Alan Oster, National Australian Bank, Part 2 - 'pressures on the australian economy'

This is just a chart that we use internally. It's a figure breakdown, if you like, of those retail numbers - and you probably can't see it there but if you're in household goods and clothing & footwear you're getting some really negative numbers. So that minus 10 or minus 15 in net balance becomes minus 60 when you come into the clothing and the footwear bit. The blue line there is where it was in December So what we're seeing is quite a further deteriation in the consumer space. I should say before someone asks me the question - we do not see that as internet driven. We see the internet essentially as eating some of their lunch but it's been doing that for quite a while - and the total spend on internet offshore - on our book anyway - is something like 1.5% of the total spend - and it's been going at the same rate all year. It's more that the consumer is now basically pulling back. You might say the retailers didn't help themselves very much by saying that it was the internet and telling everybody which websites to go to. So now everybody goes to those websites; so it's not helped - but broadly what I'm saying is the consumer, fundamentally, is nervous. The other area that you see slowdown or reassessments - these are expectations for house prices The blue lines are where they were this time last year, the red and the sort of gold was in the middle of the year and the green sort of colours were where they were at the end of the year. And I should emphasise that is prior to the floods. So what you're seeing is quite a huge over-build in south east Queensland and a very weak property market which has also caused a lot of problems in terms of Queensland. If I use Queensland as an illustration of the problems that we have - prior to the floods in terms of the multi-speed, the north was in serious trouble - Cairns, that sort of area because of the high Australian dollar - and secondly it was raining a lot, so people weren't going. The middle of Queensland was coal so that was doing great. South east Queensland - basically a very bad property market. Something like one in four homes in the Gold Coast we think are vacant. So the clearance rates - in Sydney Melbourne sort of 50-60% but in Brisbane prior to the floods 10-15%. That has a real effect in wealth. Going forward, our view on house prices are essentially that they're going to go sideways and then increase a little bit. They're not going to probably increase in Queensland in the short term, given the dynamics. The only thing I'd say on the right hand side, when we look at consumption - and that's just running some models we run - we see consumption weakening a bit in the next six months because of the floods but once you get beyond that it goes back to something like 3%. By historical standards that's actually pretty weak. So, what we see in consumer land is a consumer that will continue to basically - I won't say be scared - but to be cautious. This is where we come into the optimistic side - where we're looking at energy prcies on the left hand side and our expectations for gonig forward. For the last four years I've been forecasting commodity prices to go down - this year I'm forecasting they're going up. Mainly because the contracts have just been changed, so they are gonig up. And then - where are we on our terms of trade? I think everybody knows about the terms of trade and the implications of what that does My brief summary measure is that the change in the terms of trade associated with those changing commodity prices adds about $50billion of additional income to the Australian economy - and that flows through. It takes about 12 months to flow through but it's coming through. So, talk about currency - this is a graph I always put up. We have a model that basically ... the best I can do is plus or minus five cents and if I can get it within plus or minus five cents I'm really happy. This goes back through the float. So, the red is basically what the model says and the blue is the actual. There are times when the model doesn't work. So there's, like, Nasdaq - where everyone wanted to buy Nasdaq shares so you needed US dollars. The model wanted sixty odd cents and it was 48c. Going into the GFC, when commodity prices came down, everybody basically thought this going to be the Great Depression mark two. Turns out it wasn't and so therefore it came back. What does the model drive on? Fundamentally it's commodity prices, so think of it as a play on China, global growth going forward and how strong is the local economy. Model says 95c plus or minus five. So, my sort of bottom line is this currency is not going away any time soon, and so we actually end with something like 105c in the short term and then in the medium term we take it back to about 90c. - because we don't have a big slowdown fundamentally in commodity prices. So again that's pretty similar in terms of currency forecasts to what Abares is talking about. This is my most optimistic chart for Australia. It's basically engineering work done or still to be done - in other words, you've started but you haven't finished So, the black is mining - and the black says it's still $60billion of spending still to go - and on the right hand side, the black is mining, which says if they stop now they've still got 30 months worth of work to do. Of stuff they've started. That virtually says that mining by itself adds 0.5% to GDP. When we look at the Australian outlook what we see is a consumer that will recover, we see a re-building of what's been destroyed and we see this mining flow coming through. And, as I said, econometrically it takes about 12 months for these effects to start off in the miners and then spread right across the economy. So ... this is just our forecast - and again, you know, we're probably going to be wrong tomorrow but we've got a 0.4% and it could be higher. But the bottom line is in the short you're basically - in the bars there - don't have much in the March quarter and you could even have a negative. Then, once you get on the other side you're growing at more than one percent per quarter. That's really picking up a lot in terms of GDP. In terms of prices - for the Reserve Bank - if you've got a retail sector that is really struggling you've got a lot of discounting. So that's our measure of retail prices - basically it's not doing anything. So yes, you will get fruit & vegetable prices going through the roof associated with the floods; and yes you will get inflation Our headline inflation number gets close to 4%. But the core is more like 2.75%. In terms of the short term, I think the Reserve Bank will be looking through the temporary effects. They will be sitting around worried about how big the hole is but what they're really saying is once you get beyond that you've got an economy with an unemployment rate at 5% that's going to be growing in excess of 4% - which means unemployment is basically going to be 4.5%. Now if you believe, as they do that once you get below 5% you start to generate wage pressures then I think they basically still expect that they're going to do some more. Our forecast for what they're worth is that we think they're going to do 50 basis points. Timing? We don't know. Our assumptions are somewhere in the middle of the year and then towards the end of the year. If the hole is bigger and inflation is lower they might not start until the of the year and then finish it off. But I think you should assume 50 basis points or so in the next 6-9 months. And so ... this is sort of a summary of our various forecasts. if you look at the extreme right hand side that gives you annual - 2012 - for where you are post the floods; because the floods numbers are going to be quite weak. But what have you got? You've got an economy growing at 4%, you've got employment growing at 2% and you've got unemployment at around 4.5% and you 've got inflation towards the top end of the target. So that's why we also have a cash rate half a point higher than where we are today. So, my sort of overall summary is that I think the outlook in Australia is still extremely good. I think the world economy is quite encouraging - but you're going to have some ups and downs in terms of the aggregate levels of growth associated with the floods and the cyclones - but also the other thing to remember is one of the big things you're going to have to manage is this multi-speed economy because the miners don't care if rates go up 0.5% and they don't care if the currency is at 105c but manufacturing and retail do - and that's very difficult. Thank you.