WestpacRedBookMarch2013.pdf

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The Red Book

Westpac Economicswith theInstitutionalBank.

March 2013


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March 2013

The Westpac Red Book is produced by Westpac EconomicsEditor: Matthew HassanInternet: www.westpac.com.auEmail: [email protected]

This issue was finalised on 15 March 2013

Contents

Executive summary 4

The consumer mood: gaining confidence 6

Sentiment indicators: spending 8

Special topics

Wage expectations 10

Sentiment indicators

Durables, cars 12

Housing 13

Risk aversion 14

Job security 15

State snapshot: Victoria 16

Westpac household barometer 17

Summary forecast tables

Economic & financial forecasts 18

Consumer data and forecasts 20


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Westpac Institutional Bank

3


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4

March 2013

Executive summary

The WestpacMelbourne Institute Index ofConsumer Sentiment rose 2% in Mar followinga strong 7.7% rise in Feb. At 110.5, the Index isnow firmly in optimistic territory.

The survey in 2013 continues to suggest lowerinterest rates are starting to drive a sustainedimprovement across the consumer sector.An improved tone to economic news, both inAustralia and abroad, rising asset values (shares

in particular) and a less fearful outlook for themining sector are adding to the rally.

These themes are echoed in responses toquestions on news recall which showed a lessnegative perception of news on the economy,budget & tax, and international conditions.

Updates on the wisest place for savingsquestion run every 3mths indicate the improvedconsumer mood has not shifted attitudes

towards risk. Although there was a marginaldecline in the proportion nominating pay downdebt, consumers continue to heavily favourdeposits/super over riskier assets like sharesand real estate.

The Westpac Risk Aversion Index whichcombines these savings views into a singlemeasure of risk aversion actually rose slightlyby 2.1pts between Dec and Mar. It impliesconsumers are likely to maintain their high

savings rates in 2013.

Our CSI measure, which includes the WestpacRisk Aversion Index and excludes economiccomponents of consumer sentiment, continuesto give a good guide to spending trends withthe weak Q4 data in line with the indicatorsweakness through mid-2012.

Although the weak finish to 2012 points to moresubdued momentum heading into 2013, theMar CSI reading points to spending growthreturning to around 2.8%yr and real retail salesgrowth rising to 3.8%yr.

The Westpac Melbourne InstituteUnemployment Expectations Index showeda notable 3.7% improvement in Mar afterholding flat in Feb. Readings have been volatile

since Oct last year but there are tentativesigns of a modest trend improvement in thisproxy for consumers job security. However,unemployment expectations are coming froma much weaker starting point than headlinesentiment and are improving at a slower pace.A separate question on wage expectations runthis month showed a significant downgradesince Sep.

All time to buy indexes continue to read atstrong levels, again suggesting that lowerinterest rates are generating buyer interest.Spending on household durables was veryweak in 2012, suggesting it may take time forthe rise in time to buy a major item to give alift to spending growth. Supply disruptions in2010-11 have seen vehicle purchases moveout of synch with the time to buy a car indexcomplicating the outlook here.

The time to buy a dwelling index remains ata cyclical high. Latest auction market datapoint to a significant pick-up in activity inFeb and early Mar, over and above the usualseasonal lift. The mix of buyer sentiment andunemployment expectations continues to pointto a 10% rise in housing finance approvals in2013.


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In last months Red Book we welcomed

the strong rise in consumer sentiment in

Feb but warned that it fell short of being

clear confirmation of a consumer upswing.

We noted that not only did the rise needto be sustained and accompanied by a

clear improvement in unemployment

expectations, it needed to point to an upturn

strong enough to absorb a sizeable shock

from the mining sector later in the year.

The Mar WestpacMelbourne Institute

Consumer Survey comes a step closer

to meeting these criteria. It shows the

sentiment rally being well sustained with

the 110.5 reading on the Index now in

solidly optimistic territory. It also shows

consumers job loss concerns easing, after

holding at deeply fearful levels in Feb.

It again falls short of a consumer breakout

though. The turn in unemployment

expectations remains tentative and modest,

falling well short of the 130 target we see as

the significant threshold.

Meanwhile, the picture on current spendingmomentum is much weaker. The Q4 national

accounts revealed a more abrupt slowdown

in consumer spending over 2012, more in

line with the guidance we were getting from

the consumer survey in the middle of last

year but weaker than we had been assuming.

Other aspects of the Mar survey alsosuggest the consumer caution that has

restrained demand over the last five years is

still stubbornly entrenched. Our measure of

consumer risk aversion is largely unchanged

despite the more upbeat consumer mood.

There are some frailties around non interest

rate related supports to sentiment as

well. The improved tone from offshore is

susceptible to setbacks, particularly in

Europe. Ditto the rally in sharemarkets.Consumers may also have misjudged the

extent to which conditions have improved in

the mining sector the hard landing fears

of Aug-Sep 2012 have clearly abated but the

sector still faces challenging conditions and

a turning point in investment this year. They

may also be over-optimistic about prospects

for housing and non-mining sectors.

The sentiment rally will be encouraging for

the RBA and will keep it sidelined on ratesnear term. But we still see the balance of

risks as likely to tilt back towards a further

rate cut around the middle of the year.

-4-3-2-1012345678

-4-3-2-1012345678

Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 Dec-12

ann%ann%

real consumer spending real consumer spending per capita

Sources: ABS, Westpac Economics

long runaverage

Westpacforecasts

qtly%ch

Consumer spending: weak finish to 2012



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March 2013

The consumer mood: gaining confidence

The Westpac-Melbourne Institute ConsumerSentiment Index rose 2% in Mar from 108.3 to110.5. Though the rise is small, this is a strongresult. It follows on from a 7.7% jump in Feb,marks the 5th month in a row above 100 and isthe highest level since Dec 2010.

The uptick came despite the RBA again holdingthe cash rate steady at its Mar meeting. Therise, and the overall strength of the Index

instead appears to be due to the accumulatedeffect of previous rate reductions combinedwith an improved tone to economic news, bothat home and abroad, rising asset values and aless fearful outlook for the mining sector.

Sentiment would have drawn support from thecontinued rally in equity markets. The ASX rose3% between the Feb and Mar surveys to be up10% for the year and 20% from its Sep low. Gainshave been impressive offshore as well with theDow Jones up 10% so far in 2013, reaching anew record high. Although markets are reactingto many of the same developments influencingsentiment, the strength of the rally would have

enhanced the positive mood. Other market factors that tend to affectsentiment were more mixed with petrol pricesup 4 a litre between Feb and Mar and the AUDdown 1c vs the USD following a 1.8 fall in Feb.

60

70

80

90

100

110

120

130

60

70

80

90

100

110

120

130

Mar-83 Mar-88 Mar-93 Mar-98 Mar-03 Mar-08 Mar-13

indexindex

Sources: Melbourne Institute, W estpac Economics

long runaverage

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

2.5

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

st devnsst devns

consumer sentimentunemp. expectations^Sources: Melbourne Institute, RBA,Westpac

RBA easing cycles, (figures are3mth change after last cut)

*deviationfrom avg,^inverted

+1.5

+1.1 +1.3

+1.0

+1.2

+1.2

+0.9

+0.8

2. Consumer sentiment and RBA easing cycles

1. Consumer sentiment: up again


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The mix of influences is apparent in responsesto additional questions on news recall. Topic-wise the most recalled items were aroundeconomic conditions, budget and taxation,interest rates, international conditions andemployment. With the exception of interestrates, news was seen as mostly negative butmarkedly less negative compared to Dec foreconomic conditions, budget and taxation and

international conditions. The Mar survey also showed continued positive

reads on time to buy questions. Responseson the wisest place for savings showed only asmall improvement in consumer caution though.

Importantly, the improved consumer mood nowlooks to be filtering through to unemploymentexpectations. These showed little responsein Feb, holding at very pessimistic levels, butshowed a promising 3.7% improvement in Mar.

In previous editions of the Red Book we havenoted past RBA easing cycles have ended whensentiment and unemployment expectationshave entered sustained rallies and marked 110+

for the former and sub-130 level for the latter askey thresholds. The first target has been met butat 139.7, the Unemployment Expectations Indexstill needs a 7% improvement to get across theline. Both gains will also need to be sustained.

0

20

40

60

80

0 50 100 150 200

%recall*

interest rates

Budget & tax

economy

unemployment

overseas

Sources: Westpac Economics, Melbourne Institute

unfavourable favourable high

recall

lowrecall

*bubble size also shows

level of recall

Observations:1: Dec-122: Mar-13

96

9798

99

100

101

102

103

104

96

9798

99

100

101

102

103

104

Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13

%index

Australia trading partner average*

global proxy^ G7

Source: OECD, CEIC, Westpac

*composite of available trading partner measures

weighted by share of Australias trade^composite of OECD and available non-OECDmeasures weighted by GDPseries presented on a consistent basis

4. Consumer sentiment: Aus vs world

3. Consumer recall: selected news items


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March 2013

Sentiment indicators: spending

Our CSI index, a modified measure thatexcludes economic questions and includes theWestpac Risk Aversion Index, rose 0.9pts inMar, extending the marked improvement sinceAug but still a touch below its long run average,reflecting lingering risk aversion.

The measure continues to point to recovery indemand consistent with per capita consumptiongrowth of around 1%yr and per capital real retail

sales of around 2%yr. With population growthof 1.8%yr that equates to 2.8% growth in totalconsumption and 3.8% growth in retail sales.Both of those growth rates look some way offthough.

Latest spending data showed a very weakfinish for 2012. Household consumption slowedabruptly over the second half of the year, rising

just 0.2% in both Q3 and Q4 after averaging1.1% qtr in the first half. The soft Q3 result wasimpacted by the let-down from fiscal boostersin Q2 ($1.9bn in payments associated withthe carbon tax). There were no extenuatingcircumstances to account for the Q4 weakness.

As such it appears to reflect a genuine slowing. Q3 and Q4 mark the weakest 6mth stretch since

2008-09 and, prior to that, 2002-03. Annualgrowth slowed to 2.8%, down from 3.5% in Jun.The long run average is 3.6%yr.

-4-3-2-10123456

7

-30

-20

-10

0

10

20

30

Dec-77 Dec-82 Dec-87 Dec-92 Dec-97 Dec-02 Dec-07 Dec-12

ann%index

CSI (lhs)*consumer spend (rhs)^

Source: Melbourne Institute,

ABS, Westpac Economics

*consumer sentiment plus risk aversionminus economic questions, devn fromlong run avg, smoothed, adv. 6mths;^real, per capita

Westpacforecast

-4

-20

2

4

6

8

10

-30

-20

-10

0

10

20

30


ann%indexCSI (lhs)*

real retail sales per capita (rhs)

Source: Melbourne Institute, ABS, W estpac Economics

*consumer sentiment plus risk aversion minus economicquestions, devn from long run avg, smoothed

Westpacforecast

6. CSI vs retail sales

5. CSI vs total consumer spending


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The spending detail shows the slowdown wasconcentrated in discretionary goods andservices. Q4 was a bad quarter for indulgenceswith big declines in cigarettes & tobacco(4.1%qtr), alcohol (1.9%qtr), recreation &culture (1.2%qtr) which includes gambling,and cafes & restaurants (3.1%qtr). Spendingon household goods, insurance & finance andcommunications also recorded small declines.

This was offset quarter to quarter by increasesin spending on vehicles (up a very strong+6.7%qtr) and health (+2.4%qtr). In the case ofvehicles, the forward view on sales suggests aweak start to 2013 (see p12).

Actual spending now aligns much more closelywith the picture from CSI in 2012. Notably,the most cyclical component to spendingalso shows a more pronounced weakening inline with usual pattern seen during periods ofheightened job loss fears. This has occurredeven with a key cyclical component vehiclepurchases moving in the opposite direction.

Going forward, both sentiment and job loss

fears point to some recovery. A 0.9% bouncein Jan retail suggests this may already beunderway although given the apparent lagsbetween sentiment and spending, a clearrecovery may not be apparent until mid-year.

-0.2 0.0 0.2 0.4 0.6

educ

cafes & rest's

utilities

transport

recreation

health

vehicles

food

-0.2 0.0 0.2 0.4 0.6

alcohol

cigs

fuel

comm's

insur & fin

hh goods

other

clothingH1 H2

Source: ABS, Westpac

ppt contrib to %chin total spend

80

100

120

140

160

180

200-2.0

-1.5-1.0

-0.5

0.0

0.5

1.0

1.5

2.0


index%ch

consumer spend 'cyclical' (lhs)*

job security (rhs)^

Sources: ABS,

Melb. Institute,Westpac

majordownturns

*most cyclical components of spending,per capita, trend, qtly%ch,^unemp. expectations, smoothed

8. Job security and cyclical consumer spend

7. Consumer spending: 2012 H1 vs H2


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March 2013

Special topic: wage expectations

The Mar survey included a repeat of an extraquestion on wage expectations for the next12mths. The results show a downgradecompared to Sep although fewer consumersexpect outright wage declines.

There was basically a 50:50 split betweenthose expecting their wages to rise andthose expecting no change or a decline. Thatcompares to a 53:47 split in the Sep survey and

a 58:42 split in Mar last year. The balance isthe weakest since we began surveying in Mar2010. The main shift was from those expectinga modest wage rise of 0-4% to no change. Only1.8% expect outright wage declines.

There were still a fair chunk of wage optimiststhough. Over 10% of consumers expect theirwages to rise by more than 8% while a further13% expect a solid gain of 4 to 8%. Indeed, theproportion expecting gains of over 4% was thehighest since Mar 2010.

On the surface that may suggest a two-speed jobs market. However, the surveydetail suggests it may instead be due to more

upbeat expectations amongst labour marketentrants those in the 18-24 year old age groupshowed the biggest increase in wage optimistsbetween Mar and Sep. This particular shift wasalso more pronounced in Vic and WA.

-30-25-20-15-10-505101520

25

020406080

100120140160180200

220

Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

%responses%responses

fall no change rise

Source: W estpac-Melbourne Institute*net of % expecting wages to rise and

% expecting wages to fall or no change

25

2015

05

-5

10

806040200

-40

-30

-20-10

0

10

20

30

40

50

60

-40

-30

-20-10

0

10

20

30

40

50

60

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

net %net %

NSW Vic SA Qld WA

Source: Westpac-Melbourne Institute

*% reporting expected wage rise minus% reporting expected flat/decline

survey months are Mar and Sep

10. Consumer wage expectations by state

9. Consumer expectations for wages


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The broader state measures also showed a morepositive shift in Vic and WA. The net balance ofthose expecting wage gains vs those expectingno change or wage declines slipped to 6.6%in NSW, fell sharply to 17.5% in Qld and sankto 18.2% in SA. Vic rose to +22.1% and WAsnapped back from 26.2% in Sep recordedduring the depths of the mining downturn fears to +14.3% in Mar.

Indeed, whereas the median wage expectationin NSW, Qld, SA and nationally was for nochange the median for both Vic and WA was inthe 0 to 4% range (interpolated point estimatesof +1.5% and +1.8% respectively).

Australian businesses also see a more moderateoutlook for wages. The NAB Dec quarterbusiness survey shows wages are expected torise 3.0% on average in the year ahead. Thatcompares to 3.5% in Dec 2011, and a currentpace of private sector wages growth of 3.5%yr.The latest Federal minimum wage decision setdown a 2.9% increase for 2012-13 vs a 3.4%increase in 2011-12. The 2013-14 decision is

likely to be released in Jun. Although we are still benchmarking wageexpectations measures, both the consumerand business measures appear consistent withsubdued wages growth in 2013-14.

0

5

10

15

20

25

30

3540

45

0

5

10

15

20

25

30

3540

45

Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

%%

NSW Vic SA Qld WA

Source: W estpac-Melbourne Institute*% expecting wage rise >4%

survey months are Mar and Sep

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12 Dec-14

net%%ann

business wage expectations Federal minimum wage decision^private sector wages growth consumer wage expectations (rhs)*

Sources: ABS, NAB, Fair W ork Australia, Westpac, Melbourne Institute

*net of % expecting rise >4% and flat/decline^centred 18mth moving average;expectations measures advanced 12mths

12. Wage expectations: consumers vs businesses

11. Consumers expecting strong wage rises by state


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March 2013

Sentiment indicators: durables, cars

The sub-index tracking views on time to buy amajor item was the sole component to declinein Mar slipping 1.6%. But that follows a strongsurge in Jan-Feb with the sub-index still rising intrend terms and well above its long run average.

How this plays through to spending will becritical. Spending on durables was strikinglyweak in Q4 with real per capita spending ondurables ex vehicles contracting 1%yr. The Jan

retail sales update suggests this may havepopped back up a bit in early 2013 householdgoods retail sales rose 1.3% in the month after a2% decline through Q4. The time to buy indexpoints to growth well over 5%yr.

The story is similar but different for cars. Thetime to buy a vehicle sub-index rose 1.3% inMar and is tracking a high level after weak readsthrough mid-2012.

However, the pattern for actual spending hasbeen completely out of synch with sentimentin 2011-12. Vehicle purchases rose 23% in 2012despite weak buyer sentiment for most of theyear. The strength is mainly due to catch-up

buying after supply disruptions in 2010-11.However, there also appears to be support frompent-up demand and strong affordability (highAUD and low interest rates). Initial sales for JanFeb point to a 3%+ pull back in Q1.

-6

-4

-2

0

2

4

68

10

-60

-50

-40

-30

-20

-10

0

1020

30


%ann avgindex*

time to buy a major household item (lhs)*

real per capita durables spend ex vehicles (rhs)

Sources: Melbourne Institute,

ABS, Westpac Economics

*deviation from long run average, smoothed, adv 3qtrs

annualgrowthto Q4

-30

-20

-10

0

10

20

30

-40

-30-20

-10

0

10

20

30

40

Jun-91 Jun-94 Jun-97 Jun-00 Jun-03 Jun-06 Jun-09 Jun-12

ann%index

time to buy a car (adv. 6mth, lhs)purchase of vehicles (rhs)*

Sources: ABS, Melbourne

Institute, WestpacEconomics

*real per capita, trend, national accounts measure

qtly

Japanesesupplyshock

14. Time to buy a car vs vehicle purchases

13. Time to buy a major item vs durables spend


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The sub-index tracking views on time to buy adwelling rose 6.7% in Mar, hitting a new cyclicalhigh. The index is at its highest level since Sep2009 and excluding 2009, since Dec 2001.

Housing markets are showing clearer signs ofimprovement as well. The most timely data,auction market activity, points to a strongstart to the year. The first 6 weeks have seenclearance rates over 60% nationally. About

2ppts of this can be attributed to seasonalvariations. That implies a significant underlyingimprovement from the 49-53% clearancerates in Q4 last year. The data mostly reflectsconditions in Sydney and Melbourne.

There is also evidence of improvement in thedwelling price data, some of which is availableup to mid-Mar, although the picture is moreuneven both month to month and acrossmarkets. Other data, on housing financeapprovals and dwelling approvals have beenmuch weaker but relate to the Jan month andare both less reliable (due to the seasonal low)and less reflective of the 2013 open.

Our model of finance approvals based on thetime to buy a dwelling and unemploymentexpectations projects a 10% rise for 2013.A continued improvement in unemploymentexpectations could lift this to around 15%.

40

45

50

55

60

65

70

7580

85

60

80

100

120

140

160

180


%index

time to buy a dwelling*

auction clearance rates (rhs)^

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

*state indexes weighted by totalnumber of auction sales^national, seasonally adj. by Westpac,smoothed(Mar-13 is month to date)

-50-40-30-20

-100102030405060

-50-40-30-20

-100

102030405060

Jan-83 Jan-88 Jan-93 Jan-98 Jan-03 Jan-08 Jan-13

ann%ann%

simple regression on 'time to buy dwelling' and unemp expectations

housing finance approvals ex refi (number, trend)

Source: ABS, Westpac

*low projection assumes no change;high projection assumes unemploymentexpectations improves 2.5pts a month

16. Model of housing finance approvals

15. Time to buy a dwelling vs auction clearance rates

Sentiment indicators: housing


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March 2013

Sentiment indicators: risk aversion

The Mar survey included an update ofquestions on the wisest place for savingsused to construct the Westpac ConsumerRisk Aversion Index. The results were moresurprising for what they did not show: risksentiment retained most of the modest easingseen between Sep and Dec but did not build onthat despite the rally in sentiment overall andthe positive news on housing and sharemarkets.

There were shifts but these were mainlybetween different risky and safe options.On the safe side, there was a shift away fromnominating pay down debt (0.5ppt to 18.4%)in favour of deposits/super (+3pts 45.7%).

On the risky side, there was a shift awayfrom real estate (2.3pts to 21.7%) in favourof shares (+1.4pts to 8.1%). The net effect wasa 2.1pt rise in the Westpac Consumer RiskAversion Index from 31.4 to in Dec to 33.5 inMar. At best, there is a weak downtrend in riskaversion. That also appears to be the case forthe household savings rate which barely edgedlower between Q3 and Q4 (10.3% to 10.1%).

Given the weak income backdrop, the fact thathouseholds chose to maintain a 10% savingsrate indicates quite some determination ontheir part. Taken literally, the wisest place forsavings responses may mean more of this isdirected towards deposits than paying off debt.

0

10

20

30

40

50

60

0

10

20

30

40

50

60


%%

shares real estate deposits/super repay debt*

Sources: Westpac, Melbourne Institute

seasonally adjusted by Westpac*repay debt and super options onlyincluded from 1997

-6

-1

4

9

14

19

-30

-10

10

30

50

70


%%Westpac consumer riskaversion index (lhs)*

household savings rate (rhs)

Sources: Westpac, Melbourne Institute

*% nominating 'pay down debt' or interestbearing assets as wisest place for savingsminus % nominating real estate or shares

18. Westpac Consumer Risk Aversion Index

17. Consumers: wisest place for savings


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The Westpac-Melbourne InstituteUnemployment Expectations Index showeda notable improvement in Mar, declining 3.7%to 139.7. Recall that lower index readings meanfewer consumers expect unemployment to risein the year ahead.

The Mar update followed a flat read in Feb andvolatility through Q4 of last year. There aretentative signs of a modest trend improvement

starting to emerge although the emphasisremains on both the tentative and the modest.Further gains are required to solidify the movewhich at this stage looks to be a much slowerturn than that seen in 2009.

The overall level of the index, which we view asa proxy for consumers job loss fears, remainsrelatively high. At 139.7, the Index is still overhalf a standard deviation above its long runaverage (127.9). Using historical variations as aguide, the reading implies consumers expect theunemployment rate to rise by about 0.6ppts toover 6.1% by Mar 2014.

Offi cial ABS estimates show the unemployment

rate steady at 5.4% in Feb, unchanged sinceNov. And while the big jump in jobs in Feb looksto be exaggerated by measurement issues, thesignal from this and other indicators suggeststhe labour market firmed in early 2013.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.02.5

3.0

40

60

80

100

120

140

160

180

200220

240

Jan-02Jan-03Jan-04Jan-05Jan-06Jan-07Jan-08Jan-09Jan-10Jan-11Jan-12Jan-13

std devns/pptsindex

unemployment expectations (lhs)

actual unemployment rate (annual change, rhs)

'labour shedding' composite (rhs)^

Sources: ABS, W estpac-Melbourne Institute

^based on movements out of employment and total detailed industries reporting employmentdeclines (excl. gross flows prior to 1997), shown as deviation from long run avg

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

-1.5

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Feb-12 Feb-14

%%

Sources: ABS, W estpac-Melbourne Institute

projection*

*grey line is Westpacforecast, red markers are theimplied year-ahead rate basedon unemployment expectationsin Jun-12, Sep-12, Dec-12; dark

red is Mar-13

annualppt change

6.1%

20. Unemployment rate: implied expectation

19. Unemployment expectations vs unemployment change

Sentiment indicators: job security


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March 2013

State snapshot: Victoria

The Vic state economy was the weakest of themajor states in 2012. State demand contractedthree quarters in a row, falling 1.1% in Q4 alone.Annual demand declined 0.1%, a stark contrastto the nations 3.5% gain. Business investmentwas a key driver but consumer demand was alsosoft. Vics unemployment rate rose about pptalthough volatility has been higher than usual.

The consumer survey shows little divergence

between Vic and the nation in terms of overallsentiment. The detail shows Vic consumersmore positive on time to buy a major item andthe 12mth outlook for family finances but lessconfident on the economic outlook.

Vic consumers tended to be less riskaverse than interstate peers in 2012. Thegap has narrowed due to improved riskaversion nationally. Its the reverse story forunemployment expectations with much weakerreads in Vic in 2012 narrowing in 2013 due to aVic-specific shift.

On housing, Vic consumers still favour realestate more heavily as the wisest place for

savings but have been less positive on timeto buy a dwelling until very recently. Priceexpectations surveyed in Jan were also weaker.This may be why Vic investor housing financeapprovals significantly underperformed in 2012.

60

80

100

120

140

160

180

200

-50-40-30-20-10

01020304050

60

Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11

indexindex

Vic Aus

Source: Melbourne Institute, WestpacEconomics

*smoothed

risk aversion index (lhs)* unemp. expectations (rhs)

60

80

100

120

140

160

180

0

510

15

20

25

30

35

Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11

indexindex

Vic Aus

Source: Melbourne Institute, WestpacEconomics

*%nominatingas wisest

place for savings

real estate (lhs)* time to buy a dwelling (rhs)

22. Consumer views on housing: Vic vs Aus

21. Risk aversion, job loss fears: Vic vs Aus


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17


Westpac household barometer

The Westpac Household Barometer draws ona range of data including system-wide creditand debit card usage from the RBA, and themortgage repayment behaviour and credit cardusage of Westpac customers to give a broadproxy for consumers financial behaviour.

The Barometer has risen by half a point sincemid 2012, indicating a further significant shifttowards more conservative financial behaviour.

That is in contrast with the household savingsratio and the Westpac Consumer RiskAversion Index which suggest a modestloosening in financial restraint over the sameperiod.

The main drivers of the shift since Jun havebeen mortgage repayment behaviour peoplegetting further ahead on their repayments and the mix of card usage and people tendingto favour debit over credit cards. The increasein the degree to which mortgages are ahead ofschedule may reflect compositional shifts dueto low levels of first home buyer activity overthe last year (first time buyers are less much

likely to be ahead of schedule). Card usage has also contributed with a notableslowdown in growth in the real value of cardtransactions in Jan. That is despite a 0.9% popin monthly retail sales reported for Jan.

-2

0

2

4

6

8

10

12

98

99

100

101

102

103


%index

Westpac household barometer (lhs)*

household savings ratio (rhs)

Source: RBA, Westpac Group

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

more conservative

less conservative

-2

0

2

4

6

8

1234

56789

101112

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

ann%ann%

card transactions (lhs)* consumer spending (rhs)

Source: RBA, ABS, Westpac

*real value of all credit and debit card transactions,

rolling 3mth total, seasonally adjusted by Westpac

24. Card transactions vs real spending growth

23. Westpac household barometer


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18

March 2013

Economic and financial forecasts

Interest rate forecastsLatest (15 Mar) Jun 13 Sep 13 Dec 13 Mar 14 Jun 14

Cash 3.00 2.75 2.75 2.75 2.75 2.75

90 Day Bill 3.07 3.00 3.10 3.10 3.00 3.00

3 Year Swap 3.35 3.20 3.10 3.00 2.80 2.80

10 Year Bond 3.62 3.50 3.50 3.30 3.20 3.00

10 Year Spread to US (bps) 160 140 130 120 120 120

International

Fed Funds 0.125 0.125 0.125 0.125 0.125 0.125

US 10 Year Bond 2.02 2.10 2.20 2.10 2.00 1.80

US Fed balance sheet USDtrn 3.21 3.36 3.61 3.87 4.12 4.38

ECB Repo Rate 0.75 0.75 0.75 0.50 0.50 0.50

Exchange rate forecastsLatest (15 Mar) Jun 13 Sep 13 Dec 13 Mar 14 Jun 14

AUD/USD 1.0366 1.04 1.03 1.01 0.99 0.97

NZD/USD 0.8206 0.86 0.86 0.86 0.85 0.83

USD/JPY 96.08 92 91 89 88 86

EUR/USD 1.3015 1.34 1.32 1.29 1.26 1.23

AUD/NZD 1.2632 1.21 1.20 1.17 1.16 1.17

Sources: Bloomberg, Westpac Economics.


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19

Economic and financial forecasts


Australian economic growth forecasts2012 2013

Q2 Q3 Q4 Q1f Q2f Q3f Q4f

GDP % qtr 0.6 0.7 0.6 0.7 0.8 0.5 0.5

Annual change 3.7 3.1 3.1 2.6 2.8 2.6 2.5

Unemployment rate % 5.1 5.3 5.3 5.4 5.8 6.0 6.1

CPI % qtr 0.6 0.7 0.5 0.6 0.4 0.5 0.6

Annual change 2.1 2.4 2.3 2.5 2.3 2.0 2.1

CPI underlying % qtr 0.6 0.7 0.5 0.6 0.4 0.5 0.6

ann change 2.1 2.4 2.3 2.5 2.3 2.0 2.1

Calendar years

2011 2012 2013f 2014f

GDP % ann change 2.4 3.6 2.5 2.3

Unemployment rate % 5.2 5.3 6.1 6.1

CPI % ann change 2.8 2.3 2.1 2.5

CPI underlying % ann change 2.8 2.3 2.1 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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20

March 2013

Consumer demand2012 2013 2014

% change Q3 Q4 Q1f Q2f Q3f Q4f Q1f Q2f

Total private consumption* 0.2 0.2 0.6 0.7 0.7 0.8 0.7 0.8

annual chg 3.0 2.8 1.8 1.8 2.3 2.8 2.9 3.0

Real labour income, ann ch 2.3 2.3 1.0 1.2 2.5 1.8 1.7 1.8

Real disposable income, ann ch** 2.0 1.8 1.8 0.9 1.8 2.3 2.1 2.1Household savings ratio 10.3 10.1 10.0 9.9 10.0 9.7 9.4 9.2

Real retail sales, ann chg 3.2 2.6 1.6 1.0 2.1 2.8 3.0 3.2

Motor vehicle sales (000s)*** 884.7 912.6 885.2 858.6 875.8 893.3 911.2 929.4

annual chg 6.5 9.5 3.4 -1.6 -1.0 -2.1 2.9 8.2

Calendar years

2011 2012 2013f 2014f

Total private consumption, ann ch* 3.3 3.2 2.2 3.1

Real labour income, ann ch 4.5 3.7 1.6 2.0

Real disposable income, ann ch** 4.5 2.1 1.7 2.1

Household savings ratio, % 11.0 10.2 9.9 9.2

Real retail sales, ann chg 0.5 3.2 1.9 3.3

Motor vehicle sales (000s) 806.3 881.5 862.9 934.1

annual chg -2.6 9.3 -2.1 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.

Consumer data and forecasts


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21

Consumer data and forecasts


Consumer sentiment2012

% change avg^ Jun Jul Aug Sep Oct

WestpacMI Consumer Sentiment Index 101.7 95.6 99.1 96.6 98.2 99.2

family finances vs a year ago 89.9 79.8 83.5 78.2 78.4 82.6

family finances next 12 months 108.5 86.3 88.9 91.8 96.2 98.9

economic conditions next 12 months 90.3 90.5 95.8 92.8 93.3 91.1

economic conditions next 5 years 90.9 92.7 97.5 94.9 98.1 93.6

time to buy major household item 128.0 128.6 130.0 125.4 124.9 129.6

time to buy a motor vehicle 122.2 124.7 130.8 126.3 126.1 134.6

time to buy a dwelling 122.9 128.0 128.8 118.5 127.6 139.8

WestpacMI Consumer Risk Aversion Index^^ 11.5 34.1 39.9

CSI 103.7 90.1 91.6 89.3 89.9 93.5

consumer mortgage rate expectations# 48.4 -27.4 0.2

consumer house price expectations# 38.7 25.2 34.4consumer wage expectations# 6.6 5.7

WestpacMI Unemployment Expectations 128.3 151.1 148.1 153.7 155.3 152.7

128.1 2013

continued Nov Dec Jan Feb Mar

WestpacMI Consumer Sentiment Index 104.3 100.0 100.6 108.3 110.5

family finances vs a year ago 91.8 85.2 77.8 83.5 86.8

family finances next 12 months 100.2 104.8 103.5 105.0 108.2

economic conditions next 12 months 96.6 92.4 95.0 108.9 109.8

economic conditions next 5 years 96.8 88.2 91.1 101.0 107.1

time to buy major household item 136.1 129.6 135.7 143.1 140.8

time to buy a motor vehicle 137.5 138.4 146.8 140.7 142.5

time to buy a dwelling 139.8 142.2 140.0 135.4 144.5

WestpacMI Consumer Risk Aversion Index^^ 31.4 33.5

CSI 98.4 97.0 96.2 99.7 100.6

consumer mortgage rate expectations# 11.2

consumer house price expectations# 26.7

consumer wage expectations# -0.9

WestpacMI Unemployment Expectations 142.2 154.5 144.9 145.1 139.7


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22

March 2013

Westpac Economics

Sydney

Level 2, 275 Kent StreetSydney NSW 2000Telephone (612) 8254 8372Facsimile (612) 8254 6934

Bill Evans

Chief EconomistGlobal 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 7LLUnited KingdomTelephone (4420) 7621 7061Facsimile (4420) 7621 7527

James Shugg

Senior Economist

Auckland

Takutai on the SquareLevel 8, 16 Takutai SquareAuckland, New ZealandTelephone (649) 336 5671Facsimile (649) 336 5672

Dominick Stephens

Chief Economist, New Zealand

Michael GordonMarkets Economist

Felix Delbrck

Senior Economist

Nathan Penny

Economist

Westpac Economics directory

Publication enquiries, Westpac Economics, Telephone (612) 8254 8720, [email protected]


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23

Things you should know: If you are located in Australia, this material and access to this websiteis provided to you solely for your own use and in your capacity as a wholesale client of WestpacInstitutional Bank being a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL233714 (Westpac). If you are located outside of Australia, this material and access to thiswebsite is provided to you as outlined below.

This material and this website contains general commentary only and does not constituteinvestment advice. Certain types of transactions, including those involving futures, optionsand high yield securities give rise to substantial risk and are not suitable for all investors. We

recommend that you seek your own independent legal or financial advice before proceedingwith any investment decision. This information has been prepared without taking account ofyour objectives, financial situation or needs. This material and this website may contain materialprovided by third parties. While such material is published with the necessary permission noneof Westpac or its related entities accepts any responsibility for the accuracy or completenessof any such material. Although we have made every effort to ensure the information is free fromerror, none of Westpac or its related entities warrants the accuracy, adequacy or completenessof the information, or otherwise endorse it in any way. Except where contrary to law, none ofWestpac or its related entities intends by this notice to exclude liability for the information. Theinformation is subject to change without notice and none of Westpac or its related entities is

under any obligation to update the information or correct any inaccuracy which may becomeapparent at a later date. The information contained in this material and this website does notconstitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sellany financial instrument or to enter a legally binding contract. Past performance is not a reliableindicator of future performance. The forecasts given in this material and this website are predictivein character. Whilst every effort has been taken to ensure that the assumptions on which theforecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or byknown or unknown risks and uncertainties. The ultimate outcomes may differ substantially fromthese forecasts.

Transactions involving carbon give rise to substantial risk (including regulatory risk) and are notsuitable for all investors. We recommend that you seek your own independent legal or financialadvice before proceeding with any investment decision. This information has been preparedwithout taking account of your objectives, financial situation or needs. Statements setting outa concise description of the characteristics of carbon units, Australian carbon credit units andeligible international emissions units (respectively) are available at www.cleanenergyregulator.gov.au, as mentioned in section 202 of the Clean Energy Act 2011, section 162 of the CarbonCredits (Carbon Farming Initiative) Act 2011 and section 61 of the Australian National Registryof Emissions Units Act 2011. You should consider each such statement in deciding whetherto acquire, or to continue to hold, any carbon unit, Australian carbon credit unit or eligibleinternational emissions unit.

Disclaimer


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Additional information if you are located outside of Australia

New Zealand: The current disclosure statement for the New Zealand division of Westpac BankingCorporation ABN 33 007 457 141 or Westpac New Zealand Limited can be obtained at the internetaddress www.westpac.co.nz. Westpac Institutional Bank products and services are provided byeither Westpac Banking Corporation ABN 33 007 457 141 incorporated in Australia (New Zealanddivision) or Westpac New Zealand Limited. For further information please refer to the ProductDisclosure Statement (available from your Relationship Manager) for any product for which aProduct Disclosure Statement is required, or applicable customer agreement. Download the

Westpac NZ QFE Group Financial Advisers Act 2008 Disclosure Statement at www.westpac.co.nz.China, Hong Kong, Singapore and India: Westpac Singapore Branch holds a wholesale bankinglicence and is subject to supervision by the Monetary Authority of Singapore. Westpac Hong KongBranch holds a banking license and is subject to supervision by the Hong Kong Monetary Authority.Westpac Hong Kong branch also holds a license issued by the Hong Kong Securities and FuturesCommission (SFC) for Type 1 and Type 4 regulated activity. Westpac Shanghai and Beijing Brancheshold banking licenses and are subject to supervision by the China Banking Regulatory Commission(CBRC). Westpac Mumbai Branch holds a banking license from Reserve Bank of India (RBI) andsubject to regulation and supervision by the RBI.

U.K.: Westpac Banking Corporation is registered in England as a branch (branch numberBR000106) and is authorised and regulated by The Financial Services Authority. WestpacEurope Limited is a company registered in England (number 05660023) and is authorised andregulated by The Financial Services Authority. This material and this website and any informationcontained therein is directed at a) persons who have professional experience in matters relatingto 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 lawfullycommunicated, falling within Article 49(1) of the Order (all such persons together being referredto as relevant persons). The investments to which this material and this website relates are onlyavailable 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 relevantperson should not act or rely upon this material and this website or any of its contents. In thesame way, the information contained in this material and this website is intended for eligiblecounterparties and professional clients as defined by the rules of the Financial ServicesAuthority and is not intended for retail clients. With this in mind, Westpac expressly prohibits youfrom passing on the information on this material and this website to any third party. In particularthis material and this website, website content and, in each case, any copies thereof may not betaken, transmitted or distributed, directly or indirectly into any restricted jurisdiction.

Disclaimer


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U.S.: Westpac operates in the United States of America as a federally licensed branch, regulatedby the Office of the Comptroller of the Currency. Westpac is also registered with the USCommodity Futures Trading Commission (CFTC) as a Swap Dealer, but is neither registered as,or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac CapitalMarkets, LLC (WCM), a wholly-owned subsidiary of Westpac, is a broker-dealer registered underthe U.S. Securities Exchange Act of 1934 (the Exchange Act) and member of the FinancialIndustry Regulatory Authority (FINRA). This communication is provided for distribution to U.S.institutional investors in reliance on the exemption from registration provided by Rule 15a-6under the Exchange Act and is not subject to all of the independence and disclosure standards

applicable to debt research reports prepared for retail investors in the United States. WCM isthe U.S. distributor of this communication and accepts responsibility for the contents of thiscommunication. All disclaimers set out with respect to Westpac apply equally to WCM. If youwould like to speak to someone regarding any security mentioned herein, please contact WCM on+1 212 389 1269. All disclaimers set out with respect to Westpac apply equally to WCM.

Investing in any non-U.S. securities or related financial instruments mentioned in thiscommunication may present certain risks. The securities of non-U.S. issuers may not be registeredwith, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not

subject to audit and reporting standards and regulatory requirements comparable to those ineffect in the United States. The value of any investment or income from any securities or relatedderivative instruments denominated in a currency other than U.S. dollars is subject to exchangerate fluctuations that may have a positive or adverse effect on the value of or income from suchsecurities or related derivative instruments.

The author of this communication is employed by Westpac and is not registered or qualified asa research analyst, representative, or associated person under the rules of FINRA, any otherU.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwisespecifically stated, the views expressed herein are solely those of the author and may differ fromthe 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 reportcertifies that (1) the views expressed in this report accurately reflect the personal views of theanalyst about any and all of the subject companies and their securities and (2) no part of thecompensation of the analyst was, is, or will be, directly or indirectly related to the specific views orrecommendations in this report.

Disclaimer


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


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