The Red Book

October 2011

Westpac Economics with the Institutional Bank.

October 2011

Contents
Executive summary The consumer mood: edgy Sentiment indicators: spending Special topic House price expectations Sentiment indicators Durables, cars Housing Risk aversion Job security
Summary forecast tables Economic & financial forecasts Consumer data and forecasts 4 6 8

10

12 13 14 15

16 18

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 finalised on 18 October 2011

Westpac Institutional Bank

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 your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpacs financial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to economics@westpac.com.au or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company 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 are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The ultimate outcomes may differ substantially from these forecasts.

October 2011

Executive summary
The WestpacMelbourne Institute Consumer Sentiment Index was broadly unchanged in October with a small 0.4% gain. This follows a surprisingly strong 8.1% rise in September but still leaves the Index at 97.2, pessimistic territory below 100. The consumer mood continues to be buffeted by severe financial market volatility and the shifting outlook for interest rates. In October, negatives and positives mostly cancelled out. Responses over the course of the survey week show significant variation though, suggesting an edgy consumer mood. The survey detail showed improvements to views on family finances, the economy and the labour market outlook but a less optimistic picture on time to buy questions. Our modified consumer sentiment indicator which excludes economic components and includes the Westpac Risk Aversion Index remains at very low levels, above the extreme lows registered at the worst of the 2008-09 global financial crisis and the early 1990s recession but 20pts below the normal level recorded over the last two decades outside these two periods. The reading remains consistent with falling per capita spending. Recent partial data on actual spending continues to show surprising strength with nominal retail sales posting back-to-back 0.6%mth gains in July-August and vehicle sales posting a strong rebound from supplydisruptions stemming from the Japanese earthquake/tsunami. Total spending is now expected to show a respectable 0.6%qtr, 2.9%yr gain in the Q3 national accounts. However, we continue to expect a material weakening in demand over Q4 and Q1 and see risks of downward revision to earlier estimates. October saw less optimistic consumer views on time to buy a major household item (5.6%) and time to buy a vehicle (1.6%). Both indexes were coming from elevated starting points though and remain in positive territory overall. The sharp fall in the previously very high AUD appears to have had a hand in the October declines. Consumers continue to show mixed view on housing. Attitudes towards time to buy a dwelling fell sharply by 10.4% in October but followed a surprisingly big 15.1% jump in September and are still net positive territory. The October survey included an update of the Westpac-Melbourne Institute Consumer House Price Expectations Index which showed a further cooling, the Index falling from 15.3 in July to 9.0 in October. Price optimists still outnumber pessimists but the median view is now firmly for no change over the next 12mths. The most positive development out of the October survey was an improvement in consumers sense of job security with the index of unemployment expectations improving 5% in the month. While this halts what was an alarmingly swift deterioration, the reversal still leaves a 27% deterioration over the last six months that points to a material weakening in labour market conditions. The heightened fear of job loss is still likely to negatively impact consumers purchasing and financial decisions near term.

Westpac Institutional Bank

Consumer spending: weakness ahead

ann% 8 7 6 5 4 3 2 1 0 -1 -2 -3 Jun-86
real consumer spending real consumer spending per capita
long run average

ann%
Westpac forecasts

qtly%ch
Sources: ABS, Westpac Economics

Jun-91

Jun-96

Jun-01

Jun-06

Jun-11

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

The WestpacMelbourne Institute Consumer Sentiment Survey showed a slight improvement in October, holding on to Septembers surprisingly strong 8.1% rebound and edging another 0.4% higher. However, the overall message is still downbeat and the vibe is edgy. The Index remains firmly in pessimistic territory with the steady monthly result concealing powerful undercurrents pulling sentiment in both directions. Responses over the course of the week show a big influence from financial market turbulence which remains extreme across both equities and the AUD and the RBAs continued shift to an easing bias on interest rates. These two factors, which turned around strongly from the middle of the survey week, look to be worth 3% on headline sentiment. The survey detail also shows a mix of improvement on views on family finances, economic prospects and jobs and deterioration on time to buy a dwelling, a vehicle or a major household item and on house price expectations.

Partial data on spending has held up better than expected through Q3 and suggests total consumer spending will be okay for the quarter as a whole. We expect the Q3 national accounts (due December 7) to show spending up 0.6%qtr, 2.9%yr. However, we continue to see weakness near term with downward revisions to previous estimates a significant risk as well. Indeed, our concern is that despite the firming in Sep-Oct, consumer sentiment is still vulnerable. In particular, if Europes financial crisis flares again or if consumers become less convinced that interest rate relief is on the way, sentiment could quickly reverse recent gains. With anxiety around job markets and housing likely to linger and Europes crisis set to be a recurring threat to global financial stability and world growth, we expect the RBA will need to follow through on its easing bias with actual rate cuts to prevent a renewed slide in sentiment. Accordingly, we continue to forecast a 25bp rate cut by year-end with a further 75bps in rate reductions by September 2012.
5

October 2011

The consumer mood: edgy

The WestpacMelbourne Institute Index of Consumer Sentiment increased slightly in Oct, rising 0.4% from 96.9 in to 97.2. Sentiment continues to be pulled by powerful cross-currents. On the downside, financial market turmoil remains a significant factor with more sharp falls in both the sharemarket (ASX down 8% between surveys) and the AUD, which slumped from 106 US to 94 at the beginning of the Oct survey week. However, on the positive side is a continued shift in rhetoric from the RBA, which adopted a clear easing bias at its October Board meeting. That coupled with a strong rally in financial markets late in the survey week (ASX up nearly 7%, AUD rally to 98 US) made for a gain in sentiment overall, though a small one. The cross-currents are evident in survey responses over the course of the week. Those surveyed on Oct 3 to 4 (prior to the RBA meeting and the market turnaround) recorded an Index reading of 92.3 while those surveyed on Oct 5 to 8 recorded a reading of 99.1. While this is a positive finish it appears unlikely to be sustained if we see renewed financial turmoil or doubts on the interest rate outlook.

1. Consumer sentiment: weak, buffeted by events

130 120 110 100 90 80 70 60 Oct-81 Oct-86 Oct-91 Oct-96
pre Oct-5
Sources: Melbourne Institute, Westpac Economics

index

index
post Oct-5

130 120 110 100 90 80 70 60

long run average

Oct-01

Oct-06

Oct-11

2. Consumer sentiment: economy vs finances

index 50 *deviation from long run 40 average, smoothed 30 Source: Melbourne Institute, Westpac Economics 20 10 0 -10 -20 -30 -40 -50 Oct-87 Oct-91 index
supported by mining boom

'economic outlook'

'family finances'

off extreme lows but still recessionary

Oct-95

Oct-99

Oct-03

Oct-07

Oct-11

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

Westpac Institutional Bank

The small sample means these sub-estimates need to be treated with caution, but the big swings suggest an edgy consumer mood that is being weighed on by uncertain conditions domestically and knocked around by financial market volatility and the shifting rate outlook. The Index remains at quite a weak level overall. It is 16.9% below its level a year ago and 6.8% below the average for the first half of 2011. At sub-100, the Index is still in pessimistic territory. The detail showed gains across all sub-indexes except time to buy a major item which fell 5.6%, likely due to the sharply lower AUD.

There are notable divergences by housing tenure and state with renters and those in Vic and WA showing significantly stronger sentiment gains into outright positive territory. The RBA has identified confidence as one of the key channels through which deteriorating conditions in Europe may affect Australia. The crisis in 2008 saw a global collapse in confidence unprecedented in scope and scale with spectacular falls synchronised across all the major advanced economies. The European crisis is starting to show similar signs of a broad-based hit to sentiment although to date the declines have not been quite as severe.

3. Consumer sentiment: selected groups

140 130 120 110 100 90 80 70
*smoothed
Source: Melbourne Institute, Westpac Economics

index
NSW

by state
Vic Qld WA freehold

by tenure
mortgage

index
renters

140 130 120 110 100 90 80 70 60

60 Mar-08

Mar-09

Mar-10

Mar-11

Mar-08

Mar-09

Mar-10

Mar-11

4. Consumers: (another) global shock?

4 3 2 1 0 -1 -2 -3 -4 Jan-85
*smoothed avg < 1.4
Sources: University of Michigan, DG ECFIN, Cabinet Office, Westpac-Melbourne Institute,

st.devns
EU US

consumer sentiment
UK Aust Japan

unemp. expectations
avg < 1.4

st.devns

4 3 2 1 0 -1 -2 -3 -4

Jan-95

Jan-05

Jan-85

Jan-95

Jan-05

October 2011

Sentiment indicators: spending

The survey detail continues to point to an abrupt slowdown in consumer demand. Our modified index which excludes economic questions and includes the Westpac Risk Aversion Index remains at extreme lows consistent with falling per capita spending. Despite this, the data on actual spending continues to hold up. ABS figures show nominal retail sales up 0.6% in Aug following a 0.6% gain in July. Although this followed a weak patch in May-June (sales down 0.6% and 0.1%), the stronger than expected gains have lifted annual growth from a low of 1.4%yr in Jun to 2.1%yr in August (+0.6%yr in per capita terms). With vehicle sales also posting a strong rebound from supply disruptions due to the Japanese earthquake/tsunami, the Q3 national accounts are expected to show a solid 0.6% gain for total spending in Q3, holding annual growth at 2.9%yr (1.4%yr in per capita terms). While Q3 did not see a significant drop-off in total consumer spending, we continue to expect weakening to come through with total spending growth forecast to track a 1.2% annual pace (0.2% in per capita terms) over Q4 and Q1. We also remain wary of potential downward revisions to previous spending estimates, particularly the surprisingly strong Q2 figures.

5. Modified consumer sentiment vs retail sales

30 20 10 0 -10 -20 -30 Oct-86 Oct-91
*excl. economic questions, incl. risk aversion index, deviation from long run avg, smoothed

index

modified consumer sentiment (lhs)* real retail sales per capita (rhs)

ann%
Source: Melbourne Institute, ABS, Westpac Economics

10 8 6 4 2 0 -2 -4

Oct-96

Oct-01

Oct-06

Oct-11

6. Modified consumer sentiment vs total spending

30 20 10 0 -10 -20 -30 Oct-86 Oct-91
modified consumer sentiment (lhs)* real consumer spending per capita (rhs)
*excl. economic questions, incl. risk aversion index, deviation from long run avg, smoothed weakness ahead

index
Source: Melbourne Institute, ABS, Westpac Economics

ann%
WBC Q3 est

Oct-96

Oct-01

Oct-06

Oct-11

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

Westpac Institutional Bank

As discussed in last months Red Book, the 1% rise in spending in Q2 was much stronger than had been indicated by the partial data. Some of this gap reflects strong growth in spending on services, which are a minor part of retail sales. However, there are also large and hard to explain discrepancies between national accounts estimates for spending on goods which should line up closely with the retail data. Services spending is also notoriously prone to revision. Annual benchmarking alone has taken % off initial spending estimates over the last three years, with these revisions heavily concentrated in the services components.

While the retail data removes some of the near term weakness we had expected for Q3 there is still significant scope for the broader national accounts measure to show weakness/revisions that bring growth rates down more in line with the weak through the year growth in retail sales. The remaining gap vs sentiment is likely to be mostly timing. Total spending has been slower to fall in line with sentiment in past cycles. The next few readings on retail sales, business conditions and car sales will be decisive in confirming this view. Cyclical spending components will need to be monitored particularly closely.

7. Consumer spending on retail goods vs retail sales

114 112 110 108 106 104 102 100 98 96 index
real retail sales retail 'proxy' ex national accounts

%ch

+1.4%

qtly %ch (rhs)

Source: ABS, Westpac Economics

+0.3%

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

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

8. Composite indicator of cyclical spending

12 9 6 3 0 -3 -6 -9 -12 Aug-93
Sources: ABS, Melbourne Institute Westpac Economics

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

30 20 10 0

GST introduction

^based on car sales, outbound travel & most cyclical components of retail sales

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

-10
last 6mths

-20 -30

Aug-96

Aug-99

Aug-02

Aug-05

Aug-08

Aug-11

October 2011

Special topic: house price expectations

The October survey included an update of the WestpacMelbourne Institute Consumer House Price Expectations Index. The Index showed a further cooling, falling to 9.0 in October from 15.3 in July and 37.8 in April. This is the lowest reading since May 2009 although most still expect prices to rise or stay the same. 39% expect house prices to be higher, 32% expect prices to be unchanged and 26% expect prices to decline. In May 2009 the split was a third each way, while a similar survey conducted in November 2008, in the immediate aftermath of the Lehman Brothers collapse, showed 55% expected house price declines at the time. Judged against this, the current reading is not too bad although price expectations have been cut dramatically from their April 2010 high when 84% expected house prices to rise. The median expectation in October is for no change over the next year. That is the same as July and compares to implied median forecast price rises of +1.2% in April and +1.9% in January. Expectations for price gains may have evaporated but the mix is still a long way from implying a median forecast price decline that would take a further 11pt increase in the proportion of consumers expecting price falls.

9. Consumer expectations for house prices

220 100 200 75 180 50 160 25 140 0 120 -25 100 -50 80 60 40 20 0 %responses
net percent expecting house prices to rise

%responses

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

fall

no change

rise

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

100 75 50 25 0 -25 -50 -75 80 -100 60 -125 40 -150 20 -175 0

10. House price expectations by state

100 80 60 40 20 0
*% reporting expected rise minus % reporting expected fall

net % NSW Vic SA Qld WA

net %

100 80 60 40 20 0

-20 Jan-09

Source: Westpac-Melbourne Institute

Jan-10

Jan-11

Oct-09

Oct-10

Oct-11

-20

10

Westpac Institutional Bank

The state detail shows some notable divergences. Pessimists outnumber optimists in Qld, where housing markets have been considerably weaker (although even here the median forecast is still for no change). Consumers are more optimistic in WA, NSW and Vic, with these last two states having a significantly higher proportion of house price bulls expecting 10%+ growth. Other detail showed price expectations were more positive for younger age-groups. Indeed, the age-group mix suggests potential first home buyers are significantly more optimistic about price prospects than potential investors.

The downshift in price expectations over the last 18mths has coincided with a similar turnaround in actual price growth. After hitting 14%yr in early 2010, price growth nationally dropped to flat in March and to 3.2% in August. This is significantly weaker than the modest price growth consumers had expected a year prior. Continued price weakness may see more mark downs to expectations. However, this will be balanced against the prospect of rate cuts. The net effect will likely depend on how threatening the situation in housing markets is seen. It is notable that the weak read in May 2009 came despite mortgage rates being at 40yr lows.

11. House prices: expected vs actual

135 120 105 90 75 60 45 30 15 0 -15 net%
*net % expecting prices to rise; ^capital cities, all dwellings, latest is Aug-11

expectations next 12 months (lhs)* actual last 12 months^

ann%
Source: Westpac, Melbourne Institute, RP Data-Rismark

Aus

NSW

Vic

Qld

SA

WA

40 35 30 25 20 15 10 5 0 -5 -10

12. House price expectations by buyer type

90 60 30 0 -30
*% reporting expected rise minus % reporting expected fall

net % May-09 Oct-10

Jul-09 Jan-11

Oct-09 Apr-11

Jan-10 Jul-11

Apr-10 Oct-11

Jul-10

*weighted average of age-group responses

net % 90 60

13.3

30
5.2 2.1

0 -30

Source: ABS, RBA, Westpac-Melbourne Institute

first home buyers

upgraders

investors

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October 2011

Sentiment indicators: durables, cars

The index tracking views on time to buy a major item was the only component of sentiment to fall in October, with a 5.6% drop reversing the gains over the previous two months. Much of this appears to be currency-related. For the last year we have argued that this index was being boosted by a high AUD which rose through parity vs the USD last November and has been above most of the time since. Buyer attitudes surged on the prospect of cheap imported goods but there was little follow-through to spending. Retail data show per capita spend on household goods has instead declined. The AUD dropped to 94c US in October. The index on time to buy a vehicle also fell in October, slipping 1.6% to 124.2, slightly above the long run average for this index. This may also be currency-related although the AUD influence is harder to detect both in sentiment measures and actual vehicle sales which have been heavily buffeted by a range of influences including temporary tax incentives for business buyers last year, weather events in January-February, related insurance-funded replacement buying and supply disruptions stemming from the earthquake/tsunami disaster in Japan. These are only now dropping out of the picture.

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

index* ann% 40 AUD surges time to buy a major item (adv. 5mths, lhs)* 30 from 85c to household goods retail (rhs)^ 110c US 20 10 0 -10 -20 *deviation from long run average, smoothed -30 last 6 ^nominal per capita, 3mth average mths -40 Sources: Melbourne Institute, ABS, Westpac Economics -50 Aug-03 Aug-05 Aug-11 Aug-07 Aug-09 12 10 8 6 4 2 0 -2 -4 -6

14. Time to buy a car vs vehicle sales

60 45 30 15 0 -15 -30
*qtly prior to Jun-07 ^sa passenger and SUV sales per 1000 people
Sources: ABS, Melbourne Institute, Westpac Economics

index
time to buy a car (adv 6mths, lhs)* new vehicle sales per capita (rhs)^
tax-incentives boost business sales

number

3.8 3.6 3.4 3.2 3.0 2.8 2.6 2.4

-45 Aug-03

Japans earthquake hits supply

Aug-05

Aug-07

Aug-09

Aug-11

12

Westpac Institutional Bank

Sentiment indicators: housing

The index tracking views on time to buy a dwelling fell sharply by 10.4% in October, although that followed a surprisingly strong 15.1% jump in September to the highest level since September 2009. Consumer seem skittish on housing. The volatility has been particularly high at the state level where the monthly swings ranged from +27% in September (Vic) to 15% in October (NSW). Looking through the noise, Qld and WA consumers are more positive on time to buy but this looks largely due to the bigger improvement in affordability in these states which have seen larger house price falls. The state picture is different again in terms of consumer responses on the wisest place for savings a rough proxy for investor sentiment. This question (last run in September) also shows volatile views but with consumers in Vic and WA more positive on real estate than the rest. In the case of Vic, this likely reflects the stronger price performance in recent years. For WA it more likely reflects the mining boom which is overriding concerns about current price weakness. This does not seem to be the case for Qld though. Overall, buyer attitudes and job security point to continued soft demand near term.

15. Consumer sentiment: real estate

index 160 140 120 100 80 60 40 Jun-08 NSW Jun-09 Vic Jun-10 Qld WA Jun-08 Jun-09
Source: Melbourne Institute, Westpac Economics

time to buy a dwelling

Qld & WA more upbeat on time to buy ...

wisest place savings: real estate %

30 25 20 15

... but Vic & WA consumers more positive on real estate as an investment

10 5 0

Jun-11

Jun-10

Jun-11

16. Model of housing finance approvals

ann% 60 50 40 30 20 10 0 -10 -20 -30 -40 Source: ABS, Westpac -50 Aug-81 Aug-86
simple regression on 'time to buy dwelling' and unemp expectations housing finance approvals ex refi (number, trend)

ann%

model projection assumes no change in time to buy dwelling or unemployment expectations

Aug-91

Aug-96

Aug-01

Aug-06

Aug-11

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

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October 2011

Sentiment indicators: risk aversion

The wisest place for savings questions used to construct the Westpac Consumer Risk Aversion Index were not included in the October survey but will be in December (due January 18). The message in September was clear though with consumers retaining a highly risk averse attitude to their finances, encouraged by financial turmoil and soft housing markets. The swing towards risk aversion has coincided with a sharp rise in new saving with the household saving ratio rising from zero in 2006 to sustained levels over 10%. Westpac expects the savings rate to stay in this range in 2011-12. While much of this increased saving effort has been channelled towards paying down debt, there has also been a significant rise in households holdings of cash & deposits. There are two drivers here the increased savings effort and portfolio reallocation, i.e. liquidating sharemarket and real estate investments. State responses give some extra insight. Consumers in Vic are much less cautious, while Qlders are extremely risk averse. Much of the difference comes down to views on real estate. With Vics previously hot housing market turning down that could mean a further shift towards risk aversion in coming quarters.

17. Consumer risk aversion vs cash holdings

% 60 Westpac consumer risk aversion index (lhs)* 50 40 household cash & deposits, %income (rhs) 30 *% nominating 'pay down debt' or interest bearing 20 assets as wisest place for savings minus % nominating real estate or shares 10 0 -10 -20 Sources: ABS, Westpac, -30 Melbourne Institute -40 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 %income 84 76 68 60 52 Jun-11 44

18. Consumer risk aversion by state

index 60 NSW Vic Qld WA 50 *smoothed 40 30 20 Victorians less worried than in 10 2008 0 -10 -20 Source: Melbourne Institute, Westpac Economics -30 Jun-02 Jun-05 Jun-08 Jun-11 Jun-02 Jun-05 Jun-08 index 60 50 40 30 20 10 0 -10 -20 -30

Qlders extremely risk averse

Jun-11

14

Westpac Institutional Bank

Sentiment indicators: job security

In recent months the Red Book has warned that consumer perceptions of labour market prospects were a major downside risk to the outlook with job security a key factor in swings in cyclical spending and housing market activity. The October survey showed an improvement in unemployment expectations, with the 5% fall in the index implying fewer consumers expect a rise in unemployment over the next year. However, the index is still up sharply in the last six months (+27%) and is indicating respondents are expecting an unemployment rate of 6% by October 2012, a rise of 0.7ppts on current levels. The detail argues for caution on the October number. By far the biggest improvement was amongst the unemployed, retired and those not working combined, these sub-groups saw a 13% fall. In contrast, expectations were mainly unchanged for those with jobs a group that should have a better sense of employers actual staffing plans and the risks around them. The state split shows a gap re-opening between the resource and non-resource states with a 10pt wedge in unemployment expectations already. The gap blew out to 25pts during the first mining boom. So far the main restraint has been a more subdued view amongst Qlders.

19. Unemployment expectations vs actual

4 3 2 1 0 -1 -2 -3 Oct-76
shaded areas are recessions/GFC
Sources: ABS, WestpacMelbourne Institute

std devns
unemp expectations (lhs)
1.7 std devns

ppts

4 3 2 1 0 -1 -2 -3

ann ch unemp rate (rhs)

Oct-81

Oct-86

Oct-91

Oct-96

Oct-01

Oct-06

Oct-11

20. Unemployment expectations: selected groups

200 180 160 140 120 100 80
^weighted average of unemployed, retirees and not working ... those in non-mining states most insecure

index

by labour status
working not working^
no improvement for those with jobs ...

by state
'resource'

index

'non-resource'

200 180 160 140 120 100 80 60

60 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10

Source: Melbourne Institute, Westpac Economics

*smoothed

15

October 2011

Economic and financial forecasts

Interest rate forecasts
Latest (Oct 14) 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 2.18 2.90 1.50 Latest (Oct 14) AUD/USD NZD/USD USD/JPY EUR/USD AUD/NZD 1.0170 0.7930 76.90 1.3755 1.2825 0.125 2.10 2.91 1.00 Dec11 0.95 0.73 76 1.30 1.30 0.125 2.20 3.06 0.75 Mar12 0.93 0.71 76 1.26 1.31 0.125 2.40 3.21 0.75 Jun12 0.91 0.69 76 1.22 1.32 0.125 2.50 3.36 0.75 Sep12 0.96 0.74 78 1.27 1.30 0.125 2.60 3.51 0.75 Dec12 0.98 0.77 81 1.28 1.27 4.75 4.75 4.29 4.43 225 Dec11 4.50 4.50 4.40 4.30 220 Mar12 4.25 4.25 4.50 4.30 210 Jun12 4.00 4.00 4.60 4.40 200 Sep12 3.75 3.75 4.60 4.50 200 Dec12 3.75 3.80 4.60 4.70 210

Exchange rate forecasts

*Nominal trade weighted index, with latest data compiling the base. Weights from Reserve Bank of Australia. A reading above (below) 100 indicates a rise (fall) in the AUD. ^Approximate market forward price for AUD/USD, not a forecast. Sources: Bloomberg, Westpac Economics.

16

Westpac Institutional Bank

Economic and financial forecasts

Australian economic growth forecasts
2010 Q4 GDP % qtr Annual change Unemployment rate % CPI % qtr Annual change CPI underlying % qtr ann change 0.8 2.7 5.2 0.4 2.7 0.5 2.3 2011 Q1 0.9 1.0 5.0 1.6 3.3 0.8 2.3 Q2 1.2 1.4 4.9 0.9 3.6 0.6 2.6 Q3f 0.2 1.3 5.2 0.6 3.5 0.5 2.5 Q4f 0.5 1.0 5.3 0.5 3.6 0.6 2.6 2012 Q1f 0.5 2.4 5.4 0.7 2.8 0.6 2.3 Q2f 0.6 1.9 5.6 0.6 2.4 0.6 2.3

Calendar years 2009 GDP % ann change Unemployment rate % CPI % ann change CPI underlying % ann change 1.4 5.6 2.1 3.5 2010 2.7 5.2 2.7 2.3 2011f 1.2 5.1 3.6 2.6 2012f 2.5 5.6 3.1 2.6

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.

17

October 2011

Consumer data and forecasts

Consumer demand
2010 % change Total private consumption* annual chg Real labour income, ann ch Real disposable income, ann ch** Household savings ratio Real retail sales, ann chg Motor vehicle sales (000s)*** annual chg Q3 0.9 3.4 5.3 4.1 9.7 2.8 813.7 10.6 Q4 0.6 3.1 5.6 4.7 9.7 1.0 819.7 4.9 2011 Q1 0.6 3.5 6.1 6.0 11.7 1.1 806.1 -0.7 Q2 1.0 3.2 4.9 4.9 10.5 0.6 755.6 -12.8 Q3f 0.6 2.9 4.0 3.8 10.6 0.3 823.1 1.2 Q4f 0.3 2.5 3.3 3.7 10.8 0.6 795.5 -3.0 2012 Q1f 0.3 2.2 1.9 1.9 11.3 0.9 802.3 -0.5 Q2f 0.5 1.7 0.9 3.0 11.6 1.2 828.8 9.7

Calendar years 2009 Total private consumption, ann ch* Real labour income, ann ch Real disposable income, ann ch** Household savings ratio, % Real retail sales, ann chg Motor vehicle sales (000s)*** annual chg 1.0 -1.1 5.4 9.9 3.1 728.9 -7.7 2010 2.8 4.0 2.2 9.3 1.7 828.0 13.6 2011f 3.0 4.5 4.6 10.9 0.6 795.1 -4.0 2012f 2.0 1.5 3.0 11.8 1.5 847.3 6.6

* 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 % reporting expected rise next 12 months minus % expecting fall. Note that questions on mortgage rate, house price and wage expectations have only been surveyed since May 2009.

18

Westpac Institutional Bank

Consumer data and forecasts

Consumer sentiment
2011 % 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^^ consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# WestpacMI Unemployment Expectations 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^^ consumer mortgage rate expectations# consumer house price expectations# consumer wage expectations# WestpacMI Unemployment Expectations avg*** 101.8 90.3 108.9 90.2 90.7 127.9 121.5 122.3 10.4 82.4 49.8 49.5 127.8 Jan 104.6 85.8 104.7 97.6 95.8 139.3 137.9 114.9 43.3 108.7 2011 Jun 101.2 75.9 95.5 97.9 98.8 137.9 132.7 115.4 45.7 79.2 128.2 Jul 92.8 74.4 91.7 84.7 88.8 124.8 128.8 119.3 15.3 132.4 Aug 89.6 71.8 87.0 73.2 88.3 127.7 120.8 114.6 61.7 135.1 Sep 96.9 79.8 95.3 85.4 92.2 131.8 126.3 131.9 44.0 43.4 146.6 Oct 97.2 81.6 98.1 86.2 96.0 124.4 124.2 118.2 9.0 139.2 19 Feb 106.6 82.0 106.2 98.7 105.6 140.5 136.4 117.1 89.9 99.7 Mar 104.1 80.7 99.0 104.3 102.5 133.8 132.4 114.5 29.9 51.1 105.9 Apr 105.3 80.8 100.4 107.8 99.1 138.4 127.9 108.6 37.8 109.3 May 103.9 77.5 94.4 104.4 102.6 140.8 130.6 110.7 106.0

October 2011

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 Auckland London Camomile Court, 23, Camomile St, London EC3A 7LL United Kingdom Telephone (4420) 7621 7061 Facsimile (4420) 7621 7527 James Shugg Senior Economist

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 Anne Boniface Senior Economist Michael Gordon Markets Economist

Felix Delbrck Senior Economist

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Notes

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

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Notes

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