News: Bill Evans bets on global stimulus in 2012

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Transcription of Finance News Network Interview with Westpac Banking Corporation (ASX:WBC) Global Head of Economics, Bill Evans.



Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today from Westpac is the Bank’s Senior Economist, Bill Evans. Bill welcome to FNN. Now you defied the consensus view in July last year when you predicted the Reserve Bank would cut interest rates by 100 basis points. Australia’s official cash rate now stands at 4.25 per cent after cuts of 25 basis points, both in November and December. When do you see the next rate cuts and by how much?



Bill Evans: Well back in July we expected that the rate cut cycle that we expected to start by the end of 2011, was going to be 100 basis points. We’ve had 50 already and we expect that there will be a total of another 50, with the next instalment of 25 being on the February 7, 2012.



Lelde Smits: And where do you predict the Reserve Bank [of Australia] will move interest rates in the next 18 months?



Bill Evans: I think that the rates will bottom out around three and three quarter per cent and then they’ll be steady for some time.



Lelde Smits: And will this be enough to give our economy the boost you think it needs?



Bill Evans: I think next year we’ll have growth of around three per cent. That compares with two per cent in 2011, but I think it’ll be in two halves. My expectation is the first half of the year growth will be running around about a pace a little above two per cent. But in the second half, nearer four per cent which will give you around about a three per cent pace, but growth gradually gathering momentum as we move through the year.



Lelde Smits: If we can take a look at international growth then, how would you describe the current state of the global economy?



Bill Evans: Look it’s very uncertain. We expect global growth in 2012 to be 2.8 per cent which is significantly lower than say, the IMF’s [International Monetary Fund] current forecast of four per cent and quite a deal lower than the four per cent that we had in 2011. Some factors that will mark that will be a mild recession in Europe, with growth in the US remaining about that two to two and a quarter per cent.  So not much of a recovery coming through in the US and most importantly we expect China to be growing by around seven and a half [per cent]. That compares with nine and a half in 2011 and nearly 12 in 2009/10. So that’s a significant slowdown in China. The combination of all those factors will see global growth next year in 2012 being quite modest.



Lelde Smits: Westpac’s London based senior economist James Shugg made front page headlines at the end of last year with his dire assessment of European and American economic affairs. Mr Shugg said we’re facing an imminent global catastrophe, the potential collapse of European financial markets and the split of the Eurozone and currency. Would you agree?



Bill Evans: Look that’s a view and those risks are definitely out there. My expectation, however, is that we will see the authorities  allow the Europeans to buy a fair bit of time and that’ll be through action by the European Central Bank. The biggest issue at the moment is the price that the nations that are in trouble have to pay to borrow their money.



European Central Bank has already implemented a very, very aggressive easing policy associated with the banks giving them three-year money at around one per cent, which has allowed the banks to start to support those bond markets. And we are seeing Europe bond yields fall substantially in certain parts of Europe. I expect that to continue, I expect the European Central Bank will play an even more aggressive roll. So this year, I think things will hold together.



Lelde Smits: You say hold together, but do you believe Europe’s lingering sovereign debt situation is on the mend, or are we yet to see the worst?



Bill Evans: Look the deficit positions in these countries will continue to deteriorate because at this stage they’re lacking growth. But support from the financial markets will be a critical factor in allowing them to buy time to move into that next growth phase.



Lelde Smits: OK to the US now. How is the American economy holding up with these European pressures, and what impact do you think it will have on the nation’s growth?



Bill Evans: Well the US seems to be caught in this around about a two per cent growth pace at the moment, so it’s not contracting. But it’s not moving into that area where you’ll get a substantial fall in the unemployment rate. And so the question is, we had some encouraging evidence of growth picking up into the high two’s for the final quarter of this year. Is that sustainable?



The problem is that the pick-up in spending that we’ve seen in the US has very much been financed out of borrowings rather than out of incomes, and that’s not sustainable. And I therefore think that unless businesses in the US feel encouraged enough to go out and employ more people on the basis of stronger growth, and therefore a rise in their expectations with their sales, we’ll see the US story fall back into the sort of a two per cent growth pace.



So I think the better way to look at the US is to assume that the growth pace will be around about that two [per cent growth pace], which will mean that the unemployment rate is unlikely to fall much below eight, which means that the Federal Reserve has to get involved with quantitative easing mark three. And I expect that will start in the second quarter of this year.



Lelde Smits: And Bill what is your forecast for Chinese growth this year, do you foresee demand for commodities softening?



Bill Evans: Look China’s growth we expect this year to be around seven and a half [per cent pace]. And I think that will be in two halves, the first half around about a six and half per cent pace - second half more like eight and a half. And the reason is that China has been aggressively tightening policy, particularly with its concern over both inflation and asset price inflation.



The Chinese authorities have now successfully dealt with their inflation problem and I think that they’re realising now that they need to start easing up on policy. But there’s a nine month lag between the decision to ease up on policy and actually the impact it’s going to have on the economy. So that suggests that the first half of this year will be quite a slow half.



Lelde Smits: Our market dropped about 15 per cent in 2011. What impact do you foresee these headwinds will have on this year’s market movements?



Bill Evans: As I’ve said, I think the key factor this year will be the adoption of stimulus policies around the world, in China, in Europe in particular. Because if we look at what happened to the share markets last year, the US market was up four or five per cent, we were down 15 and of course Europe was down around 20, China was down around 22.



So our markets are being much more influenced by Europe, partly because of the implication that has for funding, given Australia’s high level of foreign debt. And for China, obviously given the implication it has for commodity prices. So it’ll depend upon what happens in that part of the world and I think the policy responses that I have talked about, will be quite important in supporting those developments.



Lelde Smits: OK Bill, now stepping away from the impact of global concerns on our economy. In what shape do you think Australia’s economy is in?



Bill Evans: Look the domestic economy is a two-speed economy. The slow part of the economy is being affected firstly by the high currency, secondly by the cautious consumer. Interest rate cuts are going to help to lower that level of caution amongst consumers and will take some edge off the currency. However, I think that those key headwinds are going to be around for some time and that’s why we expect the unemployment rate to continue to rise in Australia, peaking at around about five and three quarter per cent by the middle of the year.



That will have an impact upon confidence. But I think as we start to see that settling as the interest rate cut effect starts to impact, as the impact of stimulatory policies around the world starts to help, as we start to see evidence that China is coming back, then that will provide a good base for our economy in the second half of the year and particularly in the housing sector. As we know lower interest rates are good for the economy, and they will certainly be good for the Australian housing market.



Lelde Smits: Looking closer at the housing sector, it has been trending weakly, barely registering a lift from the latest rate cuts. How much further do you think we’ll see the price of property fall in Australia?



Bill Evans: Look there are lags in terms of interest rate policy and the housing market. Clearly at the moment the market is soft, but I would expect that with further interest rate cuts, further support to confidence, we’ll start to see some stability in those markets.



Lelde Smits: But will your forecast rate cuts be enough to lure buyers in the long term, is there not a chance that monetary policy is artificially delaying an inevitable price correction?



Bill Evans: The big positive the Australian market has is the imbalance between demand and supply. We have very strong population growth and we just aren’t producing enough houses. So that imbalance is going to provide a support for the market. Now I’m aware that affordability issues come into account here, but affordability is improving significantly.



House prices have come down, interest rates are down. So I think improvement in affordability and this ongoing imbalance between demand and supply is certainly going to find a floor for these housing markets in the second half of this year and into next year.



Lelde Smits: Finally Bill, to sentiment. If the first half cuts you’re predicting eventuate, how would you expect consumer and business sentiment to trend in 2012?



Bill Evans: I would think that if we do get this approach in the world of significant policy stimulus from China, from the US and particularly from Europe that is going to settle these confidence issues. And I think the lagged effect of the slowdown in China that it’ll have on the Australian dollar, will make the Australian dollar a little weaker which will certainly help some industries. But the lower interest rates, strongest stimulus around the world are the key factors that we are looking for, for 2012. That’ll ensure that the second half will be a better half than the first half.



Lelde Smits: Well at least we can finish on a positive note. Bill Evans thanks so much for your insights.



Bill Evans: Right, thank you.



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