Transcription of Finance News Network with ANZ Banking Group’s (ASX:ANZ) Chief Economist Warren Hogan.
Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network. Joining me from ANZ Banking Group
(ASX:ANZ) is the bank’s Chief Economist, Warren Hogan. Warren, welcome to FNN.
Warren Hogan: Thank you.
Lelde Smits: ANZ blamed funding cost pressures for the last rate rise, though the RBA [Reserve Bank of Australia] has recently stated that funding costs for banks have eased, who should we believe?
Warren Hogan: They’re both correct statements. It’s just that we’ve got to make sure we look at the whole side of the story. And, the Reserve Bank did note that underlying pressures on funding costs for banks are rising. It’s just that in the last month or two as global financial markets have settled down, post the concerns in Europe at the end of last year, the marginal borrowing costs for all institutions- banks, corporations and so forth- have come down a little bit. But, the average level of funding costs, that is the amount that money costs banks, is still on average rising because of very cheap borrowings from the past are maturing. So generally speaking the pressures on our funding from the wholesale markets are still on an upward trajectory.
Lelde Smits: And while still on the RBA, do you believe its monetary policy is currently adjusted accordingly to the domestic economic environment?
Warren Hogan: For the rest of this year, we’re seeing some modest downward pressure on interest rates. But, there is a lot of different forces of work here are it is a very volatile environment. And, I think that’s the key message here, is that for the Reserve Bank, their official interest rate is likely to track down a little bit. But, global financial volatility is putting upward pressure on wholesale market rates, or wholesale lending rates. And of course, for Australian banks and Australian financial institutions, those two forces are working in different directions.
But overall we think interest rates will probably not drift too far from where they are now, upwards or downwards over the next couple of years. The economy is very sensitive to interest rates. So, if the Reserve Bank feels it needs to give the economy some support it can cut rates and it won’t have to do much. Alternatively, if the economy is starting to pick up and they’re worrying about inflation it will only take a small upward adjustment on interest rates to get that cooling affect on the economy.
Lelde Smits: And to China, first quarter GPD [Gross Domestic Product] just witnessed the pace of economic growth drop to near a three year low of 8.1 per cent. Where do you see China’s growth headed this year?
Warren Hogan: We are reasonably optimistic that we’ve seen or that we are at the low point for Chinese economic growth. It’s first important to listen to what people are saying when they say Chinese growth has weakened to 8.1 per cent, and is weak. Characterising any rate of growth in the current world at 8.1 per cent as weak is interesting; it’s strong and their economy is continuing to be underpinned by huge investments in infrastructure, across many different parts of their economy. And, we think that they’re not only going to maintain at least 8 per cent growth, but that it could actually pick up toward the end of the year.
Lelde Smits: With the Australian economy so tied to demand from China, what’s your outlook for commodities and which commodities do you think are the most at risk of a price correction?
Warren Hogan: Well I think the big picture commodity story can’t be lost here. So we’ve had a huge gain in just about every commodity segment in the last half-decade. Our strategic view is that those gains are going to be held on. So the big lift in prices we’ve seen, in this so called commodity boom are going to hold for a number of years to come. But there will be a lot of volatility around that and there will also be a lot of different performances from different classes of commodities.
So for example, the areas where we’re most positive on over the 12 months are precious metals and energy. So we think oil and gold will do well. Whereas some of the soft commodities are a bit softer and a bit weaker in world markets, and there may be some sort of modest downward movement in iron ore prices and coal.
So, there’s a bit of diversions. But we’ve talking about softness measured in terms of 5/10 per cent price declines, after what is essentially a doubling of prices in recent years. So, we’re still very positive on commodities in general. And of course that’s underpinned by a reasonably positive story on not just China, but the emerging world more generally.
Lelde Smits: To Europe now and the threat of a meltdown in the euro zone seems to have eased this year, with the IMF [International Monetary Fund] even boosting its outlook for global growth for this year and next. What do you believe is the risk of a crisis reigniting?
Warren Hogan: Challenges for Europe are tremendous and there’s no guarantees that we won’t once again be faced with a substantial financial problem in Europe. And, of course the big one out there, the one that we just have no way of predicting, is if the euro itself breaks up. That would be a significant event on the global scene. I would say it would be a bigger event that the failure of Lehman Brothers, in terms of the financial complexity around it.
Although that’s not our central case in any way, shape or form, many people talk about it and the European’s obviously have a strong commitment to keep the euro together. The fact that this substantial risk remains with something that is a very small probability of event means that markets will continue to worry about it. Europe’s going to be a problem for many, many years to come. At the very least their governments have got to de-lever, cut back on their spending, increase taxes that will act as a headwind to the economy and as I said their banks have got to consolidate. All of that will mean that at the very best, Europe will have very little economic growth associated with it. And, at worst it could be the source of another major financial shock for the world.
Lelde Smits: To the markets Warren, the S&P/ASX 200 index has gained about 10 per cent from October last year, but has moved sideways since February. What do you think is holding Australian investors back?
Warren Hogan: I think it’s more to do with the underlying economy and some of the dimensions we’ve already talked about. That is, we’ve got a lot of structural change happening in this economy. So, 10/20 per cent of the economy or of the market, however you want to measure it, is doing very well. And, that’s at the expense of the rest. Some of those other industries are doing OK and some are doing poorly. Really that represents itself in terms of share performance. It means that quite a big portion of the listed companies are not reflective of a strong economy. They are more reflective of a subdued economy. In fact there’s many parts of the Australian economy that look more like what you’d be experiencing in the US or Europe right now. So that’s one element of it.
And the other one of course is the high currency. The high currency makes our equity market look expensive to international investors and of course it acts as a headwind to all those exporting companies that are listed here.
Lelde Smits: Now Warren you mentioned a strong Australian dollar, what’s ANZ’s forecast for the dollar this year?
Warren Hogan: We think the currency is going to remain strong. It’s been softened in recent months, it got up to about $US1.08, it’s been as high as $US1.10 versus the US dollar. It’s now headed back to that $US1.03/$US1.05 mark in recent weeks. We think it’s going to be between parity and $US1.10 versus the US dollar for the rest of the year. And, we think that if our view on the world economy is right, that is we’re going to see a recovery in Asia, and China and in the United States, then the Australian dollar will probably drift up to towards $US1.10 again at the end of the year.
Lelde Smits: Finally Warren, what do you think it will it take to inject some confidence into Australian investors?
Warren Hogan: I think the key one in the short term is the government’s fiscal position and showing that strong commitment to get the government’s budget back into balance. And, I think that really should reinforce the gilt-edged nature of investing in Australia at the moment. We’ve got a government that’s got very low debt levels, that’s been able to not only support the economy through the global recession and avoid recession here, but then pull that financial stimulus out. We’ve got interest rates that, although low by Australian standards, are still positive, so therefore there is a lot of room to cut interest rates if they need to. And of course we’ve got these links into all the fastest growing parts of the world. So we have an economy that really is a gilt-edged investment.
Lelde Smits: Warren Hogan, thanks for the update.
Warren Hogan: Thank you.
Ends
