Asian Economics

Global Research

Asian Economics

Paul Bloxham

Chief Economist (Australia and New Zealand)

HSBC Bank Australia Limited

+61 (2) 435 966 522 [email protected]

Australia in the Asian century: Looking beyond the mining boomNovember 2012

View HSBC Global Research at: http://www.research.hsbc.com

Issuer of report: HSBC Bank Australia Limited

Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

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Australia’s is now in its 21st year of continuous growth

Source: ABS; HSBC estimates

-4

-2

0

2

4

6

8

1980 1985 1990 1995 2000 2005 2010

Australian GDP Growth

F/C%

Q4 1991

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Some signs of growth moderating into the second half of 2012

Source: ABS

Unemployment RateSeasonally adjusted

2

4

6

8

10

1978 1982 1986 1990 1994 1998 2002 2006 2010

2

4

6

8

10

% %

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Timely measures of sentiment are around their average levels

Source: Westpac-Melbourne Institute, NAB, Datastream

-45

-30

-15

0

15

30

45

60

75

90

105

1997 2000 2003 2006 2009 2012

-120

-105

-90

-75

-60

-45

-30

-15

0

15

30NAB Business Survey

Confidence

Conditions

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Australia in the Asian century

1) Asia is driving global growth, which is benefiting Australia

2) Mining boom not over yet: more investment and export ramp-up yet to come

3) Local economy will rebalance, with lower rates supporting housing and retail sales

4) Asia presents medium-term opportunities beyond just mining for Australia

5) Lifting productivity is the main challenge and important for inflation and rates

outlook

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1.1) Asia is driving global growth: economic centre of gravity moving east

Source: Quah (2010)

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1.2) China and India expected to overtake the US and Europe as the largest in the world

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1.3) Emerging economies already contributing more to global growth

Source: HSBC estimates

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1.4) China is delivering 50yrs of US advance every decade (India 30 yrs)

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1.5) Europe is straining under the weight of debt

Source: IMF

General Government Gross DebtPer cent of GDP

0

50

100

150

200

250

90 94 98 02 06 10 14 91 95 99 03 07 11 15

0

50

100

150

200

250

European Countries Other Advanced Countries% %

Greece Japan

US

UK

Australia

Italy

IrelandSpain

Germany

France

NZ

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1.6) Europe faces enormous challenges that will be with us for some time

Source: Datastream

European GDP September 2007 = 100

Index

105

100

95

90

85

80 80

85

90

95

100

105

Index

Sep-07 Sep-09 Sep-11 Jun-08 Jun-10 Jun-12

Germany Ireland

Greece

Portugal

Italy

SpainFrance

North Other

Austria Belgium

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1.7) Timely indicators suggest Europe is in recession

Source: Eurostat and HSBC

European Coincidence Indicator (EuroCOIN)

-1.5

-1.0

-0.5

0.0

0.5

1.0

1995 1998 2001 2004 2007 2010 2013

-1.5

-1.0

-0.5

0.0

0.5

1.0

% %

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1.8) US is operating at well below its capacity

Source: Thomson Reuters Datastream

US - Employment to Population Ratio

54

56

58

60

62

64

1950 1960 1970 1980 1990 2000 2010

54

56

58

60

62

64

% %

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1.9) China’s PMI suggests around trend growth

Source: HSBC; Bloomberg

China HSBC PMI

40

45

50

55

2004 2005 2006 2007 2008 2009 2010 2011 2012

40

45

50

55

Index Index

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1.10) High commodity prices may be the new (old) normal?

Source: Erten and O’Campo (2012); HSBC estimates

Real Commodity* Price TrendsAverage for 1860-2010=100

80

90

100

110

1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 200580

90

100

110

IndexIndex

* Excludes oil

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1.11) But commodity demand still to be supported by emerging economies

Source: GGDC, Brook Hunt, HSBC estimates, IMF

Copper Demand Across Selected Economies

500 1500 3000 8500 22500 16300060000

20

Cu/pc

16

12

8

4

0

20

Cu/pc

16

12

8

4

0

Asia (NID)

Japan

US

China

IndiaEurope*

* Includes SwitzerlandGDP per capita (EKS$2011, log scale)

Latin America

Asia (other)

Steel Demand Across Selected Economies

500 1500 3000 8500 22500 16300060000

Stl/pc

0.75

0.50

0.25

0.00

Stl/pc

0.75

0.50

0.25

0.00

Asia (NID)

Japan

US

China

India Europe*


Latin America

Zinc Demand Across Selected Economies

500 1500 3000 8500 22500 16300060000

10.0

7.5

5.0

2.5

0.0

Za/pc

10.0

7.5

5.0

2.5

0.0

Za/pc

Asia (NID)

JapanUS

China

India

Europe*


Latin America0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0 10 20 30 40 50

Per

cap

ita e

nerg

y co

nsu

mpt

ion

(BT

Us)

GDP per capita ('000s)

US

Korea

Japan

Germany

ChinaBrazil

Energy Consumption

India

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1.12) Bulk of global population at commodity intensive stage of development

Source: Total Economy Database; IMF; HSBC estimates

Share of Global Population at Commodity Intensive Usage Stage

0

20

40

60

%

0

20

40

60

%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Forecast

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1.13) Commodity intensive economies driving the bulk of global growth

Source: Total Economy Database; IMF; HSBC estimates

Share of Global Growth in Commodity Intensive Usage Stage

-4

-2

0

2

4

6

%

-4

-2

0

2

4

6

%

1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 2016

Non commodity intensive phaseCommodity intensive phase

Global growthForecast

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1.14) High AUD has been a key catalyst for slowdown in some sectors

Source: RBA; HSBC

0.00

0.50

1.00

1.50

2.00

2.50

3.00

1901 1908 1915 1922 1929 1936 1943 1950 1957 1964 1971 1978 1985 1992 1999 2006

USD per AUD

Float

Nominal Exchange Rate

UK pound per AUD

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2.1) Mining boom not over: just part way through second of three stages

Mining boom stages

Stage 1: Commodity prices rise, boosting incomes and motivating investment

Stage 2: Investment pick up owing to high commodity prices

Stage 3: Capacity comes on line and exports ramp up

Source: HSBC

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2.2) Commodity prices have peaked, but remain historically high

Source: RBA, HSBC

Australia's Commodity Prices 2008/09 = 100

0

40

80

120

160

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

0

40

80

120

160

In AUD

In USD

Index Index

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2.3) Free kick to income growth from rising commodity price has now passed

Source: ABS; RBA

-60

-40

-20

0

20

40

60

80

100

2001 2003 2005 2007 2009 2011-8

-4

0

4

8

12

16

20

24

Commodity prices (in AUD, LHS)

Nominal GDP (RHS)

Nominal GDP and Commodity PricesYear-ended percentage change% %

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2.4) But terms of trade still at a very high level, making investment worthwhile

Source: ABS, HSBC

Australia's Terms of Trade

40

60

80

100

120

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

F/CIndex

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2.5) Mining investment should make large contribution to growth this year and next


Contribution to GDP from Engineering InvestmentYear-ended change

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2000 2002 2004 2006 2008 2010 2012 2014

%

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2.6) Much of the investment pipeline is for energy (LNG in particular)

Source: BREE, HSBC

Value of Advanced Mining Projects

0

50

100

150

200

1995 1998 2001 2004 2007 20100

50

100

150

200

$Abn

Energy

Mineral

Infrastructure

Minerals &Energy Processing

$Abn

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2.7) Export ramp-up has yet to come

Source: BREE

Australian Commodity Exports OutlookFinancial years

0

300

600

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

LNG

*Co

alIro

n or

e

2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17

0

30

60

MtMtForecast

* Right hand side axis

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3.1) Some rebalancing expected: after some sectors slowed to make way for mining


Employment Across IndustriesTrend, February 2007 = 100

100

105

110

2007 2008 2009 2010 2011 2012

100

105

110

Exchange rate sensitive industries*(33% of total)

Other industries(67% of total)

* Includes manufacturing, retail trade, accommodation and education

Index Index

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3.2) Keep in mind that Australia’s economy is mostly services

Source: ABS; RBA

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3.3) Growth needs to switch from being commodity-driven to credit-driven

40

80

120

160

200

240

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 20110

30

60

90

120

150

Terms of trade* (RHS)

*Ratio of export to import prices

Credit to GDP ratio (LHS)

Commodity price driven growthIndex Index

Source: ABS; RBA

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3.4) Credit growth has been weak, but domestic demand has been strong

Source: ABS; RBA

Domestic Demand and Credit Year-ended change

-4

-2

0

2

4

6

8

1997 1999 2001 2003 2005 2007 2009 2011-8

-4

0

4

8

12

16

% %

Growth in domestic demand (LHS)

Real Credit Growth(deflated by GNE deflator, RHS)

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3.5) Financial system still works in Australia, so credit growth is lifting

-20

-10

0

10

20

30

2000 2002 2004 2006 2008 2010 2012

-20

-10

0

10

20

30

Credit growthSix-month annualised

Business

% %

Housing

Personal

Source: RBA

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3.6) Lower rates mean that housing prices are picking up

Source: Rismark

Capital city housing prices

400

450

500

550

2006 2007 2008 2009 2010 2011 2012

400

450

500

550

$'000 $'000

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3.7) Housing building cycle likely to have troughed

Source: ABS; RBA; HSBC

Building Approvals - AustraliaNumber of buildings*

0

5

10

15

1995 1997 1999 2001 2003 2005 2007 2009 2011

0

5

10

15

'000s'000s

Total

Houses

Other*** Thick line represents trend numbers w hile the lighter line represents seasonally adjusted number** Includes non-residential buldings

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3.8) Households have already lifted their savings to elevated levels

Source: ABS, RBA

Household Saving Ratio*Per cent of disposable income

-5

0

5

10

15

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012-5

0

5

10

15

%

* Net of depreciation

%

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3.9) Household caution is reflected in easing housing prices

Source: RP Data / Rismark

0

1

2

3

4

5

6

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Housing price to income ratio

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3.10) Record number of outbound Australian tourists weakening domestic spending

Source: ABS

-4

-2

0

2

4

6

8

1977 1982 1987 1992 1997 2002 2007 2012

-4

-2

0

2

4

6

8

Short-term Arrivals and DeparturesAnnual rolling total

mn mn

Arrivals

Departures

Net flow

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3.11) Exchange rate effect is starting to wear off

Source: ABS

-5

0

5

10

15

20

25

2005 2006 2007 2008 2009 2010 2011 2012

-30

-20

-10

0

10

20

30

Overseas departures and the exchange rateYear-ended percentage change

% %

AUD trade-weighted index (RHS)

Overseas departures (LHS)

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4.1) Growing Asian middle class will bring opportunities beyond mining

- Increased demand for housing and consumer durables;

- Increased demand for more and better quality food;

- Increased demand for education services;

- Increased demand for holidays;

- Increased demand for financial services

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4.2) Chinese motor vehicle sales still have a lot of catching up to do

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4.3) China should account for over a quarter of global car sales by 2018

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4.4) Food intake rising in developed countries

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4.5) Higher incomes lead to higher meat consumption and less grain

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4.6) China is driving Australia’s tourist arrivals numbers

Source: ABS

80

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012

China (11%)

Australian Overseas Arrivals*Index January 2007 = 100

*Share of total in June 2012 in brackets

Other (12%)

Europe (18%)Asia ex China (32%)

US (7%) NZ (20%)

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5.1) Weak productivity growth remains Australia’s main challenge

Source: ABS

GDP per hour worked*Index (log scale)

4.60

4.70

4.80

4.90

5.00

5.10

5.20

1980 1984 1988 1992 1996 2000 2004 2008 2012

100

110

130

190

1980-851.6%pa

1985-900.9%pa

1990-951.7%pa

1995-002.6%pa

2000-051.9%pa

2005-111.0%pa

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5.2) Growth has been driven by working harder, not necessarily smarter

Source: ABS; HSBC

Factor Contribution to Potential GDP GrowthYear-ended

-2

0

2

4

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010-2

0

2

4

% %

Total factor productivity

Growth in capital stock

Growth in hours worked

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5.3) Weak productivity partly reflects the mining boom

1973/74-1993/94 1993/94-2003/04 2003/04-2010/11

Labour productivity 1.8 3.1 1.4of which:

Capital deepening 1.3 1.3 1.8Multifactor productivity 0.6 1.8 -0.4

Labour productivity - 3.1 1.7of which:

Capital deepening - 1.3 1.3Multifactor productivity - 1.9 0.4Source: RBA

Decomposition of trend productivity growthAnnual average percentage change

Selected market sector industries

Excluding mining and utilities

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5.4) Weak productivity boosted local inflation, but import prices have fallen

Source: ABS, RBA

Components of InflationYear-ended change

-4

-2

0

2

4

6

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

-4

-2

0

2

4

6

Non-tradeables (domestic)

Tradeables(mostly imported)

% %

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5.5) Inflation low, largely due to AUD appreciation in 2009 and 2010

Source: ABS; RBA

Measures of Underlying InflationYear-ended change

0

1

2

3

4

5

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

0

1

2

3

4

5Weighted median

Trimmed mean

CPI(excl vol items)

% %

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5.6) Wages growth remains solid

Source: ABS; RBA

Labour Price Index GrowthSeasonally adjusted

0

1

2

3

4

1999 2001 2003 2005 2007 2009 2011

0

1

2

3

4

Year-ended

Quarterly

% %

Six month annualised

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5.7) RBA rates are well below neutral

Source: RBA; HSBC

0

2

4

6

8

10

12

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

Margin Cash rate Effective mortgage rate

% Variable mortgage rates and nominal cash rate

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51

Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Bloxham

Important Disclosures This document has been prepared and is being distributed by the Research Department of HSBC and is intended solely for the clients of HSBC and is not for publication to other persons, whether through the press or by other means.

This document is for information purposes only and it should not be regarded as an offer to sell or as a solicitation of an offer to buy the securities or other investment products mentioned in it and/or to participate in any trading strategy. Advice in this document is general and should not be construed as personal advice, given it has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Accordingly, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to their objectives, financial situation and needs. If necessary, seek professional investment and tax advice.

Certain investment products mentioned in this document may not be eligible for sale in some states or countries, and they may not be suitable for all types of investors. Investors should consult with their HSBC representative regarding the suitability of the investment products mentioned in this document and take into account their specific investment objectives, financial situation or particular needs before making a commitment to purchase investment products.

The value of and the income produced by the investment products mentioned in this document may fluctuate, so that an investor may get back less than originally invested. Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested. Value and income from investment products may be adversely affected by exchange rates, interest rates, or other factors. Past performance of a particular investment product is not indicative of future results.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.

* HSBC Legal Entities are listed in the Disclaimer below.

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Additional disclosures 1 This report is dated as at 12 October 2012. 2 All market data included in this report are dated as at close 12 October 2012, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's

analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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Disclaimer * Legal entities as at 8 August 2012 ‘UAE’ HSBC Bank Middle East Limited, Dubai; ‘HK’ The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; ‘TW’ HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; ‘DE’ HSBC Trinkaus & Burkhardt AG, Düsseldorf; 000 HSBC Bank (RR), Moscow; ‘IN’ HSBC Securities and Capital Markets (India) Private Limited, Mumbai; ‘JP’ HSBC Securities (Japan) Limited, Tokyo; ‘EG’ HSBC Securities Egypt SAE, Cairo; ‘CN’ HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; ‘US’ HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC México, SA, Institución de Banca Múltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA – Banco Múltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR

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