1 3.0 3.1 3.1 3.1 3.0 3.0 3.2 3.2 3.1

Japan 1.3 1.3 1.2 1.3 1.2 1.3 1.2 1.3 1.2 1.2 1.3 1.1

China 7.2 7.2 7.1 7.2 7.2 7.1 7.1 7.1 7.0 7.0 7.0 7.0

Germany 2.0 2.0 2.0 2.0 2.0 1.8 1.5 1.4 1.3 1.4 1.5 1.8

UK 2.4 2.5 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.7 2.7

“World” 3.2 3.2 3.2 3.2 3.3 3.2 3.2 3.1 3.0 3.0 2.8 2.8

Source: Consensus Economics

Oil prices generally bounce hard

3 Source : ISI Evercore

7.5 is the new 10. China’s growth contribution is still increasing.

4

Resources investment (% of GDP)

5

The terms of trade have come down a long way (index, 2012/13=100)

6

7

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 14

USAustralia

Year to % change

Mining exports have been growing rapidly

8

9

Non-mining activity has picked up slightly

10

Financial Market Forecasts

Now (19 March)

End-Jun2015

End-Dec2015

AUD/USD 0.777 0.75 0.72

Official cash rate (%) 2.25 2.00 2.00

10 Year Bond yield (%) 2.45 2.70 2.90

ASX 200 5900 5700 5800

11

The Australian Dollar and US Trade Weighted Index

Source: Datastream

64

84

103

122

142

161

180

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

0.40

0.52

0.64

0.76

0.88

1.00

1.12Index AUD/USD

US TWI inverted (LHS)

AUD/USD (RHS)

12

Australian Share market Performance – ASX200

Source: Bloomberg

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

The Australian market is a little above fair value (forward p/e ratio)

13

14

But the P/E tends to be higher when the cash rate is lower

15

The resources sector has been a massive drag on the market

16

Australia has kept pace with the developed world ex US

We have been in almost perfect sync with the United States market, but may now be looking relatively a little cheap.

17 Source :Minack Advisors

18

The labour market data are still soft and unemployment is still rising

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 15

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5000’s %

Employment (LHS)

Unemployment Rate (RHS)

It’s clear where most of the new jobs come from

19

20

Contribution to employment growth over 2014

21

Employment growth has been very uneven

22

Australian inflation is not an issue

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 17

Headline CPI Underlying inflation

%

BT Forecasts

GST Effect

Wage growth has moderated across the board

23

Household financial ratios

24

House Prices - Australia v Brisbane

Source: ABS

87 89 91 93 95 97 99 01 03 05 07 09 11 13100

150

200

250

300

350

400

450

500

550

600

650

700

750 Index (1987 = 100)

26

Australian houses are the biggest in the world (sq m per capita)

House prices have risen everywhere, particularly in Sydney ($’000s)

27

House price rises have been a capital-city story

28 Source: Minack Advisors

Prices have been rising rapidly in just two cities in the past year (% increase year to February 2015)

29 Source : Core Logic RPData

30

Where’s the bubble? Average house price increase in the past ten years

31

Credit growth is picking up, driven by investors

The investors are now in charge

32 source :Goldman Sachs

33

Investors have been piling in in New South Wales

34

Not much of the borrowing by investors finances new dwellings!

35

Gross Domestic Product

Source: ABS

-1

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Qtly growth Year-to growth Non-farm year-to growth

%

BT Forecasts

36 Source Consensus EconomicsSs: Consensus Economics

GDP Inflation

Australia 3.0 2.6

United States 2.6 2.1

New Zealand 2.5 2.1

Norway 2.3 2.0

United Kingdom 2.3 2.2

Canada 2.2 2.0

Sweden 2.2 1.9

Spain 2.0 1.4

Switzerland 1.7 1.1

Germany 1.5 1.8

Netherlands 1.4 1.7

Eurozone 1.4 1.5

France 1.3 1.6

Japan 1.1 1.7

Italy 0.9 1.5

Global Medium-Term Economic Growth and Inflation Prospects (2014-2024)

37

Asia-Pacific Medium-Term Economic Growth and Inflation Prospects (2014-2024)

GDP Consumer Prices

China 6.6 2.8

India 6.5 5.9

Philippines 5.7 3.8

Indonesia 5.6 5.2

Malaysia 5.0 3.1

Thailand 3.9 2.7

Singapore 3.7 2.1

South Korea 3.2 2.3

Taiwan 3.1 1.6

Hong Kong 3.0 3.0

Australia 3.0 2.6

New Zealand 2.5 2.1

Japan 1.1 1.7

Source: Consensus Economics

38

Summary

The big question in the US is when will rates begin to rise and how quickly?

The Eurozone is battling deflation.

We will always worry about China.

The Australian economy should continue to experience only moderate growth. The mining investment boom has ended with no significant pickup to date in non-mining capex.

The cash rate is likely to fall again.

The exchange rate may fall further.

The Australian share market is a little above fair value.

39

Disclaimer

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