WestpacRedbookOctober2011[1]

8/3/2019 WestpacRedbookOctober2011[1]

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The Red Book

Westpac Economicswith theInstitutionalBank.

October 2011


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October 2011

The Westpac Red Book is produced by Westpac Economics

Editor: Matthew Hassan

Internet: www.westpac.com.au

Email: [email protected]

This issue was nalised on 18 October 2011

Contents

Executive summary 4

The consumer mood: edgy 6

Sentiment indicators: spending 8

Special topic

House price expectations 10

Sentiment indicators

Durables, cars 12

Housing 13

Risk aversion 14

Job security 15

Summary orecast tables

Economic & nancial orecasts 16

Consumer data and orecasts 18


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Past perormance is not a reliable indicator o uture perormance. The orecasts given in this document are predictive in character. Whilst every

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assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may dier substantially rom these orecasts.

Westpac Institutional Bank

3


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4

October 2011

Executive summary

The WestpacMelbourne Institute Consumer

Sentiment Index was broadly unchanged in

October with a small 0.4% gain. This ollows

a surprisingly strong 8.1% rise in September

but still leaves the Index at 97.2, pessimistic

territory below 100.

The consumer mood continues to be bueted

by severe nancial market volatility and the

shiting outlook or interest rates. In October,

negatives and positives mostly cancelled out.

Responses over the course o the survey week

show signicant variation though, suggesting an

edgy consumer mood.

The survey detail showed improvements to

views on amily nances, the economy and the

labour market outlook but a less optimistic

picture on time to buy questions.

Our modied consumer sentiment indicator

which excludes economic componentsand includes the Westpac Risk Aversion

Index remains at very low levels, above the

extreme lows registered at the worst o the

2008-09 global nancial crisis and the early

1990s recession but 20pts below the normal

level recorded over the last two decades

outside these two periods. The reading remains

consistent with alling per capita spending.

Recent partial data on actual spending

continues to show surprising strength withnominal retail sales posting back-to-back

0.6%mth gains in July-August and vehicle

sales posting a strong rebound rom supply-

disruptions stemming rom the Japanese

earthquake/tsunami. Total spending is now

expected to show a respectable 0.6%qtr, 2.9%yr

gain in the Q3 national accounts. However,

we continue to expect a material weakening

in demand over Q4 and Q1 and see risks o

downward revision to earlier estimates.

October saw less optimistic consumer views on

time to buy a major household item (5.6%)

and time to buy a vehicle (1.6%). Both indexes

were coming rom elevated starting points

though and remain in positive territory overall.

The sharp all in the previously very high AUD

appears to have had a hand in the October

declines.

Consumers continue to show mixed view

on housing. Attitudes towards time to buy

a dwelling ell sharply by 10.4% in October

but ollowed a surprisingly big 15.1% jump in

September and are still net positive territory.

The October survey included an update o the

Westpac-Melbourne Institute Consumer

House Price Expectations Index which

showed a urther cooling, the Index alling rom

15.3 in July to 9.0 in October. Price optimists

still outnumber pessimists but the median

view is now rmly or no change over the next

12mths.

The most positive development out o the

October survey was an improvement in

consumers sense o job security with the index

o unemployment expectations improving 5%

in the month. While this halts what was an

alarmingly swit deterioration, the reversal still

leaves a 27% deterioration over the last six

months that points to a material weakening in

labour market conditions. The heightened ear

o job loss is still likely to negatively impact

consumers purchasing and nancial decisions

near term.


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5

The WestpacMelbourne Institute

Consumer Sentiment Survey showed a

slight improvement in October, holding on

to Septembers surprisingly strong 8.1%rebound and edging another 0.4% higher.

However, the overall message is still

downbeat and the vibe is edgy. The Index

remains rmly in pessimistic territory

with the steady monthly result concealing

powerul undercurrents pulling sentiment in

both directions.

Responses over the course o the week

show a big infuence rom nancial marketturbulence which remains extreme across

both equities and the AUD and the RBAs

continued shit to an easing bias on interest

rates. These two actors, which turned

around strongly rom the middle o the

survey week, look to be worth 3% on

headline sentiment.

The survey detail also shows a mix o

improvement on views on amily nances,

economic prospects and jobs anddeterioration on time to buy a dwelling,

a vehicle or a major household item and on

house price expectations.

Partial data on spending has held up better

than expected through Q3 and suggests

total consumer spending will be okay or

the quarter as a whole. We expect the Q3national accounts (due December 7) to show

spending up 0.6%qtr, 2.9%yr. However, we

continue to see weakness near term with

downward revisions to previous estimates a

signicant risk as well.

Indeed, our concern is that despite the

rming in Sep-Oct, consumer sentiment

is still vulnerable. In particular, i Europes

nancial crisis fares again or i consumers

become less convinced that interest raterelie is on the way, sentiment could quickly

reverse recent gains.

With anxiety around job markets and

housing likely to linger and Europes crisis

set to be a recurring threat to global

nancial stability and world growth, we

expect the RBA will need to ollow through

on its easing bias with actual rate cuts to

prevent a renewed slide in sentiment.

Accordingly, we continue to orecast a 25bp

rate cut by year-end with a urther 75bps in

rate reductions by September 2012.

-3-2-1

012345678

-3-2-1

012345678

Jun-86 Jun-91 Jun-96 Jun-01 Jun-06 Jun-11

ann%ann%real consumer spending

real consumer spending per capita

Sources: ABS, Westpac Economics

long run

average

Westpac

forecasts

qtly%ch

Consumer spending: weakness ahead



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6

October 2011

The consumer mood: edgy

The WestpacMelbourne Institute Index o

Consumer Sentiment increased slightly in Oct,

rising 0.4% rom 96.9 in to 97.2.

Sentiment continues to be pulled by powerul

cross-currents. On the downside, nancial

market turmoil remains a signicant actor

with more sharp alls in both the sharemarket

(ASX down 8% between surveys) and the AUD,

which slumped rom 106 US to 94 at the

beginning o the Oct survey week.

However, on the positive side is a continued

shit in rhetoric rom the RBA, which adopted a

clear easing bias at its October Board meeting.

That coupled with a strong rally in nancial

markets late in the survey week (ASX up nearly

7%, AUD rally to 98 US) made or a gain in

sentiment overall, though a small one.

The cross-currents are evident in survey

responses over the course o the week. Those

surveyed on Oct 3 to 4 (prior to the RBA meeting

and the market turnaround) recorded an Index

reading o 92.3 while those surveyed on Oct 5 to

8 recorded a reading o 99.1.

While this is a positive nish it appears unlikely

to be sustained i we see renewed nancial

turmoil or doubts on the interest rate outlook.

60

70

80

90

100

110

120

130

60

70

80

90

100

110

120

130

Oct-81 Oct-86 Oct-91 Oct-96 Oct-01 Oct-06 Oct-11

indexindex

Sources: Melbourne Institute, W estpac Economics

long run

average

pre

Oct-5

post

Oct-5

-50

-40

-30

-20

-10

0

10

20

30

40

50

-50

-40

-30

-20

-10

0

10

20

30

40

50

Oct-87 Oct-91 Oct-95 Oct-99 Oct-03 Oct-07 Oct-11

indexindex

'economic outlook' 'family finances'

Source: Melbourne Institute,

Westpac Economics

*deviation from long run

average, smoothed

supported by mining

boom

off extreme

lows but still

recessionary

2. Consumer sentiment: economy vs nances

1. Consumer sentiment: weak, bufeted by events


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7


The small sample means these sub-estimates

need to be treated with caution, but the big

swings suggest an edgy consumer mood that

is being weighed on by uncertain conditions

domestically and knocked around by nancial

market volatility and the shiting rate outlook.

The Index remains at quite a weak level overall.

It is 16.9% below its level a year ago and 6.8%

below the average or the rst hal o 2011. At

sub-100, the Index is still in pessimistic territory.

The detail showed gains across all sub- indexes

except time to buy a major item which ell

5.6%, likely due to the sharply lower AUD.

There are notable divergences by housing

tenure and state with renters and those in Vic

and WA showing signicantly stronger sentiment

gains into outright positive territory.

The RBA has identied condence as one o

the key channels through which deteriorating

conditions in Europe may aect Australia.

The crisis in 2008 saw a global collapse in

condence unprecedented in scope and scale

with spectacular alls synchronised across all

the major advanced economies. The European

crisis is starting to show similar signs o a

broad-based hit to sentiment although to date

the declines have not been quite as severe.

60

70

80

90

100

110

120130

140

60

70

80

90

100

110

120130

140

Mar-08 Mar-09 Mar-10 Mar-11 Mar-08 Mar-09 Mar-10 Mar-11

indexindex

NSW Vic Qld WA freehold mortgage renters

Source: Melbourne Institute, WestpacEconomics

*smoothed

by state by tenure

-4

-3

-2

-1

0

1

2

3

4

-4

-3

-2

-1

0

1

2

3

4

Jan-85 Jan-95 Jan-05 Jan-85 Jan-95 Jan-05

st.devns

EU UK Japan

US Aust

Sources: University of Michigan, DG ECFIN,

Cabinet Office, W estpac-Melbourne Institute,

st.devnsconsumer sentiment unemp. expectations

avg < 1.4*smoothed

avg < 1.4

4. Consumers: (another) global shock?

3. Consumer sentiment: selected groups


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8

October 2011

Sentiment indicators: spending

The survey detail continues to point to an abrupt

slowdown in consumer demand. Our modied

index which excludes economic questions and

includes the Westpac Risk Aversion Index

remains at extreme lows consistent with alling

per capita spending.

Despite this, the data on actual spending

continues to hold up. ABS gures show nominal

retail sales up 0.6% in Aug ollowing a 0.6% gain

in July. Although this ollowed a weak patch

in May-June (sales down 0.6% and 0.1%), the

stronger than expected gains have lited annual

growth rom a low o 1.4%yr in Jun to 2.1%yr in

August (+0.6%yr in per capita terms).

With vehicle sales also posting a strong rebound

rom supply disruptions due to the Japanese

earthquake/tsunami, the Q3 national accounts

are expected to show a solid 0.6% gain or total

spending in Q3, holding annual growth at 2.9%yr

(1.4%yr in per capita terms).

While Q3 did not see a signicant drop-o in

total consumer spending, we continue to expect

weakening to come through with total spending

growth orecast to track a 1.2% annual pace

(0.2% in per capita terms) over Q4 and Q1.

We also remain wary o potential downward

revisions to previous spending estimates,

particularly the surprisingly strong Q2 gures.

-4

-2

0

2

4

6

8

10

-30

-20

-10

0

10

20

30

Oct-86 Oct-91 Oct-96 Oct-01 Oct-06 Oct-11

ann%index

modified consumer sentiment (lhs)*

real retail sales per capita (rhs)

Source: Melbourne Institute, ABS, Westpac Economics

*excl. economic questions, incl. risk aversion

index, deviation from long run avg, smoothed

-4

-3

-2

-1

0

1

2

3

4

5

6

-30

-20

-10

0

10

20

30

Oct-86 Oct-91 Oct-96 Oct-01 Oct-06 Oct-11

ann%index

modified consumer sentiment (lhs)*

real consumer spending per capita (rhs)

Source: Melbourne Institute, ABS, Westpac Economics

*excl. economic questions, incl. risk aversion

index, deviation from long run avg, smoothed

weaknessahead

WBC Q3

est

6. Modied consumer sentiment vs total spending

5. Modied consumer sentiment vs retail sales


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9


As discussed in last months Red Book, the

1% rise in spending in Q2 was much stronger

than had been indicated by the partial data.

Some o this gap reects strong growth in

spending on services, which are a minor part o

retail sales. However, there are also large and

hard to explain discrepancies between national

accounts estimates or spending on goods

which should line up closely with the retail data.

Services spending is also notoriously prone

to revision. Annual benchmarking alone has

taken % o initial spending estimates over the

last three years, with these revisions heavily

concentrated in the services components.

While the retail data removes some o the near

term weakness we had expected or Q3 there

is still signicant scope or the broader national

accounts measure to show weakness/revisions

that bring growth rates down more in line with

the weak through the year growth in retail sales.

The remaining gap vs sentiment is likely to be

mostly timing. Total spending has been slower

to all in line with sentiment in past cycles.

The next ew readings on retail sales, business

conditions and car sales will be decisive

in conrming this view. Cyclical spending

components will need to be monitored

particularly closely.

-2

-1

0

1

2

3

4

56

7

96

98

100

102

104

106

108

110112

114

Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

%chindex

real retail sales

retail 'proxy' ex national accounts

Source: ABS, W estpac Economics

qtly %ch (rhs)

+1.4%

+0.3%

-30

-20

-10

0

10

20

30

-12

-9

-6

-3

0

3

6

9

12

Aug-93 Aug-96 Aug-99 Aug-02 Aug-05 Aug-08 Aug-11

%ann%

composite cyclical

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

Sources: ABS, Melbourne Institute

Westpac Economics

*deviation from long run average

GSTintroduction

last

6mths^based on car sales, outbound travel &

most cyclical components of retail sales

severe weather events

& Japanese earthquake

8. Composite indicator o cyclical spending

7. Consumer spending on retail goods vs retail sales


10/24

10

October 2011

Special topic: house price expectations

The October survey included an update o the

WestpacMelbourne Institute Consumer

House Price Expectations Index. The Index

showed a urther cooling, alling to 9.0 in

October rom 15.3 in July and 37.8 in April. This

is the lowest reading since May 2009 although

most still expect prices to rise or stay the same.

39% expect house prices to be higher, 32%

expect prices to be unchanged and 26% expect

prices to decline. In May 2009 the split was a

third each way, while a similar survey conducted

in November 2008, in the immediate atermath

o the Lehman Brothers collapse, showed 55%

expected house price declines at the time.

Judged against this, the current reading is not

too bad although price expectations have been

cut dramatically rom their April 2010 high when

84% expected house prices to rise.

The median expectation in October is or no

change over the next year. That is the same as

July and compares to implied median orecast

price rises o +1.2% in April and +1.9% in January.

Expectations or price gains may haveevaporated but the mix is still a long way rom

implying a median orecast price decline

that would take a urther 11pt increase in the

proportion o consumers expecting price alls.

-175-150-125-100-75-50-250255075

100

020406080

100120140160180200

220

Nov-08May-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

%responses%responses

fall no change rise

Source: Westpac-Melbourne Institute, Mortgage Choice (Nov-08)

net percent expecting

house prices to rise

100

7550

-250

-50

25

80604020

0

-20

0

20

40

60

80

100

-20

0

20

40

60

80

100

Jan-09 Jan-10 Jan-11 Oct-09 Oct-10 Oct-11

net %net %

NSW Vic SA Qld WA

Source: Westpac-Melbourne Institute

*% reporting expected rise

minus % reporting expected fall

10. House price expectations by state

9. Consumer expectations or house prices


11/24

11


The state detail shows some notable

divergences. Pessimists outnumber optimists

in Qld, where housing markets have been

considerably weaker (although even here

the median orecast is still or no change).

Consumers are more optimistic in WA, NSW

and Vic, with these last two states having a

signicantly higher proportion o house price

bulls expecting 10%+ growth.

Other detail showed price expectations were

more positive or younger age-groups. Indeed,

the age-group mix suggests potential rst home

buyers are signicantly more optimistic about

price prospects than potential investors.

The downshit in price expectations over the last

18mths has coincided with a similar turnaround

in actual price growth. Ater hitting 14%yr in

early 2010, price growth nationally dropped

to at in March and to 3.2% in August. This

is signicantly weaker than the modest price

growth consumers had expected a year prior.

Continued price weakness may see more mark

downs to expectations. However, this will be

balanced against the prospect o rate cuts. The

net eect will likely depend on how threatening

the situation in housing markets is seen. It is

notable that the weak read in May 2009 came

despite mortgage rates being at 40yr lows.

-10

-5

0

5

10

15

20

25

3035

40

-15

0

15

30

45

60

75

90

105120

135

Aus NSW Vic Qld SA WA

ann%net%expectations next 12 months (lhs)*

actual last 12 months^

Source: Westpac, Melbourne

Institute, RP Data-Rismark

*net % expecting prices to rise;

^capital cities, all dwellings, latest is Aug-11

13.35.2

2.1

-30

0

30

60

90

-30

0

30

60

90

first home buyers upgraders investors

May-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

Oct-10 Jan-11 Apr-11 Jul-11 Oct-11

Source: ABS, RBA, Westpac-Melbourne Institute

net %

*% reporting expected rise minus% reporting expected fall

net %*weighted average of

age-group responses

12. House price expectations by buyer type

11. House prices: expected vs actual


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12

October 2011

Sentiment indicators: durables, cars

The index tracking views on time to buy a major

item was the only component o sentiment to

all in October, with a 5.6% drop reversing the

gains over the previous two months.

Much o this appears to be currency-related. For

the last year we have argued that this index was

being boosted by a high AUD which rose through

parity vs the USD last November and has been

above most o the time since. Buyer attitudes

surged on the prospect o cheap imported

goods but there was little ollow-through to

spending. Retail data show per capita spend on

household goods has instead declined. The AUD

dropped to 94c US in October.

The index on time to buy a vehicle also ell in

October, slipping 1.6% to 124.2, slightly above

the long run average or this index.

This may also be currency-related although

the AUD inuence is harder to detect both in

sentiment measures and actual vehicle sales

which have been heavily bueted by a range o

inuences including temporary tax incentives

or business buyers last year, weather events

in January-February, related insurance-unded

replacement buying and supply disruptions

stemming rom the earthquake/tsunami

disaster in Japan. These are only now dropping

out o the picture.

-6

-4

-2

0

2

4

6

810

12

-50

-40

-30

-20

-10

0

10

2030

40

Aug-03 Aug-05 Aug-07 Aug-09 Aug-11

ann%index*

time to buy a major item (adv. 5mths, lhs)*

household goods retail (rhs)^

Sources: Melbourne Institute,

ABS, Westpac Economics

*deviation from long run average, smoothed

^nominal per capita, 3mth averagelast 6

mths

AUD surges

from 85c to110c US

2.4

2.62.8

3.0

3.2

3.4

3.6

3.8

-45

-30-15

0

15

30

45

60

Aug-03 Aug-05 Aug-07 Aug-09 Aug-11

numberindex

time to buy a car (adv 6mths, lhs)*

new vehicle sales per capita (rhs)^

Sources: ABS, Melbourne

Institute, WestpacEconomics

*qtly prior to Jun-07

^sa passenger and SUVsales per 1000 people

Japans earthquake

hits supply

tax-incentives

boost business

sales

14. Time to buy a car vs vehicle sales

13. Time to buy a major item vs household goods retail


13/24

13


The index tracking views on time to buy a

dwelling ell sharply by 10.4% in October,

although that ollowed a surprisingly strong

15.1% jump in September to the highest level

since September 2009.

Consumer seem skittish on housing. The

volatility has been particularly high at the state

level where the monthly swings ranged rom

+27% in September (Vic) to 15% in October

(NSW). Looking through the noise, Qld and

WA consumers are more positive on time to

buy but this looks largely due to the bigger

improvement in aordability in these states

which have seen larger house price alls.

The state picture is dierent again in terms o

consumer responses on the wisest place or

savings a rough proxy or investor sentiment.

This question (last run in September) also shows

volatile views but with consumers in Vic and WA

more positive on real estate than the rest. In the

case o Vic, this likely reects the stronger price

perormance in recent years. For WA it more

likely reects the mining boom which is over-

riding concerns about current price weakness.This does not seem to be the case or Qld

though.

Overall, buyer attitudes and job security point to

continued sot demand near term.

0

5

10

15

20

25

30

40

60

80

100

120

140

160

Jun-08 Jun-09 Jun-10 Jun-11 Jun-08 Jun-09 Jun-10 Jun-11

%index

NSW Vic Qld WA


Qld & WA more upbeat

on time to buy ...

... but Vic & WA

consumers more

positive on real estate

as an investment

time to buy a dwelling wisest place savings: real estate

-50-40-30-20

-100102030405060

-50-40-30-20

-100

102030405060

Aug-81 Aug-86 Aug-91 Aug-96 Aug-01 Aug-06 Aug-11

ann%ann%simple regression on 'time to buy dwelling' andunemp expectationshousing finance approvals ex refi (number, trend)

Source: ABS, Westpac

model projection assumes nochange in time to buy dwelling or

unemployment expectations

16. Model o housing nance approvals

15. Consumer sentiment: real estate

Sentiment indicators: housing


14/24

14

October 2011

Sentiment indicators: risk aversion

The wisest place or savings questions

used to construct the Westpac Consumer

Risk Aversion Index were not included in

the October survey but will be in December

(due January 18). The message in September

was clear though with consumers retaining a

highly risk averse attitude to their nances,

encouraged by nancial turmoil and sot

housing markets.

The swing towards risk aversion has coincidedwith a sharp rise in new saving with the

household saving ratio rising rom zero in 2006

to sustained levels over 10%. Westpac expects

the savings rate to stay in this range in 2011-12.

While much o this increased saving eort

has been channelled towards paying down

debt, there has also been a signicant rise in

households holdings o cash & deposits. There

are two drivers here the increased savings

eort and portolio reallocation, i.e. liquidating

sharemarket and real estate investments.

State responses give some extra insight.

Consumers in Vic are much less cautious, while

Qlders are extremely risk averse. Much o thedierence comes down to views on real estate.

With Vics previously hot housing market turning

down that could mean a urther shit towards

risk aversion in coming quarters.

44

52

60

68

76

84

-40

-30

-20

-10

0

10

20

30

4050

60

Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11

%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

-30

-20

-10

0

10

20

30

40

50

60

-30

-20

-10

0

10

20

30

40

50

60

Jun-02 Jun-05 Jun-08 Jun-11 Jun-02 Jun-05 Jun-08 Jun-11

indexindex

NSW Vic Qld WA


*smoothed

Qlders

extremelyrisk averse

Victorians lessworried than in

2008

18. Consumer risk aversion by state

17. Consumer risk aversion vs cash holdings


15/24

15


In recent months the Red Book has warned

that consumer perceptions o labour market

prospects were a major downside risk to the

outlook with job security a key actor in swings

in cyclical spending and housing market activity.

The October survey showed an improvement in

unemployment expectations, with the 5% all in

the index implying ewer consumers expect a

rise in unemployment over the next year.

However, the index is still up sharply in the lastsix months (+27%) and is indicating respondents

are expecting an unemployment rate o 6%

by October 2012, a rise o 0.7ppts on current

levels.

The detail argues or caution on the October

number. By ar the biggest improvement was

amongst the unemployed, retired and those not

working combined, these sub-groups saw a

13% all. In contrast, expectations were mainly

unchanged or those with jobs a group that

should have a better sense o employers actual

stafng plans and the risks around them.

The state split shows a gap re-opening between

the resource and non-resource states witha 10pt wedge in unemployment expectations

already. The gap blew out to 25pts during the

rst mining boom. So ar the main restraint has

been a more subdued view amongst Qlders.

-3

-2

-1

0

1

2

3

4

-3

-2

-1

0

1

2

3

4

Oct-76 Oct-81 Oct-86 Oct-91 Oct-96 Oct-01 Oct-06 Oct-11

std devns

unemp expectations (lhs)

ann ch unemp rate (rhs)

Sources: ABS, Westpac-

Melbourne Institute

ppts

shaded areas are

recessions/GFC

1.7 std devns

60

80100

120

140

160

180

200

60

80100

120

140

160

180

200

Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10

indexindex

working not working^ 'resource' 'non-resource'


^weighted average of unemployed,

retirees and not working

no

improvement

for those with

jobs ...

... those in non-mining

states most insecure*smoothed

by labour status by state

20. Unemployment expectations: selected groups

19. Unemployment expectations vs actual

Sentiment indicators: job security


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16

October 2011

Economic and fnancial orecasts

Interest rate orecastsLatest (Oct 14) Dec11 Mar12 Jun12 Sep12 Dec12

Cash 4.75 4.50 4.25 4.00 3.75 3.75

90 Day Bill 4.75 4.50 4.25 4.00 3.75 3.80

3 Year Swap 4.29 4.40 4.50 4.60 4.60 4.60

10 Year Bond 4.43 4.30 4.30 4.40 4.50 4.70

10 Year Spread to US (bps) 225 220 210 200 200 210

International

Fed Funds 0.125 0.125 0.125 0.125 0.125 0.125

US 10 Year Bond 2.18 2.10 2.20 2.40 2.50 2.60

US Fed balance sheet USDtrn 2.90 2.91 3.06 3.21 3.36 3.51

ECB Repo Rate 1.50 1.00 0.75 0.75 0.75 0.75

Exchange rate orecastsLatest (Oct 14) Dec11 Mar12 Jun12 Sep12 Dec12

AUD/USD 1.0170 0.95 0.93 0.91 0.96 0.98

NZD/USD 0.7930 0.73 0.71 0.69 0.74 0.77

USD/JPY 76.90 76 76 76 78 81

EUR/USD 1.3755 1.30 1.26 1.22 1.27 1.28

AUD/NZD 1.2825 1.30 1.31 1.32 1.30 1.27

*Nominal trade weighted index, with latest data compiling the base. Weights rom Reserve Bank o Australia. A reading above (below) 100 indicates

a rise (all) in the AUD. ^Approximate market orward price or AUD/USD, not a orecast. Sources: Bloomberg, Westpac Economics.


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17

Australian economic growth orecasts2010 2011 2012

Q4 Q1 Q2 Q3 Q4 Q1 Q2

GDP % qtr 0.8 0.9 1.2 0.2 0.5 0.5 0.6

Annual change 2.7 1.0 1.4 1.3 1.0 2.4 1.9

Unemployment rate % 5.2 5.0 4.9 5.2 5.3 5.4 5.6

CPI % qtr 0.4 1.6 0.9 0.6 0.5 0.7 0.6

Annual change 2.7 3.3 3.6 3.5 3.6 2.8 2.4

CPI underlying % qtr 0.5 0.8 0.6 0.5 0.6 0.6 0.6

ann change 2.3 2.3 2.6 2.5 2.6 2.3 2.3

Calendar years

2009 2010 2011 2012

GDP % ann change 1.4 2.7 1.2 2.5

Unemployment rate % 5.6 5.2 5.1 5.6

CPI % ann change 2.1 2.7 3.6 3.1

CPI underlying % ann change 3.5 2.3 2.6 2.6

Calendar year changes are (1) period average or GDP, employment and unemployment, terms o trade (2) through the year or inlation and wages.

* GDP & component orecasts are reviewed ollowing the release o quarterly national accounts.

** Business investment and government spending adjusted to exclude the eect o private sector purchases o public sector assets.

Economic and fnancial orecasts



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18

October 2011

Consumer demand2010 2011 2012

% change Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Total private consumption* 0.9 0.6 0.6 1.0 0.6 0.3 0.3 0.5

annual chg 3.4 3.1 3.5 3.2 2.9 2.5 2.2 1.7

Real labour income, ann ch 5.3 5.6 6.1 4.9 4.0 3.3 1.9 0.9

Real disposable income, ann ch** 4.1 4.7 6.0 4.9 3.8 3.7 1.9 3.0Household savings ratio 9.7 9.7 11.7 10.5 10.6 10.8 11.3 11.6

Real retail sales, ann chg 2.8 1.0 1.1 0.6 0.3 0.6 0.9 1.2

Motor vehicle sales (000s)*** 813.7 819.7 806.1 755.6 823.1 795.5 802.3 828.8

annual chg 10.6 4.9 -0.7 -12.8 1.2 -3.0 -0.5 9.7

Calendar years

2009 2010 2011 2012

Total private consumption, ann ch* 1.0 2.8 3.0 2.0

Real labour income, ann ch -1.1 4.0 4.5 1.5

Real disposable income, ann ch** 5.4 2.2 4.6 3.0

Household savings ratio, % 9.9 9.3 10.9 11.8

Real retail sales, ann chg 3.1 1.7 0.6 1.5

Motor vehicle sales (000s)*** 728.9 828.0 795.1 847.3

annual chg -7.7 13.6 -4.0 6.6

* National accounts deinition.

** Labour and nonlabour income ater tax and interest payments.

*** Passenger vehicles and SUVs., annualised

^ Average over entire history o survey.

^^Seasonally adjusted.

# Net % reporting expected rise next 12 months minus % expecting all.

Note that questions on mortgage rate, house price and wage expectations have only been surveyed since May 2009.

Consumer data and orecasts


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19

Consumer data and orecasts


Consumer sentiment2011

% change avg*** Jan Feb Mar Apr May

WestpacMI Consumer Sentiment Index 101.8 104.6 106.6 104.1 105.3 103.9

amily inances vs a year ago 90.3 85.8 82.0 80.7 80.8 77.5

amily inances next 12 months 108.9 104.7 106.2 99.0 100.4 94.4

economic conditions next 12 months 90.2 97.6 98.7 104.3 107.8 104.4

economic conditions next 5 years 90.7 95.8 105.6 102.5 99.1 102.6

time to buy major household item 127.9 139.3 140.5 133.8 138.4 140.8

time to buy a motor vehicle 121.5 137.9 136.4 132.4 127.9 130.6

time to buy a dwelling 122.3 114.9 117.1 114.5 108.6 110.7

WestpacMI Consumer Risk Aversion Index^^ 10.4 29.9

consumer mortgage rate expectations# 82.4 89.9

consumer house price expectations# 49.8 43.3 37.8

consumer wage expectations# 49.5 51.1

WestpacMI Unemployment Expectations 127.8 108.7 99.7 105.9 109.3 106.0

2011

continued Jun Jul Aug Sep Oct

WestpacMI Consumer Sentiment Index 101.2 92.8 89.6 96.9 97.2

amily inances vs a year ago 75.9 74.4 71.8 79.8 81.6

amily inances next 12 months 95.5 91.7 87.0 95.3 98.1

economic conditions next 12 months 97.9 84.7 73.2 85.4 86.2

economic conditions next 5 years 98.8 88.8 88.3 92.2 96.0

time to buy major household item 137.9 124.8 127.7 131.8 124.4

time to buy a motor vehicle 132.7 128.8 120.8 126.3 124.2

time to buy a dwelling 115.4 119.3 114.6 131.9 118.2

WestpacMI Consumer Risk Aversion Index^^ 45.7 44.0

consumer mortgage rate expectations# 79.2 61.7

consumer house price expectations# 15.3 9.0

consumer wage expectations# 43.4

WestpacMI Unemployment Expectations 128.2 132.4 135.1 146.6 139.2


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20

October 2011

Westpac Economics

Sydney

Level 2, 275 Kent Street

Sydney NSW 2000

Telephone (612) 8254 8372

Facsimile (612) 8254 6934

Bill Evans

Chie Economist

Global Head o Economics & Research

Andrew Hanlan

Senior Economist

Matthew Hassan

Senior Economist

Huw McKay

Senior International Economist

Justin Smirk

Senior Economist

Elliot Clarke

Economist

Auckland

Takutai on the Square

Level 8, 16 Takutai Square

Auckland, New Zealand

Telephone (649) 336 5671

Facsimile (649) 336 5672

Dominick StephensChie Economist, New Zealand

Anne Boniace

Senior Economist

Michael Gordon

Markets Economist

Felix Delbrck

Senior Economist

London

Camomile Court,

23, Camomile St,

London EC3A 7LL

United Kingdom

Telephone (4420) 7621 7061

Facsimile (4420) 7621 7527

James Shugg

Senior Economist

Westpac Economics directory


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21

Notes

Publication enquiries, Westpac Economics, Telephone (612) 8254 8720, [email protected]



22/24

Notes

22


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2011. A division o Westpac Banking Corporation ABN 33 007 457 141


24/24

www.westpac.com.au

WestpacRedbookOctober2011[1]

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