|Projected GDP growth globally over next 15 years||Developed economies will grow 1-2%pa|
|Projected long term population growth||Nigeria is a standout|
|Debt levels remain an issue across the globe||Australia compared with US in terms of total debt|
|Australia’s sensitivity to China growth||Australia trade balance with major trade partners|
|We remain a highly cyclical resource economy||We will remain in a sustained low growth cycle|
This week concluded our End of Year Investor Briefing tour across Australia.
From these presentations, we have chosen some of the key charts and highlighted their significance for the outlook for Australia and financial markets.
Figure 1. World’s 20 largest Economies in 2030
Source. US Department of Agriculture
This chart, created by the US Department of Agriculture, paints a sobering outlook for most of the G20 countries. In the main, the expectation is that the larger developed economies of the world will have pedestrian growth over the next 15 years. Compound growth rates of 1% to 2% are expected to be the norm. Lower growth rates are expected in Japan, France and Italy. The commodity countries, Canada, Brazil and Russia, will have slow growth by recent standards. Australia is forecast to have its slowest compound growth period since the Second World War.
Outside China and India, the fastest growth will be seen in Mexico, Indonesia and Nigeria.
Small economies with large, young populations are expected to excel. Nigeria has recently overtaken South Africa to emerge as the largest economy in Africa, and is forecast to be the fastest growing economy in the world over the next 30 years. But that is off a very low base: it is at present the world’s 20th largest economy with GDP estimated at US$1.1 trillion.
Figure 2. Population growth in China, India, Nigeria and USA (1950 – 2100, actual and projected)
Source. United Nations
This chart, sourced from the United Nations, projects that population growth will have peaked in China by 2035 at about 1.4 billion people. India will peak at about 1.65 billion people by 2070, while the United States will grow steadily but moderately from today’s 330 million to 450 million by 2100.
The emerging growth economy measured by population is Nigeria. Today, its population is 182 million, with over 50% of its citizens below 18 years of age. It is this feature, plus improvements in its society (health care and education) that will result in its population spiraling to 800 million by the end of this century.
Nigeria is rapidly emerging, and its checkered history is worthy of review as it transitions from a debt-driven, oil-based economy to a more diversified growth economy. Nigeria benefited from being a member of OPEC and supplying about 10% of the oil needs of the US. However, excesses following the oil boom of the 1970s coupled with mismanagement and corruption, and Nigeria nearly collapsed in the 1980s. Debt reconstructions and a deal with European lenders resulted in the repurchase and repayment of debt by 2005. While it still faces many challenges, today Nigeria has government debt below 10% of GDP and has expanded its economy into telecommunications and IT.
The lessons are clear. Recovery from debt distress can be achieved by quick debt relief and a focus on diversification off an industrial base. Countries such as Greece and Portugal need to have their debt written down so that Governments can focus upon economic recovery and sponsoring new industries. For Australia, there continues to be too much trade focus on our resource-based industries. We are fortunate that our national debt is low at a time of substantial commodity price declines, because resource-based economies are highly cyclical.
Figure 3. General Government Net Debt – 2015 (%)
Sources. International Monetary Fund; Fiscal Monitor October 2014; Statistical Tables 8 & 16; Austrade
Debt levels remain high across Europe and will not decline anytime soon. It is clear that debt continues to grow faster than the economy in Greece, France, Italy and Portugal. Debt in the major G20 advanced economies of Japan, US, Germany and UK averages over 80%. Too much government revenue remains directed at servicing and repaying debt. This stymies growth and any chance of dynamic economic growth.
Australia’s debt remains relatively low at a national government level, but our total debt (ie including households and corporates) is high and growing. This is evident in the next table where Australia’s total debt is compared to that of the US.
Figure 4. Australia compared to US total debt (Debt-to-GDP %)
Source. McKinsey & Co.
While US Government debt swamps that of Australia, we can see that our financial institutions were highly geared when measured in 2014. The recent bank capital raisings were necessary to bring down bank leverage which had ballooned with excessive lending for residential mortgages. Mortgage lending by banks translates into growing household debt; Australia’s debt in this sector vastly exceeds that of the US (on a GDP measure, obviously not in absolute terms).
Australian bank sector leverage has come down, but US banks are better positioned for profit growth should credit demand and interest rates rise across the world.
Figure 5. World commodity exposure
Source: Oxford Economics / UNCTAD
The above chart highlights those economies which are commodity-focused measured by net commodity exports as a percentage of GDP. The economies at the top of the chart all benefited greatly from the surge in commodity prices either side of the GFC. Those economies at the bottom were losers during the price boom, given they were net importers of commodities and energy.
Today, the cycle has turned and countries at the top of the table are feeling the substantial drop in foreign trade income. Those at the bottom are benefiting from lower costs of production and substantially lower energy costs. This is where China sits, and the benefits of lower commodity and energy prices are magnified by its currency peg with the US.
Figure 6. Export dependence on China
Sources: Oxford Economics; Haver Analytics
This table highlights Australia’s large exposure in its trade account with China. Australia’s fortunes are still very much dependent upon the growth in trade with China.
The largest economic dependence with China is seen in Taiwan, Korea, South Africa, Chile and Malaysia. These countries are large exporters to China. Compare this to the US and the Eurozone which have large inbound trade with China, but do not benefit from large export trade.
An economic slowdown in China is significant for the world but potentially devastating for countries like Australia.
Figure 7. Australia’s top trading partners
Sources. National Australia Bank; Macrobond
The final chart captures recent trends in the trade balances of our major partners – China, Japan and Korea. The first point is the decline in trade balances with each country. In 2013, the combined trade surplus with these countries exceeded $60 billion, with China’s surplus exceeding $40 billion. At that point, Australia had a trade surplus of about $10 billion, and so our deficit with smaller trade partners was massively negative.
Figure 8. Australian: Top trading partners – ‘ trading places’
Sources: Haver, TD Securities (2015 is Jan – Apr annualised)
Since 2014, the trade surpluses with China, Japan and Korea have all fallen substantially. In 2015, the combined surplus will fall to below $40 billion and this represents a $25 billion contraction. Remarkably, the trade surplus with China has fallen so much that Japan will once again become our most profitable trade partner. This surplus (which revolves around coal) will be supplemented by LNG exports towards the end of this decade.
On review of the last ten years, we observe from the above charts that Australia was fortunate to be so trade-engaged with China (which demanded massive supplies of bulk commodities). However, this tailwind is now becoming a headwind, and the transitioning of the Australian economy cannot happen quickly enough.
Australia remains a highly cyclical, resource-based economy. The downturn in commodities is being felt across the economy with both lower national income (seen through wage outcomes) and business capital investment intentions. For a while, we can live off the income generated during the mining boom and the capital gains generated from a residential property boom. But after they peter out, economic growth will slow. That is precisely what the RBA has flagged in recent pronouncements – Australia is in a sustained low economic growth cycle.