Geelong Chamber of Commerce breakfast Westpac Institutional Bank Presented by Bill Evans August 18
Current Forecasts July 17 Latest Dec-17 Mar-18 Jun-18 Dec-18 RBA Cash 1. 1. 1. 1. 1. FED FUNDS 1.12 1.37 1.37 1.62 1.87 3 year swap 2.1 2. 2.4 2.4 2.6 AUD/USD.8.76.74.7.6 2
Current forecasts August 18 Latest Sept 18 Dec 18 Jun 19 Dec 19 RBA Cash 1. 1. 1. 1. 1. Aus 1yr 2.72 2.7 2.9 3. 3.1 Fed Funds 1.87 2.12 2.37 2.87 2.87 US 1yr 3. 3. 3.2 3.4 3. 3yr swap 2.21 2.3 2.4 2.4 2. AUD/USD.74.74.74.72.7 Source: Westpac Economics. 3
October, 17 Rate outlook (first hike) - 21 forecasters 6 forecasters 2Q 18 (or earlier) forecasters 3Q 18 4 forecasters 4Q 18 WBC Market pricing : 3 hikes No move 18 or 19 by end 19 Current market pricing % of one hike by end 19 Source: Bloomberg; Westpac Economics. 4
..2. -.2 -. Westpac: rate differential negative (July) % Market Westpac.28.3.13 Sources: Westpac Economics *market prices implied rates as at 21/7/17 expected cash rate level % -.13.3 Dec 17 Jun 18 Dec 18 -.38..2. -.2 -.
Westpac: rate differential negative.2. -.2 -. -.7-1. -1.2-1. % -.38 Market -.38 Westpac -.82 -.88 Sources: Westpac Economics, Bloomberg *market prices implied rates as at 24/7/18 expected policy rate differential % -1.3 -.86.2. -.2 -. -.7-1. -1.2-1.38-1.38-1. Jun 18 Dec 18 Jun 19 Dec 19 6
22 18 16 S&P PE ratio and US 1yr bond Ratio S&P PE ratio lhs US 1yr bond inverted rhs % (inverted) 1 2 3 14 12 1 6 Jan Jan 8 Jan 11 Jan 14 Jan 17 Jan 7 Westpac forecasts Sources: Bloomberg, Westpac Economics 4
Australian GDP growth outlook % yr 17 18 19 RBA, GDP 2.4 3.2 3.2 Westpac GDP 2.4 2.7 2. RBA consumer 2.9 3. 3.2 Westpac consumer 2.9 2.6 2. Source: ABS, RBA Statement on Monetary Policy, Westpac Economics 8
Dwelling approvals 2 ' non high rise (lhs) total annualised (rhs) high rise (lhs) ' WBC f/c s 6% 1 underlying demand 1 1 1 *3mth avg, dotted lines are monthly 16% Jun-3 Jun-6 Jun-9 Jun-12 Jun-1 Jun-18 9
1 8 6 4 2 Dwelling approvals: NSW ' non high rise (lhs) total annualised (rhs) *3mth avg, dotted lines are monthly high rise (lhs) Jun-3 Jun-6 Jun-9 Jun-12 Jun-1 Jun-18 ' WBC f/c s 24% 42% 1 1 8 6 4 1
1 8 6 4 2 Dwelling approvals: Vic ' non high rise (lhs) total annualised (rhs) *3mth avg, dotted lines are monthly high rise (lhs) Jun-3 Jun-6 Jun-9 Jun-12 Jun-1 Jun-18 ' WBC f/c s +4% 7% +1% 1 1 8 6 4 11
1 1 8 6 4 Vic housing stock deficiency ' estimated housing stock deficiency dwelling approvals (annualised) Sources: ABS, Westpac Economics underlying demand - Jul-93 Jul-97 Jul-1 Jul- Jul-9 Jul-13 Jul-17 ' f/c s 1 1 8 6 4-12
Australia: consumer spending vs labour income 1 8 6 4 2-2 % ann Labour income Consumption -4 Dec-97 Dec-1 Dec- Dec-9 Dec-13 Dec-17 13 Sources: ABS, Westpac Economics real LR avg: 3.3%yr % ann Consumption: 17 Q4: 1.%qtr, 2.9%yr f/cs to end 19 1 8 6 4 2-2 -4
13 11 9 7 3 1-1 -3 - Household labour income: decomposed %ann 'X' factor^ hours worked wages total *nominal ^residual including structural and compositional shifts not Sources: ABS; Westpac Economics %ann Westpac Dec-99 Dec-2 Dec- Dec-8 Dec-11 Dec-14 Dec-17 13 11 9 7 3 1-1 -3-14
14 12 1 8 6 4 2-2 -4 Household savings rate % income Sources: ABS, Westpac Economics Latest, Mar 18: 2.1% Average 9 to 1: 7.3% % income Mar-94 Mar-98 Mar-2 Mar-6 Mar-1 Mar-14 Mar-18 14 12 1 8 6 4 2-2 -4 1 1
4 3 2 1-1 Election uncertainty & employment %yr 6mth annualised pace Sep 13 election Jul 16 election Sources: ABS, Westpac Economics. %yr -2 Jun-12 Jun-13 Jun-14 Jun-1 Jun-16 Jun-17 Jun-18 4 3 2 1-1 -2 16
Newspoll: recent leads hold for multiple years 6 6 % LNP 87 seats ALP 83 seats ALP 72 seats LNP 9 seats LNP 76 seats % 6 6 4 4 3 Jan-3 Jan-7 Jan-11 Jan-1 17 Sources: Newspoll, Westpac Coalition Labor 4 4 3
9 8 7 6 4 3 2 1 Marginal seats* by state 18 Source: ABC. *Marginal Seats being defined as margin of <= 3%, Data may change pending finalisation of new electoral boundaries in Victoria, SA and ACT in June. Coalition Labor NSW VIC QLD SA WA 9 8 7 6 4 3 2 1
ALP Policy Shifts (savings over 1 years) Company Tax: Franking Credits: Negative Gearing/Capital gains: Trusts/Income splitting: Budget deficit levy: Total $3 billion $6 billion $49 billion $17 billion $22 billion $18 billion Source: Westpac Economics 19
China debt: developed world scale % of GDP June 17 government household corporate % of GDP 1 *China government is nominal value Source: BIS, Westpac Economics 1 1 1 Australia US China
14 12 1 8 6 4 2 Value of finance approvals by segment $bn 'upgraders'* investors* FHBs *excludes refinancing Sources: ABS, RBA, Westpac Economics May-98 May-2 May-6 May-1 May-14 May-18 $bn year to May 4%yr 22%yr +32%yr 14 12 1 8 6 4 2 21
3 3 2 1 1 Housing: investor credit stalls 3 mth % chg, annl sd 3 mth % chg, annl sd Sources: RBA, Westpac Economics Owner-occupiers Investors 3 mth annls d, latest: Owner-occupiers: 7.% Investors:.1% Total: 4.6% Investor credit Jun-2 Jun- Jun-8 Jun-11 Jun-14 Jun-17 3 3 2 1 1 22
2 1 1 - Credit outlook: slowing in 18 & 19 % ann % ann -1-1 Dec-97 Dec-1 Dec- Dec-9 Dec-13 Dec-17 Dec-21 23 updated: Apr 18 Sources: RBA, Westpac Economics Housing Westpac f/cs end 2 1 1 -
Population growth international EU Developed UK US Canada NZ World Developing Australia 24 % ann.28.33.76.8 1.8 1.1 1. 6-16, avg 1.37 Source: AFR 1.69.. 1. 1. 2.
4 Population growth: NSW lags VICTORIA % ann Sources: ABS, Westpac Economics. % ann 4 3 NSW Tas Vic Australia 3 2 2 1 1 Jun-8 Aug-11 Oct-14 2 WA Qld SA Jun-8 Aug-11 Oct-14
3. 3. 2. 2. 1. 1... -. -1. Population growth: Aus, Vic, Geelong % ann Vic (2.3%yr, 143k) Geelong (2.7%yr, 7.6k)* Aust (1.6%yr) *annual observations Sources: ABS, Westpac Economics. % ann Dec-86 Dec-91 Dec-96 Dec-1 Dec-6 Dec-11 Dec-16 3. 3. 2. 2. 1. 1... -. -1. 26
Housing affordability: Vic 1 1 % units houses long run averages improve deteriorate % 1 1 2 3 3 4 Mar-88 Mar-93 Mar-98 Mar-3 Mar-8 Mar-13 Mar-18 27 *%income required to accumulate a 2% deposit and service mortgage of 7% of the median priced dwelling avg over yr pre-purchase period and yr post purchase Sources: CoreLogic, RBA, ABS, Westpac-Melbourne Institute latest 2 3 3 4
3 2 1 1 - -1-1 Australian dwelling prices: major cities % Sydney Melbourne Brisbane Perth 6mth annualised * all dwellings Sources: CoreLogic, Westpac Economics Jul-1 Jul-11 Jul-12 Jul-13 Jul-14 Jul-1 Jul-16 Jul-17 Jul-18 % 3 2 1 1 - -1-1 28
4 3 1-1 Australian dwelling prices: major capital cities % * all dwellings Sources: CoreLogic, Westpac Economics - Jul-93 Jul-98 Jul-3 Jul-8 Jul-13 Jul-18 29 6mth annualised, nominal Sydney Melbourne % 3 3 2 1 1 - -1-1
3 3 2 1 1 - -1 Dwelling prices: Geelong holding up ann% Melbourne inner middle outer Geelong other Source: APM, Westpac Economics rest of Vic *qtly, smoothed, based on weighted avg of postcode median prices 6 9 12 1 18 6 9 12 1 18 ann% 3 3 2 1 1 - -1 3
13 1 11 1 9 8 7 6 4 3 1 Dwelling prices: Geelong ahead of the Rest index Mar-93 Mar-98 Mar-3 Mar-8 Mar-13 Mar-18 31 Melbourne Geelong Rest of Vic *indexes based on weighted avg of postcode median prices (all dwellings); Mar-93=1, all figures to Mar 18 Sources: APM, Westpac Economics index +13% +1% +9% 13 1 11 1 9 8 7 6 4 3 1 31
13 1 11 1 9 8 7 6 4 3 1 Dwelling prices: Geelong tops Regionals Mar-93 Mar-98 Mar-3 Mar-8 Mar-13 Mar-18 32 index Melbourne Geelong *indexes based on weighted avg of postcode median prices (all dwellings); Mar-93=1, all figures to Dec 17 Sources: APM, Westpac Economics Shepparton Rest of Vic index +13% +1% +9% +7% 13 1 11 1 9 8 7 6 4 3 1 32
13 1 11 1 9 8 7 6 4 3 1 Dwelling prices: Vic index Mar-93 Mar-98 Mar-3 Mar-8 Mar-13 Mar-18 33 Melbourne Geelong *indexes based on weighted avg of postcode median prices (all dwellings); Mar-93=1, all figures to Dec 17 Sources: APM, Westpac Economics Ballarat Rest of Vic index +13% +1% +1% +% 13 1 11 1 9 8 7 6 4 3 1 33
4 3 3 2 1 1 - -1-1 Sydney prices: by property value % top 2% middle % bottom 2% *all dwellings, seasonally adjusted by Westpac; rolling 3mth ann d %ch; dotted lines show mthly Sources: CoreLogic, Westpac Economics macro-prudential tightening Jul-1 Jul-12 Jul-14 Jul-16 Jul-18 % 4 3 3 2 1 1 - -1-1 34
4 3 3 2 1 1 - -1-1 Melbourne prices: by property value % top 2% middle % bottom 2% *all dwellings, seasonally adjusted by Westpac; rolling 3mth ann d %ch; dotted lines show mthly Sources: CoreLogic, Westpac Economics macro-prudential tightening Jul-1 Jul-12 Jul-14 Jul-16 Jul-18 % 4 3 3 2 1 1 - -1-1 3
9 8 Auction clearance rates % Sydney Melbourne % 9 8 7 long run averages 7 6 6 4 3 3 Jul-88 Jul-93 Jul-98 Jul-3 Jul-8 Jul-13 Jul-18 36 *seasonally adjusted by Westpac Sources: APM, CoreLogic, Westpac Economics last 3 weeks 4
Rental markets: vacancy rates 8 % % Sydney Brisbane Melbourne Perth 7 *annual avg, dotted lines are seasonally 6 4 adjusted qtly advanced 6mths national avg since 198 3 2 1 Source: REIA, Westpac Economics Mar-93 Mar-98 Mar-3 Mar-8 Mar-13 Mar-18 8 7 6 4 3 2 1 37
8 7 6 4 3 1 Interest only housing loans 38 % total own. occ. investor major banks other 3% interest only limit introduced *interest only % total new loans 3% interest only limit introduced Sources: RBA, APRA, Westpac Economics Dec-8 Dec-11 Dec-14 Dec-17 Dec-8 Dec-11 Dec-14 Dec-17 % 8 7 6 4 3 1
Short term funding spreads (3 month) 6 4 bps BBSW-OIS LIBOR-OIS TBILLS-OIS bps 6 4 - - Sources: Bloomberg, Westpac Economics -4 Jan 11 Jan 13 Jan 1 Jan 17-4 39
Loan versus deposit growth: majors % 4 6-month annualised % Source: APRA 4 3 3 Loans Deposits 2 1 1 - May- May-7 May-9 May-11 May-13 May-1 May-17 4 4 3 3 2 1 1-4
2 1 1 Deposit growth: total vs households % ann % ann Data, quarterly Gov t handouts Total deposits Household deposits f/cs end 19 2 1 1 Sources: ABS, Westpac Economics Mar-98 Mar-2 Mar-6 Mar-1 Mar-14 Mar-18 41
7 6 4 3 1-1 - -3 Deposit growth( total) offshore leakages % % Source: APRA;MACROBOND 6mth annualised change Financial corporates (lhs) Non-financial corporates (rhs) May- May-7 May-9 May-11 May-13 May-1 May-17 3 3 2 1 1 - -1 42
8 6 Bills/OIS forward curves- to remain elevated bps bps Dec end Mar end Jun end Current (24 July) 8 6 4 4 BBSW 43 First bill future Sources: Bloomberg, Westpac Economics Dec Mar Jun Sep Dec Mar
It Disclaimer has been dry, little chance of improvement 44
26 24 2 18 16 14 1 1 8 6 4 US tariffs primarily target China $USbn 4 value of trade tariffs imposed on Announced Implemented Retaliation Source: Westpac Economics *Steel & aluminium affect all; other measures are bilateral against China China Canada Europe Mexico $USbn 26 24 2 18 16 14 1 1 8 6 4
China debt: developed world scale % of GDP June 17 government household corporate % of GDP 1 *China government is nominal value Source: BIS, Westpac Economics 1 1 1 Australia US China 46
12. 11. 1. 9. 8. 7. 6.. 4. 3. 2. 1.. China credit in 18: a wholesale change RMB trn year-to-date lending RMB trn Source: CEIC Jun-17 Jun-18 Total finance Bank Non-bank 12. 11. 1. 9. 8. 7. 6.. 4. 3. 2. 1.. 47
China s Shadow Banking System Funded by wealth products; banks; insurance Supports Offshore investments Property investors Property developers Commodity investors Local Government (8% of Infrastructure) Corporates, outside banking system Source: Westpac Economics 48
1 14 13 1 11 1 9 Equity markets jittery but sell off contained Index Sources: Bloomberg, JPM, Westpac Economics. Major stock indexes China US Europe 8 Jan 1 Jan 16 Jan 17 Jan 18 Index 1 14 13 1 11 1 9 8 49
4 4 3 3 2 1 1 - Number of foreign real estate approvals s s Source: FIRB, Westpac Economics 9-1 1-11 11-12 12-13 13-14 14-1 1-16 16-17 4 4 3 3 2 1 1 -
US 1 year minus fed funds rate 6 bps Sources: Bloomberg, Westpac Economics bps 6 4 4 - -4 Westpac forecasts - -4-6 -6 Jan 71 Jan 78 Jan 8 Jan 92 Jan 99 Jan 6 Jan 13 Jan 1
3 2 1 1 Service exports, Australia Mar-94 Mar-98 Mar-2 Mar-6 Mar-1 Mar-14 Mar-18 Mar-22 2 $bn Sources: ABS, Westpac Economics * Business services: $21bn, including: legal & prof services $.3bn financial services $4.3bn IT & Telecomm $3.8bn Intellectual property rights $1.1bn other, $6.3bn Rolling annual, nominal Total service exports: +7% yr $bn Education +14% Leisure travel Business services* +1% Transportation Business travel 3 2 1 1
28 24 16 1 International students numbers by state Index* VIC NSW Australia QLD WA Commencements, higher education Education exports (revenue) 3yrs to 16/17 Australia 1% Index* VIC NSW Aus Qld WA 28 24 16 1 8 8 2 4 6 8 1 12 14 16 18 3 Sources: AEI.gov.au, Westpac Economics *2 commencements = 1
8 6 4 Total Infrastructure: work done, by state $bn Sources: ABS, Westpac Economics NSW Vic SA $bn +28%yr +%yr 8 6 4 2 +14%yr 2 Mar-6 Mar-1 Mar-14 Mar-18 4
4 3 Office approvals: take-off, led by Victoria $bn 12 month sum NSW Victoria WA Qld $bn 4 3 2 2 1 1 May-8 Sources: ABS, Westpac Economics May-14 May-8 May-14
3 1 CBD office markets: vacancy rates % 9 93 96 99 2 8 11 14 17 9 93 96 99 2 8 11 14 17 6 Sydney CBD Melbourne CBD Canberra Source: PCA OMR 2/18 Brisbane CBD Perth CBD Adelaide CBD % 3 3 2 1 1
Employment by major sector Growth in the 2 years to May 18 Education & health White collar 149 16 Construction Production employment 91 9 Leisure & hospitality Retail & wholesale distribution -6 69 Sources: ABS, Westpac Economics 7-1 1 change in employment
Conclusion RBA on hold in 18 and 19; markets and RBA still expect rate hikes. House and unit prices in Melbourne to fall further; Geelong holding up. Headwinds: household sector; housing; market rates; tight credit; election. No RBA rate relief ; banks?; affordability; regulation; Bright spots: infrastructure; service exports; population growth; lower AUD. RBA/FED margin to peak at 137. basis points by June 19. AUD to USD.7; bond spread to 4 bp s. US bond rates likely to reach 3.% in 19 H1 drag on equity market. US yield curve to go inverse by 21 signalling US recession. China to slow more than anticipated through 19 - credit; equities. Global growth slows in 19/ even without trade war. 8
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