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ECONOMICS I RESEARCH A Presentation to Women in Securitisation Australia – Pulling hard on the fiscal lever Royal Bank of Canada, RBC Capital Markets Su-Lin Ong (+612) 9033 3088 su-lin.ong@rbccm.com This report is priced as of market close 21 September 2020 October 2020 For Required Non-U.S. Analyst and Conflicts Disclosures, please see page 22
A decent bounce in global activity underway but momentum will ease and the recovery is uneven
70
Global Composite PMIs (Level)
60
50
40
30
20
AU US EU UK JP CH
10
0
Jan-2016 Jul-2016 Jan-2017 Jul-2017 Jan-2018 Jul-2018 Jan-2019 Jul-2019 Jan-2020 Jul-2020
Source: Haver, RBC Capital Markets
Asia ex Japan outperforming, EU lagging
2 RBC Capital MarketsGlobal trade volumes also recovering and will help sustain the Chinese recovery
Global Trade Volumes & Global Manufacturing PMI
130 56
54
125
52
120 50
48
115
46
110 44
CPB World Trade Volume Index (LHS) 42
105
JPM global manuf PMI (RHS) 40
100 38
Jan-2017 Jul-2017 Jan-2018 Jul-2018 Jan-2019 Jul-2019 Jan-2020 Jul-2020
Source: Haver, RBC Capital Markets
Chinese demand still lagging with growth mostly driven by production/investment
3 RBC Capital MarketsAustralian recovery set back but not derailed by Victoria
4.0 Contributions to quarterly GDP growth RBC forecasts
3.0
1.8
2.0
1.1 1.1 1.1 1.1 1.0
0.7 0.9 0.9 0.9 0.8 0.9 0.9 0.8 0.9
1.0 0.5 0.5 0.6
0.2 0.3 0.3 0.1 0.4 0.3 0.1 0.4
-0.3
0.0
-1.0
-2.0
-3.0
-4.0
-5.0 Household consumption Dwelling investment Business investment
-6.0 Public demand Net Exports Inventories
GDP -7.0
-7.0
-8.0
Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 Mar-20 Sep-20 Mar-21 Sep-21
Source: ABS, Haver, RBC Capital Markets
We push growth from Q3 into Q4 and Q1 with budget boost likely
4 RBC Capital MarketsThe worst is likely behind us, encouraging signs ex-VIC, some positives emerging
Employee job indices by state/territory
100.0
98.0
96.0
94.0
Australia- All industries- Persons- All ages
92.0
NSW- All industries- Persons- All ages
VIC- All industries- Persons- All ages
90.0 QLD- All industries- Persons- All ages
SA- All industries- Persons- All ages
WA- All industries- Persons- All ages
88.0
04-Jan 25-Jan 15-Feb 07-Mar 28-Mar 18-Apr 09-May 30-May 20-Jun 11-Jul 01-Aug 22-Aug 12-Sep
Source: ABS, Haver, RBC Capital Markets
Mostly moving in the right direction
5 RBC Capital MarketsAlternative and timely data also encouraging
20 Google mobility trends - workplaces (7 day trimmed mean)
10 School holidays
0
-10
-20
-30
New South Wales
-40 Queensland
Victoria
-50
Western Australia
-60
15-Feb-20 15-Mar-20 15-Apr-20 15-May-20 15-Jun-20 15-Jul-20 15-Aug-20 15-Sep-20
Source: ABS, Haver, RBC Capital Markets
Although output unlikely to be fully recouped until 2022
6 RBC Capital MarketsHousehold savings soars and will provide a buffer
20
Household Savings Rate (%) 20
15 15
10 10
5 5
0 0
Seasonally adjusted Trend
-5 -5
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: ABS, Haver, RBC Capital Markets
Although much depends on the labour market and confidence
7 RBC Capital MarketsBut there are structural headwinds for households
210 Household debt (% of household income, 4 qtr moving average)
190
170
150
130
110
90
70
50
90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Australia New Zealand Canada Euro area UK US
Source: IMF, Haver, RBC Capital Markets
Which will be exacerbated by a weaker labour market
8 RBC Capital MarketsResidential construction to drag, fiscal measures tempering weakness in the housing market
National House Prices (Index) RBC forecasts
160 140%
Peak-trough (%, rhs)
140 Trough-peak (%, rhs) 120%
House prices (lhs, index)
120 100%
Prior forecast (lhs, index)
100 80%
80 60%
60 40%
40 20%
20 0%
0 -20%
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Source: ABS, Haver, RBC Capital Markets
Housing fundamentals still challenging
9 RBC Capital MarketsGlobal house prices also proving resilient
275 Nationwide house prices (Index)
250
AU CA UK GER US
225
200
175
150
125
100
75
Jan-05 Jan-08 Jan-11 Jan-14 Jan-17 Jan-20
Source: ABS, Haver, RBC Capital Markets
Low rates are the common denominator
10 RBC Capital MarketsBusiness investment already weak pre-COVID, confidence is the key
20 Business & consumer confidence through COVID restrictions 110
9 Jan: CCTV reports the 11 Mar: WHO labels 25 Jun: Announcement
10 mystery pneumonia outbreak COVID-19 a pandemic of $250m JobMaker
in Wuhan is a new type of 25 Jan: Australia advises package for arts industry 105
coronavirus . "do not travel" to China 15 Mar: AU bans gathering
of 500+ people Mid-May: progressive
0 16-Mar: Overseas arrivals to easing of SD measures 17 Jul: $2.5bn skills package
AU must self-isolate for 14 days and trading restrictions incl extending apprentice
17-Mar: AU gov bans all international
100
commences subsidies and "JobTrainer" 6 Sep: Melbourne
-10 travel announces extension
18-Mar: gathering of 100+ banned of Stage 4 and slew
20-Mar: 4sqm rule imposed exit plan
95
-20 Nov 2019: Virus Mar 21-29: Social 21 Jul: JobKeeper
begins to cirulate distancing measures and JobSeeker exteneded
in Wuhan step up in AU with costing $20.4bn
-30 13 Jan: FIrst case 21 Feb: First case 90
diagnosed in Italy shutdown of non-essential
reported outside 9 Jun: Some mutual obligation
services from Mar 29.
China (in Thailand) requirements reinstated
-40 20 Jan: First case 12 Mar: First round of AU for JobSeeker
reported in US stimulus announced 85
($17.6bn)
7-9 Jul: Greater Melbourne
-50 19 Mar: RBA cuts cash returns to stage 3 lockdown,
rate to 0.25% and NSW shuts border with VIC, 80
commences unconventional QLD re-opens border to most
-60 policy measures 1 May: JobKeeper
visitors ex-VIC and Sydney
22 Mar: Second-round payments commence
2 Aug: Melbourne
AU stimulus/assistance 75
-70 package announced 30 Mar: Third round of
enter stage 4
2 Apr: Free childcare lockdown
($66bn) stimulus incl JobKeeper for working parents
payment announced announced
-80 (total ~$195bn) 70
Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20
Business confidence (index, lhs) Consumer confidence (index, rhs)
Source: NAB, Westpac, Haver, RBC Capital Markets
Will confidence continue to recover?
11 RBC Capital MarketsRecovery also underway in the labour market
300
Employment change ('000s)
200
100
0
-100
-200
-300
-400
-500 Full Time Jobs (SA, '000) Part Time Jobs (SA, '000)
Total Jobs (SA, '000)
-600
-700
Aug-19 Nov-2019 Feb-2020 May-2020 Aug-2020
Source: ABS, Haver, RBC Capital Markets
Just over 50% of jobs have been recouped
12 RBC Capital MarketsThere are encouraging signs ex-VIC
Hours worked (index, Feb 2020 = 100)
104
102
100
98
96
94 AU NSW VIC
QLD WA SA
92
AU ex-VIC
90
88
Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20
Source: ABS, Haver, RBC Capital Markets
With most States & Territories moving in the right direction
13 RBC Capital MarketsThe unemployment rate only tells part of the labour market story
21
Underutilisation metrics (seasonally adjusted)
16
11
6
1 *dotted lines are long-run averages
Unemployment (%) Underemployment (%) Underutilisation (%)
-4
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20
Source: ABS, Haver, RBC Capital Markets
Hours worked, underemployment and participation tell more
14 RBC Capital MarketsWages growth to ease further as slack rises and remains elevated
5.0 5.0
Annual Wages Growth (%)
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
1.5 1.5
Total WPI (% y/y) Private (LHS, % y/y) Public (% y/y)
1.0 1.0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: ABS, Haver, RBC Capital Markets
Cyclical and structural headwinds
15 RBC Capital MarketsToo much slack, core inflation to ease to 1-1¼%
6.0 Annual Inflation 6.0
RBC's 5.0
5.0 Forecasts
4.0
4.0
3.0
3.0
2.0
2.0
1.0
1.0
0.0
Underlying inflation (% y/y) Headline inflation (% y/y)
0.0 -1.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21
Source: ABS, Haver, RBC Capital Markets
A persistent undershoot of the inflation target
16 RBC Capital Markets2020-21 Budget - 2 simple aims: to boost confidence and jobs
Commonwealth Budget - Revenue vs expenses
34 4
2
32
0
30
-2
28
-4
26
-6
24
-8
Dotted lines represent long run averages
22 -10
20 -12
1980/81 1984/85 1988/89 1992/93 1996/97 2000/01 2004/05 2008/09 2012/13 2016/17 2020/21
Underlying Balance (% GDP, RHS) Outlays (% GDP, LHS) Revenues (% GDP, LHS)
Source: Commonwealth Budget Papers, RBC Capital Markets
With a mix of measures to lift near term growth as well as longer term potential
17 RBC Capital MarketsFiscal flexibility with scope to ease
250 237 2018 gross sovereign government debt % GDP
225
200
175
150
135
125
107
98
100 90 87
79
75 62
50 41
30
25
0
JP IT US FR CA UK GE AU NZ G7 average
Source: IMF, Haver, RBC Capital Markets
Debt levels low by international standards
18 RBC Capital MarketsGross debt to exceed 50% of GDP
Outstanding Commonwealth Government Securities (A$bn)
1200 60
Outstanding CGS subject to Treasurer's direction (LHS, $bn) Outstanding CGS % of GDP (RHS)
Forecasts
1100
1000 50
900
800 40
700
600 30
500
400 20
300
200 10
100
0 0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Source: ABS, AOFM,, RBC Capital Markets
Elevated bond issuance to continue
19 RBC Capital MarketsDemand for AU bonds remains strong
ACGB deal sizes & bids received
70 2020 deals 66 66
Face Value Issued ($bn)
Bids at Clearing Price ($bn)
60
53
51
50
40 37
30 26
21 21
20
15
14
10 9 11
9 8 9 25
10 7 8 21
5 19 17
3 4 13 15
9 11 10
6 7 7 7 8
3 3 4 4 4 5 4
0
Source: AOFM, RBC Capital Markets
Cheaper and steeper
20 RBC Capital MarketsIncreasingly blurry fiscal and monetary policy lines
Weekly RBA purchases of ACGBs and semis
$bn
18 semi
16.0
16
acgb
2
14 13.0
total
12
3
10
7.5
8
14.0
2
6 5.0 4.8 5.0
- 10.0 -
4 2
2.5
5.5 2.0 2.0 2.0
5.0 1.5 5.0
2 1 1.1 1.0 - - -
3.3
1.5 1 -
1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.0 0.0 2.0 2.0 2.0 0.0 0.0 0.0 0.0
0 0.5 0.5 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
- 0.0
-
16-Mar 30-Mar 13-Apr 27-Apr 11-May 25-May 08-Jun 22-Jun 06-Jul 20-Jul 03-Aug 17-Aug 31-Aug 14-Sep 28-Sep
Source: RBA, RBC Capital Markets
Further RBA support likely
21 RBC Capital MarketsDisclaimer
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