Westpac Budget Release

8/6/2019 Westpac Budget Release

1/55

The Federal Budget 2011/12Queensland

May 2011

Bill Evans

Chief Economist


2/55

Federal budget: swings with the cycle

-3.2

-4.0 -4.3

-60

-40

-20

0

20

40

-6

-4

-2

0

2

4

1979/80 1989/90 1999/00 2009/10

$bn% of GDP

$bn (rhs) % of GDP (lhs)

Sources: Treasury, ABS, Westpac Economics

Budgetfcsts to 14/15

Underlying cash balance

2


3/55

Stance of fiscal policy

-5

-4

-3

-2

-1

0

1

2

3

4

-5

-4

-3

-2

-1

0

1

2

3

4

1980/81 1990/91 2000/01 2010/11

% GDP % GDP

Expansionary

Contractionary


Net change in underlying cash balanceBudgetforecasts

3


4/55

Decomposing the 2011/12 deficit

-25

-20

-15

-10

-5

0

MYEFO, Nov Parameters Net Policy 2011/12estimate

$bn

12.3

7.8

2.6

22.6

Figures may not sum due to rounding.Sources: Treasury, Westpac.

4


5/55

Repairing the budget: 2012/13

-25

-20

-15

-10

-5

0

5

10

2011/12estimate

OldParameters

NewParameters

Net Policy 2012/13estimate

$bn

+15.4

+2.0

22.6

= 3.5

+8.7

Figures may not sum due to rounding.Sources: Treasury, Westpac.

5


6/55

Policy decisions: net budgetary impact

-2

-1

0

1

-2

-1

0

1

1996/97 2000/01 2004/05 2008/09

% GDP % GDP

Net spending

Net savings


Impact on 3

rd

year of forecast

Rudds

1st budget

Howards 1st budget

IncludingFeb 09Stimulus package

6


7/55

New spending initiatives in the Budget

0.8

0.186 0.2

1.5

0.20.0

1.2

0.4

0.9 0.8

2.2

1.5

0.4

1.5

0

1

2

3

0

1

2

3

Workforce MentalHealth

Education Families Regions Smallbusiness

Defence &security

$bn$bn

2011/12

over four years

7


8/55

New savings initiatives in the Budget

2.1

0.1 0.1 0.2 0.1 0.1 0.1

4.1

3.2

2.0

2.5

1.1

0.7 0.6

0

1

2

3

4

5

6

0

1

2

3

4

5

naturaldisasterrecovery

tax reform familypayments

defence efficiencydividend

medical carbonprogram

cuts

$bn$bn

2011/12 over four years

8


9/55

US unemployment high, falling participation

63

64

65

66

67

68

2

4

6

8

10

12

1980 1990 2000 2010

%%Unemployment rate (lhs)

Participation rate (rhs)

Sources: Ecowin, Westpac Economics

9


10/55

-4

-2

0

2

4

6

-4

-2

0

2

4

6

1990 1995 2000 2005 2010

Headline Core

Sources: Ecowin, Westpac Economics

6mth %chg 6mth %chgannualised

US core inflation- moving outside worry zone

10


11/55

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1991 1996 2001 2006 2011

Source: Ecowin

$ $per gallon; weekly

US gas price: +27% in 2011- a tax on consumers

11


12/55

US house prices have now declined for 7 months

100

120

140

160

180

200

220

240

100

120

140

160

180

200

220

240

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10

IndexIndex

20-city index

10-city index

Source: Ecowin

S&P Case-Shiller Index

12

Prices have fallen 6.5% in seven months to Feb 11and are 33% off July 06 peak


13/55

The FED is buying 80% of new Treasury issues

0

20

40

60

80

100

120

0

20

40

60

80

100

120

QE1 (Dec '08 Mar '10) QE2 to date (Nov '10 Feb '11)

Other domestic Federal Reserve Foreign

Source: Federal Reserve,US Treasury, Ecowin,Westpac Economics

% %share of net new issuance purchased

13


14/55

Chinas new investment- not Treasuries !

-100

0

100

200

300

400

500

600

-100

0

100

200

300

400

500

600

QE1 (Dec '08 Mar '10) QE2 to date (Nov '10 Feb '11)

Treasuries Other

Source: Ecowin, CEIC,Westpac Economics

USDbn USDbn

14


15/55

End of QE1 saw falls in shares and AUD

0.5

1.0

1.5

2.0

2.5

3.0

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11100

125

150

175

200

225$trn IndexAUD/USD* (rhs)

S&P500* (rhs)

Federal Reserve: securities held outright (lhs)

Source: Ecowin, Bloomberg

*S&P500 March2009 low = 100

QE1 QE2

15


16/55


17/55

Contributions to real GDP growth

3.2 3.74.1

3.0 3.0 2.8 2.8 2.9 3.2 3.4

1.11.4

1.5

1.2 1.1 1.1 0.9 1.01.1 1.2

4.4

5.66.1

4.6

8.7

5.64.6

3.34.0 5.0

2.6

2.0

2.5

0.8

-3.7

0.8

0.8

1.0

0.8

-5

0

5

10

15

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ppt cont.

Net exportsGross investmentPublic consumptionPrivate consumption

Sources: CEIC, Westpac.Contribution to full year growth.

17


18/55

0

5

10

15

20

25

0

5

10

15

2025

30

35

40

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

%pa%yr

Loan growth (lhs)

RRR (rhs)

Sources: Westpac Economics, CEIC

Sound,

Easing biasSound,

tightening biasSound,

tightening biasAppropriately

LoosePrudentAppropriately

Tight

TightTight

China tightens monetary & credit policy stance

18


19/55

35

40

45

50

55

60

35

40

45

50

55

60

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

%saarindex

PMI headline*

Sources: CEIC. *Seasonally adjusted by Westpac Economics.

Chinas manufacturing activity index falls

19


20/55

Expectations of Euro default/restructure grow

0

500

1000

1500

2000

2500

0

500

1000

1500

2000

2500

Jan-09 Jun-09 Dec-09 May-10 Nov-10 Apr-11

bpsbps

Spain

Greece

Portugal

Ireland

Source: Bloomberg, Westpac Economics2yr government bond spread to bunds

20


21/55

AUD was susceptible to European event risk in 2010

0.80

0.85

0.90

0.95

1.00

1.05

0.80

0.85

0.90

0.95

1.00

1.05

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10

USDUSDSource: Bloomberg

Irelandcrisis

21

Greececrisis


22/55

Recent AUD surge was mainly due to USD

0.0

1.0

2.0

3.0

4.0

5.0

6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1.001.05 1.051.0947

Other USD weakness*Source: Bloomberg, Westpac Economics

ppts ppts

*decline in DXY index

22


23/55

Australian commodity prices forecast to fall

100

150

200

250

300

350

100

200

300

400

500

600

700

Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12

indexindexBulks* (lhs)Exchange traded* (rhs)

Sources: Westpac Economics, Bloomberg, ABS.Bulks includes iron ore and coal. Exchange traded includesrural, base metals and gold.

23


24/55

The Australian dollar fair value model

0.40

0.50

0.60

0.70

0.800.90

1.00

1.10

1.20

0.40

0.50

0.60

0.70

0.800.90

1.00

1.10

1.20

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

USDUSDFair value band

AUD/USD actual

AUD/USD forecast

Sources: RBA, Westpac Economics

Includes coal price, exchanged traded commodities index, relative yield curve, net foreign debt to GDP.

24


25/55

Change in AUD fair value: past and future

-15

-10

-5

0

510

15

20

25

-15

-10

-5

0

510

15

20

25

Budget 10' to Budget 11' Budget 11' to Budget 12'

Interest rates

Foreign debt

Commodities

Sources: Westpac EconomicsUS US

25


26/55

CPI inflation: core pulse rises; RBA nervous

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

-1

0

1

2

3

4

5

Mar-95 Mar-99 Mar-03 Mar-07 Mar-11

%qtr%yravg RBA core CPI* %qtr (rhs)

avg RBA core CPI* %yr (lhs)

RBA forecasts

Sources: ABS, RBA, Westpac Economics

* average of s.a. trimmed mean & weighted medianCPI ex GST effect in 2000/01

26


27/55


28/55

Interest rates & the Aussie dollar: old & new

ActualMay 10

May-10forecast

Current(10th May)

May-12forecast

Cash %pa 4.50 5.25 4.75 5.25

3yr swap 5.35 6.20 5.45 6.00

AUD/USD 86c 90c 108c 98c

28


29/55

Government & Westpac forecasts: 2011/12

Sources: Budget papers, Westpac Economics

Government Westpac

World GDP (2011) 4.25% 4.2%

Aust GDP 4.00% 3.5%

Consumption 3.50% 3.0%

Housing 1.50% 3.5%

Investment 16.0% 12.0%

Unemployment rate(June-2012)

4.75% 4.5%

29


30/55

30

50

70

90

110

130

30

50

70

90

110

130

1870 1890 1910 1930 1950 1970 1990 2010

indexindexSources: RBA, ABS, Westpac Economics

long-runaverage

last gold rush

(WA)

post WWI woolboom

Korean Warwool boom

Early 70s nickel

boom

Rise of China &India

GFC

Terms of Trade : a once in a 140 year boom

30


31/55

Investment plans by industrymining booms

-20

0

20

40

60

80

2006 2007 2008 2009 2010 2011f 2012f

% chg, yr avg

Mining

ex mining

History in realterms,Expectationsin nominal

Sources: ABS, Westpac Economics

Financial years5th est 1st est

31


32/55

Domestic private demand growth

-2

-1

0

1

2

3

4

5

-2

-1

0

1

2

3

4

5

2010 2011f 2012f

ppts

non-mining inv. mining inv. consumer *

ppts


cont to year-end domestic demand growth

* includes housing

32


33/55

Latest on flood impact:

RBA now estimates coal effects alone took ~% off GDP in Q4and another -1% in Q1 but will turn to a significant positiveQ2-Q3 (c.f. preliminary total estimate in Feb % off Q4 and Q1ex Yasi).

agriculture and tourism ag losses ~$2bn; tourism ~$400mn.

infrastructure: power, water, wastewater, schools, main railsystems, all ports back to full operation.

main repair spending will be on roads; about of road networkdamaged; ~ of this as yet to be restored.

housing rebuild smaller than initially expected: 3.3k dwellings

require complete rebuild; 1.7k require major renovations;another 2.6k affected 7.6k total c.f. 35-40k estimates in Feb.

overall public reconstruction estimated ~$5bn +$0.8bn for Yasi;but just a mild net boost to spending as funding re-directed.

33


34/55

Australias chronic housing stock deficiency

-10

40

90

140

190

240

-10

40

90

140

190

240

Jun-92 Jun-96 Jun-00 Jun-04 Jun-08

'000'000

estimated housing stock deficiency

Aus dwelling approvals (SA annualised)

underlyingdemand

Sources: ABS, Westpac Economics f'casts

34


35/55

States: dwelling approvals- supply is a factor

40

60

80

100

120

140

160

180

200

40

60

80

100

120

140

160

180

200

Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

indexindexVic (36%) WA (13%)

Qld (18%) NSW (19%)

Sources: ABS, Westpac

smoothed, Dec 2005 = 100figures in brackets show %total

35


36/55

Consumers: income, spending and saving

-20

-16-12

-8

-4

0

4

8

12

16

2024

-4

04

8

12

16

20

24

28

32

3640

Mar-80 Mar-85 Mar-90 Mar-95 Mar-00 Mar-05 Mar-10 Mar-15

%ann%annincome after tax and interest spending


24

16

4

8

0

12

12

8

40

-4*nominal, rolling annual

savings ratio (%income)

20

period averages

?

forecast

36


37/55

Retail sales: artificially supported by floods ...

-0.3

0.0

0.3

0.6

0.9

1.2

-0.3

0.0

0.3

0.6

0.9

1.2

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

% chg% chg

Qld Australia


trend, mth % chg

37


38/55

Consumer sentiment: concern for family finances

70

80

90

100

110

120

130

70

80

90

100

110

120

130


indexindex

consumer sentiment index

consumer sentiment - family finances

Sources: Westpac-Melbourne Institute

38


39/55

Household debt to income ratio- world class!

0

20

40

60

80

100

120

140

160

180

Mar-77 Mar-87 Mar-97 Mar-070

20

40

60

80

100

120

140

160

180% %

Sources: RBA, Westpac

39


40/55

House prices are falling but for how long?

-20

-10

0

10

20

30

40

50

60

70

-20

-10

0

10

20

30

40

50

60

70

Oct-03 Oct-05 Oct-07 Oct-09 Oct-03 Oct-05 Oct-07 Oct-09

%%Bris Melb Adel Syd Perth

Sources: RP Data-Rismark,Residex, Westpac

*six-monthly growth rates,annualised

40


41/55

0

100

200

300

400

500

600

0

100

200

300

400

500

600

Mar-93 Mar-98 Mar-03 Mar-08

indexindex

Brisbane Sunshine Coast

Gold Coast Rest of Qld

Sources: APM, Westpac Economics

*indexes based on weighted avg ofpostcode median prices (all dwellings);Mar-93=100, all figures to Dec 2010

1.1%

3.2%

3.7%

1.2%

House prices: Qld (pre-floods)

41


42/55

House price expectations are strong, for now

-175

-150-125

-100

-75

-50

-25

0

25

50

75100

0

2040

60

80

100

120

140

160

180

200220

Nov-08 May-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11

%responses%responses

fall no change rise

Source: Westpac-Melbourne Institute,Mortgage Choice (Nov-08)

net percent expecting houseprices to rise

10075

50

-25

0

-50

25

80

60

4020

0

how big willthe June hitbe?


43/55

House price expectations by state

-20

0

20

40

60

80

100

-20

0

20

40

60

80

100

Jan-09 Jan-10 Jan-11 Jan-09 Jan-10 Jan-11

net %net %

NSW Vic SA Qld WA

Source: Westpac-Melbourne Institute

*% reporting expected riseminus % reporting expected fall

43


44/55

Population outstrips the dwelling stock

0

50

100

150

200

250300

350

400

450500

0

50

100

150

200

250300

350

400

450500

1950s 1960s 1970s 1980s 1990s 2000s last 3years

thousandsthousands

population

dwelling completions

dwelling stock*


annual average change

* net of demolitions implied by Censusdata to 2006; Westpac estimates thereafter

44


45/55

Population growth takes a tumble- immigration

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1926 1936 1946 1956 1966 1976 1986 1996 2006

ann%ann%

population

contribution from net migration

contribution from natural increase


45


46/55

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jun-82 Jun-90 Jun-98 Jun-06

% ann% ann

Qld (lhs) Aust (rhs)


Population growth: sharp slowdown

46


47/55

Consumers are upbeat about their job security

80

100

120

140

160

180

20070

80

90

100

110

120

130


indexindex

consumer sentiment index (lhs)

unemployment expectations (rhs) Sources: Westpac-Melbourne Institute

47


48/55


49/55

When labour is hard to find wages rise

-50.0

-40.0

-30.0

-20.0

-10.0

0.010.0

20.0

30.0

40.050.0

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 Dec-13

Net bal. %WPI %yr

Westpac ACCI laboureasy/hard - adv 2 qtrs (rhs)

WPI %yr (lhs)

Sources: ABS, Westpac Economicsforecasts

labour hard to find

labour easyto find

49


50/55

Industries affected by the mining boom- jobs

0

3

6

9

12

15

18

0

3

6

9

12

15

18

Retail &w'sale

Hospitality Manuf. Constr. Bus. Svcs Mining &util.

Educ.

NeutralBenefit from miningChallenged by AUD and/or cautious consumer

Source: ABS, DEEWR, Westpac Economics

%%share of total employment

50


51/55

End of QE1 saw falls in shares and AUD

0.5

1.0

1.5

2.0

2.5

3.0

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11100

125

150

175

200

225$trn IndexAUD/USD* (rhs)S&P500* (rhs)

Federal Reserve: securities held outright (lhs)

Source: Ecowin, Bloomberg

*S&P500 March

2009 low = 100

QE1 QE2

51


52/55

Global share markets- Australia tracks US

40

60

80

100

120

40

60

80

100

120

Jan-07 Jan-08 Feb-09 Feb-10 Mar-11

indexindex

S&P500 S&P200 Euro Stoxx 50

Sources: Bloomberg, Westpac Economics

2 Jan 07 = 100

52


53/55

ASX 200 forward P/E ratios

-10

-5

0

5

10

-10

-5

0

5

10

Jan-06 Jan-08 Jan-10

pointspoints

Financials Materials

Source: Bloomberg

deviation from long-run average

53

cheap

expensive


54/55

Summary points

Budget surplus is being aided by optimistic forecasts minimal saves.

Global risks are rising as FED withdraws support; Europe dismays;China tightens.

Australian dollar will lose US 10 through next 12 months.

RBA will raise rates in June; market is underestimating RBA resolve.

Growth will be boosted by mining but consumer/housing still cautious.

Risk is that consumer raises savings rate due to house price fears.

Chronic shortages will ensure house prices go sideways.

Short term employment outlook is strong but some sectors are likely tobe reassessing next year.

54


55/55

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141.Information current as at date above. This information has been prepared without taking account of yourobjectives, 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. Westpacs

financial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting anyWestpac Branch. The information may contain material provided directly by third parties, and while suchmaterial is published with permission, Westpac accepts no responsibility for the accuracy orcompleteness of any such material. Except where contrary to law, Westpac intends by this notice toexclude liability for the information. The information is subject to change without notice and Westpac isunder no obligation to update the information or correct any inaccuracy which may become apparent at alater date. Westpac Banking Corporation is registered in England as a branch (branch numberBR000106) and is authorised and regulated by The Financial Services Authority. Westpac EuropeLimited is a company registered in England (number 05660023) and is authorised and regulated by TheFinancial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send ane-mail to [email protected] or fax us on +61 2 8254 6934 or write to Westpac Economics atLevel 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number andcompany details on all correspondence. 2011 Westpac Banking Corporation. 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 arereasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks anduncertainties. The ultimate outcomes may differ substantially from these forecasts.

DisclaimerDisclaimer

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