The Red Book

May 2013

Westpac Economics with the Institutional Bank.

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

May 2013

Contents

Executive summary The consumer mood: Budget blues Sentiment indicators: spending Special topic Budget reaction Sentiment indicators Durables, cars Housing Risk aversion Job security State snapshot: NSW Westpac household barometer Summary forecast tables Economic & nancial forecasts Consumer data and forecasts

4 6 8

10

12 13 14 15 16 17

18 20

The Westpac Red Book is produced by Westpac Economics Editor: Matthew Hassan Internet: www.westpac.com.au Email: economics@westpac.com.au This issue was nalised on 24 May2013 The next issue will be published on 14 June 2013

May 2013

Executive summary
The WestpacMelbourne Institute Index of Consumer Sentiment fell 7% in May, extending Aprs 5.1% decline to completely reverse the gains earlier in the year. At 97.6, the Index is back in cautiously pessimistic territory for the rst time since Oct with sentiment at its lowest ebb since Aug last year. The main driver this month appears to be a negative reaction to the Budget and concerns about the economic outlook. This more than oset any positive boost to sentiment from the RBAs decision to lower interest rates 25bps at its May meeting and other positives in the month around retail sales, jobs, equity markets and house prices. A specic Budget question added to this months survey shows 46% of consumers expect it to have a negative impact on their nances, a signicantly more negative response than seen when the question was run in 2010, 2011 and 2012. Aside from its direct nancial impact, consumers would also have been concerned by the rapid deterioration in the Governments nances, what this may imply about economic conditions and the economic impacts of policy changes. The May fall in sentiment was broad-based but saw particularly big declines in the sub-index tracking views on the near term outlook for the economy (13.4%) and amongst consumers in the mining states of WA and Qld. This suggests some of the increased concern around the economy may come from actual developments on the ground in exposed states. CSI , our modied consumer sentiment indicator, which includes the Westpac Risk Aversion Index, was less impacted by the May fall but is still down sharply over the last 2mths (7.5%). The measure now points to per capita consumption contracting at a 0-% annual rate implying annual growth in total consumption of 1-1.3%yr. The sub-indexes tracking time to buy a major household item, time to buy a vehicle and time to buy a dwelling were all more resilient than other parts of the survey in May. The time to buy a major item index remains near its long run average. The time to buy a vehicle and time to buy a dwelling indexes actually rose in May with both well above their long run averages reecting strong aordability levels. The RBAs May interest rate cut clearly provided a boost. Unemployment expectations showed a signicant deterioration in May as well with a 5.4% fall building on Aprs 1.3% decline. Consumers fears of job loss are below their 2012 peaks but are still at historically high levels. Notably, the deterioration in May was driven by consumers in the mining states of Qld and WA which have also seen a more abrupt slowdown in their labour markets since the start of the year.

Westpac Institutional Bank

Consumer spending: stop-start year of sub-par growth

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 Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 ann%
Westpac forecasts

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

Dec-12

After stumbling in Apr, the Westpac Melbourne Institute Consumer Sentiment Index fell more heavily May. The 7.0% decline is only marginally worse than last months 5.1% decline but it reverses all of the promising gains seen earlier in the year and takes sentiment back into pessimistic territory below 100. It also comes despite the RBA lowering the cash rate by a further 25bps at its May meeting. Any positive bump to condence from the RBA move appears to have been run over by negative sentiment around the Federal Budget and concerns about the economic outlook. The negative Budget reaction would have reected not just dissatisfaction with the Budget itself the absence of election year sweeteners and a range of savings measures but also concern about the rapid deterioration in the scal position and what that may imply about the economy.

The key issue is whether the May fall is a short term knee-jerk reaction to a Budget that will be forgotten in a couple of months, or whether it is part of a more deep-seated deterioration that will linger for longer. There are some clues in the detail that suggest condence may remain weak. The sharp downgrade to near term expectations for the economy and the more pronounced deterioration in both sentiment and unemployment expectations in the mining states suggests the May fall may be due to actual economic developments. The eects of the mining downturn in particular may be becoming more apparent. Labour markets have already shown a more pronounced slowdown in Qld and WA and consumers may be starting to see more tangible impacts. At the very least, the sharp fall in sentiment in May re-emphasises the fragility of condence in the household sector and suggest the RBA still has more work to do.
5

May 2013

The consumer mood: Budget blues

The Westpac-Melbourne Institute Consumer Sentiment Index fell 7.0% in May from 104.9 in Apr to 97.6. This follows a 5.1% decline in Apr and takes the Index into negative territory where pessimists outnumber optimists for the rst time since Oct 2012. The last two months has seen sentiment more than reverse the promising 10.5% rally between Jan and Mar. The sharp fall came despite the RBAs move to cut the cash rate by a further 0.25% at its May meeting, taking it to a new historical low. All banks reduced their standard variable mortgage rates in line with the move with one major even topping up the reduction with a 0.27% decline. Normally, in the absence of other major events, an interest rate cut could be expected to give about a 2% bump to sentiment. This month however, that eect has been overridden by concerns surrounding the Federal Budget. As in past years, the May survey was delayed to capture reactions to the Budget with an extra question on the expected impact of the Budget on family nances. Responses to this show a sharply negative reaction (details p10). The fall in sentiment overall would reect not only the expected impact of the Budget on family nances but also the sharp deterioration in the scal position and fears about the economy.

1. Consumer sentiment slides

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

index

index

130 120

long run average

110 100 90 80 70 60

60 May-83

May-88

May-93

May-98

May-03

May-08

May-13

2. Consumer sentiment: pre and post Budget

140 130 120 110 100 90 80 70 60 consumer finances finances economy sentiment vs year ago next 12mths next 12mths economy next 5yrs time to buy a major item net% April May - pre-Budget May - post-Budget
Source: Westpac-Melbourne Institute

net%

140 130 120 110 100 90 80 70 60

Westpac Institutional Bank

The pattern of responses over the survey week shows sentiment a touch higher post-Budget (though still down sharply on Apr). Although we do not know what consumers were expecting, the slight lift suggests the Budget may have been less negative than feared. In particular, the projected surplus in 2016-17 may have surprised given speculation of decits for the foreseeable future. However, the $19.4bn decit for 2012-13 was weaker than most anticipated. The main exception to the post-Budget lift component-wise was the sub-index tracking views on the 12mth economic outlook. This fell over the survey week and was down 13.4%mth.

Aside from the Budget, the RBAs rate cut, which came as something of a surprise, and a sharp slide in the AUD (down 5c vs the USD between surveys) may also have sparked renewed concerns about the economy. The mining slowdown may also be starting to have a clearer real impact unemployment expectations have been weakened sharply in Qld & WA since Mar. Other positives retail sales, jobs, sharemarket gains (ASX +6% between the Apr and May surveys), and rising house prices were clearly gazumped by these negatives. The Budget blues may fade in coming months but the detail suggests sentiment weakness will linger.

3. Consumer sentiment vs unemployment expns: by sub-group

115 110 105 100 95 90 85 80 75 70 consumer sentiment
labourers managers/professionals SA Tas *May 2013 ^scale reversed (higher readings are more pessimistic on jobs)
Source: Melbourne Institute, Westpac

tenants

mortgagors NSW

Qld primary education

sales/clerical workers 18-24 year olds

unemployment expectations^ 160 140 120 100

115 110 105 100 95 90 85 80 75 70

200

180

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 0.9 0.2 +1.5 +1.1 RBA easing cycles, (figures are 3mth change after last cut) +1.3 +1.0 +1.2 +1.2

st devns 2.5 1.5 0.5 -0.5 -1.5 -2.5

consumer sentiment unemp. expectations^

Sources: Melbourne Institute, RBA, Westpac

-3.5 -3.5 May-94 May-96 May-98 May-00 May-02 May-04 May-06 May-08 May-10 May-12 May-14

May 2013

Sentiment indicators: spending

CSI , our modied index which excludes economic questions and includes the Westpac Risk Aversion Index , fell 4.1% in May. The index has been less inuenced by both the rally in sentiment in the rst three months of the year and the decline in Apr-May. Net-net, CSI is down 4.1% so far in 2013 but is comfortably above the very weak reads seen through the rst three quarters of 2012. The main caveat on this is that the risk aversion component of the CSI is only updated quarterly. The next update is in Jun and if risk aversion rises which seems a reasonable starting assumption CSI will be marked lower. As it stands, the CSI already points to contracting demand. Current levels are consistent with total per capita consumer spend declining at a 0-% annual pace and per capita real retail sales growth of just %yr. Population growth is current tracking at 1.8%yr. That implies total spending growth of 1-1.3%yr and real retail sales growth of 2-2.5%yr. Despite the weak forward view, Q1 looks to have been a strong one for consumer spending. Real retail sales rose 2.2%qtr to be up 3.6%yr. Following a half year in which sales volumes were at, the Q1 rise was bigger than the previous three quarters combined.

5. CSI vs total consumer spending

30 20 10 0 -10 -20 -30 Dec-77
Source: Melbourne Institute, ABS, Westpac Economics

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

ann%
Westpac forecast

*consumer sentiment plus risk aversion minus economic questions, devn from long run avg, smoothed, adv. 6mths; ^real, per capita

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

Dec-82

Dec-87

Dec-92

Dec-97

Dec-02

Dec-07

Dec-12

6. CSI vs retail sales

30 20 10 0 -10 -20 -30 Mar-88
*consumer sentiment plus risk aversion minus economic questions, deviation from long run avg, smoothed
Source: Melbourne Institute, ABS, Westpac Economics

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

ann%
Westpac forecast

10 8 6 4 2 0 -2 -4

Mar-93

Mar-98

Mar-03

Mar-08

Mar-13

Westpac Institutional Bank

Last months Red Book noted that Q1 retail volumes were already on track to be up over 1% and lifted our Q1 estimate for consumption from 0.6% to 0.8%qtr. With volumes now showing a 2.2%qtr gain we have raised our Q1 estimate further to 1.2%qtr. Despite this, the gures are not as rosy as they seem. Nominal sales momentum waned over the quarter, declining 0.4% in Mar after 1.3% gains in Jan and Feb. More importantly, volume gains appears to have come via aggressive pricing. Retail prices fell 0.6%qtr in Q1, the biggest fall since Q1 2012 and, prior to that, since 1999. Annual retail ination is running at just 0.1%yr.

Some of the decline in retail prices is due to lower upstream costs and a high AUD. However, some also appears to be due to heavy discounting as retailers and wholesalers facing erce competition and soft demand sacrice margins in order to retain volumes. This would explain the more downbeat view from retailers on prots and business conditions and is questionable in terms of sustainability. Other indicators are much weaker. In particular, our composite indicator of cyclical spending, which combines car sales, outbound tourist spending and the cyclical sub-components of retail points to a sharp slowdown since Nov.

7. Quarterly retail volumes and prices

9 6 3 0 -3 Mar-06
Sources: ABS, Westpac Economics

%ann prices (rhs) volumes (rhs) volumes, ann% (lhs)

%qtr
fiscal payments floods & cyclone fiscal payments

4.5 3.0 1.5 0.0 -1.5

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Mar-13

8. Composite indicator of cyclical spending

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

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

30 20 10 0

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

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

-10
last 6mths

-20 -30

Apr-98

Apr-01

Apr-04

Apr-07

Apr-10

Apr-13

May 2013

Special topic: Budget reaction

The May survey was delayed a week to capture reactions to the Federal Budget delivered on May 14. It also included an extra question on the expected Budget impact on family nances over the year ahead. The results show a sharply negative response: 45.6% of consumers see the Budget making them worse o with only 5.6% seeing it as improving their position. The balance, 48.7%, expected no net impact. There was a signicant variation in responses received before and after Budget night though. The Budget itself appears to have been somewhat less negative for nances than those reporting prior had feared. We have run this question since 2010 and this years response is easily the most negative. The same question in 2011 and 2012 found just under 40% reporting a negative impact and 30% in 2010 with included tax relief measures. By state, the expected nancial impact was more negative for consumers in Vic and Qld and those in WA expected a more negative impact than previous Budgets. Those in NSW and SA viewed the 2013 Budget negatively but no more so than in previous years. By sub-group, the biggest downgrades vs last year were amongst under-35s and the mortgage belt. Others expected a similar impact to previous years.

9. Westpac-MI Consumer survey: Budget impact

70 60 50 40 30 20 10 0 pre-Budget post-Budget 2010 2011 2012 2013 2013 2013 % expected Budget impact on family finances next 12mths* improve stay the same worsen %
Source: Westpac-Melbourne Institute

70 60 50 40 30 20 10 0

10. Westpac-MI: expected Budget impact by state

0 -10 -20 -30 -40 -50 -60 Aus 2010 2012 NSW 2011 2013 Vic Qld
*net percent expecting positive impact
Source: Westpac-Melbourne Institute

net%

expected Budget impact on family finances next 12mths*

net%

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

SA

WA

10

Westpac Institutional Bank

The mix of reactions reects exposure to the Budgets main savings measures: a ppt increase in the medicare levy and increase in safety net threshold; reduced funding for tertiary education; the scrapping of a planned increase in family benet payments and carbon tax compensation; and the scaling back of other family payments including the baby bonus. Consumers expectations around the impact on their nances is only one aspect of the Budgets impact on sentiment. The revealed deterioration in the Governments nances and what this implies about the state of the economy would also have rattled sentiment.

The expected inuence of changes in Budget policy on the economy going forward may also be a factor. A similar survey conducted by Newspoll shows a net negative assessment on this count as well but views are more evenly balanced: 46.8% expect the Budget to be bad for the economy vs 44.3% expecting it to be good. The long history of the Newspoll survey allows broader comparisons. Budget 2013 is viewed as the most negative for the economy since 1995. On nances, Budget 2013 is viewed as the most negative since 2002. But on both counts 2013 is viewed less negatively than the extremes seen in the early 1990s.

11. Westpac-MI: expected Budget impact by sub-group

20 10 0 -10 -20 -30 -40 -50 -60 -70 net % age group 2010 2011 2012 2013 housing tenure net % 20 10 0 -10 -20 -30 -40 -50 -60 -70 $ pa

*net percent expecting Budget to have positive impact on family finances next 12mths

Source: Westpac-Melbourne Institute

18-24

25-34

35-44

45-49

50-54

55-64

65+

rent mortgage own

12. Newspoll survey: expected Budget impact

net% net% 100 80 impact on family finances - next 12mths impact on economy 60 40 20 0 -20 period avg -40 -60 *net percent expecting positive impact -80 Source: Newspoll, The Australian, Westpac -100 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 100 80 60 40 20 0 -20 -40 -60 -80 -100

11

May 2013

Sentiment indicators: durables, cars

The sub-index tracking views on time to buy a major item posted a mild 1.3% dip in May. However, that followed a sharp 7.6% fall last month with the index near its long run average. Household goods retail sales posted a 3.7% jump in Q1 to be up 5.6%yr, the strongest growth rates since 2007. That previous high was set after 7yrs of double-digit growth though, Despite the latest burst, sales continue to lag sentiment by a long way. The time to buy index seems to be reecting strong aordability, due in part to the high AUD, rather than an intention to buy. The recent dramatic slide in the currency may see that change in the months ahead. The sub-index tracking views on time to buy a vehicle posted a slight rise in May, up 1.2% and well above the its long run average. As with the time to buy a major item index, the strength reects record levels of aordability both from AUD-driven declines in imported vehicle prices and low nancing costs. New vehicle sales have slowed in recent months. Passenger vehicle and SUV sales rose 4% in the year to Apr but trend sales have been at/declining since Nov. Job loss fears may be holding buyers back although aordability has been a powerful inducement in recent years, over-riding spikes in job fears in 2011 and 2012.

13. Time to buy a major item vs household goods retail

30 20 10 0 -10 -20 -30 -40 -50 Mar-86 Mar-89 Mar-92 Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13
time to buy a major item (adv 3mths, lhs)* real per capita household goods retail sales (rhs)
last 6mths

index*
*deviation from long run average, smoothed

%ann
Sources: Melbourne Institute, ABS, Westpac Economics

24 20 16 12 8 4 0 -4 -8

14. Time to buy a car vs new vehicle sales

40 30 20 10 0 -10 -20 -30
*advanced 6mths ^trend per capita, passenger and SUVs only GST introduction (car prices fall) Japanese earthquake hits supply

index
'time to buy a car' (lhs)* new vehicle sales (rhs)^

ann%
Sources: ABS, Melbourne Institute, Westpac Economics

30 20 10 0 -10 -20 -30

-40 Apr-91

Apr-95

Apr-99

Apr-03

Apr-07

Apr-11

12

Westpac Institutional Bank

Sentiment indicators: housing

The index tracking views on time to buy a dwelling fell heavily in Apr, dropping 11.1%, but popped straight back up in May, showing a clear positive response to the RBAs rate cut. The Apr drop was led by those in younger age groups which also accounted for much of the weakness elsewhere in the Apr survey. The trigger seemed to be speculation that interest rates could rise by year end, a disheartening prospect for prospective rst home buyers or recent entrants contemplating increased mortgage repayments. Reductions in state government support for rst home buyers would also have weighed on sentiment. The RBAs May rate cut would have quashed rate rise fears, and May does show a strong bounce in time to buy a dwelling assessments by those in younger age groups. Looking through recent volatility, the time to buy a dwelling index has been sustained near historical highs since late last year. The shift in mood is now apparent in auction markets which have seen a signicant lift in clearance rates in 2013 to above average levels. The recovery in nance and dwelling approvals remains more uneven. Our modelling indicates elevated job loss fears are a key restraining factor here with the mix pointing to growth in the 5-10% range.

15. Time to buy a dwelling by state

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

index
NSW Vic Qld WA

index

170 150 130 110 90 70

*smoothed

50 May-13 May-08 May-10 May-12

May-09

May-11

16. Model of housing nance approvals

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

Mar-13

13

May 2013

Sentiment indicators: risk aversion

The wisest place for savings questions used to construct the Westpac Consumer Risk Aversion Index were not included in the May survey but will be in Jun. The Jun update will be of intense interest given the multitude of forces operating on the consumer. The Jun quarter alone has so far seen: another rate cut from the RBA, taking most deposit rates to new post-GFC lows; volatile swings in equities, with the ASX hitting a new post-GFC high but pulling back in May; a sharp slide in the AUD, down over 6 to well below parity; and more signs of a pick-up in local housing markets, albeit a patchy one. However, its the deterioration in consumer sentiment itself that probably provides the best guidance to what risk aversion may be doing. While levels frequently diverge, there is a clear correlation between changes in the Westpac Consumer Risk Aversion Index and both the headline Westpac-Melbourne Institute Consumer Sentiment Index and the Westpac-Melbourne Institute Unemployment Expectations Index (see chart 18). As such the slide in sentiment through AprMay already points to a rise in risk aversion. That is the message coming from the Westpac household barometer as well (see p17).

17. Westpac Consumer Risk Aversion Index: full history

25 20 15 10 5 0
Sources: ABS, Westpac, Melbourne Institute

%
household savings rate (lhs) Westpac consumer risk aversion index (rhs)

80 60 40 20 0 -20

-5 -40 Dec-72 Dec-77 Dec-82 Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 Dec-12

18. Consumers: change in risk aversion vs change in sentiment

ppts 50 Westpac consumer risk aversion index (lhs) 40 consumer sentiment (rhs) 30 20 10 0 -10 -20 -30 rising risk aversion/falling sentiment -40 falling risk aversion/rising sentiment -50 Mar-78 Mar-83 Mar-88 Mar-93 Mar-98 ppts
*qtly, annual change
projection if May level sustained

Sources: Westpac, Melbourne Institute

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

Mar-03

Mar-08

Mar-13

14

Westpac Institutional Bank

Sentiment indicators: job security

The Westpac-Melbourne Institute Unemployment Expectations Index rose 5.4% in May following a 1.3% rise in Apr. Although not as sharp as the decline in sentiment overall, the rise still marks a signicant deterioration in consumers labour market outlook, which was coming from a soft starting point. Recall that a lower index reading means fewer consumers expect unemployment to rise and vice versa. At 149.1, the index is below last years peaks it was well above 150 through much of the second half of 2012 but is still very weak, surpassed only by readings during the GFC and the recessions of the early 1990s and early 1980s. The state detail shows the mining states, Qld and WA, werehave been the prime movers over the last two months. Unemployment expectations have jumped 15% across these states compared to a 2.1% rise across the nonmining states combined. Moreover, the deterioration in mining states seems to reect changing conditions on the ground rather than just fears. The mining states have seen a sharp slowdown in jobs growth over the last year. While about at elsewhere, total hours worked are now falling in Qld and WA. That suggests the latest deterioration in unemployment expectations will be sustained.

19. Unemployment expectations vs hours worked

4 3 2 1 0 -1 -2
Sources: ABS, Westpac-Melbourne Institute

std devns unemployment expectations (adv. 4mths, lhs) total hours worked (rhs)

ann%*
*scale reversed

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

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

20. Unemployment expectations vs hours: mining, non-mining

4 3 2 1 0 -1 -2 -3
Source: Melbourne Institute, Westpac Economics

st devn

non-mining states

mining states

st devn

unemployment expectations* hours worked, ann change

4 3 2 1 0 -1 -2

-4 -4 May-97 May-01 May-05 May-09 May-13 May-97 May-01 May-05 May-09 May-13 May-17

std devns from long run avg *smoothed

-3

15

May 2013

State snapshot: NSW

NSW consumers have shown a notable divergence from their interstate peers in recent months. Headline sentiment, which usually shows little regional variation, has been much rmer in NSW. It did fall in May, but at 1.5% the decline was minor compared to the 7.6% drop nationally. NSW is the only state where optimists still outnumber pessimists. The main source of resilience in NSW is around family nances, with assessments improving 3.4% in May vs the 7.4% drop nationally. Views on the economy were down sharply but were also more resilient in NSW than the rest of the nation. Responses on time to buy questions have been more in line with the national measures but unemployment expectations are much lower (about 12% below the rest of Australia). NSW is outperforming due to a relatively low exposure to the mining slowdown. Its housing market has also shown a stronger response to lower interest rates with a recovery clearly underway. Indeed, much of the strength is concentrated in Sydney with sentiment across consumers based in the capital city virtually unchanged in May and unemployment expectations actually improving month to month.

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

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

index
NSW

sentiment
rest of Aus
*smoothed

finances^
^avg of family finances vs a year ago and family finances next 12mths

economy^

index

^avg economic outlook next 12mths and next 5yrs

140 130 120 110 100 90 80 70

70 May-04

May-09

May-04

May-09

May-04

May-09

22. Consumer views on time to buy: NSW vs Aus

index major item 160 140 120 100 80
*smoothed
Source: Melbourne Institute, Westpac Economics

vehicle

dwelling

index 160 140 120 100 80 60

NSW

rest of Aus

60 May-04

May-09

May-04

May-09

May-04

May-09

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 nancial behaviour. The latest update, incorporating card data to Mar and customer data to Apr, point to a signicant shift towards more conservative behaviour consistent with a rise in the household savings rate. The Barometer has risen 0.7% since Dec, posting the biggest 6mth gain since the rst half of 2009, when households savings rates rose dramatically. All components have contributed to the rise. However, by far the biggest driver has been a sharp drop-o in card usage. According to RBA data, the total value of credit and debt card transactions in the 3mths to Mar was up 4.4% on a year ago, the weakest annual growth on records back to the mid-90s. Transaction growth has averaged 9%pa over the last decade and 7.6%pa in the 5yrs since the GFC. That abrupt slowdown is a little puzzling given the apparent strength of spending in Q1. With ABS data showing retail volumes up 2.2%, we estimate total spending was up 1.2%qtr although annual growth is still weak at 2.4%yr.

23. Westpac household barometer

03.5 02.0 00.5 99.0 97.5 Dec-05
Source: RBA, Westpac Group

index
more conservative less conservative

14 12 10 8 6 4 2 0 -2

Westpac household barometer (lhs)* household savings ratio (rhs)

*based on: card transactions, mortgage prepayments; credit card usage; and card debt repayment behaviour

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

24. Card transactions vs real spending growth

ann% 12 card transactions (lhs)* 11 10 9 8 7 6 5 4 3 value of all credit and debit card transactions, 2 *real rolling 3mth total, seasonally adjusted by Westpac 1 Dec-04 Dec-06 Dec-08 ann% consumer spending (rhs) 8 6
WBC est for Q1

4 2 0

Source: RBA, ABS, Westpac

-2 Dec-12

Dec-10

17

May 2013

Economic and nancial forecasts

Interest rate forecasts
Latest (24 May) 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 3.44 0.50 0.125 2.00 3.49 0.50 0.125 2.20 3.75 0.50 0.125 2.10 4.00 0.50 0.125 2.00 4.26 0.50 0.125 1.80 4.51 0.50 2.75 2.80 2.95 3.32 132 Jun 13 2.50 2.55 2.80 3.20 120 Sep 13 2.50 2.55 2.80 3.40 120 Dec 13 2.25 2.30 2.75 3.25 115 Mar 14 2.00 2.10 2.65 3.10 110 Jun 14 2.00 2.10 2.75 2.85 105

Exchange rate forecasts

Latest (24 May) AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD
Sources: Bloomberg, Westpac Economics.

Jun 13 0.98 0.82 100 1.30 1.20

Sep 13 1.00 0.84 99 1.31 1.19

Dec 13 0.99 0.85 98 1.29 1.16

Mar 14 0.97 0.85 97 1.25 1.14

Jun 14 0.96 0.84 96 1.24 1.14

0.9670 0.8085 101.65 1.2920 1.1960

18

Westpac Institutional Bank

Economic and nancial forecasts

Australian economic growth forecasts
2012 Q2 GDP % qtr Annual change Unemployment rate % CPI % qtr Annual change CPI underlying % qtr ann change 0.6 3.7 5.1 0.5 1.2 0.6 2.2 Q3 0.7 3.1 5.3 1.4 2.0 0.7 2.5 Q4f 0.6 3.1 5.4 0.2 2.2 0.6 2.4 2013 Q1f 0.7 2.6 5.5 0.4 2.5 0.4 2.4 Q2f 0.8 2.8 5.6 0.4 2.4 0.5 2.3 Q3f 0.5 2.6 6.0 0.7 1.7 0.5 2.0 Q4f 0.5 2.5 6.2 0.4 2.0 0.6 2.0

Calendar years 2011 GDP % ann change Unemployment rate % CPI % ann change CPI underlying % ann change 2.4 5.2 3.0 2.8 2012e 3.6 5.4 2.2 2.4 2013ff 2.5 6.2 2.0 2.0 2014f 2.3 6.0 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.

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May 2013

Consumer data and forecasts

Consumer demand
2012 % change Total private consumption* annual chg Real labour income, ann chg Real disposable income, ann chg** Household savings ratio Real retail sales, ann chg Motor vehicle sales (000s)*** annual chg Q3 0.2 3.0 2.3 2.0 10.3 3.2 882.8 6.4 Q4 0.2 2.8 2.3 1.8 10.1 2.6 910.9 9.4 2013 Q1e 1.2 2.4 1.2 2.2 9.8 3.6 895.8 4.5 Q2f 0.6 2.3 1.6 1.6 10.2 1.9 868.9 -0.6 Q3f 0.7 2.8 2.7 2.5 10.2 2.4 851.5 -3.5 Q4f 0.8 3.3 1.6 2.7 9.7 2.6 868.6 -4.6 2014 Q1f 0.7 2.8 0.9 2.4 9.6 1.2 885.9 -1.1 Q2f 0.8 3.0 1.0 2.2 9.6 2.4 903.6 4.0

Calendar years 2011 Total private consumption, ann chg* Real labour income, ann chg Real disposable income, ann chg** Household savings ratio, % Real retail sales, ann chg Motor vehicle sales (000s) annual chg 3.3 4.5 4.5 11.0 0.5 806.3 -2.6 2012 3.2 3.7 2.1 10.2 3.2 881.3 9.3 2013f 2.7 1.8 2.3 10.0 2.6 840.3 -4.6 2014f 3.1 1.4 2.4 9.5 2.6 909.6 8.2

Notes to pages 20 and 21: * National accounts definition. ** Labour and nonlabour income after tax and interest payments. *** Passenger vehicles and SUVs, annualised ^ Average over entire history of survey. ^^Seasonally adjusted. # Net % expected rise next 12 months minus % expecting fall (wage expectations is net of % expecting wages to rise and % expecting flat/decline). Note that questions on mortgage rate, house price and wage expectations have only been surveyed since May 2009.

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Westpac Institutional Bank

Consumer data and forecasts

Consumer sentiment
2012 % change WestpacMI Consumer Sentiment Index family finances vs a year ago family finances next 12 months economic conditions next 12 months economic conditions next 5 years time to buy major household item time to buy a motor vehicle time to buy a dwelling WestpacMI Consumer Risk Aversion Index^^ CSI consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# WestpacMI Unemployment Expectations avg^ 101.7 89.9 108.5 90.4 90.9 128.0 122.3 123.0 11.5 103.7 48.4 6.6 128.3 128.1 continued WestpacMI Consumer Sentiment Index family finances vs a year ago family finances next 12 months economic conditions next 12 months economic conditions next 5 years time to buy major household item time to buy a motor vehicle time to buy a dwelling WestpacMI Consumer Risk Aversion Index^^ CSI

Aug 96.6 78.2 91.8 92.8 94.9 125.4 126.3 118.5 89.3 0.2 153.7 2013 Jan 100.6 77.8 103.5 95.0 91.1 135.7 146.8 140.0 96.2 26.7 144.9

Sep 98.2 78.4 96.2 93.3 98.1 124.9 126.1 127.6 39.9 89.9 5.7 155.3

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 31.4 97.0 154.5

Feb 108.3 83.5 105.0 108.9 101.0 143.1 140.7 135.4 99.7 11.2 145.1

Mar 110.5 86.8 108.2 109.8 107.1 140.8 142.5 144.5 33.5 100.6 -0.9 139.7

Apr 104.9 83.4 108.0 104.9 98.2 130.2 138.0 128.4 97.0 53.9 141.5

May 97.6 76.7 100.5 90.8 91.4 128.5 139.7 142.7 93.1 149.1 21

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

May 2013

Westpac Economics directory

Westpac Economics Sydney Level 2, 275 Kent Street Sydney NSW 2000 Telephone (612) 8254 8372 Facsimile (612) 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 (4420) 7621 7061 Facsimile (4420) 7621 7527 James Shugg Senior Economist Auckland

Takutai on the Square Level 8, 16 Takutai Square Auckland, New Zealand Telephone (649) 336 5671 Facsimile (649) 336 5672
Dominick Stephens Chief Economist, New Zealand Michael Gordon Markets Economist

Felix Delbrck Senior Economist Nathan Penny Economist

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

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Westpac Institutional Bank

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Notes

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