Global & euro zone update

Amber RabinovSenior Economist

ANZ Research

March 2012

1

Global economic outlook

• ANZ forward indicators of the global economy stabilised in late 2011 and are now picking up.

• Advanced economies face headwinds - fiscal austerity, deleveraging by households and financial institutions. Inflation pressures will be muted amid sizable spare capacity. Policy rates will be near zero for a long time.

– The US recovery will remain vulnerable to setback and shocks without a fully fledged housing recovery. There are some signs US housing is improving but there is a long way to go yet.

– Europe’s problems continue. Recent policy actions (eg. ECB’s LTRO) appear to have got some traction with a positive impact on sovereign yields and auctions. Activity has stabilised, but unemployment continues to rise.

• Emerging economies will be the main driver of global growth. Policy settings are such that there is plenty of scope to support growth if need be.

– China has slowed (“soft landing”) as desired by the authorities. This has growth on a sustainable path.

• Europe remains the biggest risk to the outlook. With the banking crisis of 2008 still fresh investor minds, even a small chance of a significant financial event will hamper risk appetite for the foreseeable future.

– That said, a rising risk (particularly for the US outlook) is the recent rise in oil prices (WTI).

2

Emerging markets remain main driver of global growth

Industrial production World trade

World GDP Contribution to world GDP

Source: Bloomberg, CPB Netherlands, ANZ

- 4

- 2

0

2

4

6

8

10

12

91 93 95 97 99 01 03 05 07 09 11 13

W orldEast A s ia ex -JapanG 7

(Ann. % c hange) Forec ast

-2

0

2

4

6

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

(%)

Asia ex Japan G7Other World

70

80

90

100

110

120

130

140

150

92 94 96 98 00 02 04 06 08 10 1255

85

115

145

175

205

235World, lhsAdvanced, lhsEmerging, rhs

(Index) (Index)

80

100

120

140

160

180

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

(Index)

3

ANZ lead indicators point to a pick up in global macro conditions

ANZ inventory pulse ANZ Lead indicator and global IP

ANZ Lead indicator and risk appetiteANZ lead indicator and inventory pulse

Source: Bloomberg, BoAML, ANZ

-3

-2

-1

0

1

2

3

2008 2009 2010 2011

Dev

12 m

th tre

nd

-4

-3

-2

-1

0

1

2

3

Dev

12 m

th tre

nd

US new ords/inventory EU new ords/inventoryJapan new orders/inventory China new ords/inventory

80

100

120

140

160

180

2000 2003 2006 2009 2012

Index

-10%

-5%

0%

5%

10%

15%

20%

Dev f

rom

12 m

th t

rend

A NZ G lo ba l le a d Ind ica to r inde x (LHS )A NZ S te e l-w e igh te d IP (R HS )

80

100

120

140

160

180

1994 1997 2000 2003 2006 2009 2012

Index

-3

-2

-1

0

1

2

3D

ev f

rom

12 m

th t

rend

A NZ G lo ba l le a d Ind ica to r inde x (LHS )A NZ G lo ba l ra tio ne w o rde rs /inv ento ry (R HS )

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

05 06 07 08 10 11

ANZ risk appetite ANZ global inventory pulse indicator

dev fro

m 1

2 m

th tre

nd

4

Lead indicators – picking up

Broad regional PMIs

Asian PMI

‘Strong’ Europe PMI

‘Weak’ Europe PMI

Source: Bloomberg, ANZ

20

30

40

50

60

70

05 06 07 08 09 10 11 12

(Index)

C hinaS ingaporeSouth KoreaTaiwanIndia

25

30

35

40

45

50

55

60

65

05 06 07 08 09 10 11 12

(Index)

USJapanEuro zoneChina

25

30

35

40

45

50

55

60

65

05 06 07 08 09 10 11 12

(Index)

GermanyFranceUK

30

40

50

60

70

05 06 07 08 09 10 11 12

(Index)

ItalySpainGreeceIreland

5

Spain

Canada

NZ

India

Korea

Hong Kong

SingaporeBelgium

Denmark

Greece

Ireland

Italy

Japan

Portugal US

Germany

France UK

Australia

China

Taiwan

Indonesia

-40

-20

0

20

40

60

80

100

120

140

160

-8 -6 -4 -2 0 2 4 6 8 10 12

Fiscal Deficit % GDP, 2012f

Net

Deb

t %

GD

P, 2

012

f

Advanced economies face substantial headwinds – large fiscal debts and sizable consolidation programs

Fiscal & Debt position

Source: IMF, ANZ

6

A broadening US recovery is a key pre-requisite for better global prospects – we are cautiously optimistic

Source: Bloomberg

Household credit growth

-5

0

5

10

15

20

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

(% y/y)

Housings starts and NAHB

400

800

1200

1600

2000

2400

98 99 00 01 02 03 04 05 06 07 08 09 10 11 120

10

20

30

40

50

60

70

80

90

Housing starts, lhs

NAHB housing index, rhs

('000, saar) (Index)

Small business optimism

80

85

90

95

100

105

110

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

(Index)

ISM - manufacturing

20

30

40

50

60

70

05 06 07 08 09 10 11

(Index)

CompositeNew orders

7

The US labour market is continuing to improve, particularly in terms of private sector job creation

Non-farm payrolls Unemployment and participation rates

Non-farm payrolls and temporary help Jobless claims

Source: Bloomberg, ANZ

-80

-40

0

40

80

120

160

200

240

280

Jan11

Feb11

Mar11

Apr11

May11

Jun11

Jul11

Aug11

Sep11

Oct11

Nov11

Dec11

Jan12

Private PublicLT avg private LT avg public

(m/m '000)

0

2

4

6

8

10

12

01 02 03 04 05 06 07 08 09 10 11 1263

64

65

66

67

68

Unemployment rate, lhs

Participation rate, rhs

(%) (%)

1

1.3

1.6

1.9

2.2

2.5

2.8

91 93 95 97 99 01 03 05 07 09 11100

110

120

130

140

Temporary help, lhs

Non-farm payrolls, rhs

(mn) (mn)

300

400

500

600

700

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12

Actual

8 week m.a.

('000)

8

How do you solve a problem called the euro zone?

Gross government debt

Source: IMF, Bloomberg

0

20

40

60

80

100

120

140

160

180

200

90 92 94 96 98 00 02 04 06 08 10 12 14 16

% o

f G

DP

Italy Greece Portugal

Germany Spain France

Ireland Australia New Zealand

IMF forecasts

9

How will Europe’s unsustainable public debt be funded?

Source: IMF, Bloomberg

10-year sovereign bond yields

0

2

4

6

8

10

12

14

16

18

Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-120

5

10

15

20

25

30

35

40

Ireland Italy Portugal

Spain Germany Greece (RHS)

% %

10

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

99 00 01 02 03 04 05 06 07 08 09 10 11 12-6

-4

-2

0

2

4

6

€-coin index, 3mths fwd (lhs) EZ GDP (rhs)

Annu

al %

chan

geIndex

80

100

120

140

160

180

200

220

03 04 05 06 07 08 09 10 11

Greece Germany France Portugal Ireland Italy

Inde

x, J

an 2

005 =

100

Greece's bank demand deposits the only to decline

f l

The ‘solution’ – grow your way out – highly unlikely. Forced deleveraging – yes. Policy support – yes. Austerity vs monetary reflation

Forced deleveraging

Source: ECB, Bloomberg

Slow economic growth

Unemployment rates

80

85

90

95

100

105

110

115

120

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

IFO - Business Climate

Index

Record high

German business conditions

4

6

8

10

12

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

(%)

6

10

14

18

22Germany France

Italy Spain, rhs

(%)

11

‘Misery’ indices amongst European nations

Source: Eurostat, Bloomberg, ANZ Research

3

4

5

6

7

8

9

10

11

12

13

14

15

00 01 02 03 04 05 06 07 08 09 10 11 125

10

15

20

25

30Euro zone Germany France ItalyAustria Netherlands Spain, rhs

unem

plo

ymen

t ra

te p

lus

inflat

ion r

ate u

nem

plo

ymen

t rate plu

s inflatio

n rate

12

Decoupling amongst European PMIs

30

35

40

45

50

55

60

Jan-01 Jan-04 Jan-07 Jan-10

Strong Europe Weak Europe

Source: ECB, Bloomberg

13

Weak Europe is not large

Sources: Bloomberg, ANZ

0

10

20

30

40

50

60

70

EM+other US Euro-strong Japan Euro-weak

World PPP weights

14

China - Property Price Index(y/y)

-4

-20

24

68

1012

1416

18

2005 2006 2007 2008 2009 2010 2011

Official Property Price Index ANZ Property Price Index

China’s GDP growth slowed to below potential in Q4 2011 We view that the bounce in China’s December PMI is the start of a rebound in activity; a hard landing in the property market is the biggest risk.

0

2

4

6

8

10

12

14

16

18

20

2005 2006 2007 2008 2009 2010 2011

y/y q/q, saar

China – GDP Growth

-5

0

5

10

15

20

01 02 03 04 05 06 07 08 09 10 11

Consumption Investment Net Exports GDP, y/y

China – Contributions to GDP Growth

35

40

45

50

55

60

2005 2006 2007 2008 2009 2010 2011 2012

Official PMI HSBC PMI

China – PMIs

Sources: Bloomberg, CEIC, and ANZ

China – Property Price Index

15

China - ANZ Activity Index

90

95

100

105

110

115

120

05 06 07 08 09 10 11 124

6

8

10

12

14

16

ANZ China Activity Index GDP, y/y (RHS)

Inflationary pressures continue to ease despite food price gains. Market has priced in “monetary easing”; more RRR cuts are expected. Policy to support a soft landing.

4

6

8

10

12

14

16

18

20

22

24

2005 2006 2007 2008 2009 2010 2011 2012

China – Reserve Requirement Ratio

China – Bond Yields

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Apr 10 Aug 10 Dec 10 Apr 11 Aug 11 Dec 11

1-year 3-year 5-year 7-year 10-year

(y/y)

-3

-2

-1

0

1

2

3

4

5

6

7

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Food Housing Medical Other CPI

New Weights

China – Contributions to Inflation

Sources: Bloomberg, CEIC, and ANZ

China – ANZ Activity Index

16

Beijing3.1%

Hebei4.9%

Shanxi2.2%

Inner Mongolia2.6%

Liaoning4.3%

Jilin1.8%

Heilongjiang2.2%

Shanghai3.8%

Jiangsu9.6%

Zhejiang6.2%

Anhui3.0%

Fujian3.0%

Jiangxi2.2%

Shandong9.1%

Henan5.6%

Hubei3.7%

Hunan3.7%

Guangdong10.1%Guangxi

2.0%

Hainan0.5%

Chongqing1.9%

Sichuan4.2%

Guizhou1.0%

Yunnan1.6%

Tibet0.1%

Shaanxi2.3%

Gansu1.0%

Qinghai0.3%

Ningxia0.4%

Xinjiang1.2%

Tianjin2.2%

Beijing3.1%

Hebei4.9%

Shanxi2.2%

Inner Mongolia2.6%

Liaoning4.3%

Jilin1.8%

Heilongjiang2.2%

Shanghai3.8%

Jiangsu9.6%

Zhejiang6.2%

Anhui3.0%

Fujian3.0%

Jiangxi2.2%

Shandong9.1%

Henan5.6%

Hubei3.7%

Hunan3.7%

Guangdong10.1%Guangxi

2.0%

Hainan0.5%

Chongqing1.9%

Sichuan4.2%

Guizhou1.0%

Yunnan1.6%

Tibet0.1%

Shaanxi2.3%

Gansu1.0%

Qinghai0.3%

Ningxia0.4%

Xinjiang1.2%

Tianjin2.2%

Beijing3.1%

Hebei4.9%

Shanxi2.2%

Inner Mongolia2.6%

Liaoning4.3%

Jilin1.8%

Heilongjiang2.2%

Shanghai3.8%

Jiangsu9.6%

Zhejiang6.2%

Anhui3.0%

Fujian3.0%

Jiangxi2.2%

Shandong9.1%

Henan5.6%

Hubei3.7%

Hunan3.7%

Guangdong10.1%Guangxi

2.0%

Hainan0.5%

Chongqing1.9%

Sichuan4.2%

Guizhou1.0%

Yunnan1.6%

Tibet0.1%

Shaanxi2.3%

Gansu1.0%

Qinghai0.3%

Ningxia0.4%

Xinjiang1.2%

Tianjin2.2%

Upbeat growth usually takes place during the Party Congress

Provinces with leadership change in 2010-2011 China - Political Business Cycle

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

2 YearsBefore

1 YearBefore

Year ofCPC

1 YearAfter

2 YearsAfter

Average GDP Growth in Previous Cycles (1980-2009)GDP Growth in Current Cycle (2009-2014)

2010

2011

China - Provincial GDP Growth(Ranked by GDP)

0

2

4

6

8

10

12

14

16

18

GD JS SD ZJ

HeN

HeB LN SC

SH

HuB

HuN FJ BJ

AH

NM HL

SN

GX JX TJ

SX JL

CQ YN XJ

GZ

GS

HN

NX

QH

XZ

2011 Growth 2012 Target2011 Average Growth

Sources: Bloomberg, CEIC, and ANZ

17

Australia & NZ

18

Australia faces growing headwinds, but still has a number of factors in its favour, which should once again provide decent insulation from current troubles

Headwinds• European-led financial system disruption• An independent slowdown in China• Domestic fiscal drag• Accelerated structural change• Persistently high AUD

Insulators• Policy ammunition

– Both monetary and fiscal• Strong government finances

– AAA-rated• A healthy banking sector

– Ample liquidity and reduced call on wholesale debt markets• Relatively limited direct trade and financial exposures to Europe

– Euro area is just 4% of Australian merchandise exports– Direct exposure of Australian banks to Euro area is just 2.7% of total assets

• Simultaneous stimulus from the resources boom– An unprecedented (and so far uninterrupted) investment pipeline

19

Australia is increasingly part of Asia

Source: ANZ, RBA ASEAN 6: Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam Other Asia: HK & Taiwan

Australian two-way merchandise trade weights

0

10

20

30

40

50

60

70

80

70 75 80 85 90 95 00 05 10

US Europe

UK Asia

Index

0

5

10

15

20

25

30

70 75 80 85 90 95 00 05 10

Japan

China

Korea

ASEAN 6

Other Asia

IndexAsiaWorld

20

50

60

70

80

90

100

110

120

130

140

60 70 80 90 00 10

Inde

x

Fore

cast

s

New f/c

It’s all about the terms of trade

Source: ABS, RBA and ANZ

Terms of trade since 1960 Terms of trade and 5-yr MA since 1860

60

80

100

120

140

160

180

200

220

1870 1890 1910 1930 1950 1970 1990 2010

Index

, 2003 =

100

21

Australian growth is set to accelerate

Source: ABS and ANZ

GDP growth Business investment vs. consumption

-2

-1

0

1

2

3

4

5

6

7

90 92 94 96 98 00 02 04 06 08 10 12

% y

early c

hange

Forecasts

48

50

52

54

56

58

60

62

90 93 96 99 02 05 08 118

10

12

14

16

18

20

22

Household consumption (left)Business investment (right)

% o

f G

DP

Fore

cast

s

% o

f GD

P

22

A solid lift in mining, energy and infrastructure investment has commenced

Source: Access Economics and ANZ

Forecast Major Project Investment ($Abn)

313.658.477.377.260.939.8Total

205.332.850.151.244.426.8Energy

108.325.627.226.016.513.0Mining

Total20152014201320122011

Forecast Major Project Investment ($Abn)

313.658.477.377.260.939.8Total

205.332.850.151.244.426.8Energy

108.325.627.226.016.513.0Mining

Total20152014201320122011

0

20

40

60

80

100

120

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Communications

Hospitals

Water Supply & Sewerage

Manufacturing

Electricity

Gas Pipelines

Mining

Energy

Airports

Rail

Ports

Roads

$Abn

23

The bad news – outside of mining and related industries, the outlook has worsened

Sources: ABS and ANZ

Non-residential building approvals

0

1

2

3

4

5

6

7

8

9

10

01 02 03 04 05 06 07 08 09 10 11 12

Private sector public sector

$ b

illio

n p

er

quar

ter

(rol

ling 3

m s

um

)

Public sector: 'nation-building' programs spike

Private sector: pre-GFC construction spike

24

Reflecting the increasingly ‘patchwork’ economy

Source: NAB

NAB business conditions

-60

-40

-20

0

20

40

60

80

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Mining Manufacturing ConstructionRetail Wholesale TransportFinance, business, property Recreation & personal

Index

(3m

ma)

25

Key risk: The cost and supply of credit Risk not as heightened as 2008, but could still get very worse very quickly (leaving a current account deficit country like Australia exposed)

Source: ANZ and Bloomberg

Australian bank funding costs

0

50

100

150

200

250

300

350

400

450

500

Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11

5yr Bank Funding 3yr Bank Funding 5-yr Aust. Itraxx (index)

Spre

ad t

o 90d B

BS

W

Lehman Bros file for bankruptcy

Greece initial downgrade

26

-4

-2

0

2

4

6

8

10

88 90 92 94 96 98 00 02 04 06 08 10 12

% c

han

ge

YoY (

real

)

Retail trade related consumption in national accounts Retail trade survey, quarterly volumes

Household spending – unusual trends and conflicting drivers

Source: ABS, RBA and ANZ

Retail sales survey vs total retail spending

Consumer Confidence

60

70

80

90

100

110

120

130

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Consumer confidence 10yr average (2000-2010)

Index

>100 = 'net optimism'

<100 = 'net pessimism'

Disposable income and household consumption

Spending on goods vs services

27

The unemployment rate forecast to head above 5½%.

Labour market, monthly trend growth

Source: ABS and ANZ

-5

0

5

10

15

20

25

30

35

40

45

05 06 07 08 09 10 11 124.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

5.8

6.0

Employment (LHS) Labour force (LHS) Unemployment rate (RHS)

'000 c

hange p

er

mon

th (

trend)

% (tre

nd)

ANZ Forecast

Employment by industry, largest six sectors

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

00 01 02 03 04 05 06 07 08 09 10 11

ManufacturingConstructionRetail TradeProfessional ServicesEducationHealth

1,0

00 p

eople

em

plo

yed (

sas.

ad

j.)

-4

-2

0

2

4

6

8

10

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

Retail employment %y/y Retail sales volumes %y/y, 12 mths ahead

% y

/y s

eas.

adj

Retail sales volumes and retail employment

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Mining

Wholesale trade

Professional services

Finance & insurance

Construction

Hospitality

ALL INDUSTRIES

Real estate

Transport & post

Public admin.

IT & media

Health

Manufacturing

Other services

Retail trade

Arts & recreation

Utilities

Education

vacancies per 100 persons employed in each industry

10 yr average 2001-10 2007 average 2011 average

Vacancy rates by industry

28

Australian rates markets: Still pricing for many of the global risks to unfold

RBA cash rate: ANZ forecasts vs. market pricing

Source: Bloomberg and ANZ

2

3

4

5

6

7

8

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

per

cen

t

RBA Cash Rate ANZ Forecast Current Cash Rate Futures Cash Rate Futures (Nov-11)

average since 1995

29

NZ economic update

• The impact of a weak and uncertain global scene on the NZ economy remains modest. We continue to assess 6 channels.

– Credibility. It is essential the Government sticks to its fiscal austerity script. This is occurring.

– Confidence. Down but respectable and now stable from month to month as opposed to easing.

– Commodity prices. Down 8% from their peak, but recent lifts in dairy prices suggest an encouraging floor. Good volumes providing an offset to weaker prices. NZD prices still very elevated.

– China. Slowing such that policymakers are now re-engaging in support by lowering the RRR.

– Cost of funds. Elevated. Unlikely to change. Lower wholesale rates providing an offset. Deposit rates are key to watch.

– The currency. Flip-flopping but acting as a shock absorber to global events.

• Relative to global peers New Zealand continues to show a degree of resilience. However, indicators are becoming increasingly polarised.

• We have pencilled in 2.5% growth in calendar 2012 and the unemployment rate to drift gradually lower. However, a soft patch in early 2012 beckons and the risk profile is skewed downward. Core pillars of our economic assessment, namely a sluggish trend growth rate and heightened period of uncertainty and volatility, remain.

• The OCR will not be moving up until the global scene stabilises. This looks a way off. Technically we are calling a higher OCR from December 2012 but the spirit of the view is rates will not be moving up for a considerable period. The hurdle to a rate cut looks high.

• The election has been and gone with few surprises. We expect the pace of structural reform to accelerate in H1 2012. Areas such as education are likely to be focal points.

30

Mixed signals continue to permeate on how the NZ economy is performing. Growth is modest, but increasingly scratchy

Financial conditions remain supportive

-4

-2

0

2

4

6

8

90 92 94 96 98 00 02 04 06 08 10 12

97.8

98.2

98.6

99.0

99.4

99.8

100.2

Annual % change

GDP (LHS)

FCI (adv 10 months, inverted, RHS)

Index

830

880

930

980

1030

1080

1130

02 03 04 05 06 07 08 09 10 11 1227282930313233343536

Jan04 = 1000

Monthly ANZ Truckometer advanced 6 months (LHS)

GDP (RHS)

Real 95/96 $bn

Monthly ANZ Truckometer and GDP levels

500

1000

1500

2000

2500

3000

3500

4000

04 05 06 07 08 09 10 11 121500200025003000350040004500500055006000

$ million

Value of mortgageapprovals (2-mth ave, RHS)

Housing turnover (LHS)

$ million

Mortgage approvals and housing turnover

0

10

20

30

40

50

60

70

90 92 94 96 98 00 02 04 06 08 10 12

0

2

4

6

8

10

12

'000

Unemployment rate (RHS, inverted scale)

Simple sum of newspaper and internet job ads (LHS)

Newspaper job ads (LHS)

Percent

Total job ads and unemployment rate

Sources: ANZ, National Bank, Statistics NZ, RBNZ, Seek, Trade Me, NZ Herald, The Press, Dominion Post, Manawatu Standard, ODT, Waikato Times, Hawkes Bay Today, Bloomberg

31

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Important Notice

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