small business bendigo july 2004 - anz business bendigo j… · victoria than in melbourne 0 2 4 6...

economics@1 Economics@

Ian JamesIan JamesSenior EconomistSenior EconomistANZ BankANZ Bank

BendigoBendigoJuly 21, 2004July 21, 2004

Presentation to AIM/ANZ Breakfast

Will the economy deliver for Bendigo small business in 2004/05?


Despite official data suggesting economic Despite official data suggesting economic weakness in the early months of 2004weakness in the early months of 2004

Economic (GDP) growth

Source: National Accounts ABS Cat.no. 5601.0

-1

0

1

2

3

4

5

00 01 02 03 04

%% changeover the year

% quarterly change


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

01 02 03

% yearly change

GDP

Australian economic growth

-6

-4

-2

0

2

4

6

8

01 02 03

% point contribution to change in GDP

Domestic final demand

Net exports

The domestic economy continues to power aheadThe domestic economy continues to power ahead

Sources of GDP growth

Source: National Accounts ABS Cat.no. 5601.0

economics@4 Economics@Source: Retail Trade ABS Cat. No. 8501.0

0

5

10

15

20

Food Departmentt Clothing Household Recreation Hospitality Other Total

Australia Victoria

annual % change, nominal terms

Retail trade continues to grow at scintillating rates Retail trade continues to grow at scintillating rates boosted in June by one off family paymentsboosted in June by one off family payments

(Jan-May 2004 v’s Jan-May 2003)


New motor vehicle sales have powered to record New motor vehicle sales have powered to record highs highs

0

5

10

15

20

25

PMV's SUV's Light Trucks HeavyTrucks

Total

Source: Vfacts & Sales of New Motor Vehicles ABS Cat. No. 9314.0

% sales growth Jan-Jun 2004 on 2003%

economics@Economics@Source: ABS

0

1

2

3

4

5

Bendigo/Loddon

December quarter 2003 vs December quarter 2002

Takings (% ch)

Guest Arrivals (% ch)

Domestic tourism numbers are rising with Domestic tourism numbers are rising with favourable benefits on tourism accommodation favourable benefits on tourism accommodation

Bendigo Loddon accommodation(hotels/motels/serviced apts)


Reflecting economic buoyancy, road transport Reflecting economic buoyancy, road transport activity is strong with latest figures showing activity is strong with latest figures showing annualised growth of 12.5% annualised growth of 12.5% -- the fastest in 15 yearsthe fastest in 15 years

-10

-5

0

5

10

15

20

Mar-88 Mar-90 Mar-92 Mar-94 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04

Road transport(seasonally adjusted real prices)

Source: National Accounts ABS Cat. No. 5206.0

Annual % change


Consumer confidence has risen to the highest level Consumer confidence has risen to the highest level in a decade and business remains extremely bullishin a decade and business remains extremely bullish

80

85

90

95

100

105

110

115

120

Jul-98 Jul-00 Jul-02 Jul-04

0

10

20

30

40

50

60

70

Jun-98 Jun-00 Jun-02 Jun-04

Consumer sentiment SME Confidence

Source: Sensis andSource: Sensis and

economics@Economics@Source: ABS Cat. No. 6416.0

-10

-5

0

5

10

15

20

25

30

35

40

45

50

87 89 91 93 95 97 99 01 03

Sydney

ann % ch.

Brisbane

Melbourne

ABS house price growth

Consumer confidence has been underpinned by Consumer confidence has been underpinned by rapid house price growth in capital citiesrapid house price growth in capital cities

-10

-5

0

5

10

15

20

25

30

35

40

45

50

87 89 91 93 95 97 99 01 03

Adelaide

ann % ch.

Perth

Hobart


And throughout regional cities, towns, coastal And throughout regional cities, towns, coastal resorts and even rural hamletsresorts and even rural hamlets

0

5

10

15

20

25

Bendig

o

Strath

fields

aye

Kanga

roo Fl

at

Eagle

hawk

Goorno

ngElm

ore

March Qtr 2004 on March Qtr 2003 Last Ten Years

% change

Source: Residex Pty. Ltd.

Median House Price Growth


Property price growth has been faster in country Property price growth has been faster in country Victoria than in MelbourneVictoria than in Melbourne

0

2

4

6

8

10

12

14

16

Houses Units

Vic. Country Melbourne

l Underpinned by improved employment prospects in agriculture due to farm consolidation and growth in more intensive areas of agriculture.

l Movement of lower income groups out of metropolitan areas due to affordability.

l Growth of tourism.

l Lifestyle considerations.

l Investors seeking the better yields available in country towns than capital cities.

l Improved communications and upgrading of transport links to capital cities.

Source: Residex Pty. Ltd.

%%Median Prices

Annual growth as at March 2004


Other data gave evidence of a robust economy.Other data gave evidence of a robust economy.

l Non residential construction continues to run hot with plenty ofuncompleted work in the pipeline.

l The labour market remains strong and the unemployment rate remains at levels last seen 14 years ago.

l Business is experiencing good conditions with strong cash flows through business and profit share at close to record highs.

l Cost pressures remain reasonably subdued - a surprise given the boom conditions the economy experienced in the latter part of 2003.

l Advertising expenditure has been very strong.

l There has been a notable increase in information technology expenditure.


In shortIn short

l Macro economic conditions were super strong in the latter half of 2003 - as good as it gets for Australian business.

l Conditions were not as good in the early months of 2004 but nonetheless remained strong.

l Overall 2003/2004 will have been a great year for domestically based Australian business.


So after the buoyancy of last financial So after the buoyancy of last financial year, is the economy heading for a year, is the economy heading for a

hangover in 2004/05?hangover in 2004/05?


Australian economic growth will be assisted by Australian economic growth will be assisted by a buoyant world economya buoyant world economy

ll The world economy is enjoying its strongest growth in four yearsThe world economy is enjoying its strongest growth in four years..

l US economic growth has bounced back strongly assisted by massivepolicy stimulus with the Fed funds rate at 1.25%, tax cuts and increased government expenditure.

l As a consequence, the US economy is forecast to grow about 4.5% in 2004 – the best outcome since 1997.

l Japan’s sustainable upturn has been the big global growth surprise with growth of 2.7% in 2003 and on track to lift to 4.5% in 2004 with business conditions the best in six years.

l The Chinese economy is red hot with growth at around 10% and despite a cooling due to capacity constraints is expected to continue to grow strongly.

l Nearly all East Asian economies will record stronger growth this year.l The U.K. economy is strong and while the picture in the rest of

Europe is more subdued things are looking better after two dismal years.

economics@16 Economics@Source: ABS, Economics@ANZ

1.0

1.5

2.0

2.5

3.0

98 99 00 01 02 03 04

$bn (trend)Mining investment

Overseas tourist arrivals

-40-20

02040

01 02 03 04

% yearly change

Export growth

-40-20

0204060

98 99 00 01 02 03 04

% yearly changeFarm production

Exports are set for a sharp rebound as 2004 Exports are set for a sharp rebound as 2004 proceedsproceeds

-202468

1012

01 02 03 04 05

% yearly change


Rural Victoria is looking strongRural Victoria is looking strong

l Dairy opening season prices are stronger, water allocations are up on last year and feed costs will be lower.

l Non irrigated pasture growth is strong across the State suggesting bountiful feed, hay and silage this season.

l The winter crop harvest is looking good and world prices are holding well.

l Lamb prices are at record highs.

l Beef prices are strong underpinned by the continuing ban in North Asia of US beef imports while store cattle are fetching sensational prices as strong re-stocker demand continues.

l Wool prices have fallen from their unsustainable peak but the recent rise in oil prices is correcting the distortion that developed between wool and synthetic prices.

economics@18 Economics@Source: Sensis, NAB, ABS *adjusted for five year realisation ratios, nominal

6080

100120140160180

90 92 94 96 98 00 02 04

% Debt to equity ratio

Business confidence

05

101520

Conditions Confidence

Index

2004-05 investment plans

20

22

24

26

90 92 94 96 98 00 02 04

% of factor incomeProfit share

The macroeconomic environment for business The macroeconomic environment for business remains favourableremains favourable

-5

0

5

10

Manuf'ingMining Other Total

% change from previous year May 04 and June04


Consumer spending will be assisted by income Consumer spending will be assisted by income tax cuts to flow to higher income earners and tax cuts to flow to higher income earners and increased family benefits from July 1increased family benefits from July 1

17.24.84.74.33.4Families

Net change in revenue ($bn)

4.75

07-08

14.734.253.801.93Income tax cuts

Total06-0705-0604-05

Note: figures in this table are in accrual, not cash, terms


The housing sector refuses to die despite a The housing sector refuses to die despite a mature cycle mature cycle

Housing finance commitments Residential building approvals

579

111315

98 99 00 01 02 03

'000 (3-mth moving avge)Houses

02468

10

97 98 99 00 01 02 03 04

$bn

Note: Finance commitments are for the construction or purchase of all dwellings. Approvals arefor private sector only. Source: ABS.

234567

98 99 00 01 02 03 04

'000 (3-mth moving avge)

Apartments, etc.

Owner-occupiers

Investors

0

2

4

6

8

97 98 99 00 01 02 03 04

$bn


5

6

7

8

9

10

11

87 89 91 93 95 97 99 01 03 05

%

0

2

4

6

8

10

12

14

16

18

87 89 91 93 95 97 99 01 03 05

% p.a.

Real

nominal

Sources: ABS; Economics@ANZ

Mortgage rates Unemployment rate

And the two main ‘triggers’ that have caused past And the two main ‘triggers’ that have caused past ‘busts’ in the housing market are benign ‘busts’ in the housing market are benign


Despite strong credit growth the RBA says it Despite strong credit growth the RBA says it will not kill the golden goose will not kill the golden goose

Sources: RBA, Economics@ANZ.

Credit growthl The Reserve Bank for sometime has

viewed present interest rates as mildly stimulatory- out of sync with a booming economy.

l Credit growth remains strong led by housing credit growing at 20% p.a. and personal lending at 14%.

l Although the RBA remains concerned about the pace of credit growth reduced commitments will ensure a slowing over the rest of the year.

l The RBA also believes that the excesses of the property price boom have passed.

l Hence recent statements have sent a clear message that interest rates are on hold.

l However in our view an interest rate increase is more likely than not.

-5

0

5

10

15

20

25

99 00 01 02 03 04 05 06

% change from year earlier

housing

business

personal


Has the A$ peaked/bottomed? Has the A$ peaked/bottomed?

Sources: Datastream, Economics@ANZ

l Most of the rise in the A$ since early 2002 was due to the decline in the US$ but the sharp run up to US 80c was aided by the Australian dollar story i.e.

– strong economic performance– sharp acceleration in commodity

prices– and wide interest rate differentials

with overseas. l So why did the currency tank in April?

– a belief that the interest rate differential would narrow

– concern about China and the implications for commodity prices.

l However we believe that the markets have overshot and our modelling suggests that fair value is US74c.

l Hence the currency may rally again to beyond this value before weakening in 2005 back to 65c by end 2005.

0.45

0.50

0.55

0.60

0.65

0.70

0.75

0.80

0.85

93 94 95 96 97 98 99 00 01 02 03 0490

95

100

105

110

115

120

125

130

US$/A$ exchangerate (LHS)

RBA index of

commodity prices in

US$ (RHS)

US$ Index

Australian dollar


Economic growth should rebound in the second Economic growth should rebound in the second half of 2004 but the drivers of growth will changehalf of 2004 but the drivers of growth will change

-6

-4

-2

0

2

4

6

8

Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05

Net Exports

GDP

Domestic Spending

Sources: ABS; Economics@ANZ

% pointContribution to economic growth

economics@Economics@

Four key economic issues impacting on Four key economic issues impacting on business in the Bendigo regionbusiness in the Bendigo region


Will high oil prices sink the world Will high oil prices sink the world recovery?recovery?


0

20

40

60

80

100

72 76 80 84 88 92 96 00 04

$US/ barrel

Spot WTI

Oil (May '04 prices)

While oil prices pose a risk they need to be kept in While oil prices pose a risk they need to be kept in perspectiveperspective

Sources: Datastream; Economics@ANZ

WTI crude oil price

l The high oil price is as much a story of a booming world economy as of potential supply problems.

l Since 1980, oil in today’s prices have averaged US $24/ barrel compared to the present price of around US$40.

l While oil at record (nominal) terms unsettles investors, in real terms the oil price is lower than at the time of the last oil crisis.

l And efficiency gains and the development of alternative sources means the world has become less dependent on oil.

l However the market is especially sensitive to bad supply-side news.

l Any further sustainable price increases have the ability to stifle world economic growth.


Can more be done for Regional Can more be done for Regional Australia?Australia?


Absolutely with infrastructure the keyAbsolutely with infrastructure the key

0

5

10

15

20

25

30

35

1995/96 1997/98 1999/00 2001/02 2003/04

Government debtPublic Corporations debtTotal public sector debt

%

l Infrastructure provision rather than grants and subsidies are the key to creating a dynamic regional Victoria.

l Access to a rapid internet service is essential to promoting business in regional Australia.

l Good transport links are important– hence the recent announcement of funds to continue the upgrading of the Calder highway is welcomed.

l As is commitments from both Federal and State governments for rail upgrades.

l But more can be done

Government debt as a % of GDP

Source: Budgetary Strategy and Outlook 2004-05


Will debt sink the household sector?Will debt sink the household sector?

economics@31 Economics@Source: ABS, ANZ, RBA

Interest payments to income

Household debt to income ratio

0

40

80

120

160

90 92 94 96 98 99 02 04

%

2

4

6

8

10

88 90 92 94 96 98 00 02 04

%Total

Housing

Household saving ratio

-4-202468

10

90 92 94 98 00 00 02 04

%, trend

Household borrowing

-505

10152025

93 95 97 99 01 03

% change over the year Housing

Personal

Household debt accumulation has been highHousehold debt accumulation has been high


And furtherAnd further

l And after years of building equity in their homes Australians are indulging in a new game – net equity withdrawal – with latest data suggesting that it is now close to 10% of household incomes.

l Hence Australian households have placed themselves in the position where they are more vulnerable to economic shocks.

l Have Australian households lost their marbles?l Debt accumulation has been driven by key structural changes

– declines in inflation and interest rates since the early 1990s– financial innovation and competition among lenders – a widely held belief that property is the place to be– generational and superannuation concerns.

l These developments have been a key driver of the strong surge in property prices and the subsequent rise in wealth has in turnallowed household spending to grow at a much faster rate than disposable income.

l So house prices become an important economic determinant.


Will established house prices crash?Will established house prices crash?

economics@Economics@

-30

-20

-10

0

10

20

30

40

Sydney Melb Bris Adelaide Perth Hobart AllCapitals

Sources: ABS; Economics@ANZ. Note: “Affordability” calculated for buyer on average incomewith 20% deposit for given level of mortgage interest rate.

% % deviation in house prices from ‘fair value’at March quarter 2004

% deviationa year earlier

Affordability constraints are beginning to pressure Affordability constraints are beginning to pressure house prices and hence household wealthhouse prices and hence household wealth


-30

-20

-10

0

10

20

30

40

50

60

86 90 94 98 02 06 10

%

Rea

Sources:, ABS; REIV, Economics@ANZ

-30

-20

-10

0

10

20

30

40

50

60

86 90 94 98 02 06 10

%

Rea

% deviationfrom fair-value

House prices(Annual %Change)

‘Soft-landing’ (a) ‘Front-load’ adjustment (b)

House prices(Annual %Change)

% deviationfrom fair-value

(a) Assumes adjustment to over-valuation occurs over a comparable period to previous episode (7 years)

(b) Assumes adjustment occurs more quickly, sentiment turns against housing, causingundervaluation by end of decade

But in our house prices will be tempered by the But in our house prices will be tempered by the favourable macrofavourable macro--economic environmenteconomic environment


ConclusionsConclusions

l The Australian economy has performed strongly in recent times, underpinned by a booming household sector.

l Economic conditions remain strong in the short-term with household expenditure gaining some support from the budget initiatives while growth will be supported by a recovery in exports.

l Domestic economic conditions will likely moderate from later this year

– households can’t keep borrowing to fund consumption and the housing cycle is turning down.

– a housing bust is unlikely, although price falls are possible.l Australian interest rates are on hold for now.l Australian economic growth is expected to be similar to this year

largely due to a recovery in the external sector.l The Australian dollar will hold its recent recovery on the back of

short term $US weakness but by 2005 will be headed down.


Would you like a “soft copy” of this Would you like a “soft copy” of this presentation?presentation?

Do you have any other questions?Do you have any other questions?

Send an eSend an e--mail to:mail to:

[email protected]@anz.com

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