GDP Growth Outlook Heavily Dependent on Consumer Spending. Which Relies on Net Job Gains Plus Modest Pick Up in Wages Growth

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2 GDP Growth Outlook Heavily Dependent on Consumer Spending Which Relies on Net Job Gains Plus Modest Pick Up in Wages Growth Plus Some Recourse to Increased Borrowings. 2

3 Introduction The only function of economic forecasting is to make astrology look respectable John Kenneth Galbraith (economist) 3

4 The Agenda The international economic outlook The Australian macro outlook What will drive the Australian growth outlook A focus on the Australian household spending outlook and the state of household balance sheets 4

5 World Economic Outlook China and US the Key 2 % pa GDP Growth Trends - Major Economies 15 F/cast 1 5 Source: IMF World Economic Outlook Database (October 216); Patersons Research -5 US Japan India China Euro-Zone Most forecasters expect modest/moderate growth in economies of our major trading partners. China National Congress outcomes 6.5% GDP growth target; infrastructure spend. In the US, delivery of fiscal initiatives - infrastructure/reflation, reduced free trade - still uncertain. Ramifications for fiscal situation clouded so too is Fed reaction to these policy prescriptions. Recovery in non-rural commodity prices boosts our external sector performance - ongoing? 5

6 Australian Economic Outlook Consumer the Key % pa Australian GDP Growth Projections Historic GDP FY17 MYEFO RBA - Feb. 217 S on MP F/cast Source: ABS, Feb 217 RBA Statement on Monetary Policy; FY17 MYEFO; Patersons Research -1-2 Jun-19 Jun-15 Jun-11 Jun-7 Jun-3 Jun-99 Jun-95 Jun-91 Many economists are not expecting a robust bounce in household spending but consumer spending growth will occur, on higher wages (from low base) and jobs growth. Dwelling investment more growth in pipeline, but set to plateau out soon. Business investment services investment to revive (but pace of recovery open to debate). Higher resource prices unlikely to see bounce in productive capacity, but boost for external sector. Monetary policy low inflation but housing worries where to for the A$? 6

7 Services-Related Business Capex Important Capex Intentions - By Broad Sector 2 16 $b Mvt: 5th Estimate FY17 on 5th Estimate FY16 - Mining -27.%; - Manufacturing: +1.4%; - Other Selected Industries +6.2% 12 8 Source: ABS; Patersons Research 4 FY1 FY11 FY12 FY13 Estimate 1 Estimate 2 Estimate 3 Estimate 4 Estimate 5 Estimate 6 Estimate 7 FY14 FY15 FY16 FY17 FY18 The drop off in mining capex looks to be slowing (albeit gradually) but a dearth of new major mining projects precludes chance of medium term bounce here. Non-mining business investment showing signs of recovery (lower A$ and interest rates). Business surveys have, for some time, indicated some improvement in capacity utilisation. But it is up to household spending to deliver large chunk of FY17 and FY18 GDP growth. 7

8 Jobs Market Growth Seen, But it Has Been Patchy 8 6 Part-Time Positions Account for All of Employment Growth Over Past 12 Months No. (') Full-time Part-time Employment Growth Over Year to Feb-17: Source: ABS; Patersons Research -6-8 Full Time -23,2 Part Time +127,8 Feb-17 Aug-16 Feb-16 Aug-15 Feb-15 Aug-14 Feb-14 Employment growth has occurred but it has overwhelmingly been in the part-time jobs component. Labour market indicators continue to be mixed from geographic angle (NSW, Victoria the winners). Our jobless rate has of late been steady at around 5.75%; but rises in Feb-17 to 5.9%. RBA still expects continued expansion in employment over 217 quality the issue! 8

9 Where to for Consumer Spending Levels? Source: 9

10 Consumer Spending Solid, But Not Robust Household Spending Growth + Lower Wages Growth = Reduced Savings Ratio 7 6 % pa Trend Real Household Spending (LHS) % pa; % H/hold Income Savings Ratio (RHS) Source: ABS; Patersons Research Avg Non Farm Compensation of Employees(RHS) -5 Dec-16 Dec-13 Dec-1 Dec-7 Dec-4 Dec-1 Dec-98 Dec-95 Dec-92 Dec-89 Dec-86 Dec-83 Dec-8 Dec-77 Dec-74 Dec-71 The RBA has recently trimmed its profile for consumption growth now unlikely to run materially ahead of household income growth. By implication, the savings ratio will be relatively stable but has run down of late. Household consumption growth quite strong in 4Q16, but consumers run down their savings... as compensation of employees (seas adj) falls.5% in 4Q16 (YoY growth just 1.5%). Consumer confidence measures show some recovery but not spectacular! 1

11 What About Dwelling-Related Wealth Effects? 2 15 House Price Increases in Sydney and Melbourne Have Been Relatively Strong % pa Australia-Wide Sydney Melbourne Brisbane Adelaide Perth Source: CoreLogic Home Price Index; Bloomberg; Patersons Research -1 Feb-17 Dec-16 Oct-16 Aug-16 Jun-16 Apr-16 Feb-16 Dec-15 Oct-15 Aug-15 Jun-15 Apr-15 Feb-15 Rise in Sydney and Melbourne house prices a boon to home-owners in those cities helped by strong state economies as services-related sectors outperform plus robust offshore interest in both cities residential markets. RBA continues to highlight the patchy nature of Australia s housing market and expects apartment supply to cool price growth rates in Sydney and Melbourne. 11

12 H/hold Debt/Income Up; Int Payments/Income Down % H/hold Disp. Income Household Debt Ratios and Mortgage Rates % H/hold Disp. Income; % pa Source: 4 2 Housing debt to income (LHS) Housing interest payments to income (RHS) Standard Variable Mortgage Rate (RHS) RBA; Patersons Research Sep-16 Sep-13 Sep-1 Sep-7 Sep-4 Sep-1 Sep-98 Sep-95 Sep-92 Sep-89 Sep-86 Sep-83 Sep-8 Housing interest payments to household disposable income trend lower post 21 as lower mortgage rates since then open way for de-gearing of h/hold balance sheets. Some 77% of loans on CBA's mortgage book are ahead on their scheduled repayments. BUT stock of housing debt to income continues to rise, as average home loan sizes swell. Only slight upward moves in retail lending rates would be enough to check consumer spending especially if wages growth remains anaemic. 12

13 Less Recourse to the Fantastic Plastic 6 $bn Revolving Credit Trends - Australia % ot Total Limits Source: RBA; Patersons Research 1 Credit Borrowings (LHS) % of Total Limits Available (RHS) 25 Jan-17 Jan-14 Jan-11 Jan-8 Jan-5 Jan-2 Jan-99 Jan-96 Jan-93 Jan-9 Jan-87 Credit borrowings have increased, but pace of these gains has slowed over recent years. At the same time, the usage of credit card limits available has clearly slowed. Personal component of Private Sector Credit Growth stats has retreated over last 12 months. But loan books for short term financiers have advanced as sub-prime borrowers still require funds. Why? 13

14 Borrowing by Non-Prime Clients Will Continue On latest ABS data (214), 1.8m households have net worth of < $1,. Here Net Worth = Value of Assets Owned less Value of Liabilities These households are prime candidates for short-term financiers... but so too are a pile of SME borrowers. 14

15 Defaults on Credit Card Receivables Increase Source: CBA 1H17 Results Presentation Credit card receivables defaults increase slightly in CBA s recent 1H17 result but from a low base (and linked to Bankwest operation). Lower credit card defaults in CBA Retail but personal loan defaults still elevated in WA. Bottom line, enough cards-related PDL product to go round in a moderately growing economy. 15

16 A Good Environment for Short-Term Financiers Credit aggregates mask significant differences across individual borrowers. Many borrowers have little or no equity buffer especially recent borrowers and those more at risk of experiencing financial stress... and borrowers with lower wealth and income or higher leverage. Across all cities and regions of Australia there should continue to be a material number of fringe household borrowers being pushed into the arms of short term financiers. Australia currently a mix of have and have not regions some are experiencing increased financial stress. Home loan performance in WA and Queensland in particular have deteriorated... while the rate of personal administrations in these two states is up. 16

17 A Segue to Benn Skender s Presentation Later Today Source: 17

18 This presentation is intended to provide general advice only, and has been prepared without taking account of your objectives, financial situation or needs and therefore before acting on any general advice contained in this presentation, you should consider its appropriateness having regard to your objectives, financial situation and needs. Alternatively, you should obtain personal advice from an accredited financial adviser that takes account of your particular objectives, financial situation and needs. Copyright Patersons Securities Limited

19 Monday, 27 March 217 Insert Presenter Name 19