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The Federal Budget 2011/12Queensland
May 2011
Bill Evans
Chief Economist
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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
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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
Sources: Treasury, ABS, Westpac Economics
Net change in underlying cash balanceBudgetforecasts
3
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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
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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
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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
Sources: Treasury, ABS, Westpac Economics
Impact on 3
rd
year of forecast
Rudds
1st budget
Howards 1st budget
IncludingFeb 09Stimulus package
6
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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
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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
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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
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-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
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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
$ $per gallon; weekly
US gas price: +27% in 2011- a tax on consumers
11
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US house prices have now declined for 7 months
100
120
140
160
180
200
220
240
100
120
140
160
180
200
220
240
Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10
IndexIndex
20-city index
10-city index
Source: Ecowin
S&P Case-Shiller Index
12
Prices have fallen 6.5% in seven months to Feb 11and are 33% off July 06 peak
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The FED is buying 80% of new Treasury issues
0
20
40
60
80
100
120
0
20
40
60
80
100
120
QE1 (Dec '08 Mar '10) QE2 to date (Nov '10 Feb '11)
Other domestic Federal Reserve Foreign
Source: Federal Reserve,US Treasury, Ecowin,Westpac Economics
% %share of net new issuance purchased
13
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Chinas new investment- not Treasuries !
-100
0
100
200
300
400
500
600
-100
0
100
200
300
400
500
600
QE1 (Dec '08 Mar '10) QE2 to date (Nov '10 Feb '11)
Treasuries Other
Source: Ecowin, CEIC,Westpac Economics
USDbn USDbn
14
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End of QE1 saw falls in shares and AUD
0.5
1.0
1.5
2.0
2.5
3.0
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11100
125
150
175
200
225$trn IndexAUD/USD* (rhs)
S&P500* (rhs)
Federal Reserve: securities held outright (lhs)
Source: Ecowin, Bloomberg
*S&P500 March2009 low = 100
QE1 QE2
15
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
Sources: ABS, Westpac Economics
cont to year-end domestic demand growth
* includes housing
32
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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
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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
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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
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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
Sources: ABS, Westpac
24
16
4
8
0
12
12
8
40
-4*nominal, rolling annual
savings ratio (%income)
20
period averages
?
forecast
36
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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
Sources: ABS, Westpac Economics
trend, mth % chg
37
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Consumer sentiment: concern for family finances
70
80
90
100
110
120
130
70
80
90
100
110
120
130
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
indexindex
consumer sentiment index
consumer sentiment - family finances
Sources: Westpac-Melbourne Institute
38
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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
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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
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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
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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?
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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
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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*
Sources: ABS, Westpac
annual average change
* net of demolitions implied by Censusdata to 2006; Westpac estimates thereafter
44
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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
Sources: ABS, Westpac Economics
45
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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)
Sources: ABS, Westpac Economics
Population growth: sharp slowdown
46
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Consumers are upbeat about their job security
80
100
120
140
160
180
20070
80
90
100
110
120
130
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
indexindex
consumer sentiment index (lhs)
unemployment expectations (rhs) Sources: Westpac-Melbourne Institute
47
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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
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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
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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
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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
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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
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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
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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.
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