West Pac Redbook February 2013

The Red Book

Westpac Economicswith the InstitutionalBank.

February 2013

February 2013

The Westpac Red Book is produced by Westpac EconomicsEditor: Matthew HassanInternet: www.westpac.com.auEmail: [email protected]

This issue was fi nalised on 15 February 2013

Contents

Executive summary 4

The consumer mood: brightens 6

Sentiment indicators: spending 8

Special topicsHouse price expectations 10Interest rate expectations 12

Sentiment indicatorsDurables, cars 14Housing 15Risk aversion 16Job security 17

State snapshot: Western Australia 18

Westpac household barometer 19

Summary forecast tablesEconomic & fi nancial forecasts 20Consumer data and forecasts 22

Westpac Institutional Bank

3

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4

February 2013

Executive summary ― The Westpac–Melbourne Institute Index of Consumer Sentiment posted a strong 7.7% rise in Feb, moving from ‘neutral’ to ‘optimistic’ territory.

― The Feb gain came despite a mixed range of infl uences in the month: the RBA leaving rates on hold; economic data releases ranging from surprisingly weak (retail, dwelling approvals), to steady (unemployment) and mildly positive (house prices). A strong sharemarket performance and a less threatening global backdrop would have been positives as well.

― The Feb gain was broad-based. All component indexes posted rises with particularly strong increases in those tracking views on the economic outlook and ‘time to buy a major item’ – components which often lead cyclical shifts.

― The circumstantial evidence and survey detail suggest the rise in sentiment is a genuine cyclical upturn rather than a ‘one-off ’. In particular it suggests lower interest rates may fi nally be starting to generate more positive traction with the consumer.

― CSI±, our modifi ed consumer sentiment indicator, posted a solid though less impressive 3.7pt gain. It points to a modest fi rming in demand by about mid-2013. However the starting point for actual spending is weaker. Although the poor fi nish to 2012 for retail sales is partly a refl ection of sector specifi c problems, the weakness of sales growth, the mix and other indicators all point to weaker than expected underlying demand momentum in early 2013.

― Consumer perceptions on ‘time to buy’ remain uniformly upbeat with the sub-indexes on ‘time to buy a major item’, ‘time to buy a vehicle’ and ‘time to buy a dwelling’ all near historical highs.

― The main negative to the Feb survey continues to be around labour market conditions. In contrast to the sentiment rise, the Westpac –Melbourne Institute Unemployment Expectations Index showed little change in Feb. The modest improvement since Sep was sustained but expectations remain deeply pessimistic overall. Job loss fears look likely to remain a signifi cant restraint on actual spending.

― The Jan survey included additional questions on house price expectations. While few consumers expect prices to decline, expectations have been marked down since Aug particularly in Vic. The picture is consistent with a more tentative, gradual housing recovery than that seen in 2008-09.

― The Feb survey also included additional questions on mortgage interest rate expectations. Responses show a notable hawkish tilt with those expecting rates to rise now outnumbering those expecting further declines.

5

After a disappointing fi nish to 2012, Australian consumers look to have begun the new year with a spring in their step. The Feb Westpac–Melbourne Institute Consumer Survey showed the most convincing signs yet that lower interest rates are starting to gain more positive traction with consumers. Sentiment posted a solid rise, largely unaided by specifi c factors in the month and with the composition and detail suggestive of an underlying cyclical upturn.

Its not quite a ‘slam dunk’ though. We have seen promising gains in the past that have reversed quickly, most notably the rise in Nov last year. And while we would class the Feb gain as a more substantive rise it still falls short of being clear confi rmation of a consumer upswing.

There are several reasons for not getting too carried away:

Firstly, the improvement needs to be sustained. Our analysis suggests the Index needs to consolidate above 110 to be a conclusive signal of an upturn. That may be hard to achieve if there are disappointments at home or abroad.

Secondly, the rise in sentiment needs to translate into increased spending. Positive views on the economy and ‘time to buy’ are a great start but a lift in spending does not always follow. Unemployment expectations will be critical here. These did not improve in Feb and remain at very pessimistic levels that are likely inhibiting demand. This proxy for job security needs to show a similar sustained improvement.

Thirdly, any upturn will need to be able to withstand a sizeable ‘shock’ later this year as mining investment peaks. The fl ow through to spending and activity needs to be strong enough to ensure ‘non-mining’ sectors are strengthening suffi ciently to counteract the mining downturn.

That ‘mix’ looks a long way off . Recent data suggests consumer demand ended 2012 with signifi cantly weaker momentum (we have lowered our near term forecast for consumer spending). ‘Non-mining’ businesses also look unlikely to lift investment materially.

Even with the improved consumer mood in Feb, we still see a case for a further 25bp rate cut by the RBA at its Mar meeting.

-4-3-2-1012345678

-4-3-2-1012345678

Jun-87 Jun-92 Jun-97 Jun-02 Jun-07 Jun-12

ann%ann%real consumer spending real consumer spending per capita

Sources: ABS, Westpac Economics

long run average

Westpac forecasts

qtly%ch

Consumer spending: recovery by second half of 2013?


6

February 2013

The consumer mood: brightens ― The Westpac–Melbourne Institute Index of Consumer Sentiment rose 7.7% in Feb from 100.6 in Jan to 108.3 – the strongest reading since Dec 2010 and the biggest gain since Sep 2011. It follows an extended period in which sentiment has disappointed, posting at best ‘neutral’ readings despite a substantial 175bp reduction in interest rates since Oct 2011.

― The Feb reading is the most promising sign yet that lower interest rates are starting to generate more positive traction domestically. That said, confi dence is still well below the levels during the last easing cycle in 2008-09 which saw sustained readings in the 115-120 range.

― The improved mood comes despite a mixed month for consumer infl uences. The RBA left rates on hold at its Feb meeting. Data releases showed a surprisingly weak fi nish to 2012 for retail sales and a patchy recovery for housing. Labour market data released in the survey week contained some weak detail but a headline unemployment rate steady at 5.4% in Jan.

― Sentiment would have been buoyed by the strong start to the year for fi nancial markets. The ASX rose 4.8% between the Jan and Feb surveys and is up 14% from its Nov low. News from off shore has also been broadly supportive, or at least more so than through most of 2012.

60

70

80

90

100

110

120

130

60

70

80

90

100

110

120

130

Feb-83 Feb-88 Feb-93 Feb-98 Feb-03 Feb-08 Feb-13

indexindex

Sources: Melbourne Institute, Westpac Economics

long run average

-60

-40

-20

0

20

40

-60

-40

-20

0

20

40

Feb-85 Feb-89 Feb-93 Feb-97 Feb-01 Feb-05 Feb-09 Feb-13

indexindex

'economic outlook''family finances''time to buy a major item'

Source: Melbourne Institute, Westpac Economics

*deviation from long run average, smoothed

2. Consumer sentiment: components

1. Consumer sentiment lifts

7


― Overall the Feb sentiment gain seems to go beyond these monthly infl uences. Across the components, the biggest lift was around views on the economic outlook which are now strongly positive. Consumers had more mixed opinions on family fi nances (‘family fi nances vs a year ago’ up 7.3% but still weak overall and ‘family fi nances over the next 12 months’ up only 1.4%). This is still a clear weak spot for confi dence.

― Consumer views on ‘time to buy a major item’ were encouraging, the sub-index rising 5.5% to its highest level since October 2010. Views on the economic outlook and ‘time to buy’ often lead cyclical shifts in sentiment.

― The survey detail provides more insight. The rally in sentiment has been strongest in ‘mining’ states where better news on China and key commodity prices would have calmed last year’s ‘hard landing’ fears. Sentiment has risen across both mortgage holders and the rest suggesting it is no longer just a story of interest rate relief. Confi dence has shown a particularly strong rally amongst Coalition voters – easing concerns about the carbon tax may be partly behind this.

― As promising as it is, the Feb sentiment gain still falls short of a decisive turning point. For that we need to see the rally sustained and a clearer improvement in unemployment expectations.

60708090100110120130140

60708090

100110120130140

Feb-99 Feb-04 Feb-09 Feb-99 Feb-04 Feb-09 Feb-99 Feb-04 Feb-09

indexindex

'mining' 'non-mining' yes no ALP Coalition

Source: Melbourne Institute, Westpac*smoothedstate mortgage voting intention

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14

st devnsst devns

consumer sentimentunemp. expectations^Sources: Melbourne Institute, RBA, Westpac

RBA easing cycles, (figures are 3mth change after last cut)

*deviation from avg, inverted

+1.5+1.1 +1.3

+1.0

+1.2+1.2

+0.3

–0.2

4. Consumer sentiment and RBA easing cycles

3. Consumer sentiment: selected groups

8

February 2013

Sentiment indicators: spending ― Our CSI± index, a modifi ed measure that excludes ‘economic’ questions and includes the Westpac Risk Aversion Index, also posted a solid rise in Feb, up 3.7pts to 100.1, the fi rst reading over 100 since Dec 2010.

― The lacklustre readings around family fi nances continue to act as a restraint, as does lingering risk aversion. Note that the ‘wisest place for savings’ questions used to compile the Westpac Risk Aversion Index are only run every 3mths with the last update in Dec. Hence the Feb CSI± reading may understate demand conditions if the Feb sentiment rise also brought an easing in risk aversion. We keenly await the Mar update.

― While the Feb reading is an improvement and there may be some upside risk with the update to risk aversion, CSI± is still pointing to modest rather than strong demand growth. It is consistent with per capita spending growth of 0.8%yr and per capita retail volume growth of 2%yr. With population rising at 1.7%yr that equates to total spending growth of 2.5%yr and retail volumes rising at a little over 3.5%yr.

― That may be wishful thinking for retail. ABS fi gures for Dec show a very disappointing fi nish to 2012 with monthly retail sales falling for a third month in a row and volumes up just 0.1% in Q4, and down 0.2% for 2012H2 as a whole.

-4-3-2-101234567

-30

-20

-10

0

10

20

30

Sep-77 Sep-82 Sep-87 Sep-92 Sep-97 Sep-02 Sep-07 Sep-12

ann%index

CSI (lhs)*consumer spend (rhs)^

Source: Melbourne Institute, ABS, Westpac Economics

±

*consumer sentiment plus risk aversionminus economic questions, devn from long run avg, smoothed, adv. 6mths;^real, per capita

Westpac forecast

-4

-2

0

2

4

6

8

10

-30

-20

-10

0

10

20

30

Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 Dec-12

ann%indexCSI (lhs)*real retail sales per capita (rhs)

Source: Melbourne Institute, ABS, Westpac Economics

±

*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed

Westpac forecast

6. CSI± vs retail sales

5. CSI± vs total consumer spending

9


― Some of the Q3 weakness in retail could be put down to the fading boost to spending in Q2 from the $1.9bn in compensation payments as part of the carbon tax introduction. The soft Q4 sales fi gures would have been clear of this infl uence though and are a more ominous sign.

― To be fair, retail sales had been surprisingly strong in early 2012, with a big disconnect between sales and demand conditions implied by the consumer sentiment based indicators. The soft Q4 reading has closed that disconnect. However, momentum-wise it points to a clear weakening rather than stabilisation/fi rming evident in consumer sentiment.

― Some of this performance is clearly a retail issue rather than a broader consumer demand story. Many retailers are facing adverse shifts in spending patterns and competitive pressures from off shore-based online retailers, aggravated by the sustained high AUD. Non-food retail’s ‘share of wallet’ has shrunk from 16% of income to just 11% in 2012. The real (infl ation adjusted) share has declined a more modest 1% but this is after 20yrs of gains and suggests much of the pressure is playing out on prices and margins.

― These issues make retail sales a problematic guide to demand. That said, the spending mix and other data point to a loss of momentum.

468101214161820

468

101214161820

Dec-82 Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 Dec-12

%%

nominal real

Source: ABS, Westpac Economics

excludes food, % of household disposable income

5%1%

-30

-20

-10

0

10

20

30

-12-9-6-30369

12

Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 Jan-13

%ann%

composite cyclical spending indicator (lhs)^consumer sent. (trend, rhs)*

Sources: ABS, Melbourne InstituteWestpac Economics

*deviation from long run avg

GST introduction last

6mths^based on car sales, outbound tourism spend & cyclical components of retail sales

severe weather events& Japanese earthquake

8. Composite indicator of cyclical spending

7. Non-food retail: ‘share of wallet’

10

February 2013

Special topic: house price expectations ― The Jan survey included an update of the Westpac–Melbourne Institute Consumer House Price Expectations Index. The Index showed a moderation, declining 7.7pts from 34.4 in Oct to 26.7 in Jan, reversing most of the gain between Jul and Oct.

― The downshift came despite the RBA’s decision to lower rates further in Dec. House price expectations showed little response to interest rate cuts in 2012 – whereas the RBA’s initial cuts in late 2011 boosted price expectations (the Index jumped from 9.1 in Oct to 25.1 in early 2012) they have been largely unchanged since despite an additional 125bps of rate cuts.

― House price expectations are still positive overall with the proportion of respondents expecting prices to rise (46.5%) outnumbering those expecting prices to fall (19.8%). The consensus is weaker in Jan though – the Oct survey found an outright majority (50.3%) expecting prices to rise.

― The lower level of conviction may refl ect the patchy performance of house prices in 2012. Prices measures put annual dwelling price growth nationally in the 0-2% range – a more restrained upturn than seen in 2008-09 and what that appears to be shakier month to month and more uneven across regions.

-50

-25

0

25

50

75

100

-50

-25

0

25

50

75

100

Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

%%

Source: Westpac-Melbourne Institute, Mortgage Choice

*grey line is a similar measure from anannual survey by Mortgage Choice

net percent expecting house prices to rise

long run avg

0

20

40

60

80

100

0

20

40

60

80

100

2004 2006 2008 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13

%responses%responsesfall no change rise

Source: Westpac-Melbourne Institute, *Mortgage Choice surveys conducted in Nov

50%

annual* quarterly

10. Consumers: expected direction of house prices

9. Westpac-MI Consumer House Price Expectations Index

11


― The state split on house price expectations is particularly interesting. Consumers in WA and NSW are much more upbeat with a clear majority expecting prices to rise (64% in WA; 55% in NSW). The standout weak spot is Vic where price expectations were downgraded sharply in Jan and are ‘neutral’ overall with 34% expecting prices to rise, 35% expecting declines and 30% expecting no change.

― The state contrast matches performances in 2012. Whereas housing recoveries look fairly well established in Perth and Sydney, the Melbourne and Brisbane markets are still just stabilising rather than in a clear recovery.

― Looking across other ‘demographic’ groupings, renters pared back their price expectations, more sharply, as did 18-24 year olds – both suggesting a bigger mark down in price expectations amongst potential fi rst home buyers. That said, both groups were more bullish to begin with and have moved more in line with the national view. Recent changes in state government incentives may also have played a part in this reassessment.

― While sentiment on ‘time to buy a dwelling’ is very positive, the more mixed view on the price outlook points to a restrained upturn that is less assured and may take longer to come through.

-40-20020406080100

-40-20

020406080

100

Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

net %net %NSW Vic Qld WA rent mortgage freehold

Source: Westpac-Melbourne Institute

*% reporting expected rise minus % reporting expected fall

-5-4-3-2-101234567

-25

0

25

50

75

100

May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12

ann%%consumers (lhs)businesses (rhs)*property market professionals (rhs)*

Source: Westpac-Melbourne Institute, NAB *expected growth next 12mths

12. House price expectations: consumers vs businesses

11. House price expectations: selected groups

12

February 2013

Special topic: interest rate expectations ― The Feb survey repeated an extra question on expectations for mortgage rates over the next 12mths. Interestingly, the results show more consumers expect rates to rise than fall over the next year, a clear shift from the evenly balanced outlook in Aug.

― Of those with an opinion, 41% expect rates to move higher, 29% expect them to move lower and 30% expect no change. The last time views were surveyed, in Aug, there was an even split between those calling rates higher, unchanged and the same. Both standard variable and 3yr fi xed mortgage rates have declined 40bps following RBA rate cut rates in Oct and Dec.

― Note that despite the ‘hawkish’ shift to consumers’ rate views in Feb, there is still no outright consensus on where interest rates are heading. Indeed, apart from Jun last year when the RBA was actively cutting rates, there has been no consensus on the direction of mortgage rates since 2011.

― The survey detail shows interest rate expectations were marked up the most sharply in NSW and Qld. Consumers in these states and in WA are now the most inclined to call rates higher. There is no outright consensus (i.e. >50%) in any state on the direction of rates though.

0

20

40

60

80

100

0

20

40

60

80

100

Feb-10 Jun-10 Aug-10 Feb-11 Jun-11 Aug-11 Feb-12 Jun-12 Aug-12 Feb-13

%responses%responsesfall no change rise Source: Westpac-

Melbourne Institute

50%

-60-40-20020406080100120

-60-40-20

020406080

100120


net%net %

NSW Vic Qld WA rent mortgage freehold


by state by housing tenure

*survey months are Feb, Jun, Aug

14. Interest rate expectations: selected groups

13. Consumer expectations for mortgage interest rates

13


― Vic consumers were much more balanced on the interest rate outlook. Indeed, a relatively softer picture on Vic is a consistent theme in the Feb survey with sentiment a touch more subdued, a markedly softer view on house price expectations and a signifi cantly weaker take on unemployment expectations.

― The state responses show a welcome consistency between interest rate and unemployment expectations with more ‘bullish views on unemployment matched by more ‘hawkish’ views on rates and vice versa. Consumers, it seems, understand the RBA’s dual mandate of low infl ation and ‘full’ employment.

― The slight hawkish tilt to consumers’ interest rate expectations is in contrast with futures markets which are currently pricing in a 43bp reduction in the cash rate by Oct (i.e. one 25bp rate cut and a 70% chance of a follow on move).Westpac expects a 25bp rate reduction over the same period. The implied median expectations for consumers is no change.

― The fact that sentiment rallied despite a more hawkish outlook on interest rates could be interpreted as an even stronger signal that consumers are on the up. However, the 40bp rate decline between Aug and Feb means the expected level of rates may actually be lower.

406080100120140160180200

406080

100120140160180200

5060708090100110120130140150


unemployment expectations^

Vic

*net% expecting mortgage rates to rise, next 12mths^net % expecting unemployment rate to rise next 12mths (deviation from long run average)Feb-13 survey

mortgage rate expectations*

‘hawkish’ on rates, ‘bullish’ on jobs

‘dovish’ on rates, ‘bearish’’ on jobs

WAAus

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0


%%Feb-11 Aug-11 Feb-12Jun-12 Aug-12 Feb-13

Sources: RBA, Westpac-Melbourne Institute

standard variable mortgage rate

* year-ahead mortgage rate implied by interpolated median of consumers expected change (Jun-12 projection assumes rate cut in survey week already ‘factored in’)

6.45%

8.57% 8.33%

7.4% 6.79%6.85%

16. Interest rate expectations: selected groups

15. Consumer expectations: interest rates vs unemployment

14

February 2013

Sentiment indicators: durables, cars ― The sub-index tracking views on ‘time to buy a major item’ posted a solid 5.5% gain in Feb and is now tracking near historical highs.

― That stands in stark contrast the Dec retail report which showed a poor fi nish for household goods retailers. Sales volumes fell 0.9%qtr with no change through the year extending a dismal run since 2007. All of our earlier comments on the challenging retail environment apply threefold for household durables which has been the single weakest category compared to its pre-GFC growth rates. We hope the surge in buyer sentiment fl ows into demand for local retailers but the form does not look good.

― The sub-index on ‘time to buy a vehicle’ declined 4.2% in Feb after a 6.1% jump in Jan. Some of this appears to be a regular seasonal fl uctuation with carmakers increasingly looking to push sales in Jan. Looking through these fl uctuations, the index remains at a high level consistent with double digit growth in per capita vehicle sales.

― Total passenger and SUV vehicle sales rose 9.4% in 2012 despite patchy sentiment and at times acute job loss fears. This was partly a rebound from supply disruptions in 2011. Abstracting from this, per capita sales growth has been fairly subdued since 2009 with annual per capita sales in 2012 still 3.4% below its 2007 peak.

-5

0

5

10

15

20

-60-50-40-30-20-10

0102030

Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12

%ann avgindex*

time to buy a major item (adv 3qtrs, lhs)*real per capita household goods retail sales (rhs)

Sources: Melbourne Institute,ABS, Westpac Economics

*deviation from long run average, smoothed

last 6mths

-50-40-30-20-10010203040

-50-40-30-20-10

010203040

Oct-80 Oct-84 Oct-88 Oct-92 Oct-96 Oct-00 Oct-04 Oct-08 Oct-12

ann%index

time to buy a car (adv 6mths, lhs)new vehicle sales (rhs)*

Sources: ABS, Melbourne Institute, Westpac Economics

disconnect due to 17.5% cut in vehicle tariffs

*trend per capita, passenger and SUVs only

qtly

Japaneseearthquake hits supply

18. ‘Time to buy a car’ vs new vehicle sales

17. ‘Time to buy a major item’ vs household goods retail

15


― The sub-index tracking views on ‘time to buy a dwelling’ declined 3.3% in Feb but remains at a high level. As with views on ‘time to buy a car’ there also appears to be some regular seasonal variation in house purchase sentiment that sees fi rmer readings over Nov-Jan. This eff ect seems to account for most of the Feb decline.

― Housing markets have been more or less shut over the last two months. Auction activity is basically non-existent over Jan and only really kicks back into gear from late Feb. Data available to date hints at a softer performance although it is extremely unreliable. The next month should give a better indication.

― Latest fi gures on housing fi nance and dwelling approvals show a soft fi nish to 2012. Finance approvals ex refi were fl at in Dec with weak detail around fi rst home buyers and investors. Dwelling approvals fell 4.4% in Dec with a sharp decline in Vic. State government policy changes may have had a hand in the weak Dec results. The market ‘off season’ means the next round of data, for Jan, will by less reliable (Dec sees a 15% fall in fi nance approvals and 30% drop in dwelling approvals that is diffi cult to adjust for).

― By state, purchase attitudes are more subdued in Vic which along with Qld showed a sharper pull-back in Feb. WA and NSW remain strong.

40455055606570758085

60

80

100

120

140

160

180

Feb-98 Feb-01 Feb-04 Feb-07 Feb-10 Feb-13

%indextime to buy a dwelling*auction clearance rates (rhs)^

Source: APM, RP Data-Rismark, Westpac – Melbourne Institute

*state indexes weighted by total number of auction sales^national, seasonally adj. by Westpac, smoothed (Feb-13 is month to date)

50

70

90

110

130

150

170

50

70

90

110

130

150

170

Feb-07 Feb-09 Feb-11 Feb-13 Feb-08 Feb-10 Feb-12

indexindexNSW Vic Qld WA

Source: Melbourne Institute, Westpac Economics *smoothed

20. ‘Time to buy a dwelling’ by state

19. ‘Time to buy a dwelling’ vs auction clearance rates

Sentiment indicators: housing

16

February 2013

Sentiment indicators: risk aversion ― The additional questions on the ‘wisest place for savings’ used to construct the Westpac Consumer Risk Aversion Index were not included in Jan or Feb but will be in the next survey due out on Mar 13.

― The Dec update showed a modest shift away from defensive options in favour of ‘real estate’. The overall position remains highly risk averse though suggesting households maintained their high saving and conservative approach to family fi nances through late last year. Obviously the latest rally in sentiment may have seen a further relaxation in attitudes. The Mar update will give us a defi nitive answer.

― The recent strength of the sharemarket could see consumers take a more favourable view of shares. Past market rallies have seen shifts, particularly early on. However, this can often be in the form of a switch between ‘risky’ assets rather than between ‘safe’ and ‘risky’.

― Increased in risk aversion continues to show through in the consumers’ fi nancial holdings. 2012Q3 data shows direct holdings of cash and deposits hit $748bn, a new record. At 77% of annual income this is well above the 50-55% rates recorded in the 1990s and early 2000s. Note that this refl ects both higher ‘new’ saving out of current income as well as portfolio shifts.

44

52

60

68

76

84

-40-30-20-10

0102030405060

Sep-92 Sep-96 Sep-00 Sep-04 Sep-08 Sep-12

%income%Westpac consumer risk aversion index (lhs)*

household cash & deposits, %income (rhs)

Sources: ABS, Westpac, Melbourne Institute

*% nominating 'pay down debt' or interest bearing assets as wisest place for savings minus % nominating real estate or shares

-80-60-40-20020406080

-15

-10

-5

0

5

10

15

Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12

%%% nominating 'shares' (ann change, lhs) ASX (ann%, rhs)*

Sources: Westpac, Melbourne Institute

*adjusted for inflation

22. Westpac Consumer Risk Aversion Index

21. Consumer risk aversion vs household cash & deposits

17


― The Westpac-Melbourne Institute Unemployment Expectations Index was broadly unchanged in Feb, rising 0.1%. This followed a 6.2% decline in Jan. Recall that lower index readings mean fewer consumers expect unemployment to rise in the year ahead.

― Although the Feb update leaves the Index unchanged, it is consistent with the modest trend improvement since Sep last year. The index is 6.6% below its Sep peak and is declining in trend terms at around 1ppt a month. That said, the Index has been very volatile in recent months making the improvement still tentative. More importantly, the level remains very high.

― At 145, the Index reading means those expecting unemployment rate to rise heavily outnumber those expecting it to stay fl at or decline. The long run average reading is around 125, with readings above 140 typically only seen during recessions, signifi cant downturns or periods of major structural adjustment in the labour market.

― By state, the last 2mths have shown a signifi cant improvement across mining states, with fears of a ‘hard landing’ for the sector late last year clearly easing. This was off set by a modest deterioration in NSW and Vic (though both are still on an improving trend).

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0

406080

100120140160180200220240

Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13

std devns/pptsindexunemployment expectations (lhs)actual unemployment rate (annual change, rhs)'labour shedding' composite (rhs)^

Sources: ABS, Westpac-Melbourne Institute

^based on movements out of employment and total detailed industries reporting employment declines (excl. gross flows prior to 1997), shown as deviation from long run avg

60

80

100

120

140

160

180

200

60

80

100

120

140

160

180

200

Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12

indexindexNSW Vic Qld WA


*smoothed

>100: unemp expected to rise<100: unemp expected to fall

24. Unemployment expectations by state

23. Unemployment expectations vs unemployment change

Sentiment indicators: job security

18

February 2013

State snapshot: Western Australia ― A rebound in commodity prices has been a signifi cant contributor to the rally in sentiment since late last year. This shows through clearly in Australia’s most mining-sensitive state, WA.

― Consumer sentiment in WA dropped sharply late last year going against the grain of a modest uptrend nationally. The catalyst was a steep fall in key commodity prices (spot iron ore prices in particular slumped 36% in Jul-Sep) and the scaling back or cancellation of several mining projects. The fear, even more apparent in readings for business confi dence, was that mining and thus the state of WA was heading for a hard landing.

― The turnaround since then has been impressive. Spot iron ore prices are back above their pre-slump levels and the positive wedge between sentiment out west and the rest of Aus has been restored. As at Feb, consumer sentiment in WA is 15pts above the national average. Figures to Jan show business confi dence in WA and across the broader mining sector is also back above the national average.

― For WA consumers, the main comfort is around the economic outlook. After dropping to post-GFC lows in Nov the sub-indexes tracking WA consumers’ views on the economic outlook are back at the highest levels since Nov 2009.

60708090100110120130140150

60708090

100110120130140150


indexindexWA Aus mining WA Aus

Source: Melbourne Institute, NAB, Westpac Economics

*smoothed

consumer sentiment business confidence

60708090100110120130140

60708090

100110120130140150


indexindex

WA Aus


*smoothed

economic outlook family finances

26. Consumer sentiment: economy, family fi nances

25. Consumer sentiment & business confi dence: WA vs Aus

19


Westpac household barometer ― The Westpac Household Barometer draws on a range of data – including system-wide credit and debit card usage from the RBA, and the mortgage repayment behaviour and credit card usage of Westpac customers – to give a broad proxy for consumers’ fi nancial behaviour.

― The Barometer edged down over Nov-Dec to be up only slightly (0.1pt) for 2012 as a whole. Aside for the most recent dip though it has been on a gradual uptrend, implying a shift towards more conservative fi nancial behaviour consistent with continued high savings rates. Note that we view the Barometer more as a directional guide than a point estimate for household savings.

― Among the components, the main driver of the slight downtick in Q4 was a lift in card usage which had shown a moderation in Q3. After tracking at 4-4¼%yr through Q3, growth in the real value of card transactions lifted to 5.3%yr.

― This was partially off set by slightly more conservative behaviour across the other components – the mix of card usage shifted slightly towards debit over credit; Westpac mortgage customers moved marginally further ahead of schedule on their repayments; and Westpac credit card customers were slightly more disciplined with repayments etc. In all cases though the moves were fairly minor.

-2024681012

98

99

100

101

102

103

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12

%index

Westpac household barometer (lhs)*household savings ratio (rhs)

Source: RBA, Westpac Group

*based on: card transactions, mortgage prepayments; credit card usage; and card debt repayment behaviour

more conservative

less conservative

-2

0

2

4

6

8

123456789

101112

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

ann%ann%

card transactions (lhs)* consumer spending (rhs)

Source: RBA, ABS, Westpac

*real value of all credit and debit card transactions, rolling 3mth total, seasonally adjusted by Westpac

28. Card transactions vs real spending growth

27. Westpac household barometer

20

February 2013

Economic and fi nancial forecastsInterest rate forecasts

Latest (14 Dec) Mar 13 Jun 13 Sep 13 Dec 13 Mar 14

Cash 3.00 2.75 2.75 2.75 2.75 2.75

90 Day Bill 2.90 2.85 3.00 3.10 3.10 3.00

3 Year Swap 3.11 3.00 3.20 3.10 3.00 2.80

10 Year Bond 3.55 3.25 3.60 3.50 3.30 3.10

10 Year Spread to US (bps) 155 140 140 120 120 110

International

Fed Funds 0.125 0.125 0.125 0.125 0.125 0.125

US 10 Year Bond 2.00 1.85 2.20 2.30 2.10 2.00

US Fed balance sheet USDtrn 3.12 3.00 3.10 3.20 3.30 3.42

ECB Repo Rate 0.75 0.75 0.75 0.50 0.50 0.50

Exchange rate forecastsLatest (14 Dec) Mar 13 Jun 13 Sep 13 Dec 13 Mar 14

AUD/USD 1.0370 1.06 1.07 1.05 1.03 1.01

NZD/USD 0.8515 0.85 0.86 0.87 0.87 0.85

USD/JPY 92.55 91 89 87 85 83

EUR/USD 1.3363 1.34 1.36 1.32 1.29 1.25

AUD/NZD 1.2175 1.25 1.24 1.21 1.18 1.19

Sources: Bloomberg, Westpac Economics.

21

Economic and fi nancial forecasts


Australian economic growth forecasts2012 2013

Q2 Q3 Q4f Q1f Q2f Q3f Q4f

GDP % qtr 0.6 0.5 0.6 0.7 0.8 0.4 0.5

Annual change 3.8 3.1 2.9 2.4 2.6 2.6 2.5

Unemployment rate % 5.1 5.3 5.3 5.5 5.6 5.7 6.0

CPI % qtr 0.5 1.4 0.2 0.6 0.6 0.7 0.4

Annual change 1.2 2.0 2.2 2.7 2.8 2.1 2.3

CPI underlying % qtr 0.6 0.7 0.5 0.6 0.4 0.5 0.6

ann change 2.1 2.4 2.3 2.5 2.3 2.0 2.1

Calendar years

2011 2012e 2013f 2014f

GDP % ann change 2.4 3.5 2.5 2.3

Unemployment rate % 5.2 5.3 6.0 6.2

CPI % ann change 3.0 2.2 2.3 2.8

CPI underlying % ann change 2.8 2.3 2.1 2.5

Calendar year changes are (1) period average for GDP, employment and unemployment, terms of trade (2) through the year for inflation and wages. * GDP & component forecasts are reviewed following the release of quarterly national accounts.** Business investment and government spending adjusted to exclude the effect of private sector purchases of public sector assets.

22

February 2013

Consumer demand2012 2013

% change Q1 Q2 Q3 Q4f Q1f Q2f Q3f Q4f

Total private consumption* 1.8 0.7 0.3 0.4 0.6 0.7 0.7 0.8

annual chg 3.8 3.6 3.3 3.3 2.1 2.0 2.4 2.8

Real labour income, ann ch 6.0 4.8 2.2 1.6 -0.3 0.0 1.3 1.2

Real disposable income, ann ch** 1.8 3.4 2.2 3.0 2.9 1.9 2.2 1.4

Household savings ratio 10.0 10.9 10.6 10.8 10.9 10.9 10.4 9.6

Real retail sales, ann chg 2.9 4.2 3.2 2.6 1.6 1.0 1.9 2.4

Motor vehicle sales (‘000s)*** 852.2 872.1 885.0 917.5 935.9 954.6 973.7 993.2

annual chg 5.8 16.1 6.4 9.7 9.8 9.5 10.0 8.2

Calendar years

2010 2011 2012f 2013f

Total private consumption, ann ch* 3.0 3.3 3.5 2.3

Real labour income, ann ch 4.1 4.5 3.6 0.6

Real disposable income, ann ch** 2.8 4.5 2.6 2.1

Household savings ratio, % 9.9 11.2 10.6 10.4

Real retail sales, ann chg 1.0 0.5 3.2 1.7

Motor vehicle sales (‘000s) 828.3 806.3 881.7 954.4

annual chg 13.7 -2.7 9.4 8.2

Notes to pages 20 and 21:* National accounts definition.** Labour and non–labour income after tax and interest payments. *** Passenger vehicles and SUVs, annualised^ Average over entire history of survey. ^^Seasonally adjusted. # Net % reporting expected rise next 12 months minus % expecting fall (wage expectations is net of % expecting >4% and % expecting flat/decline).Note that questions on mortgage rate, house price and wage expectations have only been surveyed since May 2009.

Consumer data and forecasts

23

Consumer data and forecasts


Consumer sentiment 2012

% change avg^ May Jun Jul Aug Sep

Westpac–MI Consumer Sentiment Index 101.7 95.3 95.6 99.1 96.6 98.2

family finances vs a year ago 89.9 76.3 79.8 83.5 78.2 78.4

family finances next 12 months 108.5 93.5 86.3 88.9 91.8 96.2

economic conditions next 12 months 90.3 90.7 90.5 95.8 92.8 93.3

economic conditions next 5 years 90.8 96.4 92.7 97.5 94.9 98.1

time to buy major household item 127.9 119.6 128.6 130.0 125.4 124.9

time to buy a motor vehicle 122.0 116.0 124.7 130.8 126.3 126.1

time to buy a dwelling 122.7 118.2 128.0 128.8 118.5 127.6

Westpac–MI Consumer Risk Aversion Index^^ 10.7 – 34.2 – – 40.1

CSI± 103.8 88.0 90.1 91.6 89.3 89.9

consumer mortgage rate expectations# 48.4 – -27.4 – 0.2 –

consumer house price expectations# 38.7 – – 25.2 – –

consumer wage expectations# -25.7 – – – – -27.6

Westpac–MI Unemployment Expectations 128.1 146.4 151.1 148.1 153.7 155.3

128.1 2013

continued Oct Nov Dec Jan Feb

Westpac–MI Consumer Sentiment Index 99.2 104.3 100.0 100.6 108.3

family finances vs a year ago 82.6 91.8 85.2 77.8 83.5

family finances next 12 months 98.9 100.2 104.8 103.5 105.0

economic conditions next 12 months 91.1 96.6 92.4 95.0 108.9

economic conditions next 5 years 93.6 96.8 88.2 91.1 101.0

time to buy major household item 129.6 136.1 129.6 135.7 143.1

time to buy a motor vehicle 134.6 137.5 138.4 146.8 140.7

time to buy a dwelling 139.8 139.8 142.2 140.0 135.4

Westpac–MI Consumer Risk Aversion Index^^ – – 31.3 – –

CSI± 93.5 98.4 97.1 96.4 100.1

consumer mortgage rate expectations# – – – – 11.2

consumer house price expectations# 34.4 – – 26.7 –

consumer wage expectations# – – – – –

Westpac–MI Unemployment Expectations 152.7 142.2 154.5 144.9 145.1

24

February 2013

Westpac EconomicsSydneyLevel 2, 275 Kent StreetSydney NSW 2000Telephone (61–2) 8254 8372Facsimile (61–2) 8254 6934

Bill EvansChief Economist Global Head of Economics & Research

Andrew HanlanSenior Economist

Matthew HassanSenior Economist

Huw McKaySenior International Economist

Justin SmirkSenior Economist

Elliot ClarkeEconomist

LondonCamomile Court,23, Camomile St,London EC3A 7LLUnited KingdomTelephone (44–20) 7621 7061Facsimile (44–20) 7621 7527

James ShuggSenior Economist

Auckland

Takutai on the SquareLevel 8, 16 Takutai SquareAuckland, New ZealandTelephone (64–9) 336 5671Facsimile (64–9) 336 5672

Dominick StephensChief Economist, New Zealand

Michael GordonMarkets Economist

Felix DelbrückSenior Economist

Nathan PennyEconomist

Westpac Economics directory

Publication enquiries, Westpac Economics, Telephone (61–2) 8254 8720, [email protected]

Notes

Notes

© 2013. A division of Westpac Banking Corporation ABN 33 007 457 141

www.westpac.com.au

West Pac Redbook February 2013

Documents

long run average

lead cyclical shifts

financial services authority

westpac europe limited

westpac institutional bank

25bp rate cut

house price expectations

interest rate expectations