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Westpac Economics September 2012

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Westpac Economics September 2012

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Westpac Economics September 2012

  1. 1. SydneyCorporatedinnerSeptember 2012Bill EvansChief Economist
  2. 2. Current Forecasts – September 2012 10 year real bond yields US bonds look expensive yields- % % 10 10 Latest Dec-12 Jun-13 Dec-13 8 US 10yr AU 10yr 8 RBA Cash C h 3.50 3 50 3.00 3 00 2.75 2 75 2.75 2 75 *Nominal 10yr yield less annual change in core inflation – RBA core measure 6 for Australia and PCE (ex food & energy) 6 3yr swap 3.10 3.25 3.50 4.20 for US. 10yr 3.08 3.40 3.55 4.00 4 4 US 10 yr 1.60 1 60 1.90 1 90 2.20 2 20 2.40 2 40 2 2 spread AUD/USD 1.02 1.01 1.04 1.06 0 0 USD/EUR 1.26 1.24 1.23 1.16 Sources: RBA, Bloomberg, Westpac Economics -2 -2 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12 2 3 Swap rate turns before cash rate at turning points Rate cut expectations: Westpac versus market % % bps total cuts expected over coming year bps12 12 200 200 Market pricing* Source: Westpac Economics 175 17510 10 Westpac Economics Cash rate 3yr swap 150 * as implied by OIS market 150 8 8 125 125 100 100 6 6 75 75 50 50 4 4 25 25 Source: Bloomberg2 2 0 0Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Sept12 Dec 12 Mar 13 Jun 13 Sep13 4 5 2
  3. 3. The changing Australian growth mix Household debt to income ratios ppts cont contributions to GDP growth ppts cont % debt to income (lhs) % 3 Sources: ABS, Westpac Economics 3 180 180 total (gross) 160 –0.8ppt 160 2 2 own-occ housing a year y 140 investor housing i t h i 140 1 1 120 other debt 120 100 *dashed lines show trend +0.8ppt pp 100 0 0 since Jun-07; Jun-12 is a year 80 Westpac estimate 80 1 -1 -1 1 60 60 –0.3ppt 98 - 07 10 - 13 15 - 20 40 a year 40 -2 -2 20 Sources: RBA, –1.3ppt 1.3ppt 20 ABS, Westpac * includes housing updated: Aug ’12 a year -3 -3 0 0 Consumer* Mining Business Public Net X Mar-77 Mar-87 Mar-97 Mar-07 6 7 Mining projects – gas dominates , for now! Recoverable gas resources – watch China $bn $bn trillion cubic metres200 updated: Jul ’12 Sources: Deloitte Access Economics, 200 120 120 Westpac Economics Source: The Economist Conventional (International Energy Agency; BP) 100 100160 Under construction 160 Unconventional Committed Total: 80 80 $415bn120 Under consideration 120 60 60 Possible excludes “other”, 80 $3bn in projects 80 40 40 40 40 20 20 0 0 0 0 Oil & gas Metal ores Coal Nth China Russia Middle Latin Australia America A i East E t America A i 8 9 3
  4. 4. Production cost – Australia uncompetitive Gas prices – Protected by transport costs $bn mn tpa $mBtu $mBtu 40 20 20 20 Source: The Economist Source: The Economist 16 $30bn 30 Cost (lhs) 15 15 12 Capacity (rhs) 20 8.9mn 8mn 10 10 10 10 5 5 3 $5bn 0 0 0 0 Wheatstone (Aust) Sabine Pass (US) US Europe Asia 10 11 LNG imports – China growing fast Largest contractionary stance in 40 years billion cubic metres % GDP Net change in underlying cash balance % GDP300 300 4 4 Europe China Source: The Economist (Waterborne LNG; South Korea Japan Oxford Institute for Energy Studies) 3 3250 250 Expansionary 2 2200 200 f/c 1 1150 150 0 0 -1 -1100 100 -2 Contractionary -2 50 50 -3 -3 Sources: Treasury, ABS, Westpac Economics 0 0 -4 -4 2010 2011 2012 2013 2014 2015 1981/82 1991/92 2001/02 2011/12 12 13 4
  5. 5. Confidence: weak – business mirrors consumers Unemployment likely to move higher net bal. net bal. bps index 200130 monthly 30 annual change in unemployment rate smoothed (lhs) Consumer (lhs) Business * (rhs) 400 unemployment expectations trend (rhs) 180120 20 300110 10 160 200100 0 unemployment 140 100 rising 90 -10 0 120 80 -20 -100 100 70 -30 unemployment Sources: Westpac MI, NAB, Westpac Economics * Rebased to avg 0 falling Sources: Westpac-MI 60 -40 -200 80 Jul-00 Jul-04 Jul-08 Jul-12 Aug-87 Aug-92 Aug-97 Aug-02 Aug-07 Aug-12 14 15 Male participation trending lower Unemployment supported by participation % % % % 76 60 8 8 Sources: ABS, Westpac Economics Sources: ABS, Westpac Economics 75 59 female 7 if part-rate held 65.62% from Jul 11 7 74 58 unemployment rate male 73 57 6 6 72 56 5 5 71 55 4 4 70 54 69 53 3 3 Jul-02 Jul-08 Jul-02 Jul-08 Jul-00 Jul-03 Jul-06 Jul-09 Jul-12 16 17 5
  6. 6. Labour market: remains soft RBA cash rate: just below neutral – more cuts % % % %12 Sources: ABS, Westpac Economics 64 8 8 Source: Bloomberg, Westpac Economics Peaked: 62 7 710 Jul ’08 & Dec ’10 Soft jobs market: 60 6 68 employment to pop’n ratio declines 58 5 56 56 4 4 Actual cash rate4 Unemployment rate (lhs) 54 3 Neutral cash rate 3 Latest: 5.1% Employment to popn ratio* (rhs) * smoothed2 52 2 2Aug-88 Aug-92 Aug-96 Aug-00 Aug-04 Aug-08 Aug-12 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10 18 19 World growth – Asia supports recovery in 2013 Change in world growth contributions ppt ppt 1.00 1 00 1.00 1 00 2009 2010 2011 2012f 2013f Sources: Westpac Economics. 0.75 Shares of world output in parentheses. 0.75 World –0.6 5.3 3.9 2.9 3.7 0.50 0 50 0.50 0 50 US –3.5 3.0 1.8 2.1 1.7 0.25 0.25 0.00 0 00 0.00 0 00 Euro –4.2 1.8 1.5 –1.0 –0.2 -0.25 -0.25 -0 50 0.50 Other (53%) -0 50 0.50 China 9.6 10.4 9.3 7.8 8.7 USA (19%) -0.75 Europe (14%) -0.75 -1.00 1.00 China (14%) ( ) -1.00 1.00 Australia 1.4 2.5 2.1 3.5 3.5 -1.25 -1.25 2012 versus 2011 2013 versus 2012 20 21 6
  7. 7. Chinese GDP & the money supply China -Housing and auto sales are recovering Housing %yr %yr %yr %yr16 30 150 150 Sources: Westpac Economics, CEIC 125 Auto sales 12514 GDP (lhs) 25 100 Housing sales 100 M2 (rhs) 75 7512 20 50 5010 25 25 15 0 0 8 -25 Sources: CEIC, W t S CEIC Westpac E Economics. i -25 Autos are unit sales. Housing sales are by value. 6 10 -50 -50 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 22 23 China :Credit demand & supply perceptions Chinese total credit supply (up 6.2% for year) % LR avg index 45 RMBtrn108 9 Bank assessment of loan “Appropriately “Prudent” 0.181 –38% demand (lhs) Tight” 0.293 8 1.073104 Firms on lending attitude +53% 42 0.701 of banks (rhs) 7 0.631 0 631 –45% 45% 1.154100 6 0.980 +7.2% 39 0.915 596 Ships Equity in the 4 night 36 Bonds92 3 Bill finance +13.5% Sources: Westpac 5.679 5 679 Economics, 5.005 CEIC, Shu & Ng 2010. 2 Trust & entrusted 3388 “Tight” “Appropriately Bank loans “Sound”, “S ” “Sound”, “S ” “Sound”, “S ” Loose” L ” 1 Source: CEIC, Westpac. Easing bias tightening bias tightening bias “Tight”84 30 0 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Year to July 2011 Year to July 2012 24 25 7
  8. 8. Chinese investment projects by ‘sponsor’ sponsor Chinese infrastructure investment growth %ytd %ytd %ytd %ytd50 50 75 75 Sources: CEIC, Central government Transport Westpac Economics.40 Local government g 40 60 60 Energy and water forecast30 30 45 4520 20 30 3010 10 15 15 value of projects 0 0 0 0 Sources: CEIC, Westpac Economics.-10 -10 -15 -15 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 26 27 Indicative policy impact on capex: then & now US :Unemployment rate with stable part rate %GDP % % 4 12 Sources: Ecowin, Westpac Economics 12 Hard Infrastructure 3 Heavy industry Actual unemployment rate Real estate 10 Constant part rate from Oct 09 10 2 Other investment 1 8 8 0 Sources: CEIC, Westpac Economics. Estimates of “excess” nominal investment over and above what would have prevailed under ‘normal’ 6 6 -1 conditions in the major stimulus periods. Note the comparison is between one year of GDP and 1½ years of capex. Data scaled to be consistent with national accounts GFCF. -2 4 4 6 qtrs to June 2010 6 qtrs to Dec 2013 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 28 29 8
  9. 9. Part rate not due to retirees Coming soon: the US’ fiscal cliff US % employment to population ratio by age group % % Drag on GDP growth in 2013 %100 100 1 1 16–24 25–34 35–44 45–54 55+ 80 80 0 0 60 60 -1 1 -1 1 40 40 Sources: Ecowin, Westpac Economics Source: Westpac 20 20 -2 -2 1970 1980 1990 2000 2010 Obama stimulus Unemployment Tax increases Budget control benefit expiry b fit i actt 30 31 Current composition of Congress Candidate approval ratings for key topics no. no. % %275 70 60 60 House Senate Source: UBS250 60 Obama Romney 50 50 Up for U f re- Up for re election re-election225 election 50 Source: UBS 40 40200 40 30 30175 30 20 20150 20125 10 10 10100 0 0 0 Democrats GOP Democrats GOP Economy Caring Womens issues 32 33 9
  10. 10. Unemployment – a key factor Euro job markets continue to deteriorate... % unemployment rate % 25 25Election UE rate Result Portugal Spain Italy GreeceObama (2012) 8.3% 8 3% (from 10.0%) 10 0%) ??? 20 20Ford (1976) 7.7% LOST (to Carter) 15 15Carter (1980) 7.5% LOST (to Reagan) 10 10Reagan ( g (1984) ) 7.4% (from 10.8%) ( ) WON (def Mondale) ( )G.H.W Bush (1992) 7.3% LOST (to Clinton) 5 latest 5 Wins: 3.7% – 5.6% (6 Presidents) Source: CEIC (OECD Economic Outlook) 0 0 1980 1988 1996 2004 2012 34 35Public cost of Euro exit (€bn) – watch IOU’s IOU s Deposit flight a concern €bn consolidated resident deposits €bn 1800 350 Greece PICS* Greece (rhs) 1600 Portugal (rhs) 300Aid 50 100 Italy (lhs) 1400 250Bailouts 127 56 Spain (lhs) 1200 200Bonds (ECB) 40 80 1000 150IOU sIOU’s (ECB) 106 596 800 100Total 323 832 600 50 Total cost as % of German GDP: 40% Source: Eurostat*Portugal, Ireland. Cyprus, Spain 400 0Source: The Economist; BIS; EC 1998 2000 2002 2004 2006 2008 2010 2012 36 37 10
  11. 11. German liabilities: actual and contingent? Global QE operations expansion of bsheets operations- €trn €trn trn trn 40 40 5.0 50 5.0 50 Germany 35 35 4.5 Forecasts 4.5 France 4.0 ECB in euros 4.0 30 Italy It l 30 3.5 Fed in dollars 3.5 Spain 25 *Aggregate Monetary and Financial 25 3.0 3.0 Other Institution liabilities as at May 2012 20 Source: IMF, ECB 20 2.5 2.5 15 15 2.0 2.0 1.5 15 1.5 15 10 10 1.0 1.0 5 5 0.5 05 0.5 05 Source: Ecowin, Bloomberg 0 0 0.0 0.0 Net govt debt Net govt debt Bank liabilities* Bank liabilities* Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Feb-13 38 39 The Australian dollar now overvalued Australian commodity prices USD USD index index1.201 20 1.20 1 20 Source: Westpac Economics. 700 Bulks* (lhs) 3501.10 1.10 Exchange traded* (rhs) AUD/USD actual1.001 00 1.00 1 00 600 Model estimate 3000.90 0.90 500 2500.80 0.80 4000.70 0.70 200 3000.60 0.60 200 1500.50 0.50 Sources: Westpac Economics, Bloomberg, ABS. Includes I l d coal, exchanged t d d commodities, relative yield curve, a risk proxy and net f i d bt t GDP l h d traded diti l ti i ld i k d t foreign debt to GDP. Bulks i l d i B lk includes iron ore and coal. Exchange traded includes d l E h t d di l d rural, crude oil, base metals and gold.0.40 0.40 100 100 Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14 40 41 11
  12. 12. Foreign interest in ACGB Conclusions A$bn A$bn250 250 • Leverage d i L driven growth i now hi t th is history. Sources: RBA, Westpac Total CGS On Issue • Mining boom is near spending peak.200 200 Resident Holdings • Unemployment rate set to rise.150 Non-Resident Holdings 150 • RBA to cut rates by 75 bp’s by March next year. • Stable house price outlook and no collapse.100 100 • Manageable China recovery and US disappointing. g y pp g 50 50 • Europe risky outlook – will affect global momentum. • AUD and commodities to strengthen in 2013 2013. 0 0 • US and ECB QE; policy stimulus in China and EM’s. 1986 1989 1992 1995 1998 2001 2004 2007 2010 42 43 Disclaimer Disclaimer Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (‘Westpac’). This document is provided to you solely for your own use and in your capacity as a wholesale client of Westpac. The information contained in this communication does not constitute an offer, or a solicitation of an offer, to subscribe for or purchase any securities or other financial instrument; does not constitute an offer, inducement or solicitation to enter a legally binding contract. The information is general and preliminary market information only and while Westpac has made every effort to ensure that information is free from error, Westpac does not warrant the accuracy, adequacy or completeness of the Information. The information may contain material provided directly by third parties and while such material is published with necessary permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure the information is from error, Westpac does not warrant the accuracy, adequacy or completeness of the information, or otherwise endorse it in any way. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. This communication does not constitute a personal recommendation to any individual investor. In preparing the information, Westpac has not taken into consideration the financial situation, investment objectives or particular needs of any particular investor and recommends that investors seek independent advice before acting on the information. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. Except where contrary to law, Westpac intends by this notice to exclude liability f the information. The information is subject to change without notice. A for f f product disclosure statement (“PDS”) may be available for the products referred to in this document. A copy of the relevant PDS and a copy of Westpac’s Financial Services Guide can be obtained by visiting www.westpac.com.au/disclosure-documents. You should obtain and consider the relevant PDS before deciding whether to acquire, continue to hold or dispose of the applicable products referred to in this document. This document is being distributed by Westpac Banking Corporation London Branch and Westpac Europe Limited only to and is directed at a) persons who have professional experience in matters relating to investments falling within Article 19(1) of the Financial Services Act 2000 (Financial Promotion) Order 2005 or (b) high net worth entities, and other persons to whom it may otherwise be lawfully be communicated, falling within Article 49(1) of the Order (all such persons together being referred to as “relevant persons ). The investments to which this document relates are only available to and any invitation offer or agreement to subscribe purchase or otherwise relevant persons”) invitation, subscribe, acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely upon this document or any of its contents. In the same way, the information contained in this document is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Services Authority and is not intended for “retail clients”. With this in mind, Westpac expressly prohibits you from passing on this document to any third party. In particular this presentation and any copy of it may not be taken, transmitted or distributed, directly or indirectly into the United States and any other restricted jurisdiction. This document has been approved solely for the purposes of section 21 of the Financial Services and Markets Act 2000 by Westpac Banking Corporation London Branch and Westpac Europe Limited. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. Westpac operates in the United States of America as a federally chartered branch, regulated by the Office of the Controller of the Currency and is not affiliated with either: (i) a broker dealer registered with the US Securities Exchange Commission; or (ii) a Futures Commission Merchant registered with the US Commodity Futures Trading Commission. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@westpac.com.au or fax us on +61 2 8254 6907 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. © 2012 Westpac Banking Corporation.or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts. 12

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