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The Red Book

November 2012

Westpac Economics with the Institutional Bank.

November 2012

Contents
Executive summary The consumer mood: sparks up at last Sentiment indicators: spending Special topic Christmas spending plans Sentiment indicators Durables, cars Housing Risk aversion Job security State snapshot: Tasmania Westpac household barometer Summary forecast tables Economic & financial forecasts Consumer data and forecasts
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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 finalised on 16 November 2012

Westpac Institutional Bank

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November 2012

Executive summary
― The Westpac–Melbourne Institute Index of Consumer Sentiment moved into net optimistic territory in Nov, rising 5.2% to 104.3. ― This marks the first reading above 100 since Feb, the highest reading since Apr 2011 and the strongest gain since the RBA rate cut cycle began in Nov last year. Despite this the overall level of the Index is still only marginally higher than a year ago (+0.9%). ― The positive monthly result came despite the RBA’s surprise move to leave interest rates unchanged at its Nov Board meeting and more signs of a weakening in the mining sector. ― Other factors such as an improved global backdrop, better than expected job numbers and the decisive Obama victory in the US presidential elections may have supported sentiment but the main underlying driver appears to be the low overall level of interest rates finally generating more traction with confidence. ― The survey detail showed broad gains across both Index components and different demographic groups. The main exception is WA where previously stronger sentiment has shown a pronounced weakening since mid-year that continued in Nov. This divergence was also apparent across most other survey responses. ― CSI± , our modified consumer sentiment indicator, rose 4.2pts in Nov to a level consistent with flat rather than contracting per capita consumer spending. Recent data releases have lowered previous official estimates of spending growth and point to a loss of momentum in recent months over and above the reversal of fiscal boosts to spending in Q2. ― Consumer views on ‘time to buy a major item’ and ‘time to buy a vehicle’ both improved, these sub-indexes rising 5.1% and 2.2% respectively. Both are comfortably above their long run average readings. Although much of this reflects perceived affordability rather than an intention to buy, recent sales figures have shown improved growth for durables spending and continued resilience for vehicle sales. ― Last month’s strong upturn in views on ‘time to buy a dwelling’ carried into Nov with this subindex sustaining at high levels 17pts above its long run average. ― The main cautionary note in the Nov survey came from our annual question on Christmas spending plans. This showed an almost identical ‘restrained’ attitude to spending plans as last year with over a third of consumers planning to spend less than they did in 2011 with consumers in middle to higher income brackets in particular budgeting significantly less for gifts than last year. ― Unemployment expectations showed a significant improvement in Nov, the 6.9% decline in the index indicating fewer see unemployment rises ahead than a month ago. While the balance still points to more labour market weakness ahead (the index is still well above its historical average) the easing in job loss fears is promising and, if sustained, could be a key catalyst for demand – the housing recovery in particular.

4

Westpac Institutional Bank

Consumer spending: soft patch then gradual recovery
ann% 8 real consumer spending real consumer spending per capita 7 6 long run 5 average 4 3 2 1 0 -1 qtly%ch *note estimates include benchmark -2 revisions from annual national accounts -3 Sources: ABS, Westpac Economics -4 Jun-87 Jun-92 Jun-97 Jun-02 Jun-07 ann%
Westpac forecasts

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

Jun-12

The Nov Westpac–Melbourne Institute Consumer Survey was the most positive we have seen this year. It showed not only a substantial rise in sentiment into net optimistic territory but also a solid improvement in unemployment expectations and another strong reading on ‘time to buy a dwelling’. All of this came despite the RBA’s surprise decision to leave interest rates on hold at its Nov meeting. Some of the Nov gain may be temporary and there are still some clear weak spots. The state breakdown shows Qld’ers remain badly out of sorts and confidence is deteriorating in WA where the more ominous sounds coming out of the mining sector are clearly resonating. The improvement in unemployment expectations is also from an extremely weak starting point. Consumer caution still seems to be dominating many decisions as well. Nevertheless when it comes to picking turning points the Nov reading is signalling some momentum has returned to the household sector.

Unfortunately we still see domestic headwinds and the prospect of a downturn in mining investment from late next year as continuing to make a convincing case for further rate cuts. We expect consumer caution, the high AUD and fiscal consolidation to exert more restraint on demand than in previous recoveries. Moreover, the prospect of a peak in mining investment next year means the policy imperative for the RBA is not just to generate a recovery in non-mining sectors but to ensure it is sustained at a pace sufficient to counteract the anticipated drag from the mining sector from late 2013. As such we remain comfortable with our view that further policy easing will be deployed with two 25bp rate cuts expected between now and early 2013. We expect consumer spending growth to be around 2.5%yr initially before gradually returning to 3-3.5% growth rates over 2013 and 2014. High savings rates and subdued growth in labour incomes will tend to see a restrained recovery for spending but does not preclude a return to trend.
5

November 2012

The consumer mood: sparks up at last
― The Westpac–Melbourne Institute Index of Consumer Sentiment increased by 5.2% in Nov from 99.2 in Oct to 104.3. ― This is a welcome and surprisingly strong result. The Index has reached its highest level since Apr 2011. After a long stretch in which it held below 100 for 14 of 16 consecutive months we are finally starting to see the Reserve Bank’s 150bps of interest rate cuts having an impact. However, the result needs to be kept in perspective – the Index is still only 0.9% above its level of Nov last year following the first 25bp rate cut. In effect, the subsequent easing has only really held the line since then. ― On the plus side, the Nov rise came despite some disappointment at the RBA’s decision to leave interest rates unchanged at its Nov meeting. The detail suggests this was a dampener for those with a mortgage but this appears to have been more than offset by an improved global backdrop and low overall level of rates (the cumulative effect of previous cuts). ― The rise also came despite more signs of a weakening in the mining boom. This shows through in the state results with a sharp 5.2% fall in confidence in WA. Again though this was more than offset by gains elsewhere, i.e. NSW and Vic (Qld is on a different, weaker trajectory).

1. Consumer sentiment: strong rise
130 120 110 100 90 80 70 60 Nov-82 Nov-87 Nov-92 Nov-97
Sources: Melbourne Institute, Westpac Economics

index

index

130 120 110 100 90 80 70 60

long run average

Nov-02

Nov-07

Nov-12

2. Consumer sentiment: selected groups
150 140 130 120 110 100 90 80 18-24 25-44 45+ male female rent mortgage/own 70 Nov-98 Nov-03 Nov-08 Nov-98 Nov-03 Nov-08 Nov-98 Nov-03 Nov-08
+8% +10%

index

age group
+17%

sex

home owner

index

*smoothed

Source: Melbourne Institute, Westpac

150 140 130 120 110 100 90 80 70

6

Westpac Institutional Bank

― Other factors may have influenced confidence in Nov, including another better than expected labour force report and the decisive Obama victory in the US presidential elections. The latter may account for the very sharp 17% jump in sentiment amongst 18-24 year olds. ― Rather than the result of one-off factors the Nov rise looks more like the beginning of a sustained improvement. The gain was spread across all components with particularly strong gains for the sub-indexes tracking views on ‘family finances vs a year ago’ (+11%), ‘economic conditions over the next 12 months’ (+6%) and ‘time to buy a major item’ (+5.1%).

― Importantly the Nov survey also found a significant easing in job loss fears (see p15). Past RBA easing cycles have ended when sentiment and unemployment expectations have entered sustained rallies. The current improvement does not meet the threshold of previous ‘rate-cut-cycle-ending’ rallies which are more in line with the Consumer Sentiment Index rising to over 110 and the Unemployment Expectations Index falling to 130. ― The Consumer Sentiment Index is still only 0.9% above its year ago level – rate cuts have been basically ‘holding the line’ on sentiment since then – but the latest momentum is promising.

3. Consumer sentiment by state
140 130 120 110 100 90 80 70
*smoothed
Source: Melbourne Institute, Westpac Economics

index
NSW Vic
up sharply in the south-east ...

index
Qld WA
... confidence crumbling out west ...

140 130 120 110 100 90

... Qld following its own weak path

80 70 60

60 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

4. Consumer sentiment and RBA easing cycles
st devns 2.5 1.5 0.5 -0.5 -1.5 -2.5
*deviation from avg, ^inverted +1.5 +1.1 RBA easing cycles, (figures are 3mth change after last cut) +1.3 +1.0 +1.2 +1.2 +0.6 +0.7

st devns 2.5 1.5 0.5 -0.5 consumer sentiment unemp. expectations^
Sources: Melbourne Institute, RBA, Westpac

-1.5 -2.5

-3.5 -3.5 Nov-93 Nov-95 Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-13

7

November 2012

Sentiment indicators: spending
― Our CSI± index, which excludes ‘economic’ questions and includes the Westpac Risk Aversion Index, also posted a strong gain in Nov, rising 4.2pts to be up 7.6pts in 3mths and at its highest level since Feb 2011. That is the most promising result over the current easing cycle. There is some upside risk as well with the quarterly Westpac Risk Aversion Index reading in the measure from Sep and Dec’s update likely to show some improvement. ― Despite the good news the level of CSI± remains subdued consistent with flat per capita spending and sub-2% growth in per capita retail sales volumes (population growth is 1.5-1.7%yr). ― For much of the year actual spending growth has been stronger than CSI± had been suggesting. That apparent disconnect has narrowed over the last month with updates on consumer spending and retail sales both showing weaker growth. ― Official Q3 estimates for total spending are due out with the Q3 GDP on Dec 5 but recently released annual national accounts figures have flagged a significant downward revision to previous estimates. Consumption growth for the financial year has been marked down from 3.7%yr to 3.1%yr. That points to a Q2 per capita pace of 1.9%yr vs the current estimate of 2.5%yr.

5. CSI± vs total consumer spending
30 20 10 0 -10 -20
CSI ± (lhs)* consumer spend (rhs)^
*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed, adv. 6mths; ^real, per capita

index
Source: Melbourne Institute, ABS, Westpac Economics

ann%
note: estimates include benchmark revisions from annual national accounts
Westpac est Q3

-30 Jun-77

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

Jun-82

Jun-87

Jun-92

Jun-97

Jun-02

Jun-07

Jun-12

6. CSI± vs retail sales
30 20 10 0 -10 -20 -30 Sep-87
*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed

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

ann%
Source: Melbourne Institute, ABS, Westpac Economics

10 8 6 4 2 0 -2 -4

Sep-92

Sep-97

Sep-02

Sep-07

Sep-12

8

Westpac Institutional Bank

― Digging further into the detail of the annual benchmark revisions, a rough breakdown between goods and services shows the downgrade was evenly spread. A significant mark-down to ‘retail goods’ reconciles some of the puzzling strength in this segment vs the retail trade survey. Growth in vehicle purchases was also sharply lower although it was growing at a much stronger pace than total spending and is a small component. Revisions to spending on services tended to affect ‘staples’ such as utilities, health and education more heavily than ‘discretionary’ items such as cafes & restaurants, entertainment and personal services.

― Meanwhile the Sep retail survey confirmed Q3 was a much weaker quarter for retailers with the total volume of sales contracting 0.1%qtr. This was mainly due to the boost from carbon tax compensation payments in Q2 (1.2%qtr) dropping out but also firmer retail prices (only a small part of which was carbon tax related). Nominal sales rose 0.5% in the Sep month so demand is still ticking over ‘post-fiscal-boost’. Even allowing for boost effects there does seem to have been a loss of momentum though. Our composite indicator of cyclical spending which draws on parts of retail and other spending data, is back slightly below trend as at Oct.

7. Consumer spending: benchmark revisions
18 8 6 16 14 4 2 12 0 10 8 6 60 4 40 2 20 0 0 -2 -20 ann% goods retail ex vehicles
–0.6ppts

services ‘staples’

ann%
–0.9ppts

vehicles previous revised
–2.6ppts

‘discretionary’

–0.3ppts

Source: ABS, Westpac Economics

8 6 4 2 0 -2 -4 6 -6 4 -8 2 0 -10 -12 -2

2008

2009

2010

2011

2012

2008

2009

2010

2011

2012

8. Composite indicator of cyclical spending
12 9 6 3 0 -3 -6 -9 -12 Oct-94
GST introduction
Sources: ABS, Melbourne Institute Westpac Economics

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

%

30 20 10 0

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

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

last 6mths

-10 -20 -30

Oct-97

Oct-00

Oct-03

Oct-06

Oct-09

Oct-12

9

November 2012

Special topic: Christmas spending plans
― The Nov survey included our annual questions on Christmas spending plans. The results suggest that despite the improved tone to sentiment consumers are approaching this year’s festive season with much the same degree of restraint as last year and the year before. ― When asked about planned gift spending, 35% said they intended to spend less than last year; 52% said the same and 13% said they would be spending more. This is virtually unchanged from 2011’s 34%:54%:12% split which was in turn unchanged from 2010. All of these years were lacklustre Christmas seasons for most retailers. ― With six years of survey history now there does appear to be a clear negative bias to reported spending plans. Those saying they plan to cut outnumber those increasing even in bumper years like 2007. ― There are clear fluctuations in the mix of responses year to year though. While plans were still negative in 2007 they were markedly less negative than in other years and 2008 was a disastrous reading – the only survey to find more consumers planning to spend less than those spending the same as the previous year. Viewed against these benchmarks, the 2012 survey looks subdued rather than strong/weak.

9. Christmas spending plans vs a year ago
% 70 60 50 40 30 20 10 0 2007* 2008* 2009 2010 2011 2012
+0.3 +1.5

Christmas spending intentions compared to a year ago
less
*ANRA survey

% 70 60 50 40 30 20 10 0
–1.7

the same

more

Source: ANRA, Westpac-Melbourne Institute

10. Christmas spending plans by state
0 -5 -10 -15 -20 -25 -30 -35 -40 Aus 2007* 2010 NSW 2008* 2011 Vic 2009 2012 Qld
% increasing spend minus % decreasing; * ANRA survey
Source: Westpac-Melbourne Institute, ANRA

net%

Christmas spending compared to a year ago

net%

0 -5 -10 -15 -20 -25 -30 -35 -40

SA

WA

10

Westpac Institutional Bank

― The linkage to actual spending is still difficult to pinpoint. While 2007 was a good Christmas spending-wise, aggressive policy easing and direct fiscal payments softened the blow from the disastrous reading in 2008. However, the flat results in 2009, 2010 and 2011 (per capita retail sales ex food –0.4%yr, 0.0%yr and +0.9%yr respectively) suggest the 2012 result is consistent with another ‘dud’ Christmas sales season rather than a disaster. ― The state detail is more interesting. Whereas plans are similar to last year for consumers in NSW, Vic and SA, Qld’ers are cutting back sharply while those in WA are more upbeat.

― The picture is more downbeat when consumers are asked about their actual budget for gifts. Just under 40% say they will spend over $500, well below the 47% recorded last year. Just over a quarter (26%) expect to spend $300 to $500 (vs 19% % last year); and 35% plan to spend less than $300 (about the same as 2011). ― The implied median expected spend of $419 is down 10% on 2011. The inconsistency between this and responses on ‘spend vs last year’ may be a distribution effect – planned spend is down sharply for those in middle and higher income brackets who have a higher median spend. This in turn suggests an uneven Christmas season.

11. Christmas spending plans by income group
120 100 80 60 40 20 0 -20 -40 -60 net%
median planned spend (rhs) -$80 -$55 +$16 % increasing spend minus % decreasing;

$

<$40k 2009

$41-90k 2010

>$90k

Source: Westpac-Melbourne Institute, ANRA

700 600 500 400 300 200 100 0 -100 -200

2011

2012

12. Christmas per capita retail sales: historical
1400 1200 1000 800 600 400 200 0 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
Sources: ABS, Westpac estimates

$
*per capita retail sales ex food, over Nov-Dec; note that this includes regular and ‘non-gift’ spending and excludes gifts purchased online from non-Australian retailers

%ch

50 40

trend $8.7bn in fiscal payments likely prevented a sharp fall in 2008 +0.9%

30 20 10 0 -10

%ch (rhs)

11

November 2012

Sentiment indicators: durables, cars
― The index tracking views on ‘time to buy a major item’ rose 5.1% in Oct to be up 9% in two months and decisively above its long run average. ― The Q3 retail sales data showed a quickening in the ‘household goods retail’ store-type, which broadly aligns with durables/major items. The 1.9%qtr rise in volumes brought annual growth to 3.2%yr, the strongest pace in a year. Although price effects complicate the picture, the nominal monthly detail shows a stronger rise in sales for ‘hardware, building & garden supplies’ (5.2%qtr, 5.5%yr) compared to more subdued gains for the rest of the store-type (furniture, carpets, electronics, appliances etc +0.9%qtr, 0.5%yr). ― The index on ‘time to buy a vehicle’ rose 2.2% after a 6.7% jump in Oct. It is now up 14.2%yr. ― Monthly SUV and passenger vehicle sales posted strong gains in Aug-Sep but dipped back 2.8% in Oct (still up 8% on a year ago). Although earlier gains were due to insurance-funded purchases and a recovery from last year’s supply disruptions, the more recent gains are impressive given elevated unemployment expectations (job loss fears typically see consumers defer big-ticket purchases like cars). Record levels of vehicle affordability have helped – aside from borrowing rates, new car prices have fallen 5% over the last 3yrs.

13. ‘Time to buy a major item’ vs household goods retail
%ann avg index* 30 *deviation from long run average, smoothed Sources: Melbourne Institute, ABS, Westpac Economics 20 10 0 -10 last 6mths -20 -30 -40 time to buy a major item (adv 3qtrs, lhs)* -50 real per capita household goods retail sales (rhs) -60 Sep-85 Sep-88 Sep-91 Sep-94 Sep-97 Sep-00 Sep-03 Sep-06 Sep-09 Sep-12 20 15 10 5 0 -5

14. ‘Time to buy a car’ vs new vehicle sales
index ann% 40 qtly disconnect due to 17.5% 30 cut in vehicle tariffs 20 10 0 -10 -20 time to buy a car (adv 6mths, lhs) Japanese -30 earthquake new vehicle sales (rhs)* -40 Sources: ABS, Melbourne hits supply *trend, passenger and SUVs only -50 Institute, Westpac Economics Oct-80 Oct-84 Oct-88 Oct-92 Oct-96 Oct-00 Oct-04 Oct-08 Oct-12 40 30 20 10 0 -10 -20 -30 -40 -50

12

Westpac Institutional Bank

Sentiment indicators: housing
― One of the highlights in last month’s survey was a big 9.6% jump in the sub-index tracking views on ‘time to buy a dwelling’ to the highest level since Sep 2009, and prior to the 2009 recovery, since Dec 2001. That positive move was cemented in Nov with the sub-index sustaining its high level despite the RBA’s surprise decision to leave interest rates unchanged. ― This supports the view that the level of interest rates has now reached a point that is generating a stronger recovery in housing activity. Although we have yet to get confirmation from finance approvals (data is only up to Sep), auction activity showed a clear firming in Oct-Nov. ― Prospects for a housing recovery have also received a big boost from the improvement in unemployment expectations (see p15). Job loss fears are a key factor in the house purchase decision with elevated fears clearly restraining the recovery to date. ― Our simple model of housing finance approvals – based on responses on ‘time to buy a dwelling’ and unemployment expectations – was pointing last month to a modest recovery of around 5% by mid to late 2013. With no change in ‘time to buy a dwelling’ but an improvement on unemployment expectations the same model in Nov now points to a 10% gain.

15. ‘Time to buy a dwelling’ by state
index 160 140 120 100 80
*smoothed

index 160 140 120 100
NSW Vic Qld WA

80 60

60 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12

Source: Melbourne Institute, Westpac Economics

16. Model of housing finance approvals
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 *assumes no change from current readings -40 Source: ABS, Westpac -50 Sep-92 Sep-97 Sep-02 Sep-07 ann%
projection*

60 50 40 30 20 10 0 -10 -20 -30 -40 -50

Sep-12

13

November 2012

Sentiment indicators: risk aversion
― The ‘wisest place for savings’ questions used to construct the Westpac Consumer Risk Aversion Index were not included in the Oct survey but will be in Dec (due Dec 12). The Sep update showed a swing back to risk aversion after a brief easing mid-year. ― The early signs suggest the Dec reading will show another easing in risk aversion. Not only has headline consumer sentiment improved but views on real estate have clearly turned – both ‘time to buy a dwelling’ and last month’s more positive findings on house price expectations. We keenly await next month’s result. ― Despite this shift we expect household risk aversion and the high-saving behaviour to remain fairly well entrenched over the next year. ― Indeed, actual household savings rates now look to be a touch higher than the ABS originally estimated. Along with the consumer spending revisions, the Bureau has also released revised annual benchmarks for household income, outlays and saving. For 2011-12 this has seen a marked upward revision in the household savings ratio from 9.4% to 10.8%. The move brings the measures more in line with the readings of risk aversion over the last year.

17. Consumers: ‘wisest place for savings’
60 50 40 30 20 10 0 Sep-97
Sources: Westpac, Melbourne Institute

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

%

60 50 40 30 20 10 0

Sep-00

Sep-03

Sep-06

Sep-09

Sep-12

18. Westpac Consumer Risk Aversion Index
% 70 50 30 10 -10 -30 Jun-02
Sources: Westpac, Melbourne Institute

%
Westpac consumer risk aversion index (lhs)* household savings rate (rhs)
*% nominating 'pay down debt' or interest bearing assets as wisest place for savings minus % nominating real estate or shares dashed line shows quarterly series marked to revised annual ABS benchmarks

19 14 9 4 -1 -6

Jun-04

Jun-06

Jun-08

Jun-10

Jun-12

14

Westpac Institutional Bank

Sentiment indicators: job security
― The Westpac-Melbourne Institute Unemployment Expectations Index declined 6.9% in Nov to be down 8.4% since Sep, a clear improvement in the outlook for unemployment. The index is at a high historical level though – on the basis of historical variations, the Nov reading still implies consumers expect the unemployment rate to rise by about 0.8ppts. ― This Index rates as one of the WestpacMelbourne Institute Consumer Survey’s ‘hidden gems’; In previous Red Books we have highlighted the links between this measure and actual unemployment, job ‘displacement’, cyclical spending decisions and housing activity. ― This month we highlight the extraordinarily close correlation between unemployment expectations and total hours worked as reported by the ABS labour force survey. The correlation in 2011-12 is much closer than with changes in employment – highlighting the degree to which firms are adjusting hours worked rather than ‘head count’ in response to weak demand. ― While welcome, the Nov improvement in unemployment expectations still points to flat annual growth in total hours worked rather than an upturn. State differences are again notable with big improvements in NSW and Vic, a more muted rise in Qld and a deterioration in WA.

19. Unemployment expectations vs hours worked
4 3 2 1 0 -1 -2 -3 Nov-92 Nov-94 Nov-96 Nov-98 Nov-00 Nov-02 Nov-04 Nov-06 Nov-08 Nov-10 Nov-12
Sources: ABS, Westpac-Melbourne Institute

std devns
unemp expectations (std devns from long run avg, adv 4mths) total hours worked (ann%)

ann%*
*scale reversed

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

20. Unemployment expectations by state
200 180 160 140 120 100 80
>100: unemp expected to rise <100: unemp expected to fall
Source: Melbourne Institute, Westpac Economics

index
*smoothed

index
NSW Vic Qld WA
one state bucking the trend

200 180 160 140 120 100 80 60

60 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11 Nov-03 Nov-05 Nov-07 Nov-09 Nov-11

15

November 2012

State snapshot: Tasmania
― Tasmania is often relegated to an economic afterthought – the state accounts for 2.3% of Australia’s population, 1.8% of GDP and 2.2% of jobs (in a good year) – but is worthy of attention both for what it can tell us about the forces shaping the national economy (2012 is most definitely not a good year) and the insight into how consumers respond to survey questions. ― The state is in the grips of recession with final demand down 2.2% in the year to Jun and the unemployment rate jumping from 5¼% late last year to 7¼% in early 2012. It would have pushed even higher if not for a sharp rise in the interstate emigres. ― The weak state economy shows through in sentiment – even allowing for the high volatility Sentiment has been a good 12pts below the national reading. The component detail shows big deviations on ‘family finances’ but similar readings for ‘economic outlook’ questions which are clearly a national rather than state view. ― Responses on ‘time to buy’ a major item and vehicle are more in line with national readings – suggesting this is more of an ‘affordability’ assessment than a plan to buy. Interestingly, Tasmanians are more positive on ‘time to buy’ a dwelling, the affordability boost from falling local prices (–9% over 2yrs) clearly a key factor.

21. Consumer sentiment and components: Tas vs Aus
140 130 120 110 100 90 80 70
*6mth averages
Source: Melbourne Institute, Westpac Economics

index

sentiment

family finances
Tas Aus

economy

index

130 120 110 100 90 80 70 60

60 Nov-98 Nov-03 Nov-08 Nov-98 Nov-03 Nov-08 Nov-98 Nov-03 Nov-08

22. Consumer purchase attitudes: SA vs Aus
180 160 140 120 100 80 60
*6mth averages
Source: Melbourne Institute, Westpac Economics

index major item
Tas Aus

vehicle

dwelling

index

180 160 140 120 100 80 60 40

40 Nov-98 Nov-03 Nov-08 Nov-98 Nov-03 Nov-08 Nov-98 Nov-03 Nov-08

16

Westpac Institutional Bank

Westpac household barometer
― The Westpac Household Barometer draws on a range of data – including system-wide credit and debit card usage from the RBA, and the mortgage repayment behaviour and credit card usage of Westpac customers – to give a broad proxy for consumers’ financial behaviour. ― The Barometer has shown a steady rise since the start of the year, up 0.3pts over Jun-Sep, indicating a shift towards more conservative financial behaviour. The readings suggest we may see a rise in household savings rates, although the short history of the Barometer means it should be read more in ‘directional’ terms rather than as a point estimate of savings. ― Three out of the four components have risen over the last three months – card usage, the mix of credit vs debt cards, and the mortgage repayment behaviour of Westpac customers. The fourth – the credit card repayment behaviour of Westpac customers – has been more mixed. ― Growth in the real value of card transactions remained fairly subdued at 4.2%yr in Sep, down from the 5-6% pace in the first half of the year but well above the slight contraction recorded in late 2011. The mix continues to show a big swing in favour of debit vs credit cards with debit accounting for 43% of transactions by value.

21. Westpac household barometer
103 102 101 100 99 98 Sep-05
Source: RBA, Westpac Group

index
more conservative less conservative

% 12 10 8 Westpac household barometer (lhs)* household savings ratio (rhs)
*based on: card transactions, mortgage prepayments; credit card usage; and card debt repayment behaviour

6 4 2 0 -2

Sep-06

Sep-07

Sep-08

Sep-09

Sep-10

Sep-11

Sep-12

22. Credit vs debit card usage
44 42 40 38 36 34 32 30 Sep-02 Sep-04 Sep-06 Sep-08
*debit card purchases as % of all card transactions, smoothed
Source: RBA, ABS, Westpac

%
increased use of debit vs credit decreased use of debit vs credit

ann%

44 42 40

initial onset of ‘cautious consumer’

38 36 34 32 30 Sep-12

Sep-10

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November 2012

Economic and financial forecasts
Interest rate forecasts
Latest (16 Nov) 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 1.58 2.92 0.75 Latest (16 Nov) AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD
Sources: Bloomberg, Westpac Economics.

Dec 12 3.00 2.95 2.90 3.10 135

Mar 13 2.75 2.85 3.00 3.20 130

Jun 13 2.75 3.00 3.15 3.25 120

Sep 13 2.75 3.10 3.25 3.40 120

Dec 13 2.75 3.10 3.40 3.50 120

3.25 3.26 3.04 3.03 145

0.125 1.75 3.00 0.75 Dec 12 1.02 0.81 78 1.26 1.26

0.125 1.90 3.25 0.75 Mar 13 1.06 0.82 81 1.24 1.29

0.125 2.05 3.49 0.75 Jun 13 1.05 0.81 81 1.22 1.30

0.125 2.20 3.74 0.75 Sep 13 1.03 0.80 80 1.20 1.29

0.125 2.30 3.99 0.75 Dec 13 1.01 0.79 79 1.19 1.28

Exchange rate forecasts
1.0333 0.8106 81.12 1.2771 1.2748

18

Westpac Institutional Bank

Economic and financial forecasts
Australian economic growth forecasts
2011 Q4 GDP % qtr Annual change Unemployment rate % CPI % qtr Annual change CPI underlying % qtr ann change 0.5 2.6 5.2 0.0 3.0 0.8 2.7 2012 Q1 1.4 4.4 5.2 0.1 1.6 0.4 2.2 Q2 0.6 3.7 5.1 0.5 1.2 0.6 2.1 Q3f 0.6 3.1 5.3 1.4 2.0 0.7 2.5 Q4f 0.6 3.2 5.5 0.4 2.4 0.7 2.5 2013 Q1f 0.9 2.8 5.7 0.6 2.8 0.6 2.7 Q2f 0.8 3.0 5.6 0.7 3.1 0.4 2.5

Calendar years 2010 GDP % ann change Unemployment rate % CPI % ann change CPI underlying % ann change 2.5 5.2 2.8 2.3 2011 2.1 5.1 3.0 2.7 2012f 3.5 5.3 2.4 2.5 2013f 3.2 5.6 2.1 2.3

Calendar year changes are period average for GDP and unemployment, and through the year for inflation. * GDP forecasts are reviewed following the release of quarterly national accounts.

19

November 2012

Consumer data and forecasts
Consumer demand
2012 % change Total private consumption* annual chg Real labour income, ann ch Real disposable income, ann ch** Household savings ratio Real retail sales, ann chg Motor vehicle sales (‘000s)*** annual chg Q1 1.8 4.3 5.6 2.4 8.9 2.9 852.7 5.7 Q2 0.6 4.0 5.0 3.8 9.2 4.2 871.8 16.1 Q3f 0.5 3.5 3.7 3.0 9.6 3.2 884.5 6.5 Q4f 0.7 3.6 3.2 3.8 9.7 3.4 912.5 8.9 2013 Q1f 0.8 2.5 1.5 3.0 9.4 2.3 930.7 9.2 Q2f 0.8 2.8 1.7 2.8 9.2 1.7 949.4 8.9 Q3f 0.8 3.1 2.6 2.6 9.1 2.4 968.3 9.5 Q4f 0.9 3.3 3.3 2.4 8.8 2.4 987.7 8.2

Calendar years 2010 Total private consumption, ann ch* Real labour income, ann ch Real disposable income, ann ch** Household savings ratio, % Real retail sales, ann chg Motor vehicle sales (‘000s) annual chg 2.9 4.0 1.2 8.9 1.0 828.2 13.6 2011 3.3 4.9 4.3 9.9 0.5 806.5 -2.6 2012f 3.9 4.4 3.3 9.3 3.4 880.4 9.2 2013f 2.9 2.3 2.7 9.1 2.2 952.9 8.2

Notes to pages 20 and 21: * National accounts definition. ** Labour and non–labour income after tax and interest payments. *** Passenger vehicles and SUVs, annualised ^ Average over entire history of survey. ^^Seasonally adjusted. # Net % reporting expected rise next 12 months minus % expecting fall (wage expectations is net of % expecting >4% 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 Westpac–MI 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 Westpac–MI Consumer Risk Aversion Index^^ CSI± consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# Westpac–MI Unemployment Expectations avg^ avg^ 101.7 90.0 108.6 90.3 90.8 127.9 121.8 122.5 10.7 103.8 52.5 38.7 -25.7 128.1 continued Westpac–MI 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 Westpac–MI Consumer Risk Aversion Index^^ CSI
±

Feb 101.1 83.3 103.6 91.1 99.4 128.0 125.7 118.8 – 92.9 5.8 – – 143.6 2012 Jul 99.1 83.5 88.9 95.8 97.5 130.0 130.8 128.8 – 91.4 – 25.2 – 148.1

Mar 96.1 76.2 99.0 88.8 93.3 123.1 122.1 120.8 42.3 89.0 – – -24.0 149.5

Apr 94.5 65.2 94.9 89.5 94.7 128.4 116.1 120.5 – 87.2 – 22.8 – 142.3

May 95.3 76.3 93.5 90.7 96.4 119.6 116.0 118.2 – 88.0 – – – 146.4

Jun 95.6 79.8 86.3 90.5 92.7 128.6 124.7 128.0 34.7 90.0 -27.4 – – 151.1

Aug 96.6 78.2 91.8 92.8 94.9 125.4 126.3 118.5 – 89.0 0.2 – – 153.7

Sep 98.2 78.4 96.2 93.3 98.1 124.9 126.1 127.6 41.5 89.5 – – -27.6 155.3

Oct 99.2 82.6 98.9 91.1 93.6 129.6 134.6 139.8 – 92.4 – 34.4 – 152.7

Nov 104.3 91.8 100.2 96.6 96.8 136.1 137.5 139.8 – 96.6 – – – 142.2 21

consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# Westpac–MI Unemployment Expectations

November 2012

Westpac Economics directory
Westpac Economics Sydney Level 2, 275 Kent Street Sydney NSW 2000 Telephone (61–2) 8254 8372 Facsimile (61–2) 8254 6934 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 (44–20) 7621 7061 Facsimile (44–20) 7621 7527 James Shugg Senior Economist

Takutai on the Square Level 8, 16 Takutai Square Auckland, New Zealand Telephone (64–9) 336 5671 Facsimile (64–9) 336 5672
Dominick Stephens Chief Economist, New Zealand Michael Gordon Markets Economist

Auckland

Felix Delbrück Senior Economist Nathan Penny Economist

Publication enquiries, Westpac Economics, Telephone (61–2) 8254 8720, economics@westpac.com.au
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