Federal Budget 2013/2014

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The Federal Budget 2013/14

May 2013

Bill Evans

Chief Economist

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Federal budget: $19.4bn deficit in 2012/13

-3.3

-4.1 -4.2

-60

-40

-20

0

20

40

-6

-4

-2

0

2

4

1981/82 1991/92 2001/02 2011/12

$bn% of GDP

$bn (rhs) % of GDP (lhs)

Sources: Treasury, ABS, Westpac Economics

Govtf/cs to16/17

Underlying cash balance

3

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4

300

325

350

375

400

425

450

300

325

350

375

400

425

450

'11/12 '12/13 '13/14 '14/15 '15/16

$bn$bn

May 2012 May 2013

Sources: budget papers, Westpac Economics

-$20bn

-$23bn

-$20bn

-$21bn

Total receipts

(a)

Four yrs

-$83bn

Revenue, slippage

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5

General government, net debt

0

20

40

60

80

100

120

0

20

40

60

80

100

120

Aus

NZ

C

anada

Ge

rmany

Spain

UK

F

rance

US

Italy

% %Source: IMF, budget papers, Westpac Economics

Australian Government

including

2014/15 f/c

% of GDP; 2012

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Back-loaded savings of $12.3bn in 2015/16

0.0 0.1 0.10.5 0.3 0.0 0.0

0.9 1.0

11.6

4.2

2.6

5.8

3.4

0.71.7

3.1

10.7

0

2

4

6

8

10

12

14 $bn

2013/14*

over four years

Key savings initiatives*includes savings

in 2012-13

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New spending initiatives in the Budget

0.20.5

0.0

0.6 0.40.2

0.6

3.1 3.0

1.9

1.21.0 0.9 0.8

0

1

2

3

4

0

1

2

3

4

Infrastructure Schools Disability Training Social Health Defence

$bn$bn

2013/14*

over four years

*includes spending

in 2012-13

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Government Westpac

World GDP (2014) 4.0 3.1%

Aust GDP 2.75% 2.4%

Consumption 3.0% 3.0%

Housing 5.0% 4.7%

Investment 4.5% 0.0%

Unemployment 5.75% 6.1%

Government & Westpac forecasts: 2013/14

Sources: Budget papers, Westpac Economics

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Growth to remain below trend in 2013 and 2014

-2

0

2

4

6

-2

0

2

4

6

Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14

% chg% chgGDP growth Long term avg Five year avg

Sources: ABS, Westpac Economics

fc/s

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Major gas projects: spending near peak

0

2

4

6

810

12

14

16

0

2

4

6

810

12

14

16

Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16

$bn $bn

Quarterly*

Actual, official data #

3qtr moving avg.

Sources: Westpac Economics,Access Investment Monitor

* Westpac estimates

Peak: end 2013, early 2014

# Work on al loil & gas projects

10

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Business confidence fails to respond to rate cuts

70

80

90

100

110120

130

140

150

70

80

90

100

110120

130

140

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

indexindex2001-02

2008-09

2011-12

Sources: NAB, Westpac Economics

*index based to 100 in

month prior to first rate cut

months

11

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CAPEX planscollapse in manufacturing

-30

0

30

60

-30

0

30

60

2012 2013f 2014f

% chg, yr avg% chg, yr avgMining

Manufacturing

Services

Total

History in real terms,

Expectations in nominal(calculated using avg.

realisation ratios)

Sources: ABS,Westpac Economics

Financial years

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Consumer sentiment finally responds to rate cuts

70

80

90

100

110120

130

140

150

70

80

90

100

110120

130

140

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

indexindex2001-02

2008-09

2011-12

Sources: Melbourne Institute, Westpac Economics

*index based to 100 in

month prior to first rate cut

months

13

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0

10

20

30

40

50

60

0

10

20

30

40

50

60

Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

%%Sources: Melbourne Institute,Westpac Economics

level of recall: international news items

Consumers very sensitive to European crises

Asian

crisis

9-11

Lehmans

collapseavg

last

2yrs:

28%

European

sov. debt

crisis

14

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Household leverage will contain housing excess

0

20

40

60

80

100

120

140

160

180

Mar-77 Nov-83 Jul-90 Mar-97 Nov-03 Jul-100

20

40

60

80

100

120

140

160

180% %

total (gross)

housing

Sources: RBA, Westpac Economics

Peak in Sep-06

15

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Westpac loan book shows consumer caution

90

9294

96

98

100102

104

106

108

110

80

85

90

95

100105

110

115

120

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

indexindex*based on median months aheadWestpac customers are on mortgagerepayments

increase in months ahead

decrease in months ahead

16

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New housing lending is picking up very slowly

-30

-20

-10

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14

% ann$bn/qtrHousing finance, level (lhs) Annual growth (rhs)

Sources: ABS, RBA, Westpac Economics

quarterly

30%10%

f/c toSep 13

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The job market in 2012: winners and losers

-50

-25

0

25

50

75

-50

-25

0

25

50

75

Education &health

Businessservices*

Mining Government Construction

thousandsthousandsSources: ABS, Westpac. * Professional, technical & business.

18

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19

Unemployment rate set to peak mid 2014

3

5

7

9

62.5

63.5

64.5

65.5

66.5

Mar-97 Mar-01 Mar-05 Mar-09 Mar-13

% %

unemployment rate (lhs)


Forecaststo Dec 2015

peak6.25%

mid 2014

19

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20

Unemployment rate projections by state

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14

%%

NSW Vic Qld


20

*annual averages, projectionsassume no change in populationgrowth and participation rates

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Durables inflationdomestic margin pressure

-12 -9 -6 -3 0 3 6

Textiles, clothing & footwear

Furniture

Motor vehicles & parts

Toys, books & leisure goods

Household electrical items

ppts

Consumer pricesImport prices

Source: RBA

average annualised inflation since Q1 2011

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22

Underlying inflation to stay low despite carbon tax

0

1

2

3

4

0

1

2

3

4

Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13

%yr%yr

Westpac's estimate of the Carbon Price

RBA core inflation


Forecasts

Target band

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Housing finance approvals not responding to rates

70

80

90

100

110120

130

140

150

70

80

90

100

110120

130

140

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

indexindex2001-02

2008-09

2011-12


*index based to 100 inmonth prior to first rate cut

months

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House prices are slow to respond to rate cuts

80

90

100

110

120

130

80

90

100

110

120

130

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

indexindex2001-02

2008-09

2011-12

Sources: RP Data-Rismark, Westpac Economics

*index based to 100 inmonth prior to first rate cut

months

24

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House Price Expectations finally picking up

-50

-25

0

25

50

75

100

-50

-25

0

25

50

75

100

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

%%

Source: Melbourne Institute, MortgageChoice, Westpac Economics

*grey line is a similar measure from anannual survey by Mortgage Choice;^average of all observations, adjustedfor different survey frequencies

net % expectinghouse prices to rise

avg^

25

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26

House price expectations boosted in NSW

-20

0

20

40

60

80

100

-20

0

20

40

60

80

100

May-09 May-10 May-11 May-12 May-13

%%

NSW Vic Qld

Sources: Melbourne Institute, Westpac Economics

net % expecting house prices to rise

26

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Sydney house prices have a lot to catch up

60

80

100

120

140

160

180

200

220

240

60

80

100

120

140

160

180

200

220

240

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

indexindex

Sydney

Melbourne

Brisbane


*all dwellings, Dec 2002 = 100

+33%

+82%

+89%

27

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28

Rental yields are close to mortgage rates

3

4

5

6

7

8

9

10

11

12

3

4

5

6

7

8

9

10

11

12


%pa%pa Brisbane

Australia

Sources: REIA, Westpac Economics

*median rent on2bdrm unit as %of median unitprice

investor

housing

boom

variablemortgage rate

3yr fixedrate

28

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Investors are responding to rates/yields in NSW

0.5

1.0

1.5

2.0

2.5

3.0

0.5

1.0

1.5

2.0

2.5

3.0


$bn$bn

Vic Qld NSW


NSW: +33%yr

Vic: +20%yr

Qld: +6%yr

29

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First home buyers are not responding to rate cuts

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7


thousandsthousands

NSW Vic Qld

30

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31

House prices: only modest increases expected

94

9698

100

102

104

106

108

110

112

114116

94

9698

100

102

104

106

108

110

112

114116

Dec-12 Dec-13 Dec-14

indexindex

Sydney

Melbourne

Brisbane


*all dwellings, Dec 2012 = 100

31

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Office vacancy rates starting to rise

0

5

10

15

20

25

30

35

0

5

10

15

20

25

30

35

Dec-70 Dec-80 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10

%%Sydney Melbourne Brisbane

Sources: Property Council, Westpac Economics

32

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Commercial property yields still very attractive

0

3

6

9

12

15

0

3

6

9

12

15

Dec-85 Dec-91 Dec-97 Dec-03 Dec-09

% annual avg% annual avgRisk free Retail

Office Industrial

Sources: IPD Australia, Westpac Economics.Income only.

33

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Actual

May 12

Forecast

for May

13

Current

level

May-14

forecast

Cash %pa 3.75 3.25* 2.75 2.00

3yr swap 3.42 4.20 2.90 2.75

AUD/USD 102 105 100^ 96

Last years Budget forecasts the report card

*lowered to 2.75% on May 24 2012

^trading at 105 Apr 8-12

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2

3

4

5

6

Jan Apr Jul Oct

% 3yr swap

Cash rate

Source: Bloomberg, Westpac Strategy

Fixed rates turn sharplytime to contain risk now

2

3

4

5

6

Jan Apr Jul Oct

%

fcast

2009 2013

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36

World growthWBC forecasts slowdown

2012 (%ann) 2013 (%ann) 2014 (%ann)

World 3.2 3.4 3.1

US 2.2 1.7 1.6

Europe -0.6 -0.5 -0.5

China 7.7 8.0 7.8

Australia 3.6 2.5 2.3

36

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Policy to slow down Chinese housing sales

-50

-250

25

50

75100

125

150

175200

-50

-250

25

50

75100

125

150

175200

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

%yr%yr

Centre

East

West

Sources: CEIC, Westpac Economics.

37

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Chinese infrastructure spending to slow down

28

2216

23

42

18

3

6

26

19

-10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ppt cont.

Transport

Utilities

Total

Sources: CEIC, Westpac.Contribution to full year growth. * Railways, airports, mass urban transit, pipeline, waterways.

forecast

38

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Chinese construction cycleslowdown coming

0

10

20

30

40

Jan 05 Jul 06 Jan 08 Jul 09 Jan 11 Jul 12 Jan 14

%yr %yr

%yr 3mma

Sources: CEIC,Westpac Economics.

39

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40

Europe: unemployment continues to rise

0

5

10

15

20

25

30

0

5

10

15

20

25

30

1995 1997 1999 2001 2003 2005 2007 2009 2011

%France SpainItaly Netherlands

Source: Eurostat

%unemployment rate

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41

Germany and Francecore diverging rapidly

4

6

8

10

12

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011

% %

Germany France

Source: Eurostat

unemployment rate

41

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42

-15

-10

-5

0

5

1015

20

25

3035

-15

-10

-5

0

5

1015

20

25

3035

Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12

ann%

Euro area 'troubled' economies the rest

Sources: IMF, Westpac

ann%

*private sector, 6mth annualised growth rate^Spain, Italy, Portugal, Ireland and Greece combined

Troubled economies banks just not lending

42

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43

Gross debt ratios keep risingratings risks

0

20

40

60

80

100

120

140

1991 1999 2007 2015

%Spain Italy France

Source: IMF, Westpac Economic growth forecasts

43

% of GDP

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44

Sovereign risk ratingsSpain/Italy on the cusp !

Current 2011/12

peak

Rating Outlook

France 1.0% 3.4% AA+ Neg

Italy 3.1% 7.7% BBB+ Neg

Spain 3.4% 7.6% BBB Neg

*current yield is generic 7yr yield to match average duration of existing liabilities.

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Non-residents hold EUR 1.35 tr in Spain/Italy debt*

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

France Germany Greece Ireland Italy Portugal Spain

trn

Sources: IMF, Bloomberg.Westpac Economics.

*Marketable debt only.

45

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46

US unemployment falls due to part. rate, not jobs

54

56

58

60

62

64

66

68

0

2

4

6

8

10

12

1970 1980 1990 2000 2010

%%

Unemploment rate (lhs)

Participation rate (rhs)Employment-population ratio (rhs)

Sources: Ecowin, Westpac Economics

46

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47

US consumption growth is slowing again

-8

-6

-4

-2

0

2

4

6

8

-20

-15

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007 2009 2011 2013

%%

Durables (lhs) Services (rhs) Non durables (rhs)

Sources: Ecowin, Westpac Economics

annual change

PCE total m/m chg

Dec: 0.2%Jan: 0.2%Feb: 0.3%Mar: 0.3%

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US house pricesno longer booming

-30

-20

-10

0

10

20

30

-3

-2

-1

0

1

2

3

Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13

%%

monthly change (lhs)

6 month ann change (rhs)Source: Ecowin

20-city S&P Case-Shiller Index

48

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49

US commercial banks not supporting housing

0.5

1.0

1.5

2.0

2.5

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-122.0

2.5

3.0

3.5

4.0$trn $trn

Mortgages (lhs)

Treasury & MBS

C&I loans

Sources: Federal Reserve

Mortgage charge offs circa

$28bn in 2012; rise inmortgage balance past year $12bn,but GSEs down $95bn.

49

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50

Fiscal policy still a dragnew policies next year ?

0

1

2

3

4

0

1

2

3

4

2013 2014

%

Fiscal cliff (without deal)

Sequester

January deal

%

Source: CBO; Westpac Economics

drag on GDP growth in calendar year

50

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51

Commodity prices will fall through 2014

100

150

200

250

300

350

100

200

300

400

500

600

700

Mar-07 Mar-09 Mar-11 Mar-13

indexindex

Bulks* (lhs)

Exchange traded* (rhs)

Sources: Westpac Economics, Bloomberg, ABS.Bulks includes iron ore and coal. Exchange traded includesrural, crude oil, base metals and gold.

51

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52

Farm commodity prices lag non-rural prices

0

100

200

300

400

500

600

0

100

200

300

400

500

600


indexindex

Farm commodities

Non rural commodities

Sources: Westpac Economics, Bloomberg

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53

Farm commodity prices hit hard by AUD

20

60

100

140

180

220

260

20

60

100

140

180

220

260


indexindex

In USD In AUD

Sources: Westpac Economics, Bloomberg

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54

Major central banks are committed to QE

0

10

20

30

40

50

0

10

20

30

40

50

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

%GDP

ECB Fed BOJ

Sources: Ecowin, Bloomberg, CEIC, Westpac Economics

%GDP

Indicativeforecasts

54

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55

Australian dollar to fall but retain QE premium

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20


USDUSD

Fair value band

AUD/USD actual & forecast

Sources: RBA, Westpac Economics

Includes WCFI+BI commodities index, 2 year swap spread, and NFD to GDP.

55

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56

2012 Budget talk: QE3 to support market

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11 Feb-12100

125

150

175

200

225$trn Index

S&P500* (rhs)

Federal Reserve: securities held (lhs)

Source: Ecowin, Bloomberg, Westpac Economics

*S&P500 March2009 low = 100

QE1 QE2

Operation twistannounced

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57

US sharemarket has outperformed Australia

30

50

70

90

110

130

30

50

70

90

110

130

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

indexindex

S&P500 S&P200 Euro Stoxx 50

Sources: Bloomberg,Westpac Economics

2 Jan 07 = 100

57

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58

... but not in AUD terms; Europe woeful

30

50

70

90

110

130

30

50

70

90

110

130

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

indexindex

S&P500 S&P200 Euro Stoxx 50

Sources: Bloomberg,Westpac Economics

2 Jan 07 = 100

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59

MSCI P/E ratiosmarket is no longer cheap

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15


points points

Australia US Europe

Source: Bloomberg (MSCI indexes)

deviation from long-run average

cheap

expensive

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60

Australian P/E ratios; resources better banks

-15

-10

-5

0

5

10

15

20

-15

-10

-5

0

5

10

15

20


points points

Financials

Materials

Source: Bloomberg (MSCI indexes)

deviation from long-run average

cheap

expensive

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Key messages from Budget presentation

Forecast budget deficits are not significant Australia has very lowsovereign debt ratio; especially with most debt issued in AUDs.

RBA to cut to 2% from 2.75% but fixed rates near lows right now.

Risks around rebalancing of mining/non mining business the key.

House prices to rise but household leverage to contain any boom.

Second wave of cuts to be associated with weak world economy.

Low inflation allows rate flexibility for the authorities.

Commodity prices to fall AUD to USD 0.96 by mid 2014.

World economy to slow in 2014 US to disappoint keep QE;China slows construction cycle; Europe remains in recession.

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DisclaimerDisclaimerThings you should know: Each time someone visits our site, data is captured so that we can accurately evaluate the quali ty of our content and make improvements for you. We may at times use technology to capture data about you to help us tobetter understand you and your needs, including potentially for the purposes of assessing your individual reading habits and i nterests to allow us to provide suggestions regarding other reading material which may be suitable for you.If you are located in Australia, this material and access to this website is provided to you solely for your own use and in yo ur capacity as a wholesale client of Westpac Institutional Bank being a division of Westpac Banking Corporation ABN 33 007457 141 AFSL 233714 ( Westpac). If you are located outside of Australia, this material and access to thi s website is provided to you a s outlined below.This material and this website contain general commentary only and do not constitute investment advice. Certaintypes of transactions, including those involving futures, options and high yield securities give rise to substantial risk and arenot suitable for all investors. We recommend that you seek your own independent legal or fi nancial advice before proceeding w ith any investment decision. Thi s information has been prepared without taking account of your objectives, financialsituation or needs. This material and this website may contain material provided by third parties. W hile such material is pub lished with the necessary permission none of Westpac or its related entities accepts any responsibi lity for the accuracy or

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the RBI.U.K.: 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 (number05660023) and is authorised and regulated by The Financial Services Authority. This material and this website and any information contained therein is directed at a) persons who have professional experience in matters relating to investments fallingwithin Article 19(1) of the Financial Services Act 2000 (Fi nancial Promotion) Order 2005 or (b) high net worth entities, and other persons to whom it may otherwise be l awfully communicated, falling within Article 49(1) of the Order (all such personstogether being referred to as relevant persons). The investments to which this material and this website relates are only availabl e to and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such i nvestments will beengaged in only with, relevant persons. Any person who is not a relevant person should not act or rely upon this material and this website or any of its contents. In the same way, the information contained in thi s material and this website is i ntendedforeligible counterparties and professional clients as defined by the rules of the Financial Services Authority and is not intended forretail clients. With this in mind, Westpac expressly prohibits you from passing on the information on this materialand this website to any third party. In particular this material and this website, website content and, in each case, any copies thereof may not be taken, transmitted or distributed, directly or indirectly into any restricted jurisdiction.U.S.: Westpac operates in the United States of America as a federally l icensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (CFTC) as a SwapDealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac Capi tal Markets, LLC (WCM), a wholly-owned subsidiary of Westpac, is a broker-deal er registered under the U.S.Securities Exchange Act of 1934 (the Exchange Act) and member of the Financial Industry Regulatory Authority (FINRA). 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Information on such non-U.S. securities or related financial instruments may be li mited. Non-U.S. companies may not subject to audit andreporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or i ncome from any securities or related derivative instruments denominated in a currency other than U.S. dollars issubject to exchange rate fluctuations that may have a positive or adverse effect on the value of or i ncome from such securities or related deri vative instruments.The author of this communication is employed by Westpac and is not registered or quali fied as a research analyst, representative, or associ ated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules orregulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by W estpac and/or its affiliatesInvesting in any non-U.S. securities or related financial i nstruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the UnitedStates. Information on such non-U.S. securities or related financial instruments may be li mited. Non-U.S. companies may not subject to audit and reporting standards and regulatory requirements comparable to those in effect i n the UnitedStates. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positi ve or adverse effect on the value ofor income from such securities or related derivative instruments.The author of this communication is employed by Westpac and is not registered or quali fied as a research analyst, representative, or associ ated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules orregulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by W estpac and/or its affiliates.For the purposes of Regulation AC only: Each analyst whose name appears in thi s report certifies that (1) the views expressed in this report accurately reflect the personal views of the analyst about any and a ll of the sub ject companies and theirsecurities and (2) no part of the compensation of the analyst was, i s, or will be, directly or i ndirectly related to the specific views or recommendations in this report.For XYLO Foreign Exchange clients: This information is provided to you solely for your own use and is not to be di stributed to any third parties. XYLO Foreign Exchange is a division of W estpac Banking Corporation ABN 33 007 457 141 and

Australian credit licence 233714. Information is current as at date shown on the publication. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on thisinformation, consider its appropriateness, having regard to your objectives, financial situation or needs. XYLO Foreign Exchanges combined Financi al Services Guide and Product Disclosure Statement can be obtained by calling XYLO ForeignExchange on 1300 995 639, or by emailing [email protected].

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Federal Budget 2013/2014