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October 2011
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 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.
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
index
index
post Oct-5
Oct-01
Oct-06
Oct-11
'economic outlook'
'family finances'
Oct-95
Oct-99
Oct-03
Oct-07
Oct-11
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.
index
NSW
by state
Vic Qld WA freehold
by tenure
mortgage
index
renters
60 Mar-08
Mar-09
Mar-10
Mar-11
Mar-08
Mar-09
Mar-10
Mar-11
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
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
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
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.
%ch
+1.4%
+0.3%
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
7 6 5 4 3 2 1 0 -1 -2
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
-10
last 6mths
-20 -30
Aug-96
Aug-99
Aug-02
Aug-05
Aug-08
Aug-11
October 2011
%responses
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
net %
100 80 60 40 20 0
-20 Jan-09
Jan-10
Jan-11
Oct-09
Oct-10
Oct-11
-20
10
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.
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
Jul-09 Jan-11
Oct-09 Apr-11
Jan-10 Jul-11
Apr-10 Oct-11
Jul-10
net % 90 60
13.3
30
5.2 2.1
0 -30
upgraders
investors
11
October 2011
index
time to buy a car (adv 6mths, lhs)* new vehicle sales per capita (rhs)^
tax-incentives boost business sales
number
-45 Aug-03
Aug-05
Aug-07
Aug-09
Aug-11
12
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
ann%
Aug-91
Aug-96
Aug-01
Aug-06
Aug-11
13
October 2011
Jun-11
14
std devns
unemp expectations (lhs)
1.7 std devns
ppts
4 3 2 1 0 -1 -2 -3
Oct-81
Oct-86
Oct-91
Oct-96
Oct-01
Oct-06
Oct-11
index
by labour status
working not working^
no improvement for those with jobs ...
by state
'resource'
index
'non-resource'
60 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10 Oct-02 Oct-04 Oct-06 Oct-08 Oct-10
*smoothed
15
October 2011
*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
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
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
October 2011
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
20
Notes
Notes
22
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