Economic Update Westpac Institutional Bank Presented by Elliot - PowerPoint PPT Presentation

Economic Update Westpac Institutional Bank Presented by Elliot Clarke, CFA 19 June 2019

Westpac RBA forecast and market pricing % % Market 20 Feb** 1.6 1.6 Market now* Westpac forecast 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 Sources: Bloomberg, Westpac Economics *Pricing as at 13 June 0.6 0.6 Mar 19 Jun 19 Sep 19 Dec 19 Mar 20 Jun 20 2

Australia: domestic demand ppts cont' ppts cont' 1.2 1.2 contributions to qtrly domestic demand growth Sources: ABS, Q2 Q3 Q4 Q1 0.8 Westpac 0.7 Economics 0.4 0.2 0.0 -0.3 -0.4 Public demand, Annual pace Mixed brisk Annual 1.6% slips to 1.8% Downturn as gas projects underway completed -0.8 -0.8 Consumer Home Business Public Domestic building demand 3

Consumer spending, per capita % ann % ann Australia NSW Vic 4 4 Qld LR avg WA 2 2 0 0 -2 -2 Sources: ABS, smoothed, 2qtr avg smoothed, 2qtr avg Westpac Economics -4 -4 Mar-09 Mar-13 Mar-17 Mar-09 Mar-13 Mar-17 4

Real wages stall: a key structural challenge % ann % ann 10 10 Wages, nominal* Real wages growth 8 8 1990s to 2007: +1.5% yr Wages, real* 2013 to 2018: -0.1% yr 6 6 4 4 2 2 0 0 -2 -2 Sources: ABS, Westpac Economics * National accounts estimate -4 -4 Mar-90 Mar-96 Mar-02 Mar-08 Mar-14 Mar-20 5

Underemployment at 8.6%, above GFC level % % 10 10 Underemployment rate Unemployment rate 8 8 Post GFC Underemployment too high, at 8.6% at 7.5% still above post GFC level 6 6 4 4 Unemployment: lifts to 5.2% no progress since mid-2018 Underemployment: the share of labour force that are employed and are Sources: ABS, Westpac Economics seeking and available to work more hours 2 2 May-07 May-10 May-13 May-16 May-19 6

Softer job growth expected net bal. % ann 20 4.5 3.5 10 2.5 0 1.5 0.5 -10 Latest Employment conditions NAB, obs’n: -0.5 adv 6mths* (lhs) -20 -1.5 Jobs growth, ABS* (rhs) Sources: NAB, ABS, Westpac Economics * smoothed, 2mth avg -30 -2.5 May-05 May-09 May-13 May-17 7

Dwelling prices: sharp falls continuing % 6mth growth rates, annualised % 40 40 Sydney Melbourne Brisbane Perth * all dwellings, s.a. 30 30 20 20 10 10 0 0 -10 -10 Sources: CoreLogic, Westpac Economics -20 -20 May-07 May-09 May-11 May-13 May-15 May-17 May-19 8

Household balance sheet: debt squeeze % % 1200 200 total debt (rhs)* March 2020 1100 total assets (lhs) 1000 150 900 800 100 % annual household disposable income 700 * net of funds held in mortgage offset accounts Sources: ABS, RBA, Westpac 600 50 1993 1998 2003 2008 2013 2018 9

NSW: affordability & buyer sentiment index % 200 12 time to buy dwelling (lhs) affordability (rhs)* 180 *%income required to save a deposit and service mortgage of 75% of median priced dwelling (avg over 5yr pre-purchase and 160 17 5yr post purchase periods) 140 latest 120 22 30yr 100 avg improve 80 27 assuming 60 2019: -5%yr deteriorate 2020: flat%yr Sources: CoreLogic, ABS, Westpac-Melbourne Institute 40 32 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16 Mar-19 10

Consumer spending: stuck in slow lane % ann % ann 8 8 Consumer spending 7 7 spending, per capita 10 years to 2007 6 Westpac 6 avg, 4.4% fc/s to Post GFC 5 5 end 2020 fiscal stimulus 4 4 3%, around LR avg 3 3 2 2 1 1 0 0 Sources: ABS, Westpac Economics -1 -1 Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19 11

Consumer spend: essentials v’s discretionary ‘essentials’ (58%) ann% ‘discretionary’ (42%) ann% 6 12 housing (33%)* services (48%) food, fuel (24%) durables (44%)^ 4 services (43%) 7 Sources: ABS, Westpac Economics 2 2 0 -3 -2 real, per capita; smoothed ^includes small renovations -4 -8 Mar-06 Mar-10 Mar-14 Mar-18 Mar-06 Mar-10 Mar-14 Mar-18 12

Budget surplus provides scope for relief % of GDP $bn Underlying cash balance 4 40 1980s 1990s 2010s 6 years of deficit 11 years of deficit 2 20 0 0 -2 -20 $bn (rhs) % of GDP (lhs) f/cs -4 -40 -4.1 -4.2 Sources: Budget papers, ABS, Westpac Economics -6 -60 1985/86 1993/94 2001/02 2009/10 2017/18 13

Budget’s impact on household incomes $bn % 3.5 60 additional Budget measures 3.0 50 Personal Income Tax Plan, legislated from last 2.5 year's budget 40 2.0 Sources: PBO, Treasury, Westpac +0.9ppts Economics 30 1.5 20 1.0 +0.6ppts 10 0.5 0 0.0 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 14

Public transport project pipeline: by state $bn $bn 2015 Q4, 2017 Q4, 2019 Q1 90 Sources: Deloitte 82 Access Economics, 80 78 Under consideration Westpac Economics 70 Definite Australia 2015 2017 2019 60 Definite 54 113 131 54 50 + under con 117 166 186 50 40 40 30 28 30 25 20 18 11 7 7 10 4 6 2 0 NSW Vic Qld WA SA 15

Non-residential building: south-east focus $bn Private $bn 3.0 3.0 Real, sa 2.5 2.5 WA Qld 2.0 2.0 1.5 1.5 1.0 1.0 NSW Vic 0.5 0.5 Sources: ABS, Westpac Economics 0.0 0.0 Mar-05 Mar-13 Mar-05 Mar-13 16

Population growth varies across nation % ann % ann 4 4 WA (0.9%yr) NSW (1.5%yr) Vic (2.2%yr) Qld (1.7%yr) 3 3 Tas (1.2%yr) 2 2 1 1 Sources: ABS, Westpac Economics 0 0 Sep-02 Sep-08 Sep-14 Sep-02 Sep-08 Sep-14 17

Service exports offer great opportunity $bn $bn Nominal, rolling annual 40 40 Sources: ABS, Education Total service exports: +9.3% yr 35 35 +15% 30 30 * Business services: $22bn, including: legal & prof’ services $5.3bn 25 25 financial services $4.9bn Leisure IT & Telecomm $4.5bn travel, +6% 20 20 Intellectual property rights $1.3bn Business other, $6.5bn services * +8% 15 15 Transportation 10 10 +1% 5 5 Business travel, +4% 0 0 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14 Dec-18 Dec-22 18

Global growth: both risk and opportunity 2015 2016 2017 2018 2019 2020 %chg World 3.4 3.4 3.8 3.6 3.3 3.5 US 2.9 1.6 2.2 2.9 2.3 1.8 Europe 2.1 2.0 2.4 1.8 1.2 1.4 China 6.9 6.7 6.8 6.6 6.1 6.0 India 8.0 8.2 7.2 7.1 7.1 7.1 Australia 2.5 2.8 2.4 2.8 1.8 2.4 NZ 3.6 4.0 3.1 2.8 2.3 3.1 Source: IMF, Westpac Economics. 19

China investment: jobs need to flow points points deviation from long-run average 6 6 Sources: CEIC, Markit, Westpac Economics 3 3 0 0 -3 -3 NBS manufacturing employment -6 -6 NBS services employment -9 -9 2005 2007 2009 2011 2013 2015 2017 2019 20

Australian population growth ’000, ann ’000, ann 500 500 2008 peak: 316k Population change 400 400 Net overseas migration Natural increase 300 300 200 200 100 100 Sources: ABS, Westpac Economics 0 0 Sep-83 Sep-88 Sep-93 Sep-98 Sep-03 Sep-08 Sep-13 Sep-18 21

China has grand ambitions % of world patent grants by country office % of world Sources: WIPO, Westpac Economics 30 30 20 20 10 10 China US 0 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 22

US tariffs, who really bears the cost? value of trade tariffs imposed on $USbn $USbn 400 400 Implemented Proposed Retaliation 350 350 Source: Westpac Economics *President Trump has proposed imposing 25% tariff 300 300 on remaining China imports, circa $325bn. Mexico tariffs to be implemented from 10 June to 1 250 250 October, rising from 5% to 25%. “Indefinitely 200 200 suspended” 150 150 100 100 50 50 ? ? 0 0 China Canada Europe Mexico 23

US economy at risk? ppts cont' ppts cont' contributions to GDP growth 3.5 3.5 3.0 2017 2018 2019f 2020f 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 -0.5 -0.5 * includes housing Sources: BEA, Westpac Economics -1.0 -1.0 Consumer* Business Government Net X GDP Inv. 24

Rate differential a significant AUD headwind bps USD AUD/USD (lhs) 1.2 600 AU-US 2y swap (rhs) Westpac 1.0 400 forecasts 0.8 200 0.6 0 Sources: Bloomberg, Westpac Economics 0.4 -200 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19 25

AUD supported by commodities log(index) USD AUD/USD (lhs) 6.5 1.2 WCFIBI commodity index (rhs, log) 6.0 Westpac 1.0 forecasts 5.5 0.8 5.0 0.6 4.5 Sources: Bloomberg, Westpac Economics 0.4 4.0 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19 26

Funding spreads and the cash rate % % 3.0 3.0 Sources: Bloomberg, Westpac Economics 2.5 2.5 2.0 2.0 1.5 1.5 AUD OIS 3m RBA cash rate AUD implied by fwds 3m 1.0 1.0 Jan 14 Jan 16 Jan 18 27

RBA: major bank’s deposits by rate *Interest rates were reported as weighted average rates for various deposit product types Source: RBA, Major Banks 28