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Westpac Economics September 2012
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SydneyCorporateCorporatedinner
September 2012
Bill EvansChief Economist
Current Forecasts – September 2012Current Forecasts September 2012
Latest Dec-12 Jun-13 Dec-13
RBA C h 3 50 3 00 2 75 2 75RBA Cash 3.50 3.00 2.75 2.75
3yr swap 3.10 3.25 3.50 4.20
10yr 3.08 3.40 3.55 4.00
US 10 yr 1 60 1 90 2 20 2 40US 10 yr 1.60 1.90 2.20 2.40
AUD/USD 1.02 1.01 1.04 1.06
USD/EUR 1.26 1.24 1.23 1.16
2
10 year real bond yields- US bonds look expensive
1010 %%
10 year real bond yields US bonds look expensive
8
10
8
10
US 10yr AU 10yr
66*Nominal 10yr yield less annual changein core inflation – RBA core measure for Australia and PCE (ex food & energy)for US.
2
4
2
4
0
2
0
2spread
-2-2Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12
Sources: RBA, Bloomberg, Westpac Economics
3
Swap rate turns before cash rate at turning points
1212 %%
Swap rate turns before cash rate at turning points
10
12
10
12
Cash rate 3yr swap
88
Cash rate 3yr swap
66
44
22Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12
Source: Bloomberg
4
Rate cut expectations: Westpac versus marketRate cut expectations: Westpac versus market
200200bps bpstotal cuts expected over coming year
150
175
200
150
175
200Market pricing*Westpac Economics
Source: Westpac Economics
125
150
125
150 * as implied by OIS market
75
100
75
100
25
50
25
50
00Sept'12 Dec '12 Mar '13 Jun '13 Sep'13
5 2
The changing Australian growth mixThe changing Australian growth mix
33 ppts cont' ppts cont'contributions to GDP growth
2
3
2
3Sources: ABS, Westpac Economics
11
-1
0
-1
0
-2
1
-2
1
'98 - '07 '10 - '13 '15 - '20
-3-3Consumer* Mining Business Public Net X
updated: Aug ’12* includes housing
6
Household debt to income ratiosHousehold debt to income ratios
180 180% %debt to income (lhs)
140160180
140160180
total (gross)own-occ housingi t h i
–0.8ppt a year
100120140
100120140investor housing
other debt
y
+0.8ppt *dashed lines show trend
6080
100
6080100pp
a yearsince Jun-07; Jun-12 is Westpac estimate
204060
204060
Sources: RBA,
–0.3ppt a year
–1.3ppt
020
Mar-77 Mar-87 Mar-97 Mar-070
20ABS, Westpac
1.3ppt a year
7
Mining projects – gas dominates , for now!Mining projects gas dominates , for now!
200200$bn$bn
160
200
160
200
Under construction
Sources: Deloitte Access Economics,Westpac Economics
updated: Jul ’12
120120Committed
Under consideration
Total: $415bn
8080Possible excludes “other”,
$3bn in projects
4040
00Oil & gas Metal ores Coal
8
Recoverable gas resources – watch ChinaRecoverable gas resources watch China
120120trillion cubic metres
100
120
100
120Conventional
Unconventional
Source: The Economist(International Energy Agency; BP)
8080
Unconventional
40
60
40
60
20
40
20
40
00Nth
A iChina Russia Middle
E tLatin
A iAustralia
America East America
9 3
Production cost – Australia uncompetitiveProduction cost Australia uncompetitive
2040 $bn mn tpa 20
30
40Source: The Economist
$30bn30 Cost (lhs)
Capacity (rhs)
1020 8.9mn8mn
10$5bn
00Wheatstone (Aust) Sabine Pass (US)
10
Gas prices – Protected by transport costsGas prices Protected by transport costs
2020 $mBtu $mBtu
16
15
20
15
20Source: The Economist
121515
1010
355
00US Europe Asia
11
LNG imports – China growing fastLNG imports China growing fast
300300 billion cubic metres
250
300
250
300 Europe ChinaSouth Korea Japan Source: The Economist (Waterborne LNG;
Oxford Institute for Energy Studies)
200200
100
150
100
150
50
100
50
100
002010 2011 2012 2013 2014 2015
12
Largest contractionary stance in 40 yearsLargest contractionary stance in 40 years
44 % GDP % GDPNet change in underlying cash balance
2
3
4
2
3
4
Expansionary
1
2
1
2
f/c
-1
0
-1
0
-3
-2
-3
-2 Contractionary
-4-41981/82 1991/92 2001/02 2011/12
Sources: Treasury, ABS, Westpac Economics
13 4
Confidence: weak – business mirrors consumersConfidence: weak business mirrors consumers
net bal. net bal.
20
30
120
130 Consumer (lhs) Business * (rhs)monthly
0
10
100
110
-10
0
90
100
-30
-20
70
80
-4060Jul-00 Jul-04 Jul-08 Jul-12
Sources: Westpac MI, NAB, Westpac Economics * Rebased to avg 0
14
Unemployment likely to move higherUnemployment likely to move higher
200indexbps
180
200
300
400 annual change in unemployment rate smoothed (lhs)unemployment expectations trend (rhs)
160200
300
120
140
0
100unemployment rising
100
120
-100
0
unemployment
80-200Aug-87 Aug-92 Aug-97 Aug-02 Aug-07 Aug-12
Sources: Westpac-MIunemployment
falling
15
Male participation trending lowerMale participation trending lower
76%
60%
75
76Sources: ABS, Westpac Economics
59
60
female
73
74 male
57
58
72 56
70
71
54
55
69Jul-02 Jul-08
53Jul-02 Jul-08
16
Unemployment supported by participationUnemployment supported by participation
88 % %
7
8
7
8
if part-rate held 65.62% from Jul 11
Sources: ABS, Westpac Economics
66
unemployment rate
55
44
33Jul-00 Jul-03 Jul-06 Jul-09 Jul-12
17 5
Labour market: remains softLabour market: remains soft
6412 %%
62
64
10
12 Sources: ABS, Westpac Economics
Peaked:Jul ’08 & Dec ’10
608 Soft jobs market:
employment to
56
586
pop’n ratio declines
54
56
4 Unemployment rate (lhs)
Employment to pop'n ratio* (rhs) Latest: 5.1%* smoothed
522Aug-88 Aug-92 Aug-96 Aug-00 Aug-04 Aug-08 Aug-12
Employment to pop'n ratio* (rhs) Latest: 5.1% smoothed
18
RBA cash rate: just below neutral – more cuts
88 %%
RBA cash rate: just below neutral more cuts
7
8
7
8Source: Bloomberg, Westpac Economics
66
4
5
4
5
3
4
3
4Actual cash rateNeutral cash rate
22Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
19
World growth – Asia supports recovery in 2013World growth Asia supports recovery in 2013
2009 2010 2011 2012f 2013fWorld –0.6 5.3 3.9 2.9 3.7
US –3.5 3.0 1.8 2.1 1.7
Euro –4.2 1.8 1.5 –1.0 –0.2
China 9.6 10.4 9.3 7.8 8.7
Australia 1.4 2.5 2.1 3.5 3.5
20
Change in world growth contributionsChange in world growth contributions
1 001 00 ppt ppt
0 500.75
1.00
0 500.75
1.00Sources: Westpac Economics.Shares of world output in parentheses.
0 000.25
0.50
0 000.25
0.50
-0 50
-0.250.00
-0 50
-0.250.00
Other (53%)
-1.00
-0.750.50
-1.00
-0.750.50
USA (19%)Europe (14%)China (14%)
-1.251.00
-1.251.00
2012 versus 2011 2013 versus 2012
( )
21 6
Chinese GDP & the money supply
3016 %yr%yr
Chinese GDP & the money supply
25
30
14
16
GDP (lhs)
Sources: Westpac Economics, CEIC
25
12
GDP (lhs)
M2 (rhs)
2010
158
106Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13
22
China -Housing and auto sales are recoveringChina Housing and auto sales are recovering
150150%yr%yr
100
125
150
100
125
150
Auto sales
75
100
75
100 Housing sales
25
50
25
50
-25
0
-25
0
S CEIC W t E i
-50-50Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
Sources: CEIC, Westpac Economics.Autos are unit sales. Housing sales are by value.
23
China :Credit demand & supply perceptions
45108 index% LR avg
China :Credit demand & supply perceptions
42
45
104
108 Bank assessment of loan demand (lhs)Firms on lending attitude of banks (rhs)
“Prudent”“AppropriatelyTight”
39100
of banks (rhs)
3692
96
Sources: Westpac
Ships in the night
3388
92 Sources: Westpac Economics, CEIC, Shu & Ng 2010.
“S ” “S ” “S ”“Appropriately
L ”“Tight”
3084Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11
“Sound”, Easing bias
“Sound”, tightening bias
“Sound”, tightening bias
Loose”“Tight”
24
Chinese total credit supply (up 6.2% for year)Chinese total credit supply (up 6.2% for year)
9RMBtrn
0 6310.701
1.0730.293 0.181
7
89
+53%45%
–38%
0.9150.9801.1540.631
567 –45%
+7.2%
5 67934
5EquityBondsBill finance +13.5%
5.005 5.679
123 Bill finance
Trust & entrustedBank loans
Source: CEIC,
0
1
Year to July 2011 Year to July 2012
Westpac.
25 7
Chinese investment projects by ‘sponsor’Chinese investment projects by sponsor
5050 %ytd%ytd
40
50
40
50Central government
Local government
3030
g
10
20
10
20
0
10
0
10value of projects
-10-10Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
Sources: CEIC, Westpac Economics.
26
Chinese infrastructure investment growthChinese infrastructure investment growth
7575%ytd%ytd
60
75
60
75Transport
Energy and water
Sources: CEIC, Westpac Economics.
4545
Energy and waterforecast
15
30
15
30
0
15
0
15
-15-15Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
27
Indicative policy impact on capex: then & nowIndicative policy impact on capex: then & now
4 %GDP
3
4Hard InfrastructureHeavy industry
2Real estateOther investment
0
1
-1
0Sources: CEIC, Westpac Economics. Estimates of “excess” nominal investment over and above what would have prevailed under ‘normal’ conditions in the major stimulus periods. Note the comparison is between one year of GDP and 1½ years of capex. Data scaled to be
-26 qtrs to June 2010 6 qtrs to Dec 2013
consistent with national accounts GFCF.
28
US :Unemployment rate with stable part rateUS :Unemployment rate with stable part rate
1212 %%
10
12
10
12
Actual unemployment rateConstant part rate from Oct '09
Sources: Ecowin, Westpac Economics
1010 Constant part rate from Oct '09
88
66
44Dec-04 Dec-06 Dec-08 Dec-10 Dec-12
29 8
Part rate not due to retireesPart rate not due to retirees
100100 %% employment to population ratio by age group
80
100
80
100
16–24 25–34 35–44 45–54 55+
8080
6060
4040
20201970 1980 1990 2000 2010
Sources: Ecowin, Westpac Economics
30
Coming soon: the US’ fiscal cliffComing soon: the US fiscal cliff
11 % %Drag on GDP growth in 201311
00
-1-1 11
-2-2Obama stimulus Unemployment
b fit iTax increases Budget control
t
Source: Westpac
benefit expiry act
31
Current composition of CongressCurrent composition of Congress
70no.
275 no.
60
70
Up for re-election
Senate
250
275
U f
House
40
50Up for re election
200
225Up for re-election
Source: UBS
30175
10
20
125
150
0Democrats GOP
100Democrats GOP
32
Candidate approval ratings for key topicsCandidate approval ratings for key topics
6060 % %
50
60
50
60
Obama RomneySource: UBS
4040
20
30
20
30
10
20
10
20
00Economy Caring Women's issues
33 9
Unemployment – a key factorUnemployment a key factor
Election UE rate Result
Obama (2012) 8 3% (from 10 0%) ???Obama (2012) 8.3% (from 10.0%) ???
Ford (1976) 7.7% LOST (to Carter)
Carter (1980) 7.5% LOST (to Reagan)
Reagan (1984) 7.4% (from 10.8%) WON (def Mondale)g ( ) ( ) ( )
G.H.W Bush (1992) 7.3% LOST (to Clinton)
Wins: 3.7% – 5.6% (6 Presidents)
34
Euro job markets continue to deteriorate...Euro job markets continue to deteriorate...
25 25% %unemployment rate
20
25
20
25Portugal Spain Italy Greece
15 15
10 10
5 5latest
0 01980 1988 1996 2004 2012
Source: CEIC (OECD Economic Outlook)
35
Public cost of Euro exit (€bn) – watch IOU’sPublic cost of Euro exit (€bn) watch IOU s
Greece PICS*
Aid 50 100Aid 50 100
Bailouts 127 56
Bonds (ECB) 40 80
IOU’s (ECB) 106 596IOU s (ECB) 106 596
Total 323 832
Total cost as % of German GDP: 40%*Portugal, Ireland. Cyprus, SpainSource: The Economist; BIS; EC
36
Deposit flight a concernDeposit flight a concern
1800 350€bn €bnconsolidated resident deposits
1600
1800
300
350Greece (rhs)Portugal (rhs)
1200
1400
200
250Italy (lhs)Spain (lhs)
1000 150
600
800
50
100
400 01998 2000 2002 2004 2006 2008 2010 2012
Source: Eurostat
37 10
German liabilities: actual and contingent?German liabilities: actual and contingent?
4040 €trn €trn
30
35
40
30
35
40GermanyFranceIt l
25
30
25
30 ItalySpainOther
*Aggregate Monetary and Financial Institution liabilities as at May 2012
15
20
15
20Other
Source: IMF, ECB
Institution liabilities as at May 2012
5
10
5
10
00Net gov't debt Net gov't debt Bank liabilities* Bank liabilities*
38
Global QE operations- expansion of bsheetsGlobal QE operations expansion of bsheets
5 05 0 trntrn
4.04.55.0
4.04.55.0
ECB in eurosForecasts
3.03.5
3.03.5 Fed in dollars
1 52.02.5
1 52.02.5
0 51.01.5
0 51.01.5
0.00.5
0.00.5
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Feb-13
Source: Ecowin, Bloomberg
39
The Australian dollar now overvaluedThe Australian dollar now overvalued
1 201 20 USDUSD
1 00
1.10
1.20
1 00
1.10
1.20
AUD/USD actual
Source: Westpac Economics.
0.90
1.00
0.90
1.00Model estimate
0.70
0.80
0.70
0.80
0.50
0.60
0.50
0.60
I l d l h d t d d diti l ti i ld i k d t f i d bt t GDP
0.400.40Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11
Includes coal, exchanged traded commodities, relative yield curve, a risk proxy and net foreign debt to GDP.
40
Australian commodity pricesAustralian commodity prices
indexindex
350
600
700 Bulks* (lhs)Exchange traded* (rhs)
250
300
500
600
200
250
300
400
150200
300
Sources: Westpac Economics, Bloomberg, ABS.B lk i l d i d l E h t d d i l d
100100Mar-06 Mar-08 Mar-10 Mar-12 Mar-14
Bulks includes iron ore and coal. Exchange traded includesrural, crude oil, base metals and gold.
41 11
Foreign interest in ACGBForeign interest in ACGB
250250 A$bnA$bn
200
250
200
250
Total CGS On Issue
Sources: RBA, Westpac
150150
Resident Holdings
Non-Resident Holdings
100100
5050
001986 1989 1992 1995 1998 2001 2004 2007 2010
42
ConclusionsConclusions
L d i th i hi t• Leverage driven growth is now history.
• Mining boom is near spending peak.
• Unemployment rate set to rise.
• RBA to cut rates by 75 bp’s by March next year.
• Stable house price outlook and no collapse.
• Manageable China recovery and US disappointing. g y pp g
• Europe risky outlook – will affect global momentum.
• AUD and commodities to strengthen in 2013• AUD and commodities to strengthen in 2013.
• US and ECB QE; policy stimulus in China and EM’s.
43
DisclaimerDisclaimerDisclaimerDisclaimer
Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 (‘Westpac’). This document is provided to you solely for your own use and in your capacity as a wholesale client of Westpac. The information contained in this communication does not constitute an offer, or a solicitation of an offer, to subscribe for or purchase any securities or other financial instrument; does not constitute an offer, inducement or solicitation to enter a legally binding contract. The information is general and preliminary market information only and while Westpac has made every effort to ensure that information is free from error, Westpac does not warrant the accuracy, adequacy or completeness of the Information. The information may contain material provided directly by third parties and while such material is published with necessary permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Although we have made every effort to ensure the information is from error, Westpac does not warrant the accuracy, adequacy or completeness of the information, or otherwise endorse it in any way. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under nowhere contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Past performance is not a reliable indicator of future performance. The forecasts given in this document are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.This communication does not constitute a personal recommendation to any individual investor. In preparing the information, Westpac has not taken into consideration the financial situation, investment objectives or particular needs of any particular investor and recommends that investors seek independent advice before acting on the information. Certain types of transactions, including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all
f f finvestors. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice. A product disclosure statement (“PDS”) may be available for the products referred to in this document. A copy of the relevant PDS and a copy of Westpac’s Financial Services Guide can be obtained by visiting www.westpac.com.au/disclosure-documents. You should obtain and consider the relevant PDS before deciding whether to acquire, continue to hold or dispose of the applicable products referred to in this document.This document is being distributed by Westpac Banking Corporation London Branch and Westpac Europe Limited only to and is directed at a) persons who have professional experience in matters relating to investments falling within Article 19(1) of the Financial Services Act 2000 (Financial Promotion) Order 2005 or (b) high net worth entities, and other persons to whom it may otherwise be lawfully be communicated, falling within Article 49(1) of the Order (all such persons together being referred to as “relevant persons”) The investments to which this document relates are only available to and any invitation offer or agreement to subscribe purchase or otherwiseto as relevant persons ). The investments to which this document relates are only available to and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely upon this document or any of its contents. In the same way, the information contained in this document is intended for “eligible counterparties” and “professional clients” as defined by the rules of the Financial Services Authority and is not intended for “retail clients”. With this in mind, Westpac expressly prohibits you from passing on this document to any third party. In particular this presentation and any copy of it may not be taken, transmitted or distributed, directly or indirectly into the United States and any other restricted jurisdiction. This document has been approved solely for the purposes of section 21 of the Financial Services and Markets Act 2000 by Westpac Banking Corporation London Branch and Westpac Europe Limited. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. Westpac operates in the United States of America as a federally chartered branch, regulated by the Office of the Controller of the Currency and is not affiliated with either: (i) a broker dealer registered with the US Securities Exchange Commission; or (ii) a Futures Commission Merchant registered with the US Commodity Futures Trading Commission. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to [email protected] or fax us on +61 2 8254 6907 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. © 2012 Westpac Banking Corporation.or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.
12