West Pac Redbook February 2013 | Real Versus Nominal Value (Economics) | Unemployment

The Red Book

February 2013

Westpac Economics with the Institutional Bank.

February 2013


Executive summary The consumer mood: brightens Sentiment indicators: spending Special topics House price expectations Interest rate expectations Sentiment indicators Durables, cars Housing Risk aversion Job security State snapshot: Western Australia Westpac household barometer Summary forecast tables Economic & financial forecasts Consumer data and forecasts

4 6 8

10 12

14 15 16 17 18 19

20 22

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 15 February 2013

Westpac Institutional Bank

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 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 investors. 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 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 economics@westpac.com.au 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. © 2013 Westpac Banking Corporation.


February 2013

Executive summary
― The Westpac–Melbourne Institute Index of Consumer Sentiment posted a strong 7.7% rise in Feb, moving from ‘neutral’ to ‘optimistic’ territory. ― The Feb gain came despite a mixed range of influences in the month: the RBA leaving rates on hold; economic data releases ranging from surprisingly weak (retail, dwelling approvals), to steady (unemployment) and mildly positive (house prices). A strong sharemarket performance and a less threatening global backdrop would have been positives as well. ― The Feb gain was broad-based. All component indexes posted rises with particularly strong increases in those tracking views on the economic outlook and ‘time to buy a major item’ – components which often lead cyclical shifts. ― The circumstantial evidence and survey detail suggest the rise in sentiment is a genuine cyclical upturn rather than a ‘one-off ’. In particular it suggests lower interest rates may finally be starting to generate more positive traction with the consumer. ― CSI± , our modified consumer sentiment indicator, posted a solid though less impressive 3.7pt gain. It points to a modest firming in demand by about mid-2013. However the starting point for actual spending is weaker. Although the poor finish to 2012 for retail sales is partly a reflection of sector specific problems, the weakness of sales growth, the mix and other indicators all point to weaker than expected underlying demand momentum in early 2013. ― Consumer perceptions on ‘time to buy’ remain uniformly upbeat with the sub-indexes on ‘time to buy a major item’, ‘time to buy a vehicle’ and ‘time to buy a dwelling’ all near historical highs. ― The main negative to the Feb survey continues to be around labour market conditions. In contrast to the sentiment rise, the Westpac –Melbourne Institute Unemployment Expectations Index showed little change in Feb. The modest improvement since Sep was sustained but expectations remain deeply pessimistic overall. Job loss fears look likely to remain a significant restraint on actual spending. ― The Jan survey included additional questions on house price expectations. While few consumers expect prices to decline, expectations have been marked down since Aug particularly in Vic. The picture is consistent with a more tentative, gradual housing recovery than that seen in 2008-09. ― The Feb survey also included additional questions on mortgage interest rate expectations. Responses show a notable hawkish tilt with those expecting rates to rise now outnumbering those expecting further declines.


Westpac Institutional Bank

Consumer spending: recovery by second half of 2013?
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 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


After a disappointing finish to 2012, Australian consumers look to have begun the new year with a spring in their step. The Feb Westpac–Melbourne Institute Consumer Survey showed the most convincing signs yet that lower interest rates are starting to gain more positive traction with consumers. Sentiment posted a solid rise, largely unaided by specific factors in the month and with the composition and detail suggestive of an underlying cyclical upturn. Its not quite a ‘slam dunk’ though. We have seen promising gains in the past that have reversed quickly, most notably the rise in Nov last year. And while we would class the Feb gain as a more substantive rise it still falls short of being clear confirmation of a consumer upswing. There are several reasons for not getting too carried away: Firstly, the improvement needs to be sustained. Our analysis suggests the Index needs to consolidate above 110 to be a conclusive signal of an upturn. That may be hard to achieve if there are disappointments at home or abroad.

Secondly, the rise in sentiment needs to translate into increased spending. Positive views on the economy and ‘time to buy’ are a great start but a lift in spending does not always follow. Unemployment expectations will be critical here. These did not improve in Feb and remain at very pessimistic levels that are likely inhibiting demand. This proxy for job security needs to show a similar sustained improvement. Thirdly, any upturn will need to be able to withstand a sizeable ‘shock’ later this year as mining investment peaks. The flow through to spending and activity needs to be strong enough to ensure ‘non-mining’ sectors are strengthening sufficiently to counteract the mining downturn. That ‘mix’ looks a long way off. Recent data suggests consumer demand ended 2012 with significantly weaker momentum (we have lowered our near term forecast for consumer spending). ‘Non-mining’ businesses also look unlikely to lift investment materially. Even with the improved consumer mood in Feb, we still see a case for a further 25bp rate cut by the RBA at its Mar meeting.

February 2013

The consumer mood: brightens
― The Westpac–Melbourne Institute Index of Consumer Sentiment rose 7.7% in Feb from 100.6 in Jan to 108.3 – the strongest reading since Dec 2010 and the biggest gain since Sep 2011. It follows an extended period in which sentiment has disappointed, posting at best ‘neutral’ readings despite a substantial 175bp reduction in interest rates since Oct 2011. ― The Feb reading is the most promising sign yet that lower interest rates are starting to generate more positive traction domestically. That said, confidence is still well below the levels during the last easing cycle in 2008-09 which saw sustained readings in the 115-120 range. ― The improved mood comes despite a mixed month for consumer influences. The RBA left rates on hold at its Feb meeting. Data releases showed a surprisingly weak finish to 2012 for retail sales and a patchy recovery for housing. Labour market data released in the survey week contained some weak detail but a headline unemployment rate steady at 5.4% in Jan. ― Sentiment would have been buoyed by the strong start to the year for financial markets. The ASX rose 4.8% between the Jan and Feb surveys and is up 14% from its Nov low. News from offshore has also been broadly supportive, or at least more so than through most of 2012.

1. Consumer sentiment lifts
130 120 110 100 90 80 70
Sources: Melbourne Institute, Westpac Economics



130 120

long run average

110 100 90 80 70 60

60 Feb-83







2. Consumer sentiment: components
index 40 20 0 -20 -40 -60 Feb-85 Feb-89 Feb-93
'economic outlook' 'family finances' 'time to buy a major item'
*deviation from long run average, smoothed
Source: Melbourne Institute, Westpac Economics

index 40 20 0 -20 -40 Feb-09 -60 Feb-13





Westpac Institutional Bank

― Overall the Feb sentiment gain seems to go beyond these monthly influences. Across the components, the biggest lift was around views on the economic outlook which are now strongly positive. Consumers had more mixed opinions on family finances (‘family finances vs a year ago’ up 7.3% but still weak overall and ‘family finances over the next 12 months’ up only 1.4%). This is still a clear weak spot for confidence. ― Consumer views on ‘time to buy a major item’ were encouraging, the sub-index rising 5.5% to its highest level since October 2010. Views on the economic outlook and ‘time to buy’ often lead cyclical shifts in sentiment.

― The survey detail provides more insight. The rally in sentiment has been strongest in ‘mining’ states where better news on China and key commodity prices would have calmed last year’s ‘hard landing’ fears. Sentiment has risen across both mortgage holders and the rest suggesting it is no longer just a story of interest rate relief. Confidence has shown a particularly strong rally amongst Coalition voters – easing concerns about the carbon tax may be partly behind this. ― As promising as it is, the Feb sentiment gain still falls short of a decisive turning point. For that we need to see the rally sustained and a clearer improvement in unemployment expectations.

3. Consumer sentiment: selected groups
140 130 120 110 100 90 80 70 'mining' 'non-mining' yes no ALP Coalition 60 Feb-99 Feb-04 Feb-09 Feb-99 Feb-04 Feb-09 Feb-99 Feb-04 Feb-09 index


Source: Melbourne Institute, Westpac

voting intention index

140 130 120 110 100 90 80 70 60

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 –0.2 +1.5 +1.1 RBA easing cycles, (figures are 3mth change after last cut) +1.3 +1.0 +1.2 +1.2 +0.3

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 Feb-94 Feb-96 Feb-98 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14


February 2013

Sentiment indicators: spending
― Our CSI± index, a modified measure that excludes ‘economic’ questions and includes the Westpac Risk Aversion Index, also posted a solid rise in Feb, up 3.7pts to 100.1, the first reading over 100 since Dec 2010. ― The lacklustre readings around family finances continue to act as a restraint, as does lingering risk aversion. Note that the ‘wisest place for savings’ questions used to compile the Westpac Risk Aversion Index are only run every 3mths with the last update in Dec. Hence the Feb CSI± reading may understate demand conditions if the Feb sentiment rise also brought an easing in risk aversion. We keenly await the Mar update. ― While the Feb reading is an improvement and there may be some upside risk with the update to risk aversion, CSI± is still pointing to modest rather than strong demand growth. It is consistent with per capita spending growth of 0.8%yr and per capita retail volume growth of 2%yr. With population rising at 1.7%yr that equates to total spending growth of 2.5%yr and retail volumes rising at a little over 3.5%yr. ― That may be wishful thinking for retail. ABS figures for Dec show a very disappointing finish to 2012 with monthly retail sales falling for a third month in a row and volumes up just 0.1% in Q4, and down 0.2% for 2012H2 as a whole.

5. CSI± vs total consumer spending
30 20 10 0 -10 -20 -30 Sep-77
CSI ± (lhs)* consumer spend (rhs)^
*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed, adv. 6mths; ^real, per capita

Source: Melbourne Institute, ABS, Westpac Economics

Westpac forecast

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








6. CSI± vs retail sales
30 20 10 0 -10 -20 -30 Dec-87
*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed
Source: Melbourne Institute, ABS, Westpac Economics

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

Westpac forecast

10 8 6 4 2 0 -2 -4







Westpac Institutional Bank

― Some of the Q3 weakness in retail could be put down to the fading boost to spending in Q2 from the $1.9bn in compensation payments as part of the carbon tax introduction. The soft Q4 sales figures would have been clear of this influence though and are a more ominous sign. ― To be fair, retail sales had been surprisingly strong in early 2012, with a big disconnect between sales and demand conditions implied by the consumer sentiment based indicators. The soft Q4 reading has closed that disconnect. However, momentum-wise it points to a clear weakening rather than stabilisation/firming evident in consumer sentiment.

― Some of this performance is clearly a retail issue rather than a broader consumer demand story. Many retailers are facing adverse shifts in spending patterns and competitive pressures from offshore-based online retailers, aggravated by the sustained high AUD. Non-food retail’s ‘share of wallet’ has shrunk from 16% of income to just 11% in 2012. The real (inflation adjusted) share has declined a more modest 1% but this is after 20yrs of gains and suggests much of the pressure is playing out on prices and margins. ― These issues make retail sales a problematic guide to demand. That said, the spending mix and other data point to a loss of momentum.

7. Non-food retail: ‘share of wallet’
20 18 16 14 12 10 8 6 4 Dec-82 Dec-87 Dec-92
excludes food, % of household disposable income
Source: ABS, Westpac Economics



20 18 16


14 12 10 8 6 4








8. Composite indicator of cyclical spending
12 9 6 3 0 -3 -6 -9 -12 Jan-95
GST introduction
Sources: ABS, Melbourne Institute Westpac Economics

*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

last 6mths

-20 -30








February 2013

Special topic: house price expectations
― The Jan survey included an update of the Westpac–Melbourne Institute Consumer House Price Expectations Index. The Index showed a moderation, declining 7.7pts from 34.4 in Oct to 26.7 in Jan, reversing most of the gain between Jul and Oct. ― The downshift came despite the RBA’s decision to lower rates further in Dec. House price expectations showed little response to interest rate cuts in 2012 – whereas the RBA’s initial cuts in late 2011 boosted price expectations (the Index jumped from 9.1 in Oct to 25.1 in early 2012) they have been largely unchanged since despite an additional 125bps of rate cuts. ― House price expectations are still positive overall with the proportion of respondents expecting prices to rise (46.5%) outnumbering those expecting prices to fall (19.8%). The consensus is weaker in Jan though – the Oct survey found an outright majority (50.3%) expecting prices to rise. ― The lower level of conviction may reflect the patchy performance of house prices in 2012. Prices measures put annual dwelling price growth nationally in the 0-2% range – a more restrained upturn than seen in 2008-09 and what that appears to be shakier month to month and more uneven across regions.

9. Westpac-MI Consumer House Price Expectations Index
100 75 50
long run avg

net percent expecting house prices to rise *grey line is a similar measure from an annual survey by Mortgage Choice


100 75 50 25 0

25 0 -25
Source: Westpac-Melbourne Institute, Mortgage Choice

-25 -50

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

10. Consumers: expected direction of house prices
%responses 100 80 60 40 20 0 2004 2006 2008 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
annual* quarterly


%responses no change rise

100 80

Source: Westpac-Melbourne Institute, *Mortgage Choice surveys conducted in Nov


60 40 20 0


Westpac Institutional Bank

― The state split on house price expectations is particularly interesting. Consumers in WA and NSW are much more upbeat with a clear majority expecting prices to rise (64% in WA; 55% in NSW). The standout weak spot is Vic where price expectations were downgraded sharply in Jan and are ‘neutral’ overall with 34% expecting prices to rise, 35% expecting declines and 30% expecting no change. ― The state contrast matches performances in 2012. Whereas housing recoveries look fairly well established in Perth and Sydney, the Melbourne and Brisbane markets are still just stabilising rather than in a clear recovery.

― Looking across other ‘demographic’ groupings, renters pared back their price expectations, more sharply, as did 18-24 year olds – both suggesting a bigger mark down in price expectations amongst potential first home buyers. That said, both groups were more bullish to begin with and have moved more in line with the national view. Recent changes in state government incentives may also have played a part in this reassessment. ― While sentiment on ‘time to buy a dwelling’ is very positive, the more mixed view on the price outlook points to a restrained upturn that is less assured and may take longer to come through.

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

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


12. House price expectations: consumers vs businesses
100 75 50 25 0 -25 May-09
Source: Westpac-Melbourne Institute, NAB


ann% consumers (lhs) businesses (rhs)* property market professionals (rhs)*

*expected growth next 12mths

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









February 2013

Special topic: interest rate expectations
― The Feb survey repeated an extra question on expectations for mortgage rates over the next 12mths. Interestingly, the results show more consumers expect rates to rise than fall over the next year, a clear shift from the evenly balanced outlook in Aug. ― Of those with an opinion, 41% expect rates to move higher, 29% expect them to move lower and 30% expect no change. The last time views were surveyed, in Aug, there was an even split between those calling rates higher, unchanged and the same. Both standard variable and 3yr fixed mortgage rates have declined 40bps following RBA rate cut rates in Oct and Dec. ― Note that despite the ‘hawkish’ shift to consumers’ rate views in Feb, there is still no outright consensus on where interest rates are heading. Indeed, apart from Jun last year when the RBA was actively cutting rates, there has been no consensus on the direction of mortgage rates since 2011. ― The survey detail shows interest rate expectations were marked up the most sharply in NSW and Qld. Consumers in these states and in WA are now the most inclined to call rates higher. There is no outright consensus (i.e. >50%) in any state on the direction of rates though.

13. Consumer expectations for mortgage interest rates
%responses 100 80 60

%responses no change rise
Source: WestpacMelbourne Institute


100 80 60 40 20 0

40 20 0 Feb-10 Jun-10 Aug-10 Feb-11 Jun-11 Aug-11 Feb-12 Jun-12 Aug-12 Feb-13

14. Interest rate expectations: selected groups
by state by housing tenure net% net % 120 NSW Vic Qld WA rent mortgage freehold 100 80 60 40 20 0 -20 *survey months are -40 Feb, Jun, Aug Source: Westpac-Melbourne Institute -60 Feb-10 Feb-11 Feb-12 Feb-13 Feb-10 Feb-11 Feb-12 Feb-13 120 100 80 60 40 20 0 -20 -40 -60


Westpac Institutional Bank

― Vic consumers were much more balanced on the interest rate outlook. Indeed, a relatively softer picture on Vic is a consistent theme in the Feb survey with sentiment a touch more subdued, a markedly softer view on house price expectations and a significantly weaker take on unemployment expectations. ― The state responses show a welcome consistency between interest rate and unemployment expectations with more ‘bullish views on unemployment matched by more ‘hawkish’ views on rates and vice versa. Consumers, it seems, understand the RBA’s dual mandate of low inflation and ‘full’ employment.

― The slight hawkish tilt to consumers’ interest rate expectations is in contrast with futures markets which are currently pricing in a 43bp reduction in the cash rate by Oct (i.e. one 25bp rate cut and a 70% chance of a follow on move). Westpac expects a 25bp rate reduction over the same period. The implied median expectations for consumers is no change. ― The fact that sentiment rallied despite a more hawkish outlook on interest rates could be interpreted as an even stronger signal that consumers are on the up. However, the 40bp rate decline between Aug and Feb means the expected level of rates may actually be lower.

15. Consumer expectations: interest rates vs unemployment
200 180 160 140 120 100 80 60 40 150 140 130 120 110 100 90
‘dovish’ on rates, ‘bearish’’ on jobs
Source: Westpac-Melbourne Institute

mortgage rate expectations*
*net% expecting mortgage rates to rise, next 12mths ^net % expecting unemployment rate to rise next 12mths (deviation from long run average) Feb-13 survey
Aus Vic

200 180 160

‘hawkish’ on rates, ‘bullish’ on jobs

140 120 100 80 60 40

unemployment expectations^ 80 70 60 50

16. Interest rate expectations: selected groups
11.0 10.0 9.0 8.0 7.0 6.0 5.0
* year-ahead mortgage rate implied by interpolated median of consumers expected change (Jun-12 projection assumes rate cut in survey week already ‘factored in’) Sources: RBA, Westpac-Melbourne Institute

% Feb-11 Jun-12

standard variable mortgage rate Aug-11 Feb-12 Aug-12 Feb-13
8.57% 8.33% 7.4% 6.79%


11.0 10.0 9.0 8.0 7.0 6.0 5.0

6.85% 6.45%

4.0 Feb-07







4.0 Feb-14


February 2013

Sentiment indicators: durables, cars
― The sub-index tracking views on ‘time to buy a major item’ posted a solid 5.5% gain in Feb and is now tracking near historical highs. ― That stands in stark contrast the Dec retail report which showed a poor finish for household goods retailers. Sales volumes fell 0.9%qtr with no change through the year extending a dismal run since 2007. All of our earlier comments on the challenging retail environment apply threefold for household durables which has been the single weakest category compared to its pre-GFC growth rates. We hope the surge in buyer sentiment flows into demand for local retailers but the form does not look good. ― The sub-index on ‘time to buy a vehicle’ declined 4.2% in Feb after a 6.1% jump in Jan. Some of this appears to be a regular seasonal fluctuation with carmakers increasingly looking to push sales in Jan. Looking through these fluctuations, the index remains at a high level consistent with double digit growth in per capita vehicle sales. ― Total passenger and SUV vehicle sales rose 9.4% in 2012 despite patchy sentiment and at times acute job loss fears. This was partly a rebound from supply disruptions in 2011. Abstracting from this, per capita sales growth has been fairly subdued since 2009 with annual per capita sales in 2012 still 3.4% below its 2007 peak.

17. ‘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 -20 last -30 6mths -40 time to buy a major item (adv 3qtrs, lhs)* -50 real per capita household goods retail sales (rhs) -60 Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 20 15 10 5 0 -5

18. ‘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 per capita, 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


Westpac Institutional Bank

Sentiment indicators: housing
― The sub-index tracking views on ‘time to buy a dwelling’ declined 3.3% in Feb but remains at a high level. As with views on ‘time to buy a car’ there also appears to be some regular seasonal variation in house purchase sentiment that sees firmer readings over Nov-Jan. This effect seems to account for most of the Feb decline. ― Housing markets have been more or less shut over the last two months. Auction activity is basically non-existent over Jan and only really kicks back into gear from late Feb. Data available to date hints at a softer performance although it is extremely unreliable. The next month should give a better indication. ― Latest figures on housing finance and dwelling approvals show a soft finish to 2012. Finance approvals ex refi were flat in Dec with weak detail around first home buyers and investors. Dwelling approvals fell 4.4% in Dec with a sharp decline in Vic. State government policy changes may have had a hand in the weak Dec results. The market ‘off season’ means the next round of data, for Jan, will by less reliable (Dec sees a 15% fall in finance approvals and 30% drop in dwelling approvals that is difficult to adjust for). ― By state, purchase attitudes are more subdued in Vic which along with Qld showed a sharper pull-back in Feb. WA and NSW remain strong.

19. ‘Time to buy a dwelling’ vs auction clearance rates
180 160 140 120 100 80
*state indexes weighted by total number of auction sales ^national, seasonally adj. by Westpac, smoothed (Feb-13 is month to date)

index time to buy a dwelling* auction clearance rates (rhs)^


60 Feb-98

Source: APM, RP Data-Rismark, Westpac – Melbourne Institute

85 80 75 70 65 60 55 50 45 40






20. ‘Time to buy a dwelling’ by state
170 150 130 110 90 70 50 Feb-07
Source: Melbourne Institute, Westpac Economics

NSW Vic Qld WA


170 150 130 110 90 70


50 Feb-12







February 2013

Sentiment indicators: risk aversion
― The additional questions on the ‘wisest place for savings’ used to construct the Westpac Consumer Risk Aversion Index were not included in Jan or Feb but will be in the next survey due out on Mar 13. ― The Dec update showed a modest shift away from defensive options in favour of ‘real estate’. The overall position remains highly risk averse though suggesting households maintained their high saving and conservative approach to family finances through late last year. Obviously the latest rally in sentiment may have seen a further relaxation in attitudes. The Mar update will give us a definitive answer. ― The recent strength of the sharemarket could see consumers take a more favourable view of shares. Past market rallies have seen shifts, particularly early on. However, this can often be in the form of a switch between ‘risky’ assets rather than between ‘safe’ and ‘risky’. ― Increased in risk aversion continues to show through in the consumers’ financial holdings. 2012Q3 data shows direct holdings of cash and deposits hit $748bn, a new record. At 77% of annual income this is well above the 50-55% rates recorded in the 1990s and early 2000s. Note that this reflects both higher ‘new’ saving out of current income as well as portfolio shifts.

21. Consumer risk aversion vs household cash & deposits
% %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 Sep-92 Sep-96 Sep-00 Sep-04 Sep-08 Sep-12 84 76 68 60 52 44

22. Westpac Consumer Risk Aversion Index
15 10 5 0 -5 -10
*adjusted for inflation
Sources: Westpac, Melbourne Institute

% nominating 'shares' (ann change, lhs) ASX (ann%, rhs)*


80 60 40 20 0 -20 -40 -60

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


Westpac Institutional Bank

Sentiment indicators: job security
― The Westpac-Melbourne Institute Unemployment Expectations Index was broadly unchanged in Feb, rising 0.1%. This followed a 6.2% decline in Jan. Recall that lower index readings mean fewer consumers expect unemployment to rise in the year ahead. ― Although the Feb update leaves the Index unchanged, it is consistent with the modest trend improvement since Sep last year. The index is 6.6% below its Sep peak and is declining in trend terms at around 1ppt a month. That said, the Index has been very volatile in recent months making the improvement still tentative. More importantly, the level remains very high. ― At 145, the Index reading means those expecting unemployment rate to rise heavily outnumber those expecting it to stay flat or decline. The long run average reading is around 125, with readings above 140 typically only seen during recessions, significant downturns or periods of major structural adjustment in the labour market. ― By state, the last 2mths have shown a significant improvement across mining states, with fears of a ‘hard landing’ for the sector late last year clearly easing. This was offset by a modest deterioration in NSW and Vic (though both are still on an improving trend).

23. Unemployment expectations vs unemployment change
std devns/ppts index 240 Sources: ABS, Westpac-Melbourne Institute unemployment expectations (lhs) 220 actual unemployment rate (annual change, rhs) 200 'labour shedding' composite (rhs)^ 180 160 140 120 100 80 ^based on movements out of employment and total detailed industries reporting employment 60 declines (excl. gross flows prior to 1997), shown as deviation from long run avg 40 Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0

24. 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


NSW Vic Qld WA

200 180 160 140 120 100 80 60

60 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12


February 2013

State snapshot: Western Australia
― A rebound in commodity prices has been a significant contributor to the rally in sentiment since late last year. This shows through clearly in Australia’s most mining-sensitive state, WA. ― Consumer sentiment in WA dropped sharply late last year going against the grain of a modest uptrend nationally. The catalyst was a steep fall in key commodity prices (spot iron ore prices in particular slumped 36% in Jul-Sep) and the scaling back or cancellation of several mining projects. The fear, even more apparent in readings for business confidence, was that mining and thus the state of WA was heading for a hard landing. ― The turnaround since then has been impressive. Spot iron ore prices are back above their preslump levels and the positive wedge between sentiment out west and the rest of Aus has been restored. As at Feb, consumer sentiment in WA is 15pts above the national average. Figures to Jan show business confidence in WA and across the broader mining sector is also back above the national average. ― For WA consumers, the main comfort is around the economic outlook. After dropping to postGFC lows in Nov the sub-indexes tracking WA consumers’ views on the economic outlook are back at the highest levels since Nov 2009.

25. Consumer sentiment & business confidence: WA vs Aus
consumer sentiment business confidence index index 150 WA Aus mining WA Aus 140 130 120 110 100 90 80 *smoothed 70 Source: Melbourne Institute, NAB, Westpac Economics 60 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 150 140 130 120 110 100 90 80 70 60

26. Consumer sentiment: economy, family finances
economic outlook family finances index index 150 140 *smoothed 130 120 110 100 90 80 WA Aus 70 Source: Melbourne Institute, Westpac Economics 60 Feb-99 Feb-02 Feb-05 Feb-08 Feb-11 Feb-99 Feb-02 Feb-05 Feb-08 Feb-11 140 130 120 110 100 90 80 70 60


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 edged down over Nov-Dec to be up only slightly (0.1pt) for 2012 as a whole. Aside for the most recent dip though it has been on a gradual uptrend, implying a shift towards more conservative financial behaviour consistent with continued high savings rates. Note that we view the Barometer more as a directional guide than a point estimate for household savings. ― Among the components, the main driver of the slight downtick in Q4 was a lift in card usage which had shown a moderation in Q3. After tracking at 4-4¼%yr through Q3, growth in the real value of card transactions lifted to 5.3%yr. ― This was partially offset by slightly more conservative behaviour across the other components – the mix of card usage shifted slightly towards debit over credit; Westpac mortgage customers moved marginally further ahead of schedule on their repayments; and Westpac credit card customers were slightly more disciplined with repayments etc. In all cases though the moves were fairly minor.

27. Westpac household barometer
103 102
less conservative

more 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

101 100 99 98 Dec-05
Source: RBA, Westpac Group

6 4 2 0 -2








28. Card transactions vs real spending growth
ann% 12 card transactions (lhs)* 11 10 9 8 7 6 5 4 3 2 *real value of all credit and debit card transactions, rolling 3mth total, seasonally adjusted by Westpac 1 Dec-04 Dec-06 Dec-08 ann% consumer spending (rhs)
Source: RBA, ABS, Westpac

8 6 4 2 0 -2 Dec-12



February 2013

Economic and financial forecasts
Interest rate forecasts
Latest (14 Dec) 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 2.00 3.12 0.75 0.125 1.85 3.00 0.75 0.125 2.20 3.10 0.75 0.125 2.30 3.20 0.50 0.125 2.10 3.30 0.50 0.125 2.00 3.42 0.50 3.00 2.90 3.11 3.55 155 Mar 13 2.75 2.85 3.00 3.25 140 Jun 13 2.75 3.00 3.20 3.60 140 Sep 13 2.75 3.10 3.10 3.50 120 Dec 13 2.75 3.10 3.00 3.30 120 Mar 14 2.75 3.00 2.80 3.10 110

Exchange rate forecasts
Sources: Bloomberg, Westpac Economics.

Mar 13 1.06 0.85 91 1.34 1.25

Jun 13 1.07 0.86 89 1.36 1.24

Sep 13 1.05 0.87 87 1.32 1.21

Dec 13 1.03 0.87 85 1.29 1.18

Mar 14 1.01 0.85 83 1.25 1.19

1.0370 0.8515 92.55 1.3363 1.2175


Westpac Institutional Bank

Economic and financial forecasts
Australian economic growth forecasts
2012 Q2 GDP % qtr Annual change Unemployment rate % CPI % qtr Annual change CPI underlying % qtr ann change 0.6 3.8 5.1 0.5 1.2 0.6 2.1 Q3 0.5 3.1 5.3 1.4 2.0 0.7 2.4 Q4f 0.6 2.9 5.3 0.2 2.2 0.5 2.3 2013 Q1f 0.7 2.4 5.5 0.6 2.7 0.6 2.5 Q2f 0.8 2.6 5.6 0.6 2.8 0.4 2.3 Q3f 0.4 2.6 5.7 0.7 2.1 0.5 2.0 Q4f 0.5 2.5 6.0 0.4 2.3 0.6 2.1

Calendar years 2011 GDP % ann change Unemployment rate % CPI % ann change CPI underlying % ann change 2.4 5.2 3.0 2.8 2012e 3.5 5.3 2.2 2.3 2013f 2.5 6.0 2.3 2.1 2014f 2.3 6.2 2.8 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.


February 2013

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 3.8 6.0 1.8 10.0 2.9 852.2 5.8 Q2 0.7 3.6 4.8 3.4 10.9 4.2 872.1 16.1 Q3 0.3 3.3 2.2 2.2 10.6 3.2 885.0 6.4 Q4f 0.4 3.3 1.6 3.0 10.8 2.6 917.5 9.7 2013 Q1f 0.6 2.1 -0.3 2.9 10.9 1.6 935.9 9.8 Q2f 0.7 2.0 0.0 1.9 10.9 1.0 954.6 9.5 Q3f 0.7 2.4 1.3 2.2 10.4 1.9 973.7 10.0 Q4f 0.8 2.8 1.2 1.4 9.6 2.4 993.2 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 3.0 4.1 2.8 9.9 1.0 828.3 13.7 2011 3.3 4.5 4.5 11.2 0.5 806.3 -2.7 2012f 3.5 3.6 2.6 10.6 3.2 881.7 9.4 2013f 2.3 0.6 2.1 10.4 1.7 954.4 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.


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^ 101.7 89.9 108.5 90.3 90.8 127.9 122.0 122.7 10.7 103.8 48.4 38.7 -25.7 128.1 128.1 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

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 34.2 90.1 -27.4 – – 151.1

Jul 99.1 83.5 88.9 95.8 97.5 130.0 130.8 128.8 – 91.6 – 25.2 – 148.1

Aug 96.6 78.2 91.8 92.8 94.9 125.4 126.3 118.5 – 89.3 0.2 – – 153.7 2013

Sep 98.2 78.4 96.2 93.3 98.1 124.9 126.1 127.6 40.1 89.9 – – -27.6 155.3

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

Nov 104.3 91.8 100.2 96.6 96.8 136.1 137.5 139.8 – 98.4 – – – 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 – 96.4 – 26.7 – 144.9

Feb 108.3 83.5 105.0 108.9 101.0 143.1 140.7 135.4 – 100.1 11.2 – – 145.1 23

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

February 2013

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 Auckland

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

Felix Delbrück Senior Economist Nathan Penny Economist

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



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


Sign up to vote on this title
UsefulNot useful