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The Federal Budget 2013/14

May 2013

Bill Evans Chief Economist

Federal budget: $19.4bn deficit in 2012/13


4 2 0

% of GDP
$bn (rhs)

Underlying cash balance

$bn

Sources: Treasury, ABS, Westpac Economics

40 20 0

% of GDP (lhs)

-2
-3.3

Govt f/cs to 16/17

-20
-40 -60

-4 -6 1981/82

-4.1

-4.2

1991/92

2001/02

2011/12

Revenue, slippage
450 425 400 375
-$20bn

$bn

Total receipts

$bn
-$21bn

450 425

Sources: budget papers, Westpac Economics

May 2012 Four yrs -$83bn

May 2013 -$20bn

400 375 350

-$23bn

350
(a)

325
300 '11/12 '12/13 '13/14 '14/15 '15/16

325
300

General government, net debt


120 100 80 60 40
Australian Government including 2014/15 f/c

% of GDP; 2012

120 100 80 60 40

Source: IMF, budget papers, Westpac Economics

20
0

20
0

Germany

UK

Aus

Canada

Spain

France

US

NZ

Italy
5

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


14 12 10 8 6
4.2 5.8 3.4 2.6 1.7 0.0 0.9 0.0

$bn
11.6

Key savings initiatives


2013/14* over four years
*includes savings in 2012-13

10.7

4
2 0
0.1
0.1

3.1

0.5

0.3

0.0

0.7

1.0

New spending initiatives in the Budget


4 $bn
2013/14*
*includes spending in 2012-13

$bn

3.1
3

3.0

over four years

1.9
1.2 1.0 0.5 0.6

2 0.9 0.6 0.2

0.8

0.2 0
Infrastructure Schools

0.4

0.0
Disability Training Social

0
Health Defence

Government & Westpac forecasts: 2013/14


Government Westpac

World GDP (2014) Aust GDP

4.0 2.75%

3.1% 2.4%

Consumption
Housing Investment Unemployment
Sources: Budget papers, Westpac Economics

3.0%
5.0% 4.5% 5.75%

3.0%
4.7% 0.0% 6.1%

Growth to remain below trend in 2013 and 2014


% chg % chg
GDP growth Long term avg Five year avg

6
4

6
fc/s

2
0
Sources: ABS, Westpac Economics

2
0 -2 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14

-2 Dec-90

Major gas projects: spending near peak


16 $bn
Peak: end 2013, early 2014

$bn
Sources: Westpac Economics, Access Investment Monitor

16

14
12 10 8 6 4

14
12 10 8 6 4

Quarterly* Actual, official data # 3qtr moving avg.


* Westpac estimates # Work on all oil & gas projects

2
0 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16

2
0

10

Business confidence fails to respond to rate cuts


150 index
2001-02 2008-09 2011-12
*index based to 100 in month prior to first rate cut

index

150

140
130 120 110

140
130 120 110

100
90 80 70
Sources: NAB, Westpac Economics

100
90 80 70 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 months

11

CAPEX plans collapse in manufacturing


% chg, yr avg
Mining

% chg, yr avg
History in real terms,

60

Manufacturing Services Total

Expectations in nominal (calculated using avg. realisation ratios)

60

30

30

0
Sources: ABS, Westpac Economics

0
Financial years

-30
2012 2013f 2014f

-30

12

Consumer sentiment finally responds to rate cuts


150 index
2001-02 2008-09 2011-12
*index based to 100 in month prior to first rate cut

index

150

140
130 120 110

140
130 120 110

100
90 80 70
Sources: Melbourne Institute, Westpac Economics

100
90 80 70 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 months

13

Consumers very sensitive to European crises


60 50 40 30
9-11

level of recall: international news items


European sov. debt crisis

60 50 40

Sources: Melbourne Institute, Westpac Economics

Asian crisis

Lehmans collapse

20
10 0

avg last 2yrs: 28%

30 20
10 0

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

14

Household leverage will contain housing excess


180 % Peak in Sep-06
total (gross)
housing

180

160
140 120 100 80

160
140 120 100 80

60
40 20 0 Mar-77
Sources: RBA, Westpac Economics

60
40 20 0 Nov-83 Jul-90 Mar-97 Nov-03 Jul-10

15

Westpac loan book shows consumer caution


120 index
*based on median months ahead Westpac customers are on mortgage repayments

index

110 108 106 104 102 100 98

115
110 105 100 95

90
85 80 Jul-06

increase in months ahead

96 94 92
90

decrease in months ahead

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

16

New housing lending is picking up very slowly


70 60 50 40 30 20 10
f/c to Sep 13
Sources: ABS, RBA, Westpac Economics

$bn/qtr
Housing finance, level (lhs) Annual growth (rhs)

% ann
quarterly

60 50 40

30% 10%

30
20 10

0
-10 -20

0 Mar-99

-30
Mar-08 Mar-11 Mar-14

Mar-02

Mar-05

17

The job market in 2012: winners and losers


75 50 25 0 -25 -50
Education & health Business services* Mining Government Construction

thousands

thousands
Sources: ABS, Westpac. * Professional, technical & business.

75 50 25 0 -25 -50

18

Unemployment rate set to peak mid 2014


66.5 %
unemployment rate (lhs)

%
peak 6.25% mid 2014

65.5

64.5
5 63.5
Forecasts to Dec 2015

62.5 Mar-97

Sources: ABS, Westpac Economics

Mar-01

Mar-05

Mar-09

Mar-13

19

Unemployment rate projections by state


9 8 7 6 5 4 % NSW Vic Qld % 9 8 7 6 5 4
*annual averages, projections assume no change in population growth and participation rates

3
Sources: ABS, Westpac Economics

2 Mar-02

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

20

Durables inflation domestic margin pressure


average annualised inflation since Q1 2011
Household electrical items

Toys, books & leisure goods Consumer prices Motor vehicles & parts Import prices

Furniture

Textiles, clothing & footwear

Source: RBA

-12

-9

-6 ppts

-3

21

Underlying inflation to stay low despite carbon tax


4 %yr
Westpac's estimate of the Carbon Price RBA core inflation

%yr
Sources: ABS, Westpac Economics Target band

3
Forecasts

0 Mar-11

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

22

Housing finance approvals not responding to rates


150 index
2001-02 2008-09 2011-12

index

150

140
130 120 110

140
130 120 110

100
90 80 70
*index based to 100 in month prior to first rate cut Sources: ABS, Westpac Economics

100
90 80

70 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 months

23

House prices are slow to respond to rate cuts


index 130 120 110 100 90 80
*index based to 100 in month prior to first rate cut Sources: RP Data-Rismark, Westpac Economics

index 130 120 110 100 90

2001-02 2008-09 2011-12

80 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 months

24

House Price Expectations finally picking up


100 75 50 25
avg^

%
*grey line is a similar measure from an annual survey by Mortgage Choice; ^average of all observations, adjusted for different survey frequencies

%
net % expecting house prices to rise

100 75 50 25

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

0 -25
-50

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

25

House price expectations boosted in NSW


100 80 % net % expecting house prices to rise NSW Vic Qld % 100 80

60
40 20 0 -20 May-09
Sources: Melbourne Institute, Westpac Economics

60
40 20 0 -20 May-12 May-13

May-10

May-11

26

Sydney house prices have a lot to catch up


240 220 200 index
Sydney Melbourne Brisbane

index

240 220 200

+89%

180
160 140 120 100 80
*all dwellings, Dec 2002 = 100
Sources: RP Data-Rismark, Westpac Economics

180
+82% +33%

160 140 120 100 80 60

60 Dec-02

Dec-04

Dec-06

Dec-08

Dec-10

Dec-12

27

Rental yields are close to mortgage rates


12 11 10 %pa
variable mortgage rate
investor housing boom

%pa
Brisbane Australia
*median rent on 2bdrm unit as % of median unit price

12 11 10

9
8 7 6 5
3yr fixed rate

9
8 7 6 5

4
3 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11
Sources: REIA, Westpac Economics

4
3

28

Investors are responding to rates/yields in NSW


3.0 2.5 2.0 1.5 1.0 0.5 Mar-08
Sources: ABS, Westpac Economics

$bn
Vic Qld NSW
NSW: +33%yr

$bn

3.0 2.5

Vic: +20%yr

2.0 1.5 1.0

Qld: +6%yr

Mar-09

Mar-10

Mar-11

Mar-12

0.5 Mar-13

29

First home buyers are not responding to rate cuts


7 6 thousands NSW Vic Qld thousands 7 6

5
4 3

5
4 3

2
1 0 Mar-08

2
1 0

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

30

House prices: only modest increases expected


116 Sydney 114 Melbourne 112 Brisbane 110 108 106 104 102 100 98 *all dwellings, Dec 2012 = 100 96 Sources: RP Data-Rismark, Westpac Economics 94 Dec-12 Dec-13 index index 116 114 112 110 108 106 104 102 100 98 96 94

Dec-14

31

Office vacancy rates starting to rise


35 30 25 20 15 10 % Sydney Melbourne Brisbane % 35 30 25 20 15 10

5
0 Dec-70 Dec-80 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
Sources: Property Council, Westpac Economics

5
0

32

Commercial property yields still very attractive


15
12 9 6 3
Sources: IPD Australia, Westpac Economics. Income only.

% annual avg
Risk free Office

% annual avg
Retail Industrial

15
12 9 6 3 0

0 Dec-85

Dec-91

Dec-97

Dec-03

Dec-09

33

Last years Budget forecasts the report card

Actual May 12
Cash %pa 3.75

Forecast for May 13


3.25*

Current level
2.75

May-14 forecast
2.00

3yr swap

3.42

4.20

2.90

2.75

AUD/USD

102

105

100^

96

*lowered to 2.75% on May 24 2012 ^trading at 105 Apr 8-12


34

Fixed rates turn sharply time to contain risk now


6 %
2009 2013

3yr swap Cash rate

fcast

3
Source: Bloomberg, Westpac Strategy

2
Jan Apr Jul Oct

Jan

Apr

Jul

Oct

35

World growth WBC forecasts slowdown


2012 (%ann) World US Europe China Australia 3.2 2.2 -0.6 7.7 3.6 2013 (%ann) 3.4 1.7 -0.5 8.0 2.5 2014 (%ann) 3.1 1.6 -0.5 7.8 2.3

36

Policy to slow down Chinese housing sales


200 Sources: CEIC, Westpac Economics. 175 Centre East 150 West 125 100 75 50 25 0 -25 -50 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 %yr
%yr

200 175 150 125 100 75 50 25 0 -25 -50

37

Chinese infrastructure spending to slow down


50 40 30 20 10
3 28 22 16

ppt cont.
Transport Utilities Total 42 forecast 26

23
19 18 6

0
Sources: CEIC, Westpac. Contribution to full year growth. * Railways, airports, mass urban transit, pipeline, waterways.

-10 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

38

Chinese construction cycle slowdown coming


40 %yr
Sources: CEIC, Westpac Economics.

%yr

30

20

10
%yr 3mma

0 Jan 05

Jul 06

Jan 08

Jul 09

Jan 11

Jul 12

Jan 14

39

Europe: unemployment continues to rise


30 25 %
France Italy

unemployment rate
Spain Netherlands

30 25

20
15 10 5
Source: Eurostat

20
15 10 5 0

0 1995 1997 1999 2001 2003 2005 2007 2009 2011

40

Germany and France core diverging rapidly


12
% unemployment rate %

12

10

10

Germany

France

4 1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: Eurostat

41

Troubled economies banks just not lending


35 30 25 20 ann%
Euro area 'troubled' economies the rest

ann%

35 30 25 20

15 10 5 0 -5 *private sector, 6mth annualised growth rate -10 ^Spain, Italy, Portugal, Ireland and Greece combined Sources: IMF, Westpac -15 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10

15 10 5 0 -5 -10 -15 Jul-12

42

Gross debt ratios keep rising ratings risks


% of GDP

140

Spain

Italy

France

120
100 80 60 40 20
Source: IMF, Westpac Economic growth forecasts

0 1991 1999 2007 2015

43

Sovereign risk ratings Spain/Italy on the cusp !


Current 2011/12 peak Rating Outlook

France

1.0%

3.4%

AA+

Neg

Italy

3.1%

7.7%

BBB+

Neg

Spain

3.4%

7.6%

BBB

Neg

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

44

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


1.4 1.2 1.0 0.8 0.6 0.4 trn
Sources: IMF, Bloomberg. Westpac Economics. *Marketable debt only.

0.2 0.0
France Germany Greece Ireland Italy Portugal Spain

45

US unemployment falls due to part. rate, not jobs


12 10 8 6 60 4 2 0 1970
Sources: Ecowin, Westpac Economics

68

66
64 62

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

58

56
54

1980

1990

2000

2010

46

US consumption growth is slowing again


20 % annual change %
Sources: Ecowin, Westpac Economics

15
10 5

6
4 2

0
-5 -10
PCE total m/m chg Dec: 0.2% Jan: 0.2% Feb: 0.3% Mar: 0.3%

0
-2 -4

-15
Durables (lhs) Services (rhs) Non durables (rhs)

-6
-8 1999 2001 2003 2005 2007 2009 2011 2013

-20 1997

47

US house prices no longer booming


3 2 1 0 -1
monthly change (lhs)

20-city S&P Case-Shiller Index

30 20 10 0 -10

-2 -3 Jan 01

6 month ann change (rhs)


Source: Ecowin

-20 -30

Jan 03

Jan 05

Jan 07

Jan 09

Jan 11

Jan 13

48

US commercial banks not supporting housing


2.5 $trn
Mortgages (lhs)

$trn
Sources: Federal Reserve

4.0

2.0

Treasury & MBS


C&I loans

3.5

1.5

3.0

1.0

Mortgage charge offs circa $28bn in 2012; rise in mortgage balance past year $12bn, but GSEs down $95bn.

2.5

0.5 Dec-02

2.0
Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

49

Fiscal policy still a drag new policies next year ?


4 % drag on GDP growth in calendar year Fiscal cliff (without deal) 3 Sequester % 4

January deal
Source: CBO; Westpac Economics

0
2013 2014

50

Commodity prices will fall through 2014


700 600 index
Bulks* (lhs) Exchange traded* (rhs)

index 350 300 250 200 150 100 Mar-13

500
400 300 200 100 Mar-07
Sources: Westpac Economics, Bloomberg, ABS. Bulks includes iron ore and coal. Exchange traded includes rural, crude oil, base metals and gold.

Mar-09

Mar-11

51

Farm commodity prices lag non-rural prices


600 500 index
Sources: Westpac Economics, Bloomberg

index
Farm commodities Non rural commodities

600 500

400
300 200 100

400
300 200 100

0 Mar-90

0
Mar-94 Mar-98 Mar-02 Mar-06 Mar-10 Mar-14

52

Farm commodity prices hit hard by AUD


260 220
In USD In AUD

index
Sources: Westpac Economics, Bloomberg

index

260 220

180
140 100 60

180
140 100 60

20 Mar-90

20
Mar-94 Mar-98 Mar-02 Mar-06 Mar-10 Mar-14

53

Major central banks are committed to QE


50 40
ECB Fed BOJ

%GDP
Sources: Ecowin, Bloomberg, CEIC, Westpac Economics
Indicative forecasts

%GDP

50 40 30 20 10 0

30 20 10 0 Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

54

Australian dollar to fall but retain QE premium


1.20 1.10 1.00 USD
Fair value band AUD/USD actual & forecast
Sources: RBA, Westpac Economics

USD

1.20 1.10 1.00

0.90 0.80
0.70 0.60 0.50

0.90 0.80
0.70 0.60

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

0.50 0.40 Jan-11

0.40 Jan-91

Jan-95

Jan-99

Jan-03

Jan-07

55

2012 Budget talk: QE3 to support market


3.0 2.5 2.0 $trn
S&P500* (rhs) Federal Reserve: securities held (lhs)
*S&P500 March 2009 low = 100

Index

225 200 175

1.5
150 1.0 0.5
QE1
Source: Ecowin, Bloomberg, Westpac Economics

Operation twist announced

QE2

125
100

0.0 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11

Aug-11 Feb-12

56

US sharemarket has outperformed Australia


130 110 90 70 50
Sources: Bloomberg, Westpac Economics

index
2 Jan 07 = 100

index
S&P500 S&P200 Euro Stoxx 50

130 110 90 70 50 30

30 Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

57

... but not in AUD terms; Europe woeful


130 110 90 70 50
Sources: Bloomberg, Westpac Economics

index
2 Jan 07 = 100

index
S&P500 S&P200 Euro Stoxx 50

130 110 90 70 50 30

30 Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

58

MSCI P/E ratios market is no longer cheap


15 10 5 0
expensive

points

deviation from long-run average


Australia US Europe

points

15 10 5 0

-5
-10
Source: Bloomberg (MSCI indexes)

-5
cheap

-10 -15

-15 Jan-96

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

59

Australian P/E ratios; resources better banks


20 15 points deviation from long-run average
Financials Materials expensive

points

20 15

10
5 0

10
5 0

-5
-10
Source: Bloomberg (MSCI indexes)

-5
-10
cheap

-15 Jan-96

-15

Jan-99

Jan-02

Jan-05

Jan-08

Jan-11

60

Key messages from Budget presentation


Forecast budget deficits are not significant Australia has very low sovereign debt ratio; especially with most debt issued in AUDs. RBA to cut to 2% from 2.75% but fixed rates near lows right now.

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


House prices to rise but household leverage to contain any boom. Second wave of cuts to be associated with weak world economy. Low inflation allows rate flexibility for the authorities. Commodity prices to fall AUD to USD 0.96 by mid 2014. World economy to slow in 2014 US to disappoint keep QE; China slows construction cycle; Europe remains in recession.

61

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The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments. The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates. For the purposes of Regulation AC only: Each analyst whose name appears in this report certifies that (1) the views expressed in this report accurately reflect the personal views of the analyst about any and all of the subject companies and their securities and (2) no part of the compensation of the analyst was, is, or will be, directly or indirectly related to the specific views or recommendations in this report. For XYLO Foreign Exchange clients: This information is provided to you solely for your own use and is not to be distributed to any third parties. XYLO Foreign Exchange is a division of Westpac Banking Corporation ABN 33 007 457 141 and Australian credit licence 233714. Information is current as at date shown on the publication. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. XYLO Foreign Exchanges combined Financial Services Guide and Product Disclosure Statement can be obtained by calling XYLO Foreign Exchange on 1300 995 639, or by emailing customercare@XYLO.com.au.