qic abn 95 942 373 762 is a statutory government owned corporation regulated by state government...
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QIC ABN 95 942 373 762 is a statutory government owned corporation regulated by State Government legislation pertaining to government owned corporations. The Corporations Act 2001 does not apply to QIC and, therefore, QIC does not hold an Australian financial services licence and the financial product disclosure provisions in the Corporations Act 2001 do not apply to QIC. However, the Corporations Act 2001 does apply to QIC’s wholly-owned subsidiaries. Where required, QIC’s subsidiaries have obtained an Australian financial services licence. QIC and its subsidiaries and associated entities, and their directors, employees and representatives (“the QIC Parties”) do not warrant the accuracy or completeness of the information contained inthis document (“the Information”). To the extent permitted by law, the QIC Parties disclaim all responsibility and liability for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying on the Information, whether that loss or damage is caused by any fault or negligence of the QIC Parties or otherwise. The Information is not intended to constitute advice and persons should seek professional advice before relying on the Information.
Growth, investment, and trade
Doug McTaggartSeptember 2010
2
Agenda
- US
• Recession and recovery
- Why Australia did well
- Openness and the Australian economy
- The commodities boom and Australia
• Sustainability
• Dutch disease
- Global structural imbalances
- Concerns
• Data requirements
3
GFC and the real economy – a recap
- Collapse of financial sector leverage led to a collapse of world growth in the fourth quarter 2008
- Order of proceedings was• Household confidence folded September 2008• Retail sales and broader consumption fell• Inventories/sales ratio soared• Business confidence collapsed• Manufacturing collapsed• Business investment contracted• Unemployment up
- End result• Collapse in inventories and world trade• Slowest global growth in over 50 years
4
A recession in US and Euro manufacturing
Because discretionary consumer spending collapsed, inventories accumulated in a totally unexpected way. This led to a collapse in manufacturing
Industrial production fell at the rate of 12 per cent per year in the US, 20 per year on Europe, and 40 per cent per year in Japan
-25
-20
-15
-10
-5
0
5
10
15
per
cen
t p
er
year
Annual growth in industrial production
Eurozone
United States
1.2
1.3
1.4
1.5
1.6
Jan
-92
Jan
-93
Jan
-94
Jan
-95
Jan
-96
Jan
-97
Jan
-98
Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
per
cen
tInventory to sales ratio -- US
5
World trade collapsed as in Great Depression
The decline in world trade was the largest seen in many decades, largely the result of contracting household consumption of discretionary consumer goods, compounded by the freeze in credit
What the world trades most are:
• Bulk commodities
• Discretionary consumer product
What the world stopped buying was discretionary consumer product
-40
-30
-20
-10
0
10
20
30
40
50
60
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
Jan-
06
Jan-
08
Jan-
10
Jan-
12
per
cent
per
yea
r
Developing economies
Developed economies
Growth in world trade
6
The V-shaped global recession
Measured real GDP growth fell in nearly all economies
September 2007 shaped as the trough in a “normal” business cycle, until the GFC hit
A V-shaped deep trough occurred
Australia fared better than most, though now the pack is catching up
-6
-4
-2
0
2
4
6
8
10
Mar
-80
Mar
-82
Mar
-84
Mar
-86
Mar
-88
Mar
-90
Mar
-92
Mar
-94
Mar
-96
Mar
-98
Mar
-00
Mar
-02
Mar
-04
Mar
-06
Mar
-08
Mar
-10
Mar
-12
% p
er y
ear
.
US UK Canada Australia
Real GDP growth per year
7
This US recovery is par for the course
99
100
101
102
103
104
105
106
107
-4 -3 -2 -1 0 1 2 3 4 5 6 7 8
US Real GDP (NBER trough = 100)
Quarters around NBER trough
Nov 2001
Mar 1991June 2009*
* QIC assumed trough. NBER is yet toreport a trough date.
98
99
100
101
102
103
104
105
106
107
-12 -10 -8 -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 22 24
US private non-farm payroll employment (NBER trough = 100)
Months around NBER trough
Nov 2001
Mar 1991
June 2009*
* QIC assumed trough. NBER is yet toreport a trough date.
The US economy has recovered from the deep recession about as fast as it could have, and at least as fast as in past recessions
Why the current paranoia regarding double dips and so?
Because attitudes to risk have changed dramatically over the last two years
8
The US economy reinvents itself …. again
By allowing the unemployment rate to reach double figures the US economy again goes through a process of “creative destruction”
The process of reinventing itself every decade or so ensures that the US remains the most efficient economy on the globe, with the best prospects for future growth
To paraphrase George Friedman: “This is the beginning of the American Century”
change in output per hour
-2
-1
0
1
2
3
4
5
6
7
% p
er
year
Change in unit labour costs
-6
-4
-2
0
2
4
6
8
10
12
14
Ma
r-8
0
Ma
r-8
2
Ma
r-8
4
Ma
r-8
6
Ma
r-8
8
Ma
r-9
0
Ma
r-9
2
Ma
r-9
4
Ma
r-9
6
Ma
r-9
8
Ma
r-0
0
Ma
r-0
2
Ma
r-0
4
Ma
r-0
6
Ma
r-0
8
Ma
r-1
0
Ma
r-1
2
% p
er
ye
ar
9
Why the US is so important
0
5
10
15
20
25
SSA ARG AUS BRA CHI FRA GER IND JAP RUS UK US
per
cent
PPP Constant (2000) US$
Consumption shares of global output2007
World Bank data for 2007 show why the US is so important for all in the global economy.
US household consumption accounts for one third of total global consumption and about one fifth of world output (slightly lower with PPP estimates)
China and other emerging economies have a long way to go be dominant forces in the global economy
10
Conclusions on the US
- The recent recession was one delivered by rational consumer behaviour as they took steps to guard against a financial market melt-down – the recession we chose to have
- Even as global financial markets are de-leveraging by about 50%, there is no evidence that households (US and other) are de-leveraging or are having to de-leverage going forward
- US economic growth will quickly return to trend
- The US economy again reinvents itself
- The US economy, led by the US consumer, is and will remain the engine of world growth. Other economies are largely dependent on the US and the broader Anglo-world
11
How has Australia done through the GFC?
The Australian business cycle is still highly correlated with the US business cycle, albeit we have done somewhat better in recent times
It is clear the US drives the Australian business cycle
And note that average GDP growth was higher before the commodities boom than it was after:
3.3% 1990-2004
3.0% 2004-10
Real GDP growth
-6
-4
-2
0
2
4
6
8
10
Mar
-80
Mar
-82
Mar
-84
Mar
-86
Mar
-88
Mar
-90
Mar
-92
Mar
-94
Mar
-96
Mar
-98
Mar
-00
Mar
-02
Mar
-04
Mar
-06
Mar
-08
Mar
-10
Mar
-12
per
cent
per
yea
r
US Australia
12
Why Australia did relatively well
- Robust financial sector – even though relatively large
- National, uniform prudential legislation
- High immigration rates
- High initial interest rates
- Variable rate mortgages and consequent large fall
- Falling oil/petrol prices
- Recent experience with skilled labour shortages, labour hoarding
- Relatively small manufacturing sector
- Predominance of bulk commodity exports
- Stimulus packages
13
How open is the Australian economy?
0
30
60
90
120
150
per c
ent
1970 2008
Imports + exports as a share of GDP1970 and 2008
211 / 361Not very, relatively speaking!
So the question is, just how much did Australia’s success through the GFC revolve around our trade links with Asia, in general, and China, in particular, via commodity exports?
Note that Australia always was and still remains a relatively closed economy. We sit alongside the US and Japan – very large internal markets – and also Brazil, Argentina and India
14
The commodity price boom
50
60
70
80
90
100
110
120
130
Sep
-59
Sep
-62
Sep
-65
Sep
-68
Sep
-71
Sep
-74
Sep
-77
Sep
-80
Sep
-83
Sep
-86
Sep
-89
Sep
-92
Sep
-95
Sep
-98
Sep
-01
Sep
-04
Sep
-07
Sep
-10
2007-0
8 =
100
The terms of trade
0
40
80
120
160
200
240
280
320
Apr-02 Apr-04 Apr-06 Apr-08 Apr-10
Coking coal
Iron ore
Thermal coal
Benchmark commodity prices (US$/t)
The commodities boom, beginning in the early 2000s, but accelerating in 2004, has been very much a price boom.
It has both supply and demand elements.
Global stocks of commodities, especially base metals, reached record lows in 2004, fuelling price rises
This coincided with increasing demand for Australian coal and iron ore from China, which between 2004 and 2008 went from being the world’s largest importer of steel to the world’s largest exporter
15
The booming commodities sector
0
10
20
30
40
50
60
70
80
90
Ju
n-8
7
Ju
n-8
9
Ju
n-9
1
Ju
n-9
3
Ju
n-9
5
Ju
n-9
7
Ju
n-9
9
Ju
n-0
1
Ju
n-0
3
Ju
n-0
5
Ju
n-0
7
Ju
n-0
9
Ju
n-1
1
per
cen
t
Plant and equipment
Buildings and structures
Type of capex
0
10
20
30
40
50
60
70
per
cen
t
Other selected industries
Mining
Manufacturing
Industry share of capex
The re-direction of resource utilisation in Australia has been dramatic as seen in business investment outcomes:
• Mining has squeezed out capex spending in manufacturing
• Capex spending in buildings and structures has squeezed out capex in plant and equipment
16
Uneven state impacts
The impacts have not been uniformly positive across Australia
• WA has dramatically increased its capex share, largely at the expense of NSW, with less significant impacts on VIC and SA
• QLD has done moderately well
0
5
10
15
20
25
30
35
40
45
Jun
-89
Jun
-91
Jun
-93
Jun
-95
Jun
-97
Jun
-99
Jun
-01
Jun
-03
Jun
-05
Jun
-07
Jun
-09
Jun
-11
Jun
-13
per
cen
t
WA
NSW
QLDVIC
SA
State share of capex
17
And trade impacts?
For the entire period of the commodities boom, Australia’s trade balance has deteriorated, except when imports crashed during the GFC as households curtailed consumption
But isn’t the commodities boom, for Australia, an export led boom?
What has happened?
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
Mar-
80
Mar-
82
Mar-
84
Mar-
86
Mar-
88
Mar-
90
Mar-
92
Mar-
94
Mar-
96
Mar-
98
Mar-
00
Mar-
02
Mar-
04
Mar-
06
Mar-
08
Mar-
10
Mar-
12
perc
en
tag
e p
oin
ts
Net exports contribution to GDP growth
GFC
Commodities boom
-4
-2
0
2
4
6
8
10
per
cen
t
Real trade balance as a share of GDP
18
Currency valuation effects
As the AUD appreciated, tourism changed from a large export industry to a large import industry
This is a dramatic example of the Dutch Disease (Gregory Thesis), and it applies across the board to all Australia export sectors outside of the resources sector
We haven’t managed this very well.
-200000
-150000
-100000
-50000
0
50000
100000
150000
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
Jan-1
1
Jan-1
2
nu
mb
er p
er q
uar
ter
0.4000
0.5000
0.6000
0.7000
0.8000
0.9000
1.0000
1.1000
US
D/A
UD
Net outbound departures
USD/AUD
Tourism as an import industry
Tourism as an export industry
The Dutch disease
19
The states and the Dutch disease
The net effect of the Dutch disease was very positive for WA, good for QLD and very bad for the other states, leading to the two speed economy
The GFC brought a temporary end to this disparity but it looks likely to emerge again, when spending stabilises
-6
-4
-2
0
2
4
6
8
10
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18
Mar
-00
Sep
-00
Mar
-01
Sep
-01
Mar
-02
Sep
-02
Mar
-03
Sep
-03
Mar
-04
Sep
-04
Mar
-05
Sep
-05
Mar
-06
Sep
-06
Mar
-07
Sep
-07
Mar
-08
Sep
-08
Mar
-09
Sep
-09
Mar
-10
Sep
-10
Mar
-11
per
cen
t p
er y
ear
QLD WA
NSW SA
VIC
20
Are structural imbalances an impediment?
-1000
-800
-600
-400
-200
0
200
400
600
US
$ B
illio
n
China
GermanyJapan
Saudi
AustUK
USA
Current account deficits
Are they structural imbalances at all?
Those countries with (relatively) large and persistent CA deficits are Anglo, rapidly growing and demographically young.
These are good environments for foreign investment
• Good governance
• Transparent
• High yielding
And are likely to continue to attract foreign investment flows for a long time to come
21
Productivity growth also dissappointing
Productivity growth through the commodities boom has also been disappointingly low.
There are a number of possible explanations for this:
• Capacity limitations
• Lower R&D
• A 3-sector problem – agriculture, mining and utilities
• Slower micro-reformFred Hilmer: “What’s wrong with microeconomic reform today?”, UNSW, 31 August 2010
22
What are the concerns?
- Is Australia putting all its eggs in the China basket and ignoring more traditional sources of growth?
- Is the commodities price boom sustainable? The supply effect.
- Will the China effect persist?
- If so, how do we deal with structural re-alignment of Australian industry that is required?
• Stolper-Samuelson: return to capital intensive factors (physical and human capital -- skilled labour) goes up, return to other factors goes down (less skilled labour)
• Capital-labour ratios rise
- What are the cross-jurisdictional implications?
23
Data issues
- To understand the impact on the structure of the Australian economy, we require an integrated database by industry and region that is:• Consistent with the national accounts• At the same level of disaggregation as the input/output data• Includes estimates of:
Capital formation;
Capital stock; and
Return to capital.
- Problems with what we have:• Annual national accounts lack sufficient industry disaggregation and a
return on capital measure;• Quarterly business indicators definition may differ from national accounts
and lacks sufficient industry disaggregation • Input/output data lacks timeliness, a measure of the industry capital stock
and return to capital.
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