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The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist

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Page 1: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

The Federal Budget 2013/14 14 May 2013

Bill Evans

Chief Economist

Page 2: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

2

Page 3: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Federal budget: $19.4bn deficit in 2012/13

-3.3

-4.1 -4.2

-60

-40

-20

0

20

40

-6

-4

-2

0

2

4

1981/82 1991/92 2001/02 2011/12

$bn % of GDP

$bn (rhs) % of GDP (lhs)

Sources: Treasury, ABS, Westpac Economics

Gov‟t

f/cs to

‟16/17

Underlying cash balance

3

Page 4: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

300

325

350

375

400

425

450

300

325

350

375

400

425

450

'11/12 '12/13 '13/14 '14/15 '15/16

$bn $bn

May 2012 May 2013

Sources: budget papers, Westpac Economics

-$20bn

-$23bn

-$20bn

-$21bn

Total receipts

(a)

Four yrs

-$83bn

Revenue, slippage

4

Page 5: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

General government, net debt

0

20

40

60

80

100

120

0

20

40

60

80

100

120 A

us

NZ

Ca

na

da

Germ

any

Sp

ain

UK

Fra

nce

US

Ita

ly

% %

Source: IMF, budget papers, Westpac Economics

Australian Government

including

2014/15 f/c

% of GDP; 2012

5

Page 6: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Back-loaded savings of $12.3bn in 2015/16

0.0 0.1 0.1 0.5 0.3 0.0 0.0

0.9 1.0

11.6

4.2

2.6

5.8

3.4

0.7

1.7

3.1

10.7

0

2

4

6

8

10

12

14 $bn

2013/14*

over four years

Key savings initiatives

*includes savings

in 2012-13

6

Page 7: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

New spending initiatives in the Budget

0.2

0.5

0.0

0.6 0.4

0.2

0.6

3.1 3.0

1.9

1.2 1.0 0.9 0.8

0

1

2

3

4

0

1

2

3

4

Infrastructure Schools Disability Training Social Health Defence

$bn $bn

2013/14*

over four years

*includes spending

in 2012-13

7

Page 8: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Australian Government staffing levels

-6

-3

0

3

6

9

12

-4

-2

0

2

4

6

8

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13* 2013/14*

thousands % chg

Change in thousands (rhs)

% change (lhs)

Source: Budget Papers.

*12/13 and 13/14 exclude contractors.

11/12 & 12/13

combined:

–2.0%

–5.3k

8

Page 9: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Government Westpac

World GDP (2014) 4.0 3.1%

Aust GDP 2.75% 2.4%

Consumption 3.0% 3.0%

Housing 5.0% 4.7%

Investment 4.5% 0.0%

Unemployment 5.75% 6.1%

Government & Westpac forecasts: 2013/14

Sources: Budget papers, Westpac Economics

9

Page 10: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Growth to remain below trend in 2013 and 2014

-2

0

2

4

6

-2

0

2

4

6

Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14

% chg % chg

GDP growth Long term avg Five year avg

Sources: ABS, Westpac Economics

fc/s

10

Page 11: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Major gas projects: spending near peak

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16

$bn $bn

Quarterly*

Actual, official data #

3qtr moving avg.

Sources: Westpac Economics,

Access “Investment Monitor”

* Westpac estimates

Peak: end 2013, early 2014

# Work on all

oil & gas projects

11

Page 12: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Business confidence fails to respond to rate cuts

70

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

index index

2001-02

2008-09

2011-12

Sources: NAB, Westpac Economics

*index based to 100 in

month prior to first rate cut

months

12

Page 13: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

CAPEX plans – collapse in manufacturing

-30

0

30

60

-30

0

30

60

2012 2013f 2014f

% chg, yr avg % chg, yr avg

Mining

Manufacturing

Services

Total

History in real terms,

Expectations in nominal

(calculated using avg.

realisation ratios)

Sources: ABS,

Westpac Economics

Financial years

13

Page 14: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Consumer sentiment finally responds to rate cuts

70

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

index index

2001-02

2008-09

2011-12

Sources: Melbourne Institute, Westpac Economics

*index based to 100 in

month prior to first rate cut

months

14

Page 15: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

0

10

20

30

40

50

60

0

10

20

30

40

50

60

Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

% %

Sources: Melbourne Institute,

Westpac Economics

level of recall: „international‟ news items

Consumers very sensitive to European crises

Asian

crisis

9-11

Lehman’s

collapse avg

last

2yrs:

28%

European

sov. debt

crisis

15

Page 16: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Household leverage will contain housing excess

0

20

40

60

80

100

120

140

160

180

Mar-77 Nov-83 Jul-90 Mar-97 Nov-03 Jul-10

0

20

40

60

80

100

120

140

160

180 % %

total (gross)

housing

Sources: RBA, Westpac Economics

Peak in Sep-06

16

Page 17: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Westpac loan book shows consumer caution

90

92

94

96

98

100

102

104

106

108

110

80

85

90

95

100

105

110

115

120

Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12

index index

*based on median months ahead

Westpac customers are on mortgage

repayments

increase in months ahead

decrease in months ahead

17

Page 18: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

New housing lending is picking up very slowly

-30

-20

-10

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14

% ann $bn/qtr

Housing finance, level (lhs) Annual growth (rhs)

Sources: ABS, RBA, Westpac Economics

quarterly

30%

10%

f/c to

Sep ‟13

18

Page 19: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

The job market in 2012: winners and losers

-50

-25

0

25

50

75

-50

-25

0

25

50

75

Education & health

Business services*

Mining Government Construction

thousands thousands

Sources: ABS, Westpac. * Professional, technical & business.

19

Page 20: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Unemployment rate: moving higher

0

2

4

6

8

10

0

2

4

6

8

10

Apr-97 Apr-01 Apr-05 Apr-09 Apr-13

Australia, sa ACT, trend

Sources: ABS, Westpac Economics

% %

f/c

end '15

ACT: unemployment rate

up 1ppt year to 4.6% in April ’13

20

Page 21: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Durables inflation – domestic margin pressure

-12 -9 -6 -3 0 3 6

Textiles, clothing & footwear

Furniture

Motor vehicles & parts

Toys, books & leisure goods

Household electrical items

ppts

Consumer prices

Import prices

Source: RBA

average annualised inflation since Q1 2011

21

Page 22: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Underlying inflation to stay low despite carbon tax

0

1

2

3

4

0

1

2

3

4

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

%yr %yr

Westpac's estimate of the Carbon Price

RBA core inflation

Sources: ABS, Westpac Economics

Forecasts

Target band

22

Page 23: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Housing finance approvals not responding to rates

70

80

90

100

110

120

130

140

150

70

80

90

100

110

120

130

140

150

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

index index

2001-02

2008-09

2011-12

Sources: ABS, Westpac Economics

*index based to 100 in

month prior to first rate cut

months

23

Page 24: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

25

30

35

40

45

50

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Dec-84 Dec-88 Dec-92 Dec-96 Dec-00 Dec-04 Dec-08 Dec-12

‟000 ‟000

ACT (lhs)

Australia (rhs) Sources: ABS, Westpac Economics

ACT: supply surge

Mar ‟09 to Mar ‟11

Dwelling commencements

24

Page 25: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

House prices are slow to respond to rate cuts

80

90

100

110

120

130

80

90

100

110

120

130

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

index index

2001-02

2008-09

2011-12

Sources: RP Data-Rismark, Westpac Economics

*index based to 100 in

month prior to first rate cut

months

25

Page 26: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

House Price Expectations finally picking up

-50

-25

0

25

50

75

100

-50

-25

0

25

50

75

100

Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12

% %

Source: Melbourne Institute, Mortgage

Choice, Westpac Economics

*grey line is a similar measure from an

annual survey by Mortgage Choice;

^average of all observations, adjusted

for different survey frequencies

net % expecting

house prices to rise

avg^

26

Page 27: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Canberra house prices – recall risk in 1996

3.4

3.8

4.2

4.6

5.0

3.4

3.8

4.2

4.6

5.0

Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09 Mar-13

log index log index

Canberra

Capital cities avg.

Sources: ABS; Westpac Economics

House prices

unchanged from

Mar ’10 to March ’13

27

Page 28: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Sydney house prices have a lot to catch up

60

80

100

120

140

160

180

200

220

240

60

80

100

120

140

160

180

200

220

240

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

index index

Sydney

Melbourne

Canberra

Sources: RP Data-Rismark, Westpac Economics

*all dwellings, Dec 2002 = 100

+33%

+82%

+82%

28

Page 29: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Rental yields are close to mortgage rates

3

4

5

6

7

8

9

10

11

12

3

4

5

6

7

8

9

10

11

12

Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11

%pa %pa

Sydney

Australia

Sources: REIA, Westpac Economics

*median rent on

2bdrm unit as %

of median unit

price

investor

housing

boom

variable

mortgage rate

3yr fixed

rate

29

Page 30: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Gross rental yields by capital city

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7

Sydney Melbourne Brisbane Adelaide Perth Canberra

% %

houses units *as at May 13 SVMR

3yr fixed

30

Page 31: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Investors are responding to rates/yields in NSW

0.0

0.1

0.2

0.3

0.4

0.5

0.5

1.0

1.5

2.0

2.5

3.0

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

$bn $bn

NSW Vic ACT (rhs)

Sources: ABS, Westpac Economics

NSW: +33%yr

Vic: +20%yr

ACT: –7.6%yr

31

Page 32: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

First home buyers are not responding to rate cuts

0.0

0.1

0.2

0.3

0.4

0

1

2

3

4

5

6

7

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13

thousands thousands

NSW Vic ACT (rhs)

32

Page 33: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

House prices: solid increases expected

94

96

98

100

102

104

106

108

110

112

114

116

94

96

98

100

102

104

106

108

110

112

114

116

Dec-12 Dec-13 Dec-14

index index

Sydney

Melbourne

Brisbane

Sources: RP Data-Rismark, Westpac Economics

*all dwellings, Dec 2012 = 100

33

Page 34: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Australian CBD office property yields: States

0

3

6

9

12

15

0

3

6

9

12

15

Dec-85 Dec-91 Dec-97 Dec-03 Dec-09

% annual avg % annual avg

Risk free SYD MEL CBR

Sources: IPD Australia, Westpac Economics.

Income only.

34

Page 35: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Australian CBD office property yields: ACT

0

3

6

9

12

15

0

3

6

9

12

15

Dec-85 Dec-91 Dec-97 Dec-03 Dec-09

% %

Risk free

CBR premium and grade A

CBR other grades

CBR - CBD total

Sources: IPD Australia,

Westpac Economics.

Income only.

35

Page 36: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Civic Office market vacancy rate

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Ja

n-9

3

Ja

n-9

5

Jan

-97

Ja

n-9

9

Ja

n-0

1

Ja

n-0

3

Ja

n-0

5

Ja

n-0

7

Jan

-09

Ja

n-1

1

Ja

n-1

3

Prime Secondary

Non Civic office market vacancy rate

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Ja

n-9

3

Ja

n-9

5

Jan

-97

Ja

n-9

9

Ja

n-0

1

Ja

n-0

3

Ja

n-0

5

Jan

-07

Ja

n-0

9

Ja

n-1

1

Ja

n-1

3

Prime Secondary

Source: PCA OMR 2/12

36

Page 37: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Actual

May 12

Forecast

for May

13

Current

level

May-14

forecast

Cash %pa 3.75 3.25* 2.75 2.00

3yr swap 3.42 4.20 2.90 2.75

AUD/USD 102¢ 105¢ 98¢^ 96¢

Last year’s Budget forecasts – the report card

*lowered to 2.75% on May 24 2012

^trading at 105¢ Apr 8-12

37

Page 38: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

2

3

4

5

6

Jan Apr Jul Oct

%

3yr swap

Cash rate

Source: Bloomberg, Westpac Strategy

Fixed rates turn sharply – time to contain risk now

2

3

4

5

6

Jan Apr Jul Oct

%

f‟cast

2009 2013

38

Page 39: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

World growth – WBC forecasts slowdown

2012 (%ann) 2013 (%ann) 2014 (%ann)

World 3.2 3.4 3.1

US 2.2 1.7 1.6

Europe -0.6 -0.5 -0.5

China 7.7 8.0 7.8

Australia 3.6 2.5 2.3

39

Page 40: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Policy to slow down Chinese housing sales

-50

-25

0

25

50

75

100

125

150

175

200

-50

-25

0

25

50

75

100

125

150

175

200

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15

%yr %yr

Centre

East

West

Sources: CEIC, Westpac Economics.

40

Page 41: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Chinese infrastructure spending to slow down

28

22

16

23

42

18

3

6

26

19

-10

0

10

20

30

40

50

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

ppt cont.

Transport

Utilities

Total

Sources: CEIC, Westpac.

Contribution to full year growth. * Railways, airports, mass urban transit, pipeline, waterways.

forecast

41

Page 42: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Chinese construction cycle – slowdown coming

0

10

20

30

40

Jan 05 Jul 06 Jan 08 Jul 09 Jan 11 Jul 12 Jan 14

%yr %yr

%yr 3mma

Sources: CEIC,

Westpac Economics.

42

Page 43: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Europe: unemployment continues to rise

0

5

10

15

20

25

30

0

5

10

15

20

25

30

1995 1997 1999 2001 2003 2005 2007 2009 2011

%

France Spain

Italy Netherlands

Source: Eurostat

% unemployment rate

Page 44: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Germany and France – core diverging rapidly

4

6

8

10

12

4

6

8

10

12

1995 1997 1999 2001 2003 2005 2007 2009 2011

% %

Germany France

Source: Eurostat

unemployment rate

44

Page 45: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

-15

-10

-5

0

5

10

15

20

25

30

35

-15

-10

-5

0

5

10

15

20

25

30

35

Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12

ann%

Euro area 'troubled' economies the rest

Sources: IMF, Westpac

ann%

*private sector, 6mth annualised growth rate

^Spain, Italy, Portugal, Ireland and Greece combined

Troubled economies’ banks just not lending

45

Page 46: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Gross debt ratios keep rising – ratings risks

0

20

40

60

80

100

120

140

1991 1999 2007 2015

%

Spain Italy France

Source: IMF, Westpac Economic growth forecasts

46

% of GDP

Page 47: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Sovereign risk ratings – Spain/Italy on the cusp !

Current 2011/12

peak

Rating Outlook

France 1.0% 3.4% AA+ Neg

Italy 3.1% 7.7% BBB+ Neg

Spain 3.4% 7.6% BBB– Neg

*current yield is generic 7yr yield to match average duration of existing liabilities.

47

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Non-residents hold EUR 1.35 tr in Spain/Italy debt*

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

France Germany Greece Ireland Italy Portugal Spain

€trn

Sources: IMF, Bloomberg.

Westpac Economics.

*Marketable debt only.

48

Page 49: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

US unemployment falls due to part. rate, not jobs

54

56

58

60

62

64

66

68

0

2

4

6

8

10

12

1970 1980 1990 2000 2010

% %

Unemploment rate (lhs)

Participation rate (rhs)

Employment-population ratio (rhs) Sources: Ecowin, Westpac Economics

49

Page 50: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

US consumption growth is slowing again

-8

-6

-4

-2

0

2

4

6

8

-20

-15

-10

-5

0

5

10

15

20

1997 1999 2001 2003 2005 2007 2009 2011 2013

% %

Durables (lhs) Services (rhs) Non durables (rhs)

Sources: Ecowin, Westpac Economics

annual change

PCE total m/m chg

Dec: 0.2%

Jan: 0.2%

Feb: 0.3%

Mar: 0.3%

50

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US house prices – no longer booming

-30

-20

-10

0

10

20

30

-3

-2

-1

0

1

2

3

Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13

% %

monthly change (lhs)

6 month ann change (rhs) Source: Ecowin

20-city S&P Case-Shiller Index

51

Page 52: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

US commercial banks not supporting housing

0.5

1.0

1.5

2.0

2.5

Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

2.0

2.5

3.0

3.5

4.0 $trn $trn

Mortgages (lhs)

Treasury & MBS

C&I loans

Sources: Federal Reserve

Mortgage charge offs circa

$28bn in 2012; rise in

mortgage balance past year $12bn,

but GSE‟s down $95bn.

52

Page 53: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Fiscal policy still a drag – new policies next year ?

0

1

2

3

4

0

1

2

3

4

2013 2014

%

Fiscal cliff (without deal)

Sequester

January deal

%

Source: CBO; Westpac Economics

drag on GDP growth in calendar year

53

Page 54: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Commodity prices will fall through 2014

100

150

200

250

300

350

100

200

300

400

500

600

700

Mar-07 Mar-09 Mar-11 Mar-13

index index

Bulks* (lhs)

Exchange traded* (rhs)

Sources: Westpac Economics, Bloomberg, ABS.

Bulks includes iron ore and coal. Exchange traded includes

rural, crude oil, base metals and gold.

54

Page 55: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Major central banks are committed to QE

0

10

20

30

40

50

0

10

20

30

40

50

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

%GDP

ECB Fed BOJ

Sources: Ecowin, Bloomberg, CEIC, Westpac Economics

%GDP

Indicative

forecasts

55

Page 56: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Australian dollar to fall but retain QE premium

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

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

USD USD

Fair value band

AUD/USD actual & forecast

Sources: RBA, Westpac Economics

Includes WCFI+BI commodities index, 2 year swap spread, and NFD to GDP.

56

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“2012 Budget talk”: QE3 to support market

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11 Feb-12

100

125

150

175

200

225 $trn Index

S&P500* (rhs)

Federal Reserve: securities held (lhs)

Source: Ecowin, Bloomberg, Westpac Economics

*S&P500 March

2009 low = 100

QE1 QE2

Operation twist

announced

Page 58: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

US sharemarket has outperformed Australia

30

50

70

90

110

130

30

50

70

90

110

130

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

index index

S&P500 S&P200 Euro Stoxx 50

Sources: Bloomberg,

Westpac Economics

2 Jan „07 = 100

58

Page 59: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

... but not in AUD terms; Europe woeful

30

50

70

90

110

130

30

50

70

90

110

130

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

index index

S&P500 S&P200 Euro Stoxx 50

Sources: Bloomberg,

Westpac Economics

2 Jan „07 = 100

59

Page 60: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

MSCI P/E ratios – market is no longer cheap

-15

-10

-5

0

5

10

15

-15

-10

-5

0

5

10

15

Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11

points points

Australia US Europe

Source: Bloomberg (MSCI indexes)

deviation from long-run average

cheap

expensive

60

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Australian P/E ratios; resources better banks

-15

-10

-5

0

5

10

15

20

-15

-10

-5

0

5

10

15

20

Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11

points points

Financials

Materials

Source: Bloomberg (MSCI indexes)

deviation from long-run average

cheap

expensive

61

Page 62: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

Key messages from Budget presentation

• Forecast budget deficits are not significant – Australia has very low

sovereign debt ratio; especially with most debt issued in AUD„s.

• RBA to cut to 2% from 2.75% but fixed rates near lows right now.

• Risks around rebalancing of mining/non mining – business the key.

• House prices to rise but household leverage to contain any boom.

• Second wave of cuts to be associated with weak world economy.

• Low inflation allows rate flexibility for the authorities.

• Commodity prices to fall – AUD to USD 0.96 by mid 2014.

• World economy to slow in 2014 – US to disappoint – keep QE;

China slows construction cycle; Europe remains in recession.

62

Page 63: The Federal Budget 2013/14 · The Federal Budget 2013/14 14 May 2013 Bill Evans Chief Economist . 2 . Federal budget: $19.4bn deficit in 2012/13 -3.3 ... Business confidence fails

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