1. The Australian economy – Staying afloat in the global storm David Gruen Tuesday, 26 May 2009

2. Setting the scene: Longer term trends

3. Real GDP growth Source: ABS Catalogue Number 5206.0 and Treasury.

4. Unemployment rate Source: ABS Catalogue Number 6202.0 and Treasury.

5. Employment shares by industry Source: ABS Catalogue Number 6291.0.55.003.

6. Participation rates (Population aged 15 and over) Source: ABS Catalogue Number 6202.0.

7. Employment shares Source: ABS Catalogue Number 6202.0.

8. Exports and imports (Values) Source: ABS Catalogue Numbers 5206.0 and 5302.0.

9. Asia’s share of Australia’s merchandise imports and exports (Values) Note: Asia defined as ASEAN, China, Japan, South Korea, Taiwan and Hong Kong. Source: ABS Catalogue Number 5368.0.

10. Terms of trade (Ratio of export prices to import prices) Note: From September quarter 1959, quarterly data from ABS National Accounts, Catalogue Number 5302.0; prior to September quarter 1959, M W Butlin (1977) ‘A Preliminary Annual Database 1900-01 to 1973-74’, RBA Discussion Paper 7701. Source: ABS Catalogue Number 5302.0, Reserve Bank of Australia and Treasury.

11. Investment, savings and the current account Source: ABS Catalogue Numbers 5206.0, 5302.0 and Treasury.

12. Foreign liabilities and assets Source: ABS Catalogue Numbers 5206.0 and 5302.0. 0 50 100 150 200 Dec-88Jun-91Dec-93Jun-96Dec-98Jun-01Dec-03Jun-06Dec-08 0 50 100 150 200 Gross foreign liabilities Gross foreign assets Per cent of GDP Net foreign liabilities Net foreign debt

13. Household debt and assets Source: ABS Catalogue Number 5232.0, Reserve Bank of Australia and Treasury.

14. Global financial crisis

15. Causes of the global financial crisis Proximate causes in the US:  Long-term public sponsorship of home ownership for groups that could not afford it  Incoherent financial regulation in the mortgage market  ‘Originate to distribute’ model for mortgages – Mortgages bundled up and ‘securitised’ – Given inappropriate AAA credit ratings and sold to final investors  Risk was supposed to be spread to those most able to bear it  In fact, it was spread to those least able to understand it

16. Causes of the global financial crisis Wider causes:  Global imbalances implied huge flow of funds from developing countries (particularly Asia) to developed countries (particularly US)  Low global interest rates, both structural and monetary policy related, led to strongly rising asset prices

17. Causes of the global financial crisis Wider causes:  Large banks, mainly in US, UK, and Europe, gradually became more highly leveraged (more loans for each dollar of bank assets). They did this because – repeal of the US Glass-Steagall Act in 1999 allowed commercial banks to run large investment banking businesses –regulatory frameworks encouraged banks to shift loans ‘off balance sheet’ –times were good –it was very profitable: “while the music is playing, you have to get up and dance”

18. Causes of the global financial crisis –low global interest rates combined with investors continuing expectation of high returns encouraged a ‘search for yield’ –banks thought they had a better understanding of financial risks than ever before, based on sophisticated models of risk and return :the models were sophisticated but, as it turned out, also fatally flawed  Inappropriate incentives in financial markets – too much pay for short-term returns, not enough downside for losses – incentive to take risks which generated good returns most of the time, but with a small probability of disaster

19. 3-month LIBOR over OIS spreads Source: Thomson Reuters – Ecowin Database. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 05-Jan-0727-Jun-0717-Dec-0707-Jun-0827-Nov-0819-May-09 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 US$ Euro UK£ A$ Per cent per annum

20. European Government bond spreads (To 10-year German bunds) Source: Thomson Reuters. -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 May-99May-00May-01May-02May-03May-04May-05May-06May-07May-08May-09 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 GreeceFranceSpainIrelandNetherlandsPortugalItaly Per cent per annum

21. IMF forecasts of 2009 GDP growth Note: March 2009 forecast is lower bound of IMF estimates. No G7 forecast was provided in the March update, so G3 forecast is used. Source: IMF. G7World

22. US – Housing indicators Housing startsTotal number of homes for sale Source: US Census Bureau and National Association of Realtors.

23. US House prices Source: S&P/Case-Shiller.

24. United States – Unemployment rate Source: Bureau of Labor Statistics.

25. Japan – Industrial production and exports Industrial productionExport volumes Note: Industrial production is seasonally adjusted. Source: Ecowin and Treasury.

26. China – GDP growth Note: Quarterly figures are Treasury estimates. GDP is on a production basis. Through-the-year data are in original terms. Source: CEIC China database and Treasury.

27. OECD output gap Note: Estimates of potential output have not been revised and therefore do not incorporate the reduction in supply implied by the downturn. Not all countries had reported their December quarter 2008 GDP at the time of calculation. Source: OECD. -10 -8 -6 -4 -2 0 2 4 6 Dec-70Dec-75Dec-80Dec-85Dec-90Dec-95Dec-00Dec-05Dec-10 -10 -8 -6 -4 -2 0 2 4 6 Percentage of potential output (f)

28. Global equity markets Source: Standard and Poor’s, Stoxx Ltd and ASX.

29. World’s largest banks by credit rating Note: Data refer to bank ratings as at 1 May 2009 and assets as at late 2007 (latest available data). Source: Bloomberg and The Banker.

30. Banks: Market capitalisation ($US Billions) Market value as at June Quarter 2007 Market value as at 19 May 2009 Source: JPMorgan and Bloomberg L.P. Morgan StanleyCredit SuisseDeutsche BankBarclaysGoldman SachsUBS SantanderRBSJP MorganHSBCCitigroup

31. Thirty largest banks in the World Note: Thirty largest banks by market capitalisation (excluding Chinese State Owned Entities e.g. ICBC). RBS is included for illustrative purposes, despite no longer being one of the top 30 largest banks globally. Market capitalisation is translated into U.S. dollars using relevant exchange rate as at 13-Feb-09. Source: Reuters (as at 13-Feb-09). HSBC JPMorgan Wells Fargo Santander Credit Suisse Mitsubishi UFJ Goldman Sachs UBS Intesa Sanpaolo Westpac BNP Paribas Commonwealth Bank RBC Banco BradescoBank of America Bank of New York Sumitomo Mitsui Mizuho Financial MorganStanley National Australia Unicredit Toronto-Dominion U.S.Bancorp Credit Agricole Citigroup Societe Generale ANZ Deutsche Bank Barclays RBS 100 908070605040302010 0 MARKET CAPITALISATION (US$m)

32. Banks’ share prices Source: Bloomberg. 0 20 40 60 80 100 120 02 Jul 0721 Dec 0710 Jun 0829 Nov 0820 May 09 0 20 40 60 80 100 120 Index (2 Jul 07=100) 0 20 40 60 80 100 120 02 Jul 0721 Dec 0710 Jun 0829 Nov 0820 May 09 0 20 40 60 80 100 120 Australia US Japan UK Index (2 Jul 07=100)

33. House prices Source: S&P/Case-Shiller, Australian Property Monitors and Treasury.

34. Bulk commodity prices Iron oreThermal coal (Newcastle) Note: Iron ore spot price is CFR for India/China imports. Source: Bloomberg, Global Coal and ABARE.

35. RBA Cash rate Note: Data to Dec-89 are the 11am call rate. Data from Jan-90 are the target cash rate. Source: Reserve Bank of Australia.

36. Australian Government fiscal stimulus Source: Treasury.

37. Real GDP (estimated effect of fiscal stimulus) Source: ABS Catalogue Number 5206.0 and Treasury.

38. Australian Government Source: Treasury. Payments and receipts Underlying cash balance

39. Government net debt position for selected countries Note: Data are general government net debt, except for Australia which are Australian Government debt. Data are as at end of calendar year, except for Australia and the UK where data refer to financial years beginning 2008-09. UK data for 2014 refer to financial year 2013-14. Source: IMF, HM Treasury and Treasury.

40. Private consumption (Nominal) Source: ABS Catalogue Number 5206.0, US Bureau of Economic Analysis and Office of National Statistics, UK. 50 55 60 65 70 75 Mar-79Mar-82Mar-85Mar-88Mar-91Mar-94Mar-97Mar-00Mar-03Mar-06Mar-09 50 55 60 65 70 75 Per cent of GDP US UK Australia

41. The Australian economy – Staying afloat in the global storm David Gruen Tuesday, 26 May 2009