The Red Book

July 2013

Westpac Economics with the Institutional Bank.

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

July 2013

Contents

Executive summary The consumer mood: faintly optimistic Sentiment indicators: spending Special topic House price expectations Sentiment indicators Durables, cars Housing Risk aversion Job security State snapshot: Western 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 12 July 2013 The next issue will be published on 16 August 2013

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July 2013

Executive summary
The WestpacMelbourne Institute Index of Consumer Sentiment held at at a faintly optimistic level in Jul. The Index inched 0.1% lower from 102.2 in Jun to 102.1. While the Index has held on to last months gain and is in net optimistic territory above 100, it remains 7.6% below its Mar peak. The reading implies optimists make up just over 2% more of the population than pessimists, a slim margin. The survey detail showed a sharp fall in assessments of family nances was oset by a sharp improvement in expectations for the economy. By sub-group, sentiment showed a notable further weakening in the mining states, amongst renters and ALP voters, balanced of course by gains across other groups. CSI , our modied consumer sentiment indicator which we favour as a guide to spending momentum, edged 2.5% lower in Jul and is notably weaker than headline sentiment. It continues to track at levels consistent with at per capita consumption growth, implying total spending growth of around 2%yr. The Jul survey included an update of the Westpac-Melbourne Institute Consumer House Price Expectations Index which moved lower from a net 53.9 in Apr to 46.9. The positive reading still points to a strong conviction among consumers that house prices will continue to rise over the next year. Consumers in WA marked their previously extremely bullish price expectations sharply lower to be more in line with the national view. The sub-index tracking views on whether now is a good time to buy a major household item recorded a marginal 1.7% decline. The sharp slide in the AUD has done little to dampen buyer attitudes so far. Actual spending on durables has been soft though and continues to undershoot this indicator by a long way. The sub-index tracking views on time to buy a vehicle fell 10.3%, the biggest monthly decline since early 2008. The index remains above average and latest sales data has been surprisingly rm. However, further declines of this magnitude would clearly be a big negative. Likewise, the sub-index tracking views on time to buy a dwelling was also down sharply by 8.4% in Jul but still a solid 8pts above its long run average. The Index posted a similar, fall in Apr that proved to be a temporary pull-back. Both look to be due to aordability issues although Juls fall may be more due to rising prices than potential interest rate increases, suggesting the decline may linger. The Westpac-Melbourne Institute Unemployment Expectations Index declined 3.6% in Jul, breaking a 3mth run of rises that took the Index to a post-GFC high in Jun (higher readings indicate more consumers expect unemployment to rise, i.e. a poorer outlook for the labour market). While the easing in job loss is positive, fears remain intense. Unemployment expectations also continued to worsen in the mining states where actual labour market conditions are also showing a more marked deterioration.

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 WestpacMelbourne Institute Consumer Sentiment Index was essentially unchanged in Jul. Whether the detail shows consumers treading water or slowly sinking though is moot. Sub-indexes relating more directly to spending decisions those on family nances and time to buy were mostly weaker, sharply in many cases. Sub-indexes relating to the economic outlook improved though, including most notably, unemployment expectations. Last month this was dangerously close to signalling a major deterioration, not just in labour market conditions but also consumer spending on discretionary and big-ticket items such as cars and houses. The rest of the survey detail also shows a lot of turbulence, a reection of the strong cross-currents acting on sentiment at the moment. Jul alone saw: big market shifts around a potential tapering in the US Feds QE stimulus; a sharp slide in the AUD; a change of Prime Minister; and a sharp rise in petrol prices. All of this is occurring alongside a rebalancing in domestic growth from mining to non-mining led growth.

The turbulence also highlights, to us at least, an underlying fragility to consumer condence. Optimism centred on the economic outlook looks precarious and although unemployment expectations improved they remain deeply pessimistic and continue to worsen in the mining states. Perhaps the best example of this fragility is the sharp fall in consumer views on time to buy a dwelling. Although coming from a high starting point, our analysis suggests the combination of intense job-loss fears and this less positive view on house purchases could, if sustained, see the housing recovery stall by the end of the year. For now, that is a risk rather than a likely outcome but as far as risks go, its an unpleasant one for policy-makers seeking to engineer a smooth transition in growth. While the exact tone of the Jul survey may be unclear what is clear is that sentiment is not strong. Optimism is faint at best with the response to lower interest rates still disappointing. Westpac continues to expect further rate cuts to be delivered, beginning with a 25bp move next month and two further 25bp cuts in Q4 and Q1 of next year.
5

July 2013

The consumer mood: faintly optimistic

The Westpac Melbourne Institute Index of Consumer Sentiment was basically unchanged in Jul edging 0.1% lower from 102.2 in Jun to 102.1. Sentiment has held on to last months gain and remains above the 100 level indicating optimists outnumber pessimists. However, this is a faintly optimistic read with the Index still 7.6% below its Mar peak. The at headline conceals some sharp big shifts in the detail. In particular, the month saw a sharp fall in the sub-index tracking views on family nances vs a year ago (5.6%) oset by a jump in the sub-index tracking views on economic conditions over the next 5yrs (+9.2%). Jul saw a multitude of factors that may have inuenced sentiment with big market shifts due to changing expectations for a tapering in the US Feds QE policy stimulus; an associated further slide in the AUD; and a dramatic leadership change with Kevin Rudd taking over from Julia Gillard as Prime Minister. All of this was on top of the usual inuences from: RBA decisions (no change); economic data (mixed); petrol prices (average pump prices up 14 a litre over the last 2mths); and the transition from mining to non-mining led growth. Needless to say, disentangling all of these eects on sentiment can be very dicult.

1. Consumer sentiment: unchanged

130 120 110 100 90 80 70
Sources: Melbourne Institute, Westpac Economics

index

index

130 120

long run average

110 100 90 80 70 60

60 Jul-83

Jul-88

Jul-93

Jul-98

Jul-03

Jul-08

Jul-13

2. Consumer sentiment: economy vs nances

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

Source: Melbourne Institute, Westpac Economics

140 130 120 110 100 90 80 70 60 50 40

Jul-95

Jul-99

Jul-03

Jul-07

Jul-11

Westpac Institutional Bank

The sub-group detail provides some insight. Sentiment continues to weaken markedly across the mining states (down 6.7% in Jul) but is also down sharply for consumers in rental accommodation (20%) and ALP voters (4.5%) despite a clear bounce in opinion polls following the leadership change. The AUD decline may also have a complex impact on sentiment. The currency has fallen from 104 US to 91.3 US over the last 3mths. Ordinarily this would be a big negative for sentiment with AUD uctuations typically seen as an assessment by foreign investors of Australias economic prospects.

That eect may be less pronounced though due to the currencys very high starting point. There is some evidence of this from the news recall questions surveyed every three months: AUD news has so far been perceived as less negative than during previous currency declines. Its very hard to isolate an AUD eect on headline sentiment. Both the speed of the descent and the level seem to matter but so does the context. An economic event where the AUD fall is central, e.g. the banana republic slump in the 1980s or the Asian crisis in 1998 seems to have a clearer negative eect than falls that are part of other events (e.g. the GFC).

3. Consumer sentiment and AUD declines

160 120 80 40 15 0 0 -40
avg: 1.0% AUD news recall: net favourable (period avg)

index
AUD declines
Source: RBA, Westpac Melbourne Institute

index

160 75 60 120

AUD events (sharp falls and/or new historic low)

45 80 40 30 15 0

mthly %change following AUD event

-80 -15 -15 Jun-85 Jun-88 Jun-91 Jun-94 Jun-97 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12

4. Consumer sentiment: selected groups

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

state index mining non-mining

sentiment down sharply for...

housing tenure rent mortgage/own

voting intention ALP L-NP

index 150 other 140 ... and ALP

voters

130 120 110 100 90 80 70

... miners

... renters

70 Jul-99

Jul-04

Jul-09

Jul-99

Jul-04

Jul-09

Jul-99

Jul-04

Jul-09

July 2013

Sentiment indicators: spending

Consumer spending slowed markedly through 2012 and Q1 of 2013 reecting a similar sharp pull-back evident in key parts of the consumer sentiment survey. CSI , a composite index that combines the sub-indexes on family nances and time to buy a major item with the Westpac Risk Aversion Index , provides what we view as the best guide to spending shifts. In Jul, CSI edged 2.5% lower to be down 5.3% from its Mar peak. While that is a smaller decline than the 7.6% fall in sentiment overall, CSI was coming from a much weaker starting point and is 8pts below its long run average, consistent with zero growth in per capita spend. The latest data on actual spending have mostly conrmed the soft picture from the Q1 national accounts. The May retail report showed sales up just 0.1% in the month (vs market expectations of +0.4%). Estimates for the previous 2mths were also revised down, Apr from +0.2% to a 0.1% dip and Mar from a 0.4% fall to 0.6% decline. The scale of the undershoot vs market expectations is clearer looking at the three months combined whereas the previously published estimates and the consensus forecast 0.4% gain would have seen sales up 0.2% for the 3mths to May, the nal result shows sales down 0.5%.

5. CSI vs total consumer spending

30 20 10 0 -10 -20 -30 Mar-78
Source: Melbourne Institute, ABS, Westpac Economics

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

ann%
Westpac forecast

*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

For the most part the weak retail data just brings this series, which was much stronger in Q1, more in line with the soft picture for total spending presented in the national accounts. That soft picture is also conrmed, to varying degrees, by business survey measures of conditions. Both the AiG and NAB surveys recorded weakening conditions amongst businesses in the retail and recreational & personal services sectors. In the case of the NAB survey, the Jun reading was very poor the weakest read since Nov 2008, in the immediate wake of the Lehmans crash. That said the reading is for conditions rather than just sales.

The message from our composite indicator of cyclical spending is a little more mixed. The category detail from the retail survey was poor with weakness in May concentrated in cyclical parts of household goods retail and cafes & restaurants. The pattern of declining spend on big ticket and discretionary items and out-performance of staples is a hallmark of a cyclical slowing in demand. Outbound tourism spending and vehicle sales ran counter to this picture though with the former trending lower at a gentle monthly pace (though still up on a 6mth basis) and the latter posting a somewhat surprising 4.4% gain in Jun.

7. Retail sales vs surveyed business conditions

3mth %ch retail sales (lhs) 5 NAB business conditions (rhs)* 4 AiG PSI (rhs)* 3 6 2 1 0 -1
*retail, recreation & service sectors weighted, shown as standard deviations from long run avg, 3mth avg
Source: Melbourne Institute, NAB, AiG, Westpac Economics

std devns
fiscal stimulus payments carbon tax compensation payments

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

-2 May-03

May-05

May-07

May-09

May-11

May-13

8. Composite indicator of cyclical spending

12 9 6 3 0 -3 -6 -9 -12 Jun-95
GST introduction
Sources: ABS, Melbourne Institute Westpac Economics

ann%
*deviation from long run avg
severe weather events & Japanese earthquake

30 20 10 0

composite cyclical spending indicator (lhs)^ consumer sent. (trend, rhs)*

^based on car sales, outbound tourism spend & cyclical components of retail sales

-10
last 6mths

-20 -30

Jun-98

Jun-01

Jun-04

Jun-07

Jun-10

Jun-13

July 2013

Special topic: house price expectations

The Westpac-Melbourne Institute Consumer House Price Expectations Index moved lower in Jul from 53.9 in Apr to 46.9. That marks a softening in the upbeat expectation for prices although most Australians still expect house prices to move higher over the next 12mths. At 58.6%, the proportion of respondents expecting prices to rise remained an outright majority, down marginally on Aprs 62% . A further 30% expect house prices to remain stable with 12% expecting prices to decline, up from 8% in the April survey. The up:same:down mix is signicantly more positive than the 47:32:21 reading averaged in 2012. Although there is a clear consensus that prices will rise, few expect double-digit price growth with just 8% expecting a 10%+ rise. Dwelling prices often surprise though. Prices rose 3.9% in the year to Jun a gain over half of consumers did not anticipate. Conversely prices were weaker than expected in 2011-12 with only 22% of consumers correctly picking the 2.6% decline. The state split showed some notable shifts. Expectations took a big knock in WA, falling from a very bullish +82 in Apr to a much lower but still positive +41 in Jul. This looks to be more than just a mining story with expectations in Qld tracking in the opposite direction (+15pts).

9. Westpac House Price Expectations Index

150 125 100 75 50 25 0 -25 -50 Jul-04
Source: RP Data-Rismark, Mortgage Choice, Westpac-Melbourne Institute

net%* Westpac-MI House Price Expectations Index (lhs)* dwelling prices (rhs)
*% expecting prices to rise minus % expecting prices to fall

ann%

30 25 20 15 10 5 0 -5 -10

Jul-06

Jul-08

Jul-10

Jul-12

10. Consumers house price expectations by state

net % 100 80 60 40 20 0 -20 *% reporting expected rise -40 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
minus % reporting expected fall
Source: Westpac-Melbourne Institute

net % Vic Qld WA rent mortgage freehold 100 80 60 40 20 0 -20 -40

NSW

10

Westpac Institutional Bank

Price expectations are now closely clustered with little separating consumer expectations in Qld, Vic and WA. Only NSW stands out as more bullish on prices, with over two thirds of consumers in NSW expecting prices to rise. The Mortgage & Finance Association conducts a survey every 6mths that asks consumers about house price expectations over a shorter forward horizon (3mths). The responses shed some interesting light on the 2011-12 correction. They show short term price expectations did turn negative but, in contrast to 2007-08 and 200405, medium term price expectations remained in positive territory.

It is unclear why 12mth price expectation were so well anchored through the 2011-12 correction but the fact that they were may have limited price declines. Sellers would have been more inclined to de-list properties rather than accept low price oers and buyers would have been less inclined to hold o purchases in the hope of lower prices in the future. This anchor may be even stronger now that prices are rising again. Similar surveys of house price expectations in the US have also shown rming expectations of house price gains. Indeed, Australian and US consumers now have identical expectations for prices in the year ahead.

11. House price expectations: 3mth vs 12mth

100 80 60 40 20 0 -20 -40
^avg of all observations, adjd for different survey frequencies
Source: Westpac-Melbourne Institute (Mortgage Choice measure prior to 2009), CBA-MFAA

% Westpac-MI House Price Expectations Index (next 12mths)* CBA-MFAA (next 3mths)

100 80 60 40

avg^

20 0 -20 -40 -60 Oct-06 Oct-08 Oct-10 Oct-12

-60 Oct-04

12. House price expectations: Aus vs US

100 % 75 50 25 0 -25
Source: Melbourne Institute, Mortgage Choice (prior to May-09), Fannie Mae, University of Michigan (prior to Jun-10), Westpac

% Aus US (monthly)
net % expecting house prices to rise next 12mths

100 75 50 25 0 -25 -50

-50 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

11

July 2013

Sentiment indicators: durables, cars

The sub-index tracking views on time to buy a major household item declined marginally (1.7%) in Jul but remained at an elevated level. Despite these positive reads, actual spending on durables appears to be weakening again. After a strong burst in Q1, nominal sales have declined 2.1%, 0.2% and 0.3% over the last 3mths. Some of this may be partly due to price falls. However, the detail points to weakness outside the disinationary electrical & electronic goods segment. Indeed, housing-related retail sales - furniture, oor coverings, housewares etc have led the weakening and continue to undershoot sentiment-based indicators. The sub-index tracking views on time to buy a vehicle fell heavily in Jul, with the 10% drop the biggest monthly fall since early 2008. Although the index remains a touch above average, the 2008 decline came from a similarly high starting point and resulted in a slump that saw consumer vehicle sales drop 10% by the end of the year and a further 9% over the following 6mths. There are no indications yet of a sales decline monthly sales look instead to be up a tidy 4.4% in Jun. However, shifts in time to buy can take up to 6mths to ow through to sales. If weak reads continue that suggests car sales may soften more markedly towards year-end.

13. Time to buy a major item vs housing-related retail

%ann index* 40 *deviation from long run averages, smoothed 30 ^nominal trend, per capita 20 10 0 last -10 3mths -20 -30 'time to buy major item' (lhs)* -40 + 'time to buy dwelling' (lhs)* Sources: Melbourne Institute, -50 ABS, Westpac Economics 'housing-related' retailing (rhs)^ -60 May-97 May-99 May-01 May-03 May-05 May-07 May-09 May-11 May-13 20 15 10 5 0 -5 -10 -15

14. Time to buy a car vs consumer car sales

40 30 20 10 0 -10 -20 -30
*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 -30

-40 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13

12

Westpac Institutional Bank

Sentiment indicators: housing

Consumer optimism on time to buy a dwelling was shaken in Jul with the index falling 8.4% to 131.3. Although this still leaves the index a comfortable 8pts above its long run average, and a similar pull-back proved to be short-lived in Apr, there are several reasons to be wary of the Jul fall. The Apr fall appeared to stem from brief speculation at the time that the next move in interest rates could be up rather than down, perhaps as soon as the end of this year. In retrospect that was clearly nonsense but it was enough to rattle some segments those in key rst home buyer groups in particular. In contrast, the Jul fall comes against a more benign interest rate backdrop with the RBA carrying a clear easing bias and few countenancing the possibility of higher rates. By state, the Jul decline was heaviest in Vic (13.8%) and NSW (10.1%). This was the case in Apr suggesting aordability may again be the cause but price rather than interest rate related. Our sentiment-based model of housing nance approvals shows why the July fall in the time to buy a dwelling index is important. With the other driver of the model, unemployment expectations, already weak, the Jul fall could see the nance upturn stall at, if sustained.

15. Time to buy a dwelling: by state

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

index
NSW Vic Qld WA

index

170 150 130 110 90 70

*smoothed

50 Jul-13 Jul-08 Jul-10 Jul-12

Jul-09

Jul-11

16. Model of housing nance approvals

ann% ann% 60 simple regression on 'time to buy dwelling' and unemp expectations 50 housing finance approvals ex refi (number, trend) 40 30 20 10 0 -10 -20 -30 *6mth projection assumes no -40 Source: ABS, Westpac change in sentiment measures -50 May-83 May-88 May-93 May-98 May-03 May-08 May-13 60 50 40 30 20 10 0 -10 -20 -30 -40 -50

13

July 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 Jul survey. As of Jun though, the mix was showing a continued modest improvement in risk appetite, with consumers warming to real estate in particular. Overall, the Westpac Consumer Risk Aversion Index improved 2pts in Jun from 32.8 in Mar to 30.7, bringing it well below the high of 40 recorded in Sep last year. The decline suggests the household savings rate, which crept up from 9.9% to 10.6% over the year to Mar, could track down towards 8%. It also suggests consumers may be less inclined to accumulate holdings of cash and deposits. Latest ABS data shows holdings dipped slightly in Q1 as a proportion of disposable income, to 76.6% from 76.9%. This is from a historically high level though prior to the shift towards risk aversion, holdings were around 60% of income. Indeed, the rise in cash and deposit holdings may account for one of the puzzles of postGFC Australia: consumer deleveraging that is apparent everywhere except in the gures on leverage. The household debt to income ratio is only 6pts below its pre-GFC peak. Net of these holdings though, the reduction is 22pts.

17. Consumer risk aversion vs cash & deposit holdings

% %income 60 Westpac consumer risk aversion index (lhs)* 50 40 household cash & deposits, %income (rhs) 30 *% nominating 'pay down debt' or interest bearing 20 assets as wisest place for savings minus % nominating real estate or shares 10 0 -10 -20 -30 Sources: ABS, Westpac, Melbourne Institute -40 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13 84 76 68 60 52 44

18. Consumer leverage and accumulated savings

% 180 160 140 120 100 80 60 40 20 0 -20 Mar-77 ratio to disposable income
accumulated savings since Jun-07 total (gross) debt housing debt total debt net of cash & deps* trend since Jun-07
*direct holdings only = 42.8%

22pts since peak

Sources: ABS, RBA, Westpac

180 160 140 120 100 80 60 40 20 0 -20

Mar-87

Mar-97

Mar-07

14

Westpac Institutional Bank

Sentiment indicators: job security

The Westpac-Melbourne Institute Unemployment Expectations Index edged back from the brink in Jul, falling 3.6% after successive rises over the previous 3mths had lifted the Index to a new post-GFC high in Jun. Note that a high reading is bad news, implying more consumers expect unemployment to rise. The Index remains very high, over 20pts above its long run average, at levels associated with signicant labour market corrections in the past. The Jun ABS jobs report again showed soft conditions: employment up but patchy (fulltime jobs +0.8%yr), hours worked growing slowly and the unemployment rate nudging up to 5.7%. State variations are becoming more pronounced. Unemployment expectations have whipsawed sharply across the resource states and are now worse than across the south-east. With unemployment rates up 1ppt on a year ago for both Qld and WA there is a fairly clear basis for job-loss fears. Job-loss fears may be less well-founded across the south-east where the unemployment lift has been more marginal. Consumers unemployment expectations may be a national view but are likely heavily inuenced by local conditions. Westpac expects Australias unemployment rate to peak at 6.2% in early 2014.

19. Unemployment expectations vs hours worked

std devns unemployment expectations (adv. 4mths, lhs) 3 total hours worked (rhs) 2 4 1 0 -1 -2
Sources: ABS, Westpac-Melbourne Institute

ann%*
*scale reversed

-3 Jun-93 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13

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

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 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13 Jun-97 Jun-01 Jun-05 Jun-09 Jun-13

15

July 2013

State snapshot: Western Australia

WA consumers have turned on the proverbial dime. Since we last devoted our snapshot to WA in Feb, headline sentiment has retreated by 18.1pts, from 123.1 to 105.0, with expectations now weaker than current conditions. That might be described as moving from ebullient to morose. Note that there was an element of relief in the Feb reading. Given a dramatic collapse in the iron ore price in Aug/Sep 2012, which hit condence in WA hard, the subsequent price recovery was greeted with enthusiasm, perhaps overstating the Feb print. Such rapid swings are not unusual for mining-dominated WA. The latest weakening in commodity prices is again weighing on sentiment. In contrast to 2012 though, the latest survey responses are picking up a much bigger decline in job security. The mining sectors austerity push looks to be hitting labour markets already. This is hitting condence in family nances as well, although interestingly, perceptions of the general economy have been more resilient, as are responses on time to buy questions. On housing, this resilience on time to buy is countered by a less positive view on the price outlook. That may see some cooling in WAs housing market which outperformed in 2012-13.

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

sentiment index 150 WA rest of Aus 140 *smoothed 130 120 110 100 90 80 70 Source: Melbourne Institute, Westpac Economics 60 Jul-04 Jul-09 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

Jul-04

Jul-09

Jul-04

Jul-09

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

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

index major item

WA rest of Aus

dwelling

unemp expns index

190 170 150 130 110 90 70 50

50 Jul-04

Jul-09

Jul-04

Jul-09

Jul-04

Jul-09

16

Westpac Institutional Bank

Westpac household barometer

The Westpac Household Barometer draws on system-wide data on credit and debit card usage from the RBA and data on mortgage and credit card payments by Westpac customers to generate a broad gauge of consumers nancial behaviour. Higher readings on the barometer correspond to more defensive/conservative behaviour and vice versa. The latest update, incorporating card data to May and customer data to Jun, shows a further modest relaxation in nancial behaviour which became notably more conservative in Q1. The Barometer has fallen 0.4% since Mar, but is still up 0.2% since the end of last year. The improvement has mainly been driven by a pick up in card usage. RBA data shows annual growth in the total value of credit and debt card transactions slowed abruptly from 5.7% in Q4 to just 1.9% in Q1. Activity has since recovered with growth back at 4.7% in May. The mix of card usage has also become less conservative, swinging back towards credit vs debit cards. The reading suggests consumers may have loosened up a little since Q1, when a lift in household savings rates contributed to a pronounced slowing in consumer demand. That said, the level of the Barometer still points to high savings rates being maintained.

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: credit vs debit

46 44 42 40 38 36 34 32 30 May-03 May-05 May-07 May-09
decreased use of debit vs credit
initial onset of cautious consumer

%
increased use of debit vs credit

ann%

46 44 42 40 38 36 34 32 30

*debit card purchases as % of all card transactions, smoothed

Source: RBA, ABS, Westpac

May-11

May-13

17

July 2013

Economic and nancial forecasts

Interest rate forecasts
Latest (12 July) 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 2.57 3.55 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 2.75% 2.78% 3.08% 3.77% 119 Sep 13 2.50 2.55 3.05 3.60 120 Dec 13 2.25 2.30 2.90 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 (12 July) AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD
Sources: Bloomberg, Westpac Economics.

Sep 13 0.94 0.80 100 1.32 1.18

Dec 13 0.97 0.83 99 1.33 1.17

Mar 14 0.95 0.83 98 1.30 1.14

Jun 14 0.93 0.81 97 1.27 1.15

Sep 14 0.92 0.80 96 1.25 1.15

0.9146 0.7834 99.24 1.3085 1.1675

18

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 0.5 2.5 0.7 2.4 Q3f 0.7 2.5 5.8 0.9 2.1 0.5 2.2 Q4f 0.5 2.5 6.1 0.4 2.3 0.6 2.2 2014 Q1f 0.5 2.4 6.2 0.8 2.7 0.7 2.5 Q2f 0.6 2.4 6.1 0.7 2.9 0.7 2.6

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 6.1 2.3 2.2 2014f 2.3 6.0 2.6 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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July 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 3.6 893.8 4.4 Q2f 0.5 1.8 0.1 2.0 10.9 2.4 896.5 2.5 Q3f 0.7 2.2 0.9 2.6 10.7 2.9 878.6 -0.6 Q4f 0.8 2.6 0.0 2.2 10.2 3.2 869.8 -4.5 2014 Q1f 0.7 2.7 0.3 1.9 10.0 1.7 878.5 -1.7 Q2f 0.8 3.0 0.4 1.8 9.9 2.4 887.3 -1.0 Q3f 0.8 3.1 0.9 1.8 9.7 3.0 905.0 3.0 Q4f 0.9 3.2 1.8 2.3 9.4 3.6 923.1 6.1

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 0.5 806.2 -2.6 2012 3.3 3.6 2.3 10.3 3.2 881.3 9.3 2013f 2.2 0.2 2.4 10.6 3.0 841.7 -4.5 2014f 3.0 0.9 1.9 9.8 2.7 893.3 6.1

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.

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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 90.9 128.0 122.4 123.1 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 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 Feb 108.3 83.5 105.0 108.9 101.0 143.1 140.7 135.4 99.9 11.2 145.1

Oct 99.2 82.6 98.9 91.1 93.6 129.6 134.6 139.8 93.5 34.4 152.7 2013 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

Jul 102.1 78.6 103.0 95.1 103.0 131.1 124.2 131.3 95.5 46.9 152.8 21

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

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

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