The Red Book

August 2013

Westpac Economics with the Institutional Bank.

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

August 2013

Contents

Executive summary The consumer mood: rate cut bump Sentiment indicators: spending Special topic Interest rate expectations Sentiment indicators Durables, cars Housing Risk aversion Job security State snapshot: Victoria 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 16 August 2013 The next issue will be published on 13 September 2013

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August 2013

Executive summary
The WestpacMelbourne Institute Index of Consumer Sentiment rose 3.5% in Aug lifting the Index from the faintly optimistic 102.2 reading in Jul to a more rmly optimistic reading of 105.7. The survey detail clearly shows the RBAs Aug rate cut was behind the gain. Survey responses after the decision, which occurred during the survey week, show a big improvement, particularly around views on family nances. While the initial rate cut reaction from sentiment is a decent one, it remains to be seen how well the lift is sustained. Other factors such as the announcement of an election date, an Economic Statement showing a further deterioration in the Governments nances, and the sustained decline in the AUD appear to have had little impact on sentiment overall. That said, the detail suggests these factors may have had an inuence on specic sub-indexes and on sentiment in particular subgroups. CSI , our modied consumer sentiment indicator which we favour as a guide to spending momentum, posted a similar 3.4% gain. It continues to point to subdued momentum consistent with per capita spending growth in the 0-%yr range (1-2%yr range once population growth is included). Available data on sales and surveyed business conditions point to continued weakness in Q2, particularly across the retail sector. Although vehicle sales, fuel sales and passenger movements point to some osetting positives, we expect the Q2 national accounts to show another weak read with total consumer spending up 0.4%qtr and annual growth slowing to 1.7%yr. The Aug survey included an additional question on consumers mortgage interest rate expectations. Responses show 41% expect rates to rise, 36% expect no change and 23% expect rates to fall, the latter shrinking to 19% across those surveyed after the RBA cut rates. While there is no majority view on the direction for mortgage rates, more expect them to rise or be unchanged than to fall. The sub-index tracking views on time to buy a major household item declined 5.5% in Aug to be o 13.4% since Mar. We suspect most, if not all, of this is linked to the decline in the AUD the parity premium that reected the cheapness of imported goods rather than an intent to buy seems to be nally coming out of this sub-index. The sub-index tracking views on time to buy a vehicle rose 5.4%, recovering half of its Jul fall. The index is o its highs of earlier in the year but remains above average. Actual car sales have yet to register the full impact of the announced changes to fringe benet tax arrangements. The sub-index tracking views on time to buy a dwelling rose 3.7%, only recovering part of Juls 8.4% drop. Buyer attitudes continued to weaken rapidly in WA, suggesting the mining downturn may be starting to impact. The Westpac-Melbourne Institute Unemployment Expectations Index was unchanged in Aug but remains at a high level indicating widespread expectations of a rise in unemployment. Job loss fears remain intense and are showing a notable escalation in the resource states.

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 RBAs decision to cut the cash rate by 25bps at its Aug 6 meeting produced an almost text-book example of a rate cut bump to consumer sentiment. The Westpac Melbourne Institute Consumer Sentiment Index rose 3.5% from 102.2 to 105.7. Descriptively, the move takes the Index from faintly optimistic to somewhat more rmly optimistic territory. It falls well short of a breakout though. Indeed, our fear is that it may prove to be a short-lived sugar hit. The impact of the rate move is clear in the responses over the course of the survey week (sentiment readings were 5.3% higher after Aug 6) and the composition of the improvement (led by a big improvement in views on family nances). In contrast to May, the sentiment impact of the cut was not gazumped by scal news. While the Budget helped knock sentiment 7% lower in May, there seemed to be little impact on headline sentiment from the scal deterioration reported in the Governments Economic Statement in Aug (although the more granular detail suggests this and the AUD decline may have had some inuence in specic areas).

While the sentiment response to the Aug rate move has been decent, history shows the initial boost tends to be followed by subsequent partial payback. Meanwhile, other aspects of the Aug survey look a little more fragile. Responses on time to buy questions were mixed in the month but continue to show a cooling o from the strong readings seen earlier in the year. Consumers unemployment expectations remain our main concern. These showed no change in Aug, holding at very weak levels. Australian consumers continue to brace for a signicant rise in unemployment with a notable deterioration in expectations occurring across the resource states. The Sep survey will give us a better sense of how durable the rise in sentiment is. It will also provide a key update on the wisest place for savings question that gives important insights into risk aversion. We continue to expect further rate cuts from the RBA, with 25bp moves in Nov and Feb. While these are likely to be triggered by developments in the business sector and abroad, how consumers react to these rate moves will also be important.
5

August 2013

The consumer mood: rate cut bump

The Westpac Melbourne Institute Index of Consumer Sentiment rose 3.5% in Aug from 102.1 in Jul to 105.7. This is the highest read since the surge in Feb-Mar and, prior to that, since Feb 2011. However, the Index is still 7% below its average read in 2010 and is only 2.3% above the Nov 2011 level immediately following the rst rate cut in the current easing cycle. The most key inuences on sentiment were: the RBAs 25bp rate cut; the announcement of a Sep 7 election date; the Governments Economic Statement which revealed a further deterioration in the scal position; and the AUD settling 15% below its Apr level. Responses over the survey week suggest the rate decision was particularly important. Responses received prior to the cut showed an index reading of 102.4 (+0.3% on Jul). Those received post-cut showed a reading of 107.4 (+5.2% on Jul). That boost appears to have outweighed other negatives, particularly from the Governments Economic Statement released the week prior to the survey which showed a further $33bn deterioration in the scal position. That is in contrast to May when a similar mix of a rate cut and a sharp deterioration in the scal position revealed in the Budget saw sentiment drop 7%.

1. Consumer sentiment lifts

130 120 110 100 90 80 70 60 Aug-83 Aug-88 Aug-93 Aug-98 Aug-03 Aug-08 Aug-13
long run average

index
Sources: Melbourne Institute, Westpac Economics

index
post RBA

130 120 110 100 90 80 70 60

2. Consumer sentiment before and after RBA rate cut

140 120 100
+15.8

index Jul Aug pre-RBA

+11.6

index Aug post-RBA

Sources: Westpac, Melbourne Institute

140 120 100 80 60

80 60
consumer sentiment finances, last 12mths finances, economy, next 12mths next 12mths economy, next 5yrs time to buy major item

Westpac Institutional Bank

By component, the biggest gains were in views on family nances vs a year ago (+13%) and family nances, next 12mths (+9.7%) with a more muted gain in the sub-index tracking views on economic conditions, next 12mths (+5.5%), a 0.4% dip in the sub-index on economic conditions, next 5yrs and a 5.5% fall in the time to buy a major item sub-index. The latter may reect the lower AUD and expectations that this may push up the cost of imported goods. Note that the stronger bounce in views on family nances is typical of rate cut reactions. On average these sub-indexes have risen 2.5% combined vs 1.5% for headline sentiment.

The demographic breakdown suggests other factors may also have been at play in Aug. Predictably, the rate cut drew a more positive response from consumers with a mortgage (+7.4%). More surprising was the wedge in sentiment between those in metro areas (+1%) and non-metro areas (+11%). That may partly reect the sustained decline in the AUD a welcome relief for the rural and tourism sectors that tend to dominate non-metro areas. While the monthly gain was more muted for those in metro areas, sentiment in this segment did show a more marked increase after the RBA rate cut.

3. Consumer views on family nances: rate cut reactions

140 120 100 80 60 5 40 avg excl. months with a -5
major event: +2.3%

index rate cut

index rate cut + 'major event'

Source: RBA, Westpac Melbourne Institute

45 140 120 35 100 25

monthly %change following cut

15 80 5 -5

20 -15 -15 Aug-73 Aug-77 Aug-81 Aug-85 Aug-89 Aug-93 Aug-97 Aug-01 Aug-05 Aug-09 Aug-13

4. Consumer sentiment: selected groups

150 140 130 120 110 100 90 80
*smoothed
Source: Melbourne Institute, Westpac Economics

index

mortgage yes no metro

region non-metro

voting intention ALP Coal.

index 150 other 140 130 120 110 100 90 80 70

70 Aug-99 Aug-04 Aug-09 Aug-99 Aug-04 Aug-09 Aug-99 Aug-04 Aug-09

August 2013

Sentiment indicators: spending

CSI is a composite index that combines the sub-indexes on family nances and time to buy a major item with the Westpac Risk Aversion Index which we nd provides a good guide to actual spending. In Aug, CSI rose 3.4% in line with the move in headline sentiment. It remains at a fairly weak level though consistent with growth in per capita spending of 0-0.5%yr Component-wise, strong gains in the subindexes on family nances (+11% on a combined basis) were partially oset by a 5.5% fall in the time to buy a major item subindex. Note that the risk aversion component is quarterly with the next update due in Sep. Ocial gures show real retail sales were at in Q2 with nominal sales also at in the Jun month. The May rate cut looks to have done little to spur demand, although it may have prevented a weaker outcome. The detail shows dicult conditions across most store categories and states, with a clear slowing in the mining states. Other spending indicators have been better. Vehicle sales rebounded in Q2: consumer sales +5.8% vs 3.6% in Q1, albeit with a 4% decline in Jul. Fuel sales also improved: +0.7% vs 0.9% in Q1. Domestic air trac also looks to be up 2% vs 1.7% in Q1. All gures are Westpac estimates of seasonally adjusted quarterly changes.

5. CSI vs total consumer spending

30 20 10 0 -10 -20
*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed, adv. 6mths; ^real, per capita
Source: Melbourne Institute, ABS, Westpac Economics

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

ann%
Westpac forecast

-30 Mar-93Mar-95Mar-97Mar-99Mar-01Mar-03Mar-05Mar-07Mar-09 Mar-11 Mar-13

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

6. CSI vs retail sales

30 20 10 0 -10 -20
*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

-30 Jun-93

Jun-98

Jun-03

Jun-08

Jun-13

Westpac Institutional Bank

Both the NAB and AiG surveys reported a further deterioration in consumer-related sectors in Q2. Reported trading conditions were particularly weak in the NAB survey (retail: 28 vs 18 in Q1; consumer services: 1.3 vs 7.5). The AiG PSI reading for retailers fell from 46.6 in Q1 to 43.6 in Q2 but improved from 50.8 to 54.2 for consumer services. The measure is a broader assessment of conditions than simply sales. One driver of demand often overlooked in the sales analysis are shifts in overseas population ows. Both short-term movements (i.e. tourism) and long-term movements (i.e. migration) can have a major bearing on demand.

The Jun month for example likely saw a boost from a 40k surge in tourist arrivals associated with the British & Irish Lions tour. The broader trends continue to be negative though, with a solid up-trend in outows and lacklustre inows. That may change with a lower AUD but this will take time to impact. Long-term movements suggest the pick-up in migrant inows may be levelling out, albeit consistent with still solid population growth of 1.8%yr. Overall, we expect the Q2 national accounts (due Sep 4) to show total consumer spending up 0.4%qtr, taking annual growth to just 1.7%, i.e. stalled in per capita terms.

7. Retail sales by store category and state

4 3 2 1 0 -1 -2
Sources: ABS; Westpac Economics

%qtr
*real

by store category Q4 Q1 Q2

by state

%qtr

4 3 2 1 0 -1 -2 -3

-3
Total food dept clothing h/hld other cafes & NSW stores goods retail rest's Vic Qld SA WA

8. Overseas arrivals and departures

thousands 750 550 350 150 -50 -250 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13
Source: Melbourne Institute, Westpac Economics

short term (lhs)

long term (rhs)* arrivals departures net arrivals

thousands

70 60 50 40 30 20 10

*seasonally adjusted by Westpac

August 2013

Special topic: interest rate expectations

The Aug survey included an extra question on expectations for mortgage rates over the next 12mths. The results show more consumers expect rates to rise or be unchanged than to fall. The results show 41% of consumers expect rates to be higher by Aug 2014. Although that is the same as in Feb, the Aug survey found a higher proportion expecting rates to stay on hold (36% vs 30% in Feb). There was also a signicant shift in responses following the RBAs 25bp rate cut: 44% of those surveyed after the move expected rates to be higher, 38% expected no change, and only 19% expected a further decline (vs 33% of those surveyed prior to the move). The clear message is that most consumers do not expect mortgage rates to come down any further over the next 12mths. We now have 4yrs of surveyed mortgage rate expectations spanning a cycle in which the average standard variable rate has risen from 6.65% to 7.8%, and back down to 5.95%. While its debatable as to how typical that cycle may have been, a few tentative observations can be drawn: 1) consumers seem more inclined to expect rate rises than falls; 2) expectations can be slow to react to cyclical changes; and 3) there is rarely a strong consensus on the direction of rates.

9. Mortgage rate changes: consumer expectations vs actual

net% 100 80 60 40 rates rising/ expected to rise 20 0 rates falling/ -20 expected to fall -40 -60 -80 -100 Aug-08 Aug-09 bps
Source: RBA, Westpac-Melbourne Institute

post RBA decision

consumer mortgage rate expectations (lhs) actual change, previous 12mths (rhs)* *standard variable actual change, following 12mths (rhs)* mortgage rate Aug-10 Aug-11 Aug-12 Aug-13

500 400 300 200 100 0 -100 -200 -300 -400 -500

10. Consumers expectations for mortgage rates next 12mths

50 45 40 35 30 25 20 15 10 5 0 %responses fall >1% fall 0-1% no change rise 0-1% rise >1% %responses Aug-13
Source: Westpac-Melbourne Institute

50 45 40 35 30 25 20 15 10 5 0

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

preRBA

postRBA

10

Westpac Institutional Bank

That lack of consensus has a dierent meaning right now given the current low level of mortgage rates. At 5.95%, rates are around 150bps below their long-run average. While consumers as a whole may not expect further rate cuts, they clearly expect a continuation of the low interest rate environment. Consumers in NSW are more convinced rates will rise with an outright majority, albeit a slight one (51%), expecting higher rates in a year. Renters are also more hawkish while home owners tend to favour no change over rises, especially those with the most on the line, consumers with a mortgage.

The age-group breakdown shows a slightly more hawkish rate view amongst those in key rst home buyer age groups. Those in age groups that drive upgrader and investor activity were more evenly split between rates higher and no change. There was no outright consensus on the direction of rates across any group though. Consumers at outlook on interest rates compares with market pricing in the survey week which had a 25bp rate cut fully priced in by Apr 2014 (though just 17bps by Aug 2014). Westpacs long-held forecast of two more 25bp rate cuts in Nov and Feb taking the cash rate to a low of 2% remains a more dovish view.

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-11 Feb-13 Feb-10 Feb-12 housing tenure mortgage rent freehold

12. Interest rate expectations

14 12 10 8 6 4 2
Expected change next 12mths: Consumers*: no change (mortgage rate) Westpac: 50bps (cash rate) Market (13-Jun): 17bps (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 Aug-97

Sources: RBA, Bloomberg, Westpac-Melbourne Institute

Aug-01

Aug-05

Aug-09

Aug-13

11

August 2013

Sentiment indicators: durables, cars

The sub-index tracking views on time to buy a major household item fell 5.5% in Aug following a milder 1.7% decline in Jul. The sub-index is down 13.4% from its Mar high. The fall coincides with a sustained decline in the AUD from 104 US during the Apr survey to 89 in Aug. The strength in the sub-index in recent years and the wide disconnect from at actual spending appeared to be a by-product of the high currency, i.e. a boost to perceived aordability from the reduced cost of imported goods rather than an intent to buy. This parity premium may now be coming out of the time to buy a major item assessment. The sub-index tracking views on time to buy a vehicle recovered half of its heavy Jul fall in Aug, rising 5.4%. The index is back above its long run average but well o its early year highs. The AUD decline may be playing a part here too. Notably though, the Aug rise came despite the Governments announced changes to fringe benet tax concessions for vehicles announced in mid-Jul. Actual car sales were down a touch in the month (we estimate consumer sales were down 4.4%). That may be partly due to the tax changes although the main impact is expected to come later on and mainly via eet sales (some expect a 5-10% fall in total annual sales).

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

30 10 -10 -30 -50
time to buy a major item (adv 3qtrs, lhs)*
last 6mths

index*
*deviation from long run average, smoothed

%ann avg

20 15 10 5 0

-70

real per capita household goods retail sales (rhs)

Sources: Melbourne Institute, ABS, Westpac Economics

-5 -10

-90 Jun-86 Jun-89 Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13

14. Time to buy a car vs consumer car sales

40 30 20 10 0 -10 -20 -30 -40 Jul-05
*advanced 6mths ^per capita, consumer sales only Japanese earthquake hits supply

index
'time to buy a car' (lhs)* new vehicle sales (rhs)^

ann%
Sources: ABS, Melbourne Institute, Westpac Economics

30 20 10 0 -10 -20

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

-30 Jul-14

12

Westpac Institutional Bank

Sentiment indicators: housing

The sub-index tracking views on time to buy a dwelling rose 3.7% in Aug, reversing much of the 8.4% drop in Jul to be 13pts above its long run average. While positive, the bounce is disappointing given the Aug rate cut. A similar situation saw a much bigger rebound in May the sub-index had fallen 11% in Apr but regained all of that lost ground following the RBAs May rate cut (note the charts below show smoothed series that conceal much of this monthly volatility). Whereas interest rate expectations seemed to be at the heart of that earlier wobble, other factors look to be behind the Jul-Aug slip. One of these factors looks to be a notable shift in WA where the mining downturn may now be starting to play through to the previously buoyant Perth housing market. Instead of bouncing in Aug, the WA time to buy a dwelling index dropped a further 13.4% to be down 18.5% since May. While we have seen similar falls in recent years reverse, the context this time of a rapidly turning mining investment cycle suggests this may be a more signicant shift. The situation looks more resilient across the other state indexes, although again none recovered all of the Jul decline. Auction activity remains strong in Aug, particularly in Sydney.

15. Time to buy a dwelling

index index 180 180 latest: real house long run 160 160 prices +3.6% average 140 140 120 120 100 100 2004 correction 80 80 early 80s recession 2010-12 real house real house prices 12.6% 60 60 GFC real house prices 2.1% mid 70s recession real house prices 40 40 real house prices 8.7% early 90s recession 10.8% prices 15.3% 20 20 real house prices 7.4% (Melb & Syd) Source: ABS, RP Data-Rismark, REIA, Westpac Melbourne Institute 0 0 Aug-74 Aug-79 Aug-84 Aug-89 Aug-94 Aug-99 Aug-04 Aug-09 Aug-14

16. Time to buy a dwelling: by state

170 150 130 110 90 70 50 Aug-07
Source: Melbourne Institute, Westpac Economics

index
NSW Vic Qld WA

index

170 150 130 110 90 70

*smoothed

50 Aug-13 Aug-08 Aug-10 Aug-12

Aug-09

Aug-11

13

August 2013

Sentiment indicators: risk aversion

The wisest place for savings questions used to construct the Westpac Consumer Risk Aversion Index were not included in the Aug survey but will be in Sep. Recent readings have shown a gradual easing in risk aversion over the last 2yrs. The index averaged 43.4 in 2011H2, easing to 39.0 in 2012H1, 35.6 in 2012H2 and 31.7 in 2013H1. The decline points to a moderation in the household savings ratio from 10.6% currently to something closer to 8%. We suspect the improvement will be more modest (to around 9%) and slower to come through. The Sep update will give a critical guide to this view. It should be noted that for the most part, this expected moderation in savings will act to cushion the eect of a slowdown in income growth on spending rather than drive an acceleration in total spending. The main driver of the decline in the Risk Aversion Index has been a rise in the proportion nominating real estate as the wisest place for savings. While that shift is conrmed by a strong 18% rise in the value of investor home loans it is notable that the increase in total investor credit outstanding has been much more muted, the implication being that existing investors are still reducing debt aggressively.

17. Consumer risk aversion vs household savings

% 70 50 30 10 -10 -30 Mar-03
Sources: ABS, 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
Westpac forecast

19 14 9 4 -1 -6

Mar-05

Mar-07

Mar-09

Mar-11

Mar-13

18. Wisest place for savings: % nominating real estate

45 40 35 30 25 20 15
Sources: RBA, ABS, Westpac, Melbourne Institute

%
improved access to finance and CGT changes investor boom

%ann wisest place for savings: real estate (advanced 6mths, lhs) investor housing credit (rhs)*
*inflation-adjusted, per capita

50 40 30 20 10 0

-10 10 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13

14

Westpac Institutional Bank

Sentiment indicators: job security

The Westpac-Melbourne Institute Unemployment Expectations Index was at in Aug, following a 3.6% fall in Jul. At 152.7 the Index remains at a very high level by historical standards and indicates widespread expectations that unemployment will rise. Interest rate cuts do not tend to generate the same immediate improvement in unemployment expectations as they do with headline consumer sentiment. Nonetheless, the lack of a positive interest rate response does tend to undermine the gain in sentiment particularly given the very weak starting point for this proxy for consumers sense of job insecurity. The contrast between sentiment and unemployment expectations has been stark in recent years. Chart 19 shows the two series scaled to a consistent basis (the unemployment expectations index inverted and adjusted for its greater volatility) with both benchmarked to 100 in Jan 2007. Whereas sentiment is down 4% over this period, unemployment expectations are 26% worse on this basis. Moreover, in the time the RBA has been cutting rates, unemployment expectations have deteriorated by about as much as sentiment has improved. The Aug detail continues to show sharp rises in Qld and WA, clearly due to the mining downturn.

19. Unemployment expectations vs consumer sentiment

130 120 110 100 90 80 70 60 50 Jan-07 Jan-08 Jan-09
both indexes re-based to Jan-07 *index inverted and scaled to be on the same basis as consumer sentiment
Source: Melbourne Institute, Westpac Economics

index Westpac-MI Consumer Sentiment Index Westpac-MI Consumer Unemployment Expectations Index*

index
since RBA easing cycle began: +8.7%

130 120 110 100 90 80 70 60 50

9.3%

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

20. Unemployment actual and expected: by state

5 4 3 2 1 0 -1 -2
*smoothed
Source: Melbourne Institute, Westpac Economics

ppts

south-east

resource states

ppts

unemployment expectations (st devns from long run avg) ann ch unemp (ppts)

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

-3 Jul-97 Jul-01 Jul-05 Jul-09 Jul-13 Jul-97 Jul-01 Jul-05 Jul-09 Jul-13

15

August 2013

State snapshot: Victoria

The Vic state economy remains the weakest of the major states with state demand down 0.6% in the year to Q1. Notably, a sharp decline in public investment (38% in 2012) has been a key driver in the weakening. Consumer demand has also slowed though as labour incomes have come under pressure. The consumer survey shows some intriguing divergences between Vic and the rest of the nation in Aug. Sentiment showed a much more muted rise in Vic (+0.6%) with a more muted response from view on family nances and expectations for the economy marked sharply lower. Responses on time to buy a major item and unemployment expectations were a little better though. The AUD decline may be seen as more of a positive for the state which has a lower direct exposure to the mining sector and a higher concentration of manufacturing, health and education sectors that may view the lower currency with relief. Vic consumers have been consistently less upbeat on time to buy a dwelling with a consistent 8pt wedge vs the rest of Aus over the last year. A Vic housing recovery does appear to be underway nonetheless although auction activity has been less buoyant than in Sydney.

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

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

index Vic

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

Aug-09

Aug-04

Aug-09

Aug-04

Aug-09

22. Consumer views on time to buy & jobs: Vic vs Aus

190 170 150 130 110 90 70
*smoothed
Source: Melbourne Institute, Westpac Economics

index major item Vic rest of Aus

dwelling

unemp expns index

190 170 150 130 110 90 70 50

50 Aug-04

Aug-09

Aug-04

Aug-09

Aug-04

Aug-09

16

Westpac Institutional Bank

Westpac household barometer

The Westpac Household Barometer combines system-wide data on credit and debit card transactions from the RBA with data on mortgage and credit card payments by Westpac customers to generate a broad gauge of consumer nancial behaviour. Higher readings correspond to more defensive/conservative behaviour and vice versa. The latest readings based on system transaction data to Jun and Westpac customer data to Jul, shows a continued modest relaxation in behaviour after a sharp conservative shift in Q1. The Barometer is 0.5% below its Mar peak, but is still up 0.4%yr (all data is seasonally adjusted). Card usage has improved notably. Q1 saw an abrupt slowdown with annual growth in the real value of credit and debt card transactions dropping to 1.8%yr, the slowest pace on records back to 1994 and well below the 6% average over the last decade and the 4.5% average over the last 5yrs. Activity bounced impressively in Q2 with annual growth lifting back to 5.7%yr albeit with a softening in the Jun month. The mix of card use also shift back in favour of credit over debit cards, a further indication of more relaxed nancial behaviour. That said, the overall level of the Barometer still points to relatively high savings rates maintained in 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 6 4 2 0 -2

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

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

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

August 2013

Economic and nancial forecasts

Interest rate forecasts
Latest (16 Aug) 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 0.25 2.78 3.69 0.50 0.125 2.40 3.78 0.50 0.125 2.20 4.03 0.50 0.125 2.10 4.29 0.50 0.125 2.00 4.54 0.50 0.125 2.00 4.80 0.50 2.50 2.58 3.09 3.97 119 Sep 13 2.50 2.55 2.90 3.60 120 Dec 13 2.25 2.30 2.80 3.40 120 Mar 14 2.00 2.10 2.70 3.30 120 Jun 14 2.00 2.10 2.70 3.20 120 Sep 14 2.00 2.10 2.90 3.10 110

Exchange rate forecasts

Latest (16 Aug) AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD
Sources: Bloomberg, Westpac Economics.

Sep 13 0.92 0.80 99 1.33 1.15

Dec 13 0.92 0.82 98 1.33 1.12

Mar 14 0.92 0.83 97 1.33 1.11

Jun 14 0.90 0.81 96 1.30 1.11

Sep 14 0.87 0.78 96 1.25 1.12

0.9147 0.8067 97.58 1.3342 1.1339

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Westpac Institutional Bank

Economic and nancial forecasts

Australian economic growth forecasts
2013 Q4 GDP % qtr Annual change Unemployment rate % CPI % qtr Annual change CPI underlying % qtr ann change 0.6 3.2 5.4 0.2 2.2 0.6 2.4 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 2.4 Q3f 0.7 2.5 5.8 1.0 2.0 0.5 2.1 Q4f 0.6 2.5 6.2 0.4 2.2 0.7 2.2 2014 Q1f 0.6 2.5 6.4 0.6 2.4 0.6 2.4 Q2f 0.6 2.4 6.4 0.6 2.6 0.6 2.4

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 2.2 2.2 2014f 2.3 6.4 2.5 2.3

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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August 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 3.5 894.7 4.3 Q2e 0.4 1.7 0.0 1.8 10.8 2.0 904.6 3.4 Q3f 0.7 2.1 0.7 2.3 10.6 2.5 805.7 -8.6 Q4f 0.8 2.5 -0.2 2.1 10.1 2.8 835.0 -8.4 2014 Q1f 0.7 2.6 0.2 1.8 10.1 1.6 839.2 -6.2 Q2f 0.8 3.0 0.3 1.8 9.9 2.4 847.6 -6.3 Q3f 0.8 3.1 0.9 2.0 9.7 3.0 864.5 7.3 Q4f 0.9 3.2 1.6 2.2 9.3 3.6 881.8 5.6

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 0.5 806.0 -2.7 2012 3.3 3.6 2.3 10.3 3.2 881.5 9.4 2013f 2.1 0.1 2.2 10.5 2.7 860.0 -2.4 2014f 3.0 0.8 1.9 9.7 2.7 895.0 4.1

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 89.8 108.5 90.4 90.9 128.0 122.5 123.2 11.6 103.4 42.5 -25.9 128.3 128.1 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 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 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 -27.3 139.7

Nov 104.3 91.8 100.2 96.6 96.8 136.1 137.5 139.8 98.5 142.2 2013 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

Jul 102.1 78.6 103.0 95.1 103.0 131.1 124.2 131.3 95.5 46.9 152.8

Aug 105.7 88.8 113.0 100.3 102.5 123.9 130.9 136.2 98.7 17.4 152.7 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 Auckland

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

Felix Delbrck Senior Economist Nathan Penny Economist

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

27

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