The Red Book

June 2013

Westpac Economics with the Institutional Bank.

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

June 2013

Contents
Executive summary The consumer mood: tense Sentiment indicators: spending Special topic Interest rate expectations Sentiment indicators Durables, cars Housing Risk aversion Job security State snapshot: South Australia Westpac household barometer Summary forecast tables Economic & nancial forecasts Consumer data and forecasts
4 6 8

10

12 13 14 15 16 18

19 21

The Westpac Red Book is produced by Westpac Economics Editor: Matthew Hassan Internet: www.westpac.com.au Email: economics@westpac.com.au This issue was nalised on 14 June 2013 The next issue will be published on 12 July 2013

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June 2013

Executive summary
The WestpacMelbourne Institute Index of Consumer Sentiment recovered some lost ground in Jun, rising 4.7% to 102.2. That follows a sharp 11.7% drop over the previous two months. The Index is back in marginally optimistic territory but remains 7.6% below its Mar peak. The component detail showed a stronger rebound in sub-indexes tracking views on family nances with more muted rises for those tracking expectations for the economy, which have been the main driver of the fall in consumer sentiment since Mar. Responses to additional questions on news recall also highlight the downgraded view on the economic outlook between Mar and Jun. News items on domestic economic conditions dominated other topics in Jun and were seen as overwhelmingly negative. Despite a more wary view on the economy, responses to separate questions on the wisest place for savings suggest consumers are becoming less focused on repaying debt and more open to investing in real estate. The question, which is run every 3mths, shows interest-bearing deposits are still most favoured but a fall in the proportion nominating pay down debt to 15.7%, the lowest reading since Dec 2007, and a rise in those nominating real estate to 24.6%. The Westpac Consumer Risk Aversion Index , which draws on responses to the wisest place for savings question to give a measure of risk aversion, declined 2pts between Mar and Jun and is now down nearly 10pts form last years peak. It suggests consumers may lower their savings rate over the second half of the year, from the high 10.6% recorded in Q1 of 2013. Our CSI measure, which includes the Westpac Risk Aversion Index and excludes economic components of consumer sentiment, rose 4.6% in Jun and has been more stable than headline sentiment in 2013. That said, CSI has been consistently tracking weaker levels over the last 2yrs and continues to point to weak spending growth of around 2%yr. Consumer views on time to buy questions remain the strongest aspect of the survey. The time to buy a major item sub-index rose 3.7% and is comfortably above its long run average. The time to buy a dwelling and time to buy a car indexes recorded minor changes but both remain at very strong levels (20pts and 16pts above their respective long run averages). The Jun survey included an additional question on consumers mortgage interest rate expectations. Responses show a slightly less hawkish tilt than in Feb but with no strong consensus on which way interest rates will head next. Indeed the main implication is that most consumers expect mortgage rates to stay below average for an extended period. That may in turn have encouraged some easing in the focus on paying down debt. Running counter to the improvement in overall sentiment and likely reecting rising concerns about the economy, the Westpac Melbourne Institute Unemployment Expectations Index showed a further signicant deterioration in Jun. The Index rose 6.3% to 158.5, above the high levels recorded in 2012 and indicating widespread expectations of rising unemployment over the next 12mths. Indeed, expectations have only been this pessimistic during recessions or downturns that have resulted in substantial rises in unemployment.

Westpac Institutional Bank

Consumer spending: stalled

ann% 8 real consumer spending real consumer spending per capita 7 6 long run 5 average 4 3 2 1 0 -1 qtly%ch -2 -3 Sources: ABS, Westpac Economics -4 Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 ann%
Westpac forecasts

8 7 6 5 4 3 2 1 0 -1 -2 -3 -4

Mar-13

The Jun WestpacMelbourne Institute Consumer Sentiment survey was the proverbial mixed bag. A glass half full reading would emphasise the 4.7% rally in headline sentiment back into positive territory, which has occurred despite the various slings and arrows of political, economic and employment uncertainty; the continued strongly positive readings on time to buy questions; and the apparent easing in the Westpac Consumer Risk Aversion Index. A glass half empty account would put a higher priority on the sharp weakening in consumer expectations for the economy and WestpacMelbourne Institute Unemployment Expectations Index over the last 3mths and the clear negatives this presents for cyclical consumer spending and big-ticket nancial decisions. The real economic data tends to favour the glass half empty view. The Q1 national accounts showed a disappointingly weak gain in spending with incomes under pressure and an apparent inclination to put cash freed up by lower interest rates towards accelerated loan repayments.

That may change in Q2 but the real data available to date suggests cyclical spending momentum remains weak. For now, this suggests the rising economic and job concerns evident throughout the consumer survey over the last 3mths are dominating consumers nancial decision-making. Housing markets are arguably the main exception. Auction market activity has picked up strongly and although nance approvals and house prices suggest the upturn is more moderate than strong an upturn is nonetheless clearly underway. The greater job loss fears are and the longer they last, the more they will undermine the housing recovery. Our modelling suggests the Jun reading, if sustained, could see momentum in nance approvals halve. So far the labour market has not validated consumer fears. But there are signicant weaknesses around hours worked and full time employment. We expect further policy easing will be required to maintain the recovery with the RBA cutting rates 25bps in Aug, Q4 and Q1. How the jobs data plays out will be critical to both sentiment and the timing of future policy moves.
5

June 2013

The consumer mood: tense

After falling sharply through Apr and May, the Westpac Melbourne Institute Index of Consumer Sentiment recovered some lost ground in Jun, rising 4.7% from 97.6 to 102.2. The rise takes the index back over the 100 level meaning optimists outnumber pessimists again, although the margin is slim. It appears that some of the factors behind the sharp drop in sentiment in May were temporary. Concerns stemming from the Federal Budget in particular may have eased. That said, the Index is still 7.6% below its Mar peak with the main driver of the pull back a deteriorating view on the economic outlook still apparent. Component-wise, the sub-indexes tracking views on family nances showed milder falls in Apr and May and a more convincing rebound in Jun. Indeed, on a combined basis, these subindexes are only 3.1% below their Mar peak. In contrast, the sub-indexes tracking expectations for the economy fell more heavily in Mar-May and posted a smaller rise in Jun. On a combined basis they remain 13% below their Mar peak. Other parts of the survey showed continued strong positive reads on time to buy, particularly for dwellings and cars, and a shifting mix of responses on wisest place for savings that suggest a less risk averse attitude.

1. Consumer sentiment: partial recovery

130 120 110 100 90 80 70 60 Jun-83 Jun-88 Jun-93 Jun-98
Sources: Melbourne Institute, Westpac Economics

index

index

130 120 110 100 90 80 70 60

long run average

Jun-03

Jun-08

Jun-13

2. Consumer sentiment: economy vs nances

index 140 'economic outlook' 130 120 110 100 90 80 70 60 50 40 Jun-83 Jun-87 Jun-91 index
'family finances'
*smoothed

Source: Melbourne Institute, Westpac Economics

140 130 120 110 100 90 80 70 60 50 40

Jun-95

Jun-99

Jun-03

Jun-07

Jun-11

Westpac Institutional Bank

The economy is now a dominant concern. The Jun survey included extra questions on news recall. By far and away the highest reading was for news items on economic conditions. Nearly 60% recalled news on this topic double the average and double the second most recalled topic, budget & tax. The news was overwhelmingly negative as well. The net proportion of respondents saying items were unfavourable sank from an already low 69% in Mar to just 33% in Jun. The weak Q1 national accounts data, sharp falls in shares and the AUD would all have compounded economic concerns, clearly drowning out any other news.

For most Australians, the prime concern with a weak economy is the threat to jobs. On this count, the Jun survey carries a strong warning. Not only was news on the economy and unemployment viewed as deeply unfavourable, but consumers sharply downgraded their expectations for the labour market. Indeed, the 12mth view on unemployment is now more negative than at any stage through 2012. So far the labour market has deed fears of a major deterioration. There are strains though. And while not 100% accurate, when it comes to big shifts in the labour market, consumers have been remarkably prescient in the past.

3. Consumer recall: selected news items

80 60 40 20 0 0 50 100 150 200 %recall*
*bubble size also shows level of recall

unfavourable

favourable

high

recall interest rates Budget & tax low economy recall unemployment overseas Observations:
1: Mar-13 2: Jun-13
Sources: Westpac Economics, Melbourne Institute

4. Consumer sentiment and RBA easing cycles

st devns 2.5 1.5 0.5 -0.5 -1.5 -2.5
*deviation from avg, ^inverted 0.7 +1.5 +1.1 RBA easing cycles, (figures are 3mth change after last cut) +1.3 +1.0 +1.2 +1.2

st devns 2.5 1.5 0.5 -0.5 -1.5 -2.5

consumer sentiment unemp. expectations^

Sources: Melbourne Institute, RBA, Westpac

1.0

-3.5 -3.5 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14

June 2013

Sentiment indicators: spending

CSI , our modied index which excludes economic questions and includes the Westpac Risk Aversion Index , rose 4.6% in Jun and has been much more resilient than headline sentiment in recent months. The Index is down just 2.8% from its Mar peak, reecting both the milder declines in responses on family nances and a modest improvement in risk aversion. Despite this more recent outperformance, CSI has been notably weaker than headline sentiment, particularly through mid to late 2012, and remains 5.6pts below its long run average. That points to spending growth of around 2%yr (0.5%yr in per capita terms) Consumer spending was weaker than expected in Q1. Despite a big 2.2%qtr surge in sales volume reported in the Q1 retail report, total consumption posted a lacklustre 0.6%qtr gain. Following very sluggish growth in 2012H2 annual spending growth slowed to a tepid 2.0%, well down on the 3.6% pace of a year ago. The detail showed a reasonable gain for retail items, albeit undershooting the retail survey. Other categories were weaker than expected though with notable declines in fuel, transport services (1.5%qtr, 6.6%yr) and soft outcomes for insurance & nance, communications and health.

5. CSI vs total consumer spending

30 20 10 0 -10 -20
Source: Melbourne Institute, ABS, Westpac Economics

index
CSI (lhs)* consumer spend (rhs)^

ann%
Westpac forecast

-30 Mar-78

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

7 6 5 4 3 2 1 0 -1 -2 -3 -4

Mar-83

Mar-88

Mar-93

Mar-98

Mar-03

Mar-08

Mar-13

6. CSI vs retail sales

30 20 10 0 -10 -20 -30 Mar-88
*consumer sentiment plus risk aversion minus economic questions, deviation from long run avg, smoothed
Source: Melbourne Institute, ABS, Westpac Economics

index
CSI (lhs)* real retail sales per capita (rhs)

ann%
Westpac forecast

10 8 6 4 2 0 -2 -4

Mar-93

Mar-98

Mar-03

Mar-08

Mar-13

Westpac Institutional Bank

The broader picture on household incomes and outlays is also revealing. Chart 7 shows recent quarterly changes in spending in terms of component changes in income sources, interest, tax and other (non consumption) outlays, and saving. It shows labour income growth has slowed markedly but that rising non-labour income and reduced interest costs have buered the impact on disposable incomes (i.e. net of tax and interest) which have actually accelerated growth-wise over the last year. The problem for spending is that this buer support from lower interest rates has been negated by a further lift in household savings.

Indeed, the whole picture strongly suggests that instead of spending the cash injection from lower interest rates, the mortgage belt is instead, and not for the rst time, maintaining their mortgage repayments and looking to get further ahead on their loans. The detail once again highlights the importance of household savings behaviour for consumer demand. While CSI has registered an improvement in Q2, retail, vehicle sales and outbound tourism suggest cyclical spending is still soft. The sharp deterioration in Unemployment Expectations in Jun also suggests demand weakness will extend into Q2 and Q3.

7. Household income & outlays: qtrly changes

$bn 12 10 8 6 4 2 0 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 1 2 3 4 5 6 2012Q2 2012Q3
1. labour income 2. other income 3. interest payments 4. tax & other payments 5. savings 6. spending
labour income stalled (avg +$1bn/qtr vs $3bn/qtr prev 4qtrs)

2012Q4
*grey indicates net boost to incomes & spending, red indicates a net drag
rate cuts adding avg $0.7bn/qtr ...

2013Q1

$bn 12 10

Source: ABS, WestpacMelbourne Institute

... but negated by higher saving (avg $0.7bn/qtr)

8 6 4 2 0

8. Job security and cyclical consumer spend

2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Mar-78 Mar-83
major downturns

%ch
Sources: ABS, Melb. Institute, Westpac

index

80 100 120 140

*most cyclical components of spending, per capita, trend, qtly%ch, ^unemp. expectations, smoothed

consumer spend 'cyclical' (lhs)* job security (rhs)^

160 180

Mar-88

Mar-93

Mar-98

Mar-03

Mar-08

200 Mar-13

June 2013

Special topic: interest rate expectations

The Jun survey included an extra question on expectations for mortgage rates over the next 12mths. The results show less consensus on the direction of rates although compared to last time the question was run in Feb, fewer consumers expect rates to rise. The main shift has been between those expecting mortgage rates to rise and those expecting no change. In the Feb 2013 survey 41% of consumers expected higher rates by Feb 2014 with 30% expecting no change and the remaining 29% expecting them to fall. In Jun, 37% now expect rates to be higher with 35% expecting no change and 28% expecting a fall. The standard variable mortgage rate declined 25bps from 6.45% to 6.20% between the Feb and Jun surveys. So while expectations for interest rate moves in the year ahead are largely unchanged the mark to market on current rates implies consumers expect a marginally lower level of rates over the next year. Very few consumers expect a big move in rates either way. Just 2.6% expect a >1% fall and 8.9% expect a >1% rise. The former reects the low starting point for rates. The latter though suggests most expect an extended period of low rates even with a 1% rise, mortgage rates would still be below their long run average.

9. Consumer expectations for mortgage interest rates

%responses 100 80 60
50%

%responses no change rise

Source: Westpac-Melbourne Institute

fall

100 80 60 40 20 0

40 20 0
Feb-10 Jun-10Aug-10Feb-11 Jun-11 Aug-11Feb-12 Jun-12Aug-12Feb-13 Jun-13

10. Interest rate expectations: history

11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 Jun-07
* year-ahead mortgage rate implied by interpolated median of consumers expected change (Jun-12 projection assumes rate cut in survey week already factored in) Sources: RBA, Westpac-Melbourne Institute

% Jun-11 Aug-12

standard variable mortgage rate Feb-12 Jun-12 Feb-13 Jun-13

8.33% 7.40% 6.79% 6.85%

11.0 10.0 9.0 8.0 7.0 6.0 5.0

6.45% 6.20%

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Jun-13

4.0 Jun-14

10

Westpac Institutional Bank

Digging further into the detail, interest rate expectations do vary by state and sub-group. While the median expectation across the board was for rates on hold, more consumers in NSW expect rates to be lower than higher in a years time. Conversely a higher proportion of consumers in Vic and WA expect rates to move up. There was no outright consensus on the direction of rates in any state though. Similarly, amongst consumers renting or with a mortgage, those predicting rate declines slightly outnumbered those expecting a rise. Freehold home owners were a touch more hawkish, though again there was no outright consensus.

Interest rate expectations by age-group point to a somewhat more hawkish view across groups that tend to drive rst home buyer (FHB) demand. A composite measure shows interest rate hawks outnumber doves by around 19% across these age-groups. That compares to 9% overall. This may be a factor contributing to recent weakness in FHB demand, especially compared to other segments. Consumers at outlook on interest rates compares with current market pricing which has a 38bp reduction priced in over the next year and Westpacs view that the cash rate will come down 75bps over the same period.

11. Interest rate expectations: selected groups

state net % 140 NSW Vic 120 Qld WA 100 80 60 40 20 0 -20 *survey months -40 are Feb, Jun, Aug -60 Feb-10 Feb-12 homebuyer group^ net% 140 FHB upgrader 120 investor 100 80 60 40 20 0 -20 ^composites -40 based on age-group results Source: Westpac-Melbourne Institute -60 Feb-10 Feb-12 Feb-10 Feb-12 housing tenure mortgage rent freehold

12. Mortgage interest rates: actual vs expected

14 12 10 8 6 4 2
Expected change next 12mths: Consumers*: no change (mortgage rate) Westpac: 75bps (cash rate) Market (13-Jun): 38bps (cash rate)

%
cash rate implied by market pricing (13-Jun) consumer expectations
*projected mortgage rates assume no further change in spread to cash rate

standard variable mortgage rate WBC forecast

% f'casts*

14 12 10 8 6 4 2

0 Jun-97

Sources: RBA, Bloomberg, Westpac-Melbourne Institute

Jun-01

Jun-05

Jun-09

Jun-13

11

June 2013

Sentiment indicators: durables, cars

The sub-index tracking views on time to buy a major household item rose 3.7% in Jun. The index is down 6.9% from its Feb peak but is still a solid 5pts above its long run average. Spending on household goods was a rare bright spot in Q1. Volumes were up 1.4%qtr, a very strong rise given annual growth of just 1.7%. The take is less positive though if we use a broader denition that includes small renovations (<$10k) which can be viewed as a major household consumption item. On this basis, total spending on major household items was up 0.3%qtr, and down 0.7%yr. The time to buy index points to a pick-up but it is sketchy so far. The sub-index tracking views on time to buy a vehicle slipped 0.9% in Jun but is holding at strong levels well above its long run average. For some time now, actual spending on vehicles has been running counter to the time to buy a vehicle index. This has been due to several natural events aecting both supply (Japanese tsunami and Thai oods) and demand (insurance funded replacement buying post the Qld oods). The result was a 5% hole in 2010-11 followed by a 20% rebound in 2012. These eects now look to be washing out with vehicle purchases dropping 1.9% in Q1. Where demand will settle though remains very dicult to judge.

13. Time to buy a major item vs spending

%ann avg index* 12 30 Sources: Melbourne Institute, ABS, Westpac Economics 9 20 6 10 3 0 0 -10 GST introduction -3 -20 annual -6 -30 growth time to buy a major item (lhs)* to Q1 -9 -40 spending: 'major household items' (rhs)^ *deviation from long run average, smoothed, adv 3qtrs -12 -50 ^real per capita spend on furniture, appliances & renovations <$10k -15 -60 Jun-89 Jun-94 Jun-99 Jun-04 Jun-09 Jun-14

14. Time to buy a car vs vehicle purchases

40 30 20 10 0 -10 -20 -30 -40 Jun-91 Jun-94
time to buy a car (adv. 6mth, lhs) purchase of vehicles (rhs)*
*real per capita, trend, national accounts measure Japanese supply shock

index
qtly

ann%
Sources: ABS, Melbourne Institute, Westpac Economics

30 20 10 0 -10 -20 -30

Jun-97

Jun-00

Jun-03

Jun-06

Jun-09

Jun-12

12

Westpac Institutional Bank

Sentiment indicators: housing

The index tracking views on time to buy a dwelling nudged up 0.4% in Jun, essentially maintaining the strongly positive readings since late last year. Auction market activity is now showing a clear boost from the rally in house purchase sentiment. Clearance rates have risen to around 70% in both Sydney and Melbourne, the two capital city markets where this channel accounts for a meaningul proportion of sales. The latest readings on time to buy a dwelling suggest these high clearance rates will be sustained near term. So far house prices are only showing a modest, uneven rming. Prices may show more of a response to the auction pick up in the months ahead. However, the subdued response to date may also reect a more moderate upturn across the broader market. Housing nance approvals have risen 10%yr a moderate rather than strong upturn. That likely reects consumers nervousness around jobs. Our sentiment-based model of nance approvals based on the time to buy a dwelling and unemployment expectations indexes illustrates the tension well. It suggests that the Jun deterioration in job security could lower the growth trajectory for approvals from 10%yr to 5%yr even if buyer attitudes hold up.

15. Time to buy a dwelling vs auction clearance rates

180 160 140 120 100 80
*state indexes weighted by total number of auction sales ^national, seasonally adj. by Westpac, smoothed (Jun-13 is month to date)

index time to buy a dwelling* auction clearance rates (rhs)^

60 Jun-98

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

85 80 75 70 65 60 55 50 45 40

Jun-01

Jun-04

Jun-07

Jun-10

Jun-13

16. Model of housing nance approvals

ann% 60 simple regression on 'time to buy dwelling' and 50 unemp expectations 40 housing finance approvals ex refi (number, trend) 30 20 10 0 -10 -20 -30 *6mth projection assumes no -40 Source: ABS, Westpac change in sentiment measures -50 Apr-83 Apr-88 Apr-93 Apr-98 Apr-03 Apr-08 ann% 60 50 40 30 20 10 0 -10 -20 -30 -40 -50

Apr-13

13

June 2013

Sentiment indicators: risk aversion

The Jun survey included an update of questions on the wisest place for savings used to construct the Westpac Consumer Risk Aversion Index. The show a further modest easing in risk aversion between Mar and Jun. In Mar, 41.3% of respondents favoured bank deposits or other xed interest investments with a further 18% nominating pay down debt. Those proportions declined to 40.7% and 15.7% in Jun. Indeed the proportion nominating pay down debt in Jun was the lowest since Dec 2007, a sign that households may be starting to ease up on their debt-reduction eorts. That said, safehaven deposit options remain heavily favoured. The main swing has been towards a more favourable view on real estate with 24.6% nominating this as the wisest place for savings (up from 21.3% in March). The proportion nominating shares was relatively steady at 8.4%, a low level by historical standards but up from 5.3% in Jun last year. The net eect was a further 2pt decline in the Westpac Consumer Risk Aversion Index from 32.8 in Mar to 30.7 in Jun. That compares to a reading of 40 in Sep last year. If sustained, the decline suggests the household savings rate, which has crept up from 9.9% to 10.6% over the year to Mar, could track down towards 8%.

17. Consumers: wisest place for savings

60 50 40 30 20 10 0 Jun-98
Sources: Westpac, Melbourne Institute

%
shares real estate deposits/super repay debt*
seasonally adjusted by Westpac *repay debt and super options only included from 1997

60 50 40 30 20 10 0

Jun-01

Jun-04

Jun-07

Jun-10

Jun-13

18. Westpac Consumer Risk Aversion Index

% 70 50 30 10 -10 -30 Mar-03
Sources: Westpac, Melbourne Institute

%
Westpac consumer risk aversion index (lhs)* household savings rate (rhs)
*% nominating 'pay down debt' or interest bearing assets as wisest place for savings minus % nominating real estate or shares; advanced 2qtrs

19 14 9 4 -1 -6

Mar-05

Mar-07

Mar-09

Mar-11

Mar-13

14

Westpac Institutional Bank

Sentiment indicators: job security

Consumers job security has deteriorated markedly over the last 3mths. The WestpacMelbourne Institute Unemployment Expectations Index jumped 6.3% in Jun after a 6.8% rise in Mar-May. At 158.5, the Index has surpassed the worst readings in 2012 and is consistent with a sharp labour market downturn. The deterioration may reect a real shift in conditions rather than just a fear factor. Consumers unemployment expectations are formed not just from media reports but also through direct contact, i.e. condition they are experiencing in their own workplace or industry or that they are aware of via family and friends. So far, ocial estimates of unemployment have been relatively steady with the unemployment rate holding near 5.5% since the start of the year, up about 0.5ppts on a year ago. However, the rate is being aected by uctuations in labour force participation. Other aspects of the survey hours worked, the employment to population ratio and full time employment are showing clearer signs of deteioration more consistent with weak consumer expectations. Of particular concern in the most recent detail is a collapse in hours worked in WA. This alone suggests a real shift may be underway and is the root cause of deterioration in expectations.

19. Unemployment expectations vs hours worked

std devns unemployment expectations (adv. 4mths, lhs) 3 total hours worked (rhs) 2 4 1 0 -1 -2 -3 May-93May-95May-97May-99May-01May-03May-05May-07May-09 May-11 May-13
Sources: ABS, Westpac-Melbourne Institute

ann%*
*scale reversed

-5 -4 -3 -2 -1 0 1 2 3 4 5 6

20. Unemployment expectations vs hours: WA, rest of Aus

4 3 2 1 0 -1 -2 -3
May: 4.3%yr
Source: Melbourne Institute, Westpac Economics

st devn

WA

the rest
std devns from long run avg *smoothed

st devn

unemployment expectations* hours worked, ann change

4 3 2 1 0 -1 -2 -3

-4 -4 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13 Jun-17

15

June 2013

State snapshot: South Australia

South Australians have had persistently weaker consumer sentiment since 2011. While initially this may have reected its status as a nonmining state, the divergence more recently may have had more to do with sensitivities to the high AUD, with SAs manufacturing, wine and tourism industries particularly exposed. The state economy has certainly had a tougher time. State demand contracted three quarters in a row to be down 2.5%yr in Q1. The unemployment rate has risen above its GFC peak to just under 6% with total hours worked down 1.9%yr at one stage in 2012. Investment has tracked lower and consumption is weak. The weakness is borne out in readings around family nances which are 10pts below the national read and explain most of the 3pt wedge between the national and state reads for headline sentiment. The other components of the survey are a touch more upbeat. South Australians are roughly the same as the rest of Australia in terms of risk aversion and unemployment expectations and a touch more positive on time to buy. The most recent economic data is also a little better: private demand rose in Q1, dwelling approvals have rebounded, and jobs and hours worked have both shown a surprising pick-up since Mar.

21. Consumer sentiment, nances & economy: SA vs Aus

140 130 120 110 100 90 80 70 60 Jun-04
Source: Melbourne Institute, Westpac Economics

index
SA

sentiment
rest of Aus
*smoothed

finances^
^avg of family finances vs a year ago and family finances next 12mths

economy^

index

^avg economic outlook next 12mths and next 5yrs

140 130 120 110 100 90 80 70 60

Jun-09

Jun-04

Jun-09

Jun-04

Jun-09

22. Consumer views on time to buy: SA vs Aus

index major item 160 140 120 100 80
*smoothed
Source: Melbourne Institute, Westpac Economics

vehicle

dwelling

index 160 140 120 100 80 60

SA

rest of Aus

60 Jun-04

Jun-09

Jun-04

Jun-09

Jun-04

Jun-09

16

Westpac Institutional Bank

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 nancial behaviour. The latest update, incorporating card data to Apr and customer data to May suggests a slightly less conservative attitude over the last two months after a sharp shift towards more conservative behaviour in the rst 3mths of the year. The Barometer has fallen 0.2% since Mar but it is still up 0.5% since the start of the year. The slight improvement in Apr-Mar has mainly been driven by changes in credit and debit card usage. Annual growth in the total value of credit and debt card transactions bounced back from a very weak Mar read, although at 5.7%yr, growth remains weak overall. The mix of card usage also swung back towards credit from debit, also implying a more relaxed attitude to nances. The slowdown in the value of card transactions is notable given the disappointing consumer spending data in the Q1 national accounts. Even with a bounce in Apr, weakness appears to have extended into Q2.

23. Westpac household barometer

03.5 02.0 00.5 99.0 97.5 Mar-06
Source: RBA, Westpac Group

index
more conservative less conservative

14 12 10 8

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

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

6 4 2 0 -2

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

24. Card transactions vs real spending growth

ann% 12 card transactions (lhs)* 11 10 9 8 7 6 5 4 3 value of all credit and debit card transactions, 2 *real rolling 3mth total, seasonally adjusted by Westpac 1 Mar-05 Mar-07 Mar-09 ann% consumer spending (rhs) 8 6 4 2 0
Source: RBA, ABS, Westpac

-2 Mar-13

Mar-11

17

June 2013

Economic and nancial forecasts

Interest rate forecasts
Latest (14 June) Cash 90 Day Bill 3 Year Swap 10 Year Bond 10 Year Spread to US (bps) International Fed Funds US 10 Year Bond US Fed balance sheet USDtrn ECB Repo Rate 0.125 2.15 3.45 0.50 0.125 2.00 3.82 0.50 0.125 2.00 4.08 0.50 0.125 1.90 4.33 0.50 0.125 1.80 4.59 0.50 0.125 2.00 4.84 0.50 2.75 2.82 2.90 3.37 122 Sep 13 2.50 2.55 2.80 3.20 120 Dec 13 2.25 2.30 2.75 3.20 120 Mar 14 2.00 2.10 2.65 3.10 120 Jun 14 2.00 2.10 2.75 2.90 110 Sep 14 2.00 2.10 3.00 3.10 110

Exchange rate forecasts

AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD
Sources: Bloomberg, Westpac Economics.

Latest (14 June) 0.9595 0.8060 94.65 1.3369 1.1910

Sep 13 0.98 0.82 100 1.33 1.19

Dec 13 0.97 0.83 99 1.31 1.17

Mar 14 0.96 0.84 98 1.30 1.14

Jun 14 0.96 0.84 97 1.30 1.14

Sep 14 0.96 0.83 96 1.30 1.16

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Westpac Institutional Bank

Economic and nancial forecasts

Australian economic growth forecasts
2012 Q2 GDP % qtr Annual change Unemployment rate % CPI % qtr Annual change CPI underlying % qtr ann change 0.6 3.6 5.1 0.5 1.2 0.6 2.2 Q3 0.8 3.3 5.3 1.4 2.0 0.7 2.5 Q4 0.6 3.2 5.4 0.2 2.2 0.6 2.4 2013 Q1 0.6 2.5 5.5 0.4 2.5 0.4 2.4 Q2f 0.6 2.6 5.6 0.4 2.4 0.5 2.3 Q3f 0.7 2.5 6.0 0.7 1.7 0.5 2.0 Q4f 0.5 2.5 6.2 0.4 2.0 0.6 2.0

Calendar years 2011 GDP % ann change Unemployment rate % CPI % ann change CPI underlying % ann change 2.4 5.2 3.0 2.8 2012 3.6 5.4 2.2 2.4 2013f 2.5 6.2 2.0 2.0 2014f 2.3 6.0 2.8 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.

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June 2013

Consumer data and forecasts

Consumer demand
2013 % change Total private consumption* annual chg Real labour income, ann chg Real disposable income, ann chg** Household savings ratio Real retail sales, ann chg Motor vehicle sales (000s)*** annual chg Q1 0.6 2.0 -0.1 2.7 10.6 3.6 895.8 4.5 Q2f 0.5 1.8 0.0 1.9 10.8 2.4 890.9 1.9 Q3f 0.7 2.2 0.8 2.5 10.5 2.9 873.1 -1.1 Q4f 0.8 2.6 -0.2 2.1 10.0 3.2 881.8 -3.2 2014 Q1f 0.7 2.7 0.2 1.8 9.9 1.7 890.6 -0.6 Q2f 0.8 3.0 0.5 1.9 9.9 2.4 908.4 2.0 Q3f 0.8 3.1 1.3 2.1 9.8 3.0 926.6 6.1 Q4f 0.9 3.2 2.2 2.6 9.6 3.6 945.1 7.2

Calendar years 2011 Total private consumption, ann chg* Real labour income, ann chg Real disposable income, ann chg** Household savings ratio, % Real retail sales, ann chg Motor vehicle sales (000s) annual chg 3.4 4.5 4.5 11.0 0.5 806.3 -2.6 2012 3.3 3.6 2.3 10.3 3.2 881.3 9.3 2013f 2.2 0.1 2.3 10.5 3.0 853.1 -3.2 2014f 3.0 1.1 2.1 9.8 2.7 914.4 7.2

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

20

Westpac Institutional Bank

Consumer data and forecasts

Consumer sentiment
2012 % change WestpacMI Consumer Sentiment Index family finances vs a year ago family finances next 12 months economic conditions next 12 months economic conditions next 5 years time to buy major household item time to buy a motor vehicle time to buy a dwelling WestpacMI Consumer Risk Aversion Index^^ CSI consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# WestpacMI Unemployment Expectations avg^ 101.7 89.9 108.5 90.4 90.9 128.0 122.4 123.1 11.6 103.5 48.4 6.6 128.3 128.1 continued WestpacMI Consumer Sentiment Index family finances vs a year ago family finances next 12 months economic conditions next 12 months economic conditions next 5 years time to buy major household item time to buy a motor vehicle time to buy a dwelling WestpacMI Consumer Risk Aversion Index^^ CSI

2013 Oct 99.2 82.6 98.9 91.1 93.6 129.6 134.6 139.8 93.5 34.4 152.7 Nov 104.3 91.8 100.2 96.6 96.8 136.1 137.5 139.8 98.5 142.2 Dec 100.0 85.2 104.8 92.4 88.2 129.6 138.4 142.2 31.3 97.1 154.5 Jan 100.6 77.8 103.5 95.0 91.1 135.7 146.8 140.0 96.3 26.7 144.9

Sep 98.2 78.4 96.2 93.3 98.1 124.9 126.1 127.6 39.9 89.9 5.7 155.3 2013 Feb 108.3 83.5 105.0 108.9 101.0 143.1 140.7 135.4 99.9 11.2 145.1

Mar 110.5 86.8 108.2 109.8 107.1 140.8 142.5 144.5 32.8 100.8 -0.9 139.7

Apr 104.9 83.4 108.0 104.9 98.2 130.2 138.0 128.4 97.4 53.9 141.5

May 97.6 76.7 100.5 90.8 91.4 128.5 139.7 142.7 93.6 149.1

Jun 102.2 83.2 105.9 94.3 94.3 133.3 138.4 143.3 30.7 97.9 8.7 158.5 21

consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# WestpacMI Unemployment Expectations

Westpac Institutional Bank

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Disclaimer
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Disclaimer
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24

Westpac Institutional Bank

Notes

Notes

26

Westpac Economics directory

Westpac Economics Sydney Level 2, 275 Kent Street Sydney NSW 2000 Telephone (612) 8254 8372 Facsimile (612) 8254 6907 Bill Evans Chief Economist Global Head of Economics & Research Andrew Hanlan Senior Economist Matthew Hassan Senior Economist Huw McKay Senior International Economist Justin Smirk Senior Economist Elliot Clarke Economist London Camomile Court, 23, Camomile St, London EC3A 7LL United Kingdom Telephone (4420) 7621 7061 Facsimile (4420) 7621 7527 James Shugg Senior Economist

Takutai on the Square Level 8, 16 Takutai Square Auckland, New Zealand Telephone (649) 336 5671 Facsimile (649) 336 5672
Dominick Stephens Chief Economist, New Zealand Michael Gordon Markets Economist

Auckland

Felix Delbrck Senior Economist Nathan Penny Economist

Publication enquiries, Westpac Economics, Telephone (612) 8254 8720, economics@westpac.com.au

27

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