1

Australian OutlookJanuary 2003

B Business

E Environment

F Forecasts

O Omens

R Revelations

E Enlightenment

foreseechangewww.foreseechange.com

2

Contents

Activity/Indicator Slide Number

Summary 3

Australian Dollar 4

Interest Rates 8

GDP 10

CPI 12

Index of Consumer Sentiment 14

Future Issues of BEFORE 16

3

Summary

• There is upwards pressure on consumer prices and on interest rates

• The value of the Australian dollar is likely to remain within a narrow range

• GDP growth is expected to slow due to– Weak exports, in part influenced by the drought– Slowing investment growth, especially housing

• The biggest threat to discretionary consumption spending, is oil prices

4

Australian Dollar

• The Australian dollar rose slightly in late 2002, following an upgrading of Australia’s debt rating and a cut in US interest rates

• The Australian dollar is expected to remain steady over the next 12 months– Rising Australian interest rates and improved expectations for

world growth (reflected in commodity prices) could lift the $A slightly

– Rising US interest rates could bring about a fall in the $A– But the poor climate for R&D in Australia is likely to limit the

upside opportunity (see our research paper at www.futuretoolkit.com/currency.pdf)

• Much depends on the value of the US dollar too– It declined by 10% to 17% against major currencies in 2002– The large US current account deficit requires foreign financing

5

Australian Dollar - TWI

Australian Dollar Trade-weighted Index (TWI)source: history, RBA; forecast, foreseechange

Mar

-199

5Ju

n-19

95S

ep-1

995

Dec

-199

5M

ar-1

996

Jun-

1996

Sep

-199

6D

ec-1

996

Mar

-199

7Ju

n-19

97S

ep-1

997

Dec

-199

7M

ar-1

998

Jun-

1998

Sep

-199

8D

ec-1

998

Mar

-199

9Ju

n-19

99S

ep-1

999

Dec

-199

9M

ar-2

000

Jun-

2000

Sep

-200

0D

ec-2

000

Mar

-200

1Ju

n-20

01S

ep-2

001

Dec

-200

1M

ar-2

002

Jun-

2002

Sep

-200

2D

ec-2

002

Mar

-200

3Ju

n-20

03S

ep-2

003

Dec

-200

3M

ar-2

004

Jun-

2004

quarter

48

50

52

54

56

58

60

62

TW

I

history forecast

6

Australian Dollar - $US

Australian Dollar vs US Dollarsource: history, RBA; forecast, foreseechange

Mar

-199

5Ju

n-19

95S

ep-1

995

Dec

-199

5M

ar-1

996

Jun-

1996

Sep

-199

6D

ec-1

996

Mar

-199

7Ju

n-19

97S

ep-1

997

Dec

-199

7M

ar-1

998

Jun-

1998

Sep

-199

8D

ec-1

998

Mar

-199

9Ju

n-19

99S

ep-1

999

Dec

-199

9M

ar-2

000

Jun-

2000

Sep

-200

0D

ec-2

000

Mar

-200

1Ju

n-20

01S

ep-2

001

Dec

-200

1M

ar-2

002

Jun-

2002

Sep

-200

2D

ec-2

002

Mar

-200

3Ju

n-20

03S

ep-2

003

Dec

-200

3M

ar-2

004

Jun-

2004

quarter

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

$US

history forecast

7

Australian Dollar(average for quarter)

Quarter TWI(Dec 02 = 51.9)

$US(Dec 02 = 0.558)

Mar 03 51.3 0.560

Jun 03 50.5 0.554

Sep 03 50.6 0.551

Dec 03 51.2 0.555

Mar 04 51.7 0.559

Jun 04 51.9 0.561

8

Interest Rates

• The Reserve Bank of Australia (RBA) influences interest rates by setting a target for the cash rate, which is the overnight money market interest rate

• Domestic activity is strong enough for the RBA to want to lift rates, but they are constrained by the very low interest rates in USA– Official interest rates in Australia are 3.5% higher than

in USA, the biggest gap since April 1992• Our model predicts that interest rates will rise by

0.5% by mid-2003 and by a further 0.5% by mid-2004

9

Cash Rate

Cash Ratesource: RBA, foreseechange

Jun.

1990

Jun.

1991

Jun.

1992

Jun.

1993

Jun.

1994

Jun.

1995

Jun.

1996

Jun.

1997

Jun.

1998

Jun.

1999

Jun.

2000

Jun.

2001

Jun.

2002

Jun.

2003

Jun

2004

quarter

0

2

4

6

8

10

12

14

16

%

History Forecast

10

GDP

• Australia’s strong economic growth rate is expected to continue, although there is likely to be a slowdown in late 2003– Slowing investment growth (especially housing) with

some recovery during 2004, depending on interest rates

– Weak export growth, in part caused by drought, with some recovery likely but timing uncertain

• Strong growth in household consumption spending (which constitutes 60% of GDP) will underpin GDP growth

11

GDP

Gross Domestic Product (Chain Volume)sources: ABS 5206.0; foreseechange

Jun-

1990

Jun-

1991

Jun-

1992

Jun-

1993

Jun-

1994

Jun-

1995

Jun-

1996

Jun-

1997

Jun-

1998

Jun-

1999

Jun-

2000

Jun-

2001

Jun-

2002

Jun-

2003

Jun-

2004

quarter

-3

-2

-1

0

1

2

3

4

5

6

7

annu

al %

cha

nge

history forecast

12

CPI

• Consumer prices are predicted to rise at a faster rate than the RBA’s target zone (between 2% and 3% per year)– This would put upward pressure on interest rates

• Influential factors include– Oil prices: the recent spike above $30 per barrel, if

maintained, will lift the cpi– The drought will put upward pressure on food prices– The value of the Australian dollar: an increase would

tend to hold prices down

13

CPI

Consumer Price Indexsource: ABS 6401.0, foreseechange

Jun.

1990

Jun.

1991

Jun.

1992

Jun.

1993

Jun.

1994

Jun.

1995

Jun.

1996

Jun.

1997

Jun.

1998

Jun.

1999

Jun.

2000

Jun.

2001

Jun.

2002

Jun.

2003

Jun

2004

quarter

-1

0

1

2

3

4

5

6

7

8

annu

al %

cha

nge

History Forecast

GST introduction

14

Index of Consumer Sentiment

• Research by foreseechange and by the RBA shows that the index of consumer sentiment (ICS) tells us nothing about the future of consumer spending

• Instead, it is like a rear vision mirror: reflecting past economic news– So it can be modelled and predicted

• Some business decision makers believe that it does contain information about the future and use it as an input to decision making– For example, increasing production or imports when ICS rises

• Our model predicts a period of quite steady ICS– although, being survey based, it is subject to sampling error– It is also volatile, depending as it does on economic news and

how that is portrayed in the media

15

Index of Consumer Sentiment

Index of Consumer Sentimentsources: Westpac - Mebourne Institute; foreseechange

Jan-

1999

Apr

-199

9

Jul-1

999

Oct

-199

9

Jan-

2000

Apr

-200

0

Jul-2

000

Oct

-200

0

Jan-

2001

Apr

-200

1

Jul-2

001

Oct

-200

1

Jan-

2002

Apr

-200

2

Jul-2

002

Oct

-200

2

Jan-

2003

Apr

-200

3

month

85

90

95

100

105

110

115

120

inde

x

History Forecast

16

Future Issues of BEFORE

Activity/Indicator Month

$A All

Interest Rates Feb, May, Aug, Nov

GDP Jan, Apr, Jul, Oct

CPI Mar, Jun, Sep, Dec

Index of Consumer Sentiment

All

Consumer Willingness and Ability to Spend

Jun, Dec