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Asian market perspectives

October 2010

Contents

Executive summary 3

US credit supply & the shadow banks: chart essay 4World growth: chart essay 6China 6Japan 8Emerging Asia 10United States 12

Summary forecast tables Japan 14East Asia 15United States 16World growth 17

Corporate directory 18

Internet: www.westpac.com.auEmail: [email protected]

This issue was finalised on 8 October 2010

Asian market perspectives is a monthly publication produced by Westpac Economics

Editor: Huw McKay, Senior International Economist

3

Executive summary

An unacceptably high unemployment rate and uncomfortably low inflation is pushing the US Federal Reserve inexorably towards a further round of balance sheet expansion. Since the Fed’s Jackson Hole conference we have perceived an air of creeping negativity among the core of the Fed leadership. This has recently burst forth into open pessimism and will soon flower into a new asset purchasing program that will eventually be of considerable magnitude. We are not alone in reaching this conclusion: financial markets have been transfixed by the prospect of renewed “QE”. This is the correct policy for the US, but the spillover effects are enormous and potentially unwelcome: particularly regards exchange rates. Excess liquidity in the US means a cheaper dollar, pure and simple. Under these conditions, we see Asia attracting heavy capital inflows. That will complicate matters further for regional monetary authorities already attempting to lean against a wall of liquidity.

China: The economy continues to decelerate, but not in a straight line, with kernels of resilience helping to alleviate the impact of the policy induced slowdown. This month we review the evidence from the various business surveys and activity indicators to make sure our basic view – that we are in a mid-cycle correction, nothing more – is still on track.

Japan: Count Japan among those countries that feels it cannot sit idly by while the US undermines its exchange rate through monetary expansion. We have been advocating an aggressive monetary easing in Japan for a considerable time. The BoJ’s recent announcement of “comprehensive” easing is bold in construction but meek in scale. Expect an extension down the line.

Emerging Asia: With the impetus from inventory rebuilding and the recovery in global trade diminishing, the region is at a critical juncture. We expect growth to be much harder to come by over the next few quarters, even though regional liquidity is expected to remain very elevated against the loose global monetary policy backdrop.

United States: Widespread dissatisfaction with the state of the labour market and the level of inflation is driving the Fed towards a further expansion of its balance sheet. Excess liquidity means a cheaper dollar, which is something the US needs but Asia will not be thrilled about.

October 2010

Summary of regional and world GDP growth

Real GDP %ann 2005 2006 2007 2008 2009 2010f 2011fJapan 1.9 2.0 2.4 –1.5 –5.8 3.3 1.1China 11.3 12.7 14.2 9.6 9.1 10.3 9.1India 9.2 9.8 9.4 7.3 5.7 8.0 9.1Korea 4.0 5.2 5.1 2.3 0.2 6.5 4.0Taiwan 4.7 5.4 6.0 0.7 –1.9 6.0 3.8Hong Kong 7.1 7.0 6.4 2.1 –2.7 5.8 5.6Singapore 7.6 8.7 8.2 1.4 –2.0 13.0 3.0Indonesia 5.7 5.5 6.3 6.0 4.5 6.0 5.2Thailand 4.6 5.1 4.9 2.5 –2.3 5.0 4.0Malaysia 5.3 5.8 6.2 4.6 –1.7 6.0 4.0Philippines 5.0 5.3 7.1 3.8 0.9 4.5 3.3Vietnam 8.4 8.2 8.5 6.2 5.3 8.0 8.3

East Asia 8.7 9.8 10.9 7.1 5.9 8.9 7.4East Asia ex China 5.2 5.8 6.0 3.2 0.4 6.4 4.4NIEs* 4.8 5.8 5.8 1.8 –0.9 6.9 4.1

United States 3.1 2.7 1.9 0.0 –2.6 2.5 1.1OECD total 2.7 2.7 2.5 0.1 –3.2 2.1 1.5Emerging ex– East Asia* 6.0 6.8 6.8 5.0 –0.7 4.9 5.0World 4.5 5.1 5.2 3.0 –0.6 4.4 3.8Sources: IMF, Westpac Economics. * Includes India. Aggregates weighted at purchasing power parity exchange rates. See notes to detailed table on page 17.

Past performance is not a reliable indicator of future performance. The forecasts given above 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 results ultimately achieved may differ substantially from these forecasts.

4

Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Chart 1.

US credit supply & the shadow banks

October 2010

US total private sector credit

-5

-1

3

7

11

15

-5

-1

3

7

11

15

Mar-61 Mar-70 Mar-79 Mar-88 Mar-97 Mar-06

%yr %yr

Nominal GDP

Total credit

Sources: BEA, Federal Reserve, Westpac Economics

Total liabilities: banks & “shadow” banks

0 2 4 6 8 10 12 14 16 18 20 22

0 2 4 6 8

10 12 14 16 18 20 22

1990 1994 1998 2002 2006 2010

$trn

Traditional commercial bank liabilities

Shadow bank liabilities

Sources: Federal Reserve, Westpac Economics

$trn

Mar ‘08

Since Mar ’08 peak in shadow bank liabilities: shadow liabilities have declined by $4.5tn; traditional bank liabilities have increased by $2.1tn.

Shadow liabilities: composition

0 2 4 6 8 10 12 14 16 18 20 22

0 2 4 6 8

10 12 14 16 18 20 22

1990 1994 1998 2002 2006 2010

$trn

GSE (liabilities and agency pools) MMkt funds ABS issuers Net securities loaned Open market paper Repos


$trn

US total credit liabilities by sector

0

3

6

9

12

15

0

3

6

9

12

15

1990 1994 1998 2002 2006 2010

$trn Other* Households Nonfarm nonfinancial firms Government Rest of World


March ‘08

$trn

*nonfinancial noncorporate and farm

US commercial bank credit provision*

-300

-200

-100

0

100

200

300

400

-300

-200

-100

0

100

200

300

400

1990 1994 1998 2002 2006 2010

$bn

Total loans Agency & GSE securities Treasuries

Source: Federal Reserve, Westpac Economics

$bn

*Consolidation of off balance sheet assets and liabilities on 31 March 2010 excluded from total loans as this accounting change did not lead to the provision of any new credit.

quarterly change

US commercial bank credit provision – loans

-300

-200

-100

0

100

200

300

400

-300

-200

-100

0

100

200

300

400

1990 1994 1998 2002 2006 2010

$bn

Security credit Consumer credit Mortgages Bank loans nec*

Source: Federal Reserve

$bn

*Primarily includes commercial and industrial loans, lease financing receivables and agricultural loans.

quarterly change


Chart 8.

Chart 9. Chart 10.

Chart 11. Chart 12.

5

Chart 7.

US credit supply & the shadow banks

October 2010

Household loan charge offs

-200

-100

0

100

200

300

400

-200

-100

0

100

200

300

400

1990 1994 1998 2002 2006 2010

$bn

Net charge offs

Household credit* (qtly change; ex net charge offs)


$bn

*Home mortgages and consumer credit

Decline in shadow liabilities broad based

-1750 -1500 -1250 -1000

-750 -500 -250

0 250 500 750

1990 1994 1998 2002 2006 2010

$bn

GSE (liabilities and agency pools) MMkt funds ABS issuers Net securities loaned Open market paper Repos


quarterly change

Ongoing difficulties in CP market …

50

100

150

200

250

300

350

200

400

600

800

1000

1200

1400

2001 2002 2003 2005 2006 2007 2009 2010

$bn

Financial (lhs)

Asset backed (lhs)

Non financial (rhs)


$bn outstanding stock

… a greater incentive to hold onto cash

0

200

400

600

800

1000

0

200

400

600

800

1000

1990 1993 1996 1999 2002 2005 2008

$bn

At call Term deposits Total deposits*


nonfarm nonfinancial cash balance Also includes foreign deposits; $50bn at June quarter 2010.

$bn

Dec ‘08

Household loans mostly non-conforming

-200

0

200

400

600

800

1000

-200

0

200

400

600

800

1000

2005 2006 2007 2008 2009 2010

$bn

GSE (on balance sheet) Mortgage pools


$bn net quarterly change; saar Conventional mortgages (Fannie and Freddie debt) were put back on the GSE’s balance sheet in Q1 ’10; pool issuance in H1 ’10 then seems to be limited to non-conventional (low deposit) FHA-backed loans through Ginnie Mae.

1

Fed has helped to ease the pain

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

ABS Security loans & repos

Open mkt paper

MMkt funds

Comm bank loans

GSE Fed purchases


change from March ’08 peak* $trn $trn

*While not shown here, we expect the Fed will embark on a new round of QE in late 2010.


6

Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Chart 1.

World growth: chart essay

October 2010

-40

-30

-20

-10

0

10

20

30

40

-40

-30

-20

-10

0

10

20

30

40

Jul-91 Nov-94 Mar-98 Jul-01 Nov-04 Mar-08

Industrial country import volumes

Industrial country export volumes

Sources: Westpac Economics, CPB Netherlands.

%6mth annualised %6mth annualised

Global trade volume: rebound dissipating

-40

-30

-20

-10

0

10

20

30

40

50

-40

-30

-20

-10

0

10

20

30

40

50


Non-industrial country import volumes

Non-industrial country export volumes


%6mth annualised

Global trade volume: EM clearly slowing

-50

-40

-30

-20

-10

0

10

20

30

40

-50

-40

-30

-20

-10

0

10

20

30

40


US Japan Euro area



IP volume: G3 slows, Japan most volatile

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30


Asia Emerging Europe Latam



IP volume: EM slow to below double digits

Global narrow liquidity: is it still ample?

0

2

4

6

8

10

12

14

16

0

2

4

6

8

10

12

14

16

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

%yr %yr

Global proxy* (lhs)

OECD (rhs)

Sources; Westpac Economics, CEIC, OECD * GDP weighted index of OECD & the BRICs

Global broad liquidity: multiplier is weak

0

2

4

6

8

10

12

3

5

7

9

11

13

15

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10

%yr %yr

Global proxy* (lhs)

OECD (rhs)

Sources; Westpac Economics, CEIC, OECD * GDP weighted index of OECD & the BRICs


Chart 8.

Chart 9. Chart 10.

Chart 11. Chart 12.

7

Chart 7.

World growth: chart essay

October 2010

World growth momentum

-9

-6

-3

0

3

6

9

12

-9

-6

-3

0

3

6

9

12

Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13

%saar %saar

World proxy Australia MTP proxy G3

Sources: Westpac Economics, IMF, National agencies.

forecasts

Contributions to world growth

-2

-1

0

1

2

3

4

5

6

1994 1997 2000 2003 2006 2009 2012

The rest China Advanced

Sources: Westpac, IMF.

%

Global auto sales: stimulus passing

22

24

26

28

30

32

0

5

10

15

20

25

May-02 May-03 May-04 May-05 May-06 May-07 May-08 May-09 May-10

million million

China (lhs)

Ex China (rhs)

Sources: Factset, CEIC. Westpac Economics. Annualised 6mth levels.

The semiconductor market

-60

-45

-30

-15

0

15

30

45

60

0.4

1

1.6

Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

%ann ratio

book-to-bill ratio US semiconductor machinery (lhs)

global semiconductor sales (rhs)

Source: SEMI, SIA

0

400

800

1200

1600

2000

0

400

800

1200

1600

2000

Jan-2002 Jan-2004 Dec-2005 Dec-2007 Dec-2009

index index

Baltic Dry Panamax Capesize

Sources: Westpac Economics, Factset

Freight costs are slightly off the lows Oil and metals prices

50

100

150

200

250

300

350

30

60

90

120

150

Jan-04 Feb-05 Apr-06 Jun-07 Aug-08 Sep-09

Index US$/bbl

Oil (lhs)

Base metals (rhs)

Sources: Westpac Economics, Bloomberg

8

China

The Chinese economy is in a transition phase. The dominant theme remains the policy-induced slowdown, which is passive in some sectors (infrastructure) and active in others (housing). This is producing a reduced rate of headline economic growth. The secondary theme is one of resilience to the aggregate slowdown through the various offsets that have emerged to take the edge off the policy headwinds. In terms of our expectations, the winding down of infrastructure spending is proceeding as foreseen, while the rebound in profits is on schedule, but housing construction has been more resilient and so has manufacturing overall, particularly if measured via the business surveys rather than the official data series.

At the aggregate level, the best measure of the current and future growth pulse are the NBS’ coincident and leading indicators. Last month we reported that the July update of the leading indicator offered tentative evidence of a bottoming. The August update did not oblige with confirmation of that signal, indeed it refuted it quite strongly, but that is comforting in a way as it confirms our view that the low point for momentum is likely to be the two quarters 2010Q4 and 2011Q1. And given the dominance of policy measures in driving the volatility in the leading index over the past year (incorporating both fiscal and monetary influences) it would not be plausible to expect a sustained turnaround before policy itself begins to rebalance. The coincident index, meanwhile, is pointing directly south, implying that activity was weak through the middle of Q3. That accords with our sub-trend forecast for Q3 of 8¾%, which translates to an official yoy rate of 9.8%. The risks are on the downside for these outcomes.

Elsewhere, the quarterly business survey reported a levelling out of confidence and conditions, the profits survey indicated that earnings have been tracking sideways while the trend in the PMI is slightly downward, but only if you squint, given it has been 52 point something in every read since March (on our seasonally adjusted estimates). However, the forward looking information in these surveys, principally in relation to inventories and order books, have shifted in a positive direction, after a soft patch through late Q2 and early Q3. Indeed, the ratio of orders to inventories, a leading indicator of near term industrial outcomes, has been rising in both the PMI and the quarterly survey. Profits, which we track religiously due to their important role in the financing of private sector investment, are up 55%ytd, but our stripped back measure indicates that the pulse has softened, resulting in a levelling out through the middle of the year. Decelerating revenues are principally responsible for the deceleration. Margins have been stable.

As far as the external sector goes, foreign orders (quarterly survey) and new exports orders (PMI) are both printing at a discount to their domestic and total new orders counterparts respectively. Import demand has been inconsistent, with the sub-index in the PMI below 50 on four occasions since March. Two factors drive the import cycle. The first is domestic demand for raw materials. The second is the global assembly trade, where components enter China for assembly and re-export. Raw materials demand has been weighed down by slowing infrastructure activity and controls on overtly polluting industries, but the fact that real estate construction has been resilient has supported demand. On the assembly trade, the first half of the year saw very rapid growth in imports of componentry, as the global electronics industry continued to rebalance after the savage inventory adjustment of early 2009, late 2008. That flow is now less strong, with upstream economies like Japan, Korea, Singapore and Taiwan all reporting headline PMI readings below the 50 threshold in September. Japan, where the data is easiest to read, clearly suffered an unanticipated inventory build in August. So it would be no surprise to see Chinese export growth lose considerable altitude going into the end of the year.

Politico-financial matters – a more delicate phrase than “China bashing” – took a turn for the worse over the month. The US House passed a bill that is a bald attempt to pressure China into revaluing by imposing tariffs equivalent to the “currency subsidy” (it has yet to be tabled in the Senate); Brazil went on the record about their concerns with weak exchange rates in the major economies; the EU is threatening to ban Chinese firms from applying for government procurement deals; and French President Sarkozy, under major pressure at home, is seeking to use his upcoming stint as G-20 chairman to push for greater coordination of international economic policy matters, which is not that far from requesting a Plaza Accord style sitdown. The Bank of Japan intervened in the FX market for the first time since 2003 and the US Fed seems intent on pursuing an implicit weak dollar policy. All these events and prospects make China’s seat at international fora more uncomfortable than ever.

Huw McKay, Senior International Economist

The transition from ...

... public to private-led growth ...

... is underway.

The transition phase will be patchy.

Trade & FX friction continues.

October 2010

9

Chart 1. Chart 2.

Chart 3. Chart 4.


China

October 2010

Economic variables – recent history

2009 2010

Monthly data %yr Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul AugConsumer prices – headline –0.8 –0.5 0.6 1.9 1.5 2.7 2.4 2.8 3.1 2.9 3.3 3.5Money supply M2 29.3 29.5 29.7 27.7 26.1 25.5 22.5 21.5 21.0 18.5 17.6 19.2Bank lending 34.2 34.2 33.8 31.7 29.3 27.2 21.8 22.0 21.5 18.2 18.4 18.6Fixed asset investment %ytd 33.3 33.1 32.1 30.5 26.6 26.6 26.4 26.1 25.9 25.5 0.0 0.0Industrial production (IVA) 13.9 16.1 19.2 18.5 12.8 12.8 18.1 17.8 16.5 13.7 13.4 13.9Retail sales 15.5 16.2 15.8 17.5 14.0 22.1 18.0 18.5 18.7 18.3 17.9 18.4Exports –15.0 –13.7 –1.2 17.6 21.0 45.7 24.2 30.4 48.5 43.9 38.0 34.3Imports –3.8 –6.8 26.3 55.6 85.6 44.7 66.4 50.1 48.9 34.6 23.2 35.5Trade balance USDbn 12.9 24.0 19.1 18.4 14.2 7.6 –7.2 1.7 19.5 20.0 28.7 20.0

Quarterly data Q1:09 Q2:09 Q3:09 Q4:09 Q1:10 Q2:10

Real GDP %yr 6.5 8.1 9.1 10.7 11.9 10.3Real fixed investment* %yr 29.8 39.8 36.5 27.3 24.5 21.9Real household consumption*^ %yr 9.2 10.7 10.4 8.7 8.8 5.8Property prices – national %yr –1.1 –0.5 1.9 5.8 10.6 12.2Sources: Government agencies, Bloomberg, CEIC, Westpac Economics. January data omitted from certain series due to Lunar New Year distortions. In these instances the February number is the average for the first two months of the calendar year. * Urban. ^ Per capita.

China: leading and coincident indicators

-18

-12

-6

0

6

12

18

Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

%6mth ann %6mth ann

Leading

Coincident

Sources: CEIC, Westpac Economics.

Shaded areas indicate the leading index is expanding at a faster pace than the coincident index, implying growth will accelerate in coming months.

35

40

45

50

55

60

35

40

45

50

55

60

Jun-92 Jun-96 Jun-00 Jun-04 Jun-08

net bal. net bal.

Foreign Domestic


China 5000 firm survey: order books

Profits: official and surveyed

45

50

55

60

65

-60

-30

0

30

60

90

120

150

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09

net bal/% %ytd industrial profits %ytd (lhs) 5000 enterprise survey, profits net balance (rhs)

Sources: CEIC, Westpac Economics. * Profits as a share of revenues.

0

4

8

12

16

0

20

40

60

80

1-Mar 31-Mar 30-Apr 30-May 29-Jun 29-Jul

‘000 sqm ‘000 sqm

Beijing (lhs)

Shanghai (lhs)

Shenzhen (rhs)

Sources: CEIC, Westpac. 5 day rolling averages.

Measures imposed

on April 16

Daily house sales in the tier one cities

10

Japan

The Bank of Japan has finally committed to truly “unconventional” monetary easing. This is something we have been hoping would happen for a long time. Back in March of this year we wrote that: “A good policy for Japan over the next three years would be to sponsor a weak yen through a policy of excess liquidity. This would take some pressure off the price level to boost Japanese competitiveness ... it is nonsensical to refrain from ... ultra loose settings.

In April we followed up with the judgement that: “Shirakawa is correct to view monetary policy as a limited tool and he is also right to be dismissive of calls for inflation targeting as a cure–all for Japan. However, that does not mean that the Bank of Japan should not be a dynamic actor in a strategic plan for economic revival. Monetary policy can impact upon price expectations through the rate of growth of monetary supply. It can also assist fiscal policy by monetising further public debt expansion, which is no small thing from such an incredibly high base. These activities will manifest themselves in a weaker exchange rate. An end to the Japanese yen’s secular real trade weighted appreciation would be a major contributor to raising expectations of future price rises.” Basically, we have argued that the transmission mechanism that is left to the BoJ is the currency and they had a good to chance to move it if they were decisive.

What has actually been announced? The BoJ calls it “Comprehensive Monetary Easing”. The Bank has unveiled a ¥5 trillion asset purchase program. In addition, the Bank has installed what might be mistaken for an inflation target, committing to maintain ZIRP until the CPI is exhibiting “medium to long term financial stability”, which is described as +2%yoy or lower (buttressed by the midpoint of Board members “understanding” of the topic at 1%). Eligible asset classes for the purchasing program are quite broad, as they should be. The Bank nominates JGBs, CP, corporate bonds, ETFs and J–REITs. One member dissented on the inclusion of JGBs in the program, which is a sensible position given on–going purchases of ¥1.8 trillion are conducted as routine. The only issue here is that ¥5 trillion is not that big and the BoJ is too late: if they had gone in Q1 or Q2, when the V shaped US recovery crowd were in the ascendant, USD/JPY might be above ¥100 today. Instead, 24 hours after this announcement USD/JPY was lower.

On the size of the program, the previously announced lending facility is capped at ¥30 trillion and the previous editions of QE saw the current deposits portion of the balance sheet expand to ¥35 trillion. Our suspicion is that the target will be increased in ¥5 or ¥10 trillion increments as time goes by and inflation is not returning. In a related development, the BoJ intervened in the FX market on behalf of the Finance Ministry in late September, the first such move since the major bout of US dollar weakness seen in the wake of the Dubai G7 meeting of late 2003. This had an ephemeral impact on the currency. If Japan wants to be in the “currency war” that is now being openly discussed, it will need a whole of monetary policy approach. Nothing piecemeal or tentative will suffice. The recent move is a promising step in the right direction.


The unconventional policy route ...

... has finally been taken ...

... which we applaud.

Timing & scale are the key concerns.

October 2010

Macroeconomic variables2009 2010

Monthly data Oct Nov Dec Jan Feb Mar Apr May Jun Jul AugConsumer prices (ex fresh food) %yr –2.2 –1.7 –1.3 –1.3 –1.2 –1.2 –1.5 –1.2 –1.0 –1.1 –1.0Corporate goods prices* %yr –3.4 –3.7 –3.4 –2.9 –1.9 –1.1 –0.9 –0.8 –0.8 –1.1 –0.9Unemployment rate % 5.2 5.3 5.2 4.9 4.9 5.0 5.1 5.2 5.3 5.2 5.1Tertiary activity index %mth 0.2 –0.2 –0.3 3.4 –2.2 –0.6 1.9 0.0 0.2 1.0 –

Retail sales %yr –1.8 –1.8 –1.3 –1.0 –1.1 –0.2 2.3 4.2 4.7 4.9 2.8Housing starts mn saar 0.746 0.676 0.699 0.762 0.798 0.819 0.863 0.794 0.854 0.793 0.737Industrial production %mth 1.5 2.6 2.6 4.3 –0.6 1.2 1.3 0.1 –1.1 –0.2 –0.3Machinery orders (core) %mth –3.8 –7.4 15.4 –3.1 –3.8 5.4 4.0 –9.1 1.6 8.8 –Exports %yr –23.2 –6.3 12.0 40.9 45.3 43.5 40.4 32.1 27.7 23.5 15.5Trade Balance ¥bn 594 523 603 678 569 695 600 338 503 595 590

Quarterly data Q2:09 Q3:09 Q4:09 Q1:10 Q2:10 Q3:10

Real GDP %saar 10.4 –1.0 4.1 4.4 1.9 –Tankan large manuf. confidence – level –48 –33 –24 –14 1 8Tankan large non–manuf. confidence – level –29 –24 –22 –14 –5 2Sources: Government agencies, Bloomberg. GDP numbers frequently revised. * Domestic final use goods.


Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

11

Japan

October 2010

Output gap underpins deflation

-3

-2

-1

0

1

2

3

4

5 60

70

80

90

100

110

120

130 Mar-85 Mar-89 Mar-93 Mar-97 Mar-01 Mar-05 Mar-09

index index

Output gap (lhs)

Consumer prices ex fresh food (rhs)

Sources: Westpac, BoJ, Cabinet Office

The Bank of Japan’s first effort with QE

0

100

200

300

400

500

600

700

Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 0

100

200

300

400

500

600 index index

Domestic bank holdings of JGBs Bank of Japan deposit liabilities

Sources: CEIC, Westpac Economics. Indexed to CY1999.

The yen against various currencies

60

70

80

90

100

110

120

60

70

80

90

100

110

120 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

index index

EUR USD AUD GBP


Economic activity & business conditions

-60

-30

0

30

Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 -10

-5

0

5 net % %yr

GDP (rhs) Tankan lrg manuf conditions

Source: BoJ, ESRI

The yen over the long run

20

40

60

80

100

120

140 50

100

150

200

250

300

350 Jan-73 Jan-79 Jan-85 Jan-91 Jan-97 Jan-03 Jan-09

JPY index

USD/JPY (lhs, inverted)

Nominal effective (rhs)

Sources: CEIC, Westpac Economics

Investment & business conditions

-60

-30

0

30

Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 -30

-15

0

15 net % %yr

Real non-res investment (rhs) Tankan lrg manuf (lhs) Tankan lrg non-manuf (lhs)

Source: BoJ, ESRI

12

Emerging Asia

October 2010

Emerging Asia is at a critical juncture. On the one hand, the region has basically recovered from the setbacks associated with the North Atlantic Financial Crisis. On the other, growth is now clearly slowing and easy monetary policy and soggy demand conditions in the G4 economies will restrict the region’s options for leaning against the slowdown. With the exception of India and Indonesia, we think that emerging Asia received too much credit for its rebound. Yes, financial system, corporate and household sector balance sheets were relatively unimpaired when the crisis hit, and therefore the region was in a position to succeed once conditions improved, but the dynamics of the recovery – an inventory cycle and the leveraging of stimulus policies at home and abroad, was not that fundamentally different from the rebound in the advanced countries. Now, with the inventory cycle maturing and the manufacturing trade slowing down accordingly, Asia has to prove it can stay the course.

As we indicated last month, Q2 growth was respectable and was nothing to worry about in its own right. What is of more concern are signs of fatigue coming through in some of the bellwether sectors. Port throughput seems to be topping out (chart 6) in the key trading nations. Tech, whose inputs generally travel by air, is showing a similar trend of slowing. The various national manufacturing PMI surveys, which are the most timely indicators of activity available, are already indicative of a shallow contraction in manufacturing activity. Korea’s is at 48.8 in September from 50.9 in August (down from 57.1 in April); Taiwan printed at 49.0 and 49.2 in September and August (down from 62.7 in March) and Singapore is at 49.4/49.5/51.9 on the same basic, with the corresponding readings for its electronics sector being 48.5/50.6, with the latest updates on new orders and inventories being 47.2 and 51.9 respectively. In India the levels look better (55.1 in September) but the direction of change is similar: the Indian PMI had not printed below 57 for a considerable time before the September update.

While growth is slowing, capital is still flowing strongly to the region. India’s Q2 balance of payments figures (admittedly a little dated, but given the European debt crisis blew up in April, the data remain interesting) showed a strong rise in the basic balance, despite a record deficit. The quality of the inflow was also pretty good, with very little reliance on loans in the quarter. Inflows to US based emerging markets equities mutual funds have been far more resilient than advanced country funds, which have been haemorrhaging consistently. We see little reason to call a halt in this trend, with the G4 seemingly bent on out–QEing each other. The question is more one of how do emerging markets deal with these flows? The basic principle right now seems to be to rely more on non–interest rate policy. That will not serve forever.


The region still has much to prove ...

... as the trade rebound fades.

Capital inflow will remain elevated.

Macroeconomic variables

2009 2010

Industrial production %yr Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

India 10.2 12.0 17.7 16.3 14.7 14.6 15.2 11.3 5.8 13.8 –Indonesia 4.7 3.8 4.9 5.3 4.0 3.5 3.8 4.1 5.0 3.7 –Korea 0.2 18.1 34.2 37.0 18.9 22.7 20.1 21.7 17.2 15.5 17.1Taiwan 7.4 32.0 47.8 70.1 35.5 39.5 32.0 31.0 24.7 20.9 23.4Singapore 2.6 –9.6 15.3 42.0 20.5 53.3 49.8 59.4 29.5 9.9 8.1Exports %yr

India 4.8 10.2 12.0 17.7 16.3 14.7 14.6 15.2 11.3 5.8 13.8Indonesia 13.5 4.7 3.8 4.9 5.3 4.0 3.5 3.8 4.1 5.0 3.7Korea –8.5 0.2 18.1 34.2 37.0 18.9 22.7 20.1 21.7 17.2 15.5Taiwan –4.6 7.4 32.0 47.8 70.1 35.5 39.5 32.0 31.0 24.7 20.9Singapore – non–oil –7.6 2.6 –9.6 15.3 42.0 20.5 53.3 49.8 59.4 29.5 9.9

GDP %yr Dec–07 Mar–08 Jun–08 Sep–08 Dec–08 Mar–09 Jun–09 Sep–09 Dec–09 Mar–10 Jun–10

India 9.7 8.5 7.8 7.5 6.1 5.8 6.0 8.6 6.5 8.6 8.8Indonesia 5.8 6.2 6.3 6.3 5.3 4.5 4.1 4.2 5.4 5.7 6.2Korea 5.7 5.3 4.2 3.1 –3.2 –4.1 –2.1 1.1 6.1 8.1 7.1Taiwan 6.5 6.8 4.5 –1.6 –6.3 –10.1 –5.6 0.5 8.4 14.6 11.4Singapore 6.3 7.4 2.7 0.0 –2.5 –8.9 –1.7 1.8 3.8 16.9 18.8


Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

13

Emerging Asia

October 2010

Target interest rates

4

6

8

10

12

14

4

6

8

10

12

14


%pa %pa

PHP

IDR

INR


Target interest rates

0

2

4

6

8

10

12

0

1

2

3

4

5

6

7


%pa %pa

HK KRW

MYR THB

TWD


Effective exchange rates

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

Feb-06 Aug-06 Mar-07 Sep-07 Apr-08 Oct-08 May-09 Dec-09 Jun-10

Index level Index level

Indonesia Malaysia

Thailand Philippines

Source: Westpac Strategy, Bloomberg.

Asian port activity: container throughput

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

Jun-01 Jun-03 Jun-05 Jun-07 Jun-09


Korea

Taiwan

Singapore

HK

Sources: CEIC. Seasonally adjusted by Westpac.

Effective exchange rates

60

70

80

90

100

110

120

130

140

60

70

80

90

100

110

120

130

140

Feb-06 Oct-06 Jun-07 Feb-08 Oct-08 Jul-09 Mar-10


Korea Taiwan

India Singapore

Source: Westpac Strategy, Bloomberg.

Net foreign investment flows: India

-4

-2

0

2

4

6

8

10

-4

-2

0

2

4

6

8

10

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

%GDP %GDP Other (mainly loans) Portfolio investment Direct investment Basic balance


14

United States

October 2010

The US economy continues to evolve broadly as we have been expecting. The headwinds weighing against recovery are well known. Household spending is constrained by near 10% unemployment and an increased tendency to save rather than borrow to consume; ongoing oversupply of housing and the expiry of the tax credit for homebuyers is pushing housing activity to multi–decade lows and further undermining reasons for households to spend. With elections just a month away Congress seems unlikely to approve further fiscal measures at the federal level, which effectively means tax hikes as the Bush tax cuts roll off at the end of 2010. Also state and local governments – unable to run deficits – are being forced to cut services and jobs. The banking system is recovering slowly but credit conditions remain tight especially for small business, where most hiring is expected to take place during an economic upswing.

With the impact of fiscal stimulus and inventory rebuilding that boosted growth to 4.5% annualised in Q4/Q1 now fading, the economy expanded just 1.7% annualised in Q2 and on our forecasts will slow further in 2010H2. Hard activity data confirm this loss of momentum. On a 3 month annualised basis, core retail spending fell at a 1% pace in Jun–Aug, compared to growth of 8% in Q1 and 4% in Q2. Full quarter figures are already available for the auto sector: unit auto sales expanded at a 7% annualised pace in Q3, down from 13% in Q2 (and 7% in Q1). Over the same time period, the equivalent data for housing are much bleaker: as an example, new home sales collapsed at a 71% annualised pace in Jun–Aug, compared to falls of 14% annualised in Q1 and 27% in Q2. Industrial production was more upbeat, expanding at a 3% annualised pace in Jun–Aug, but that was down from 6% in Q2. Similarly, still positive growth in shipments of core capital goods of 12% in June–Aug was down from 17% in Q2.

The business survey message is less clear–cut but points to activity and confidence either in retreat or markedly slowing. Some of the district Fed factory surveys clearly pointed to falling – not just slowing – orders and shipments late in Q3 (Philadelphia and Dallas) whereas others, flying high just a few months prior, were on the cusp of decline (New York and Richmond). In contrast, the private sector Chicago PMI jumped to above 60 in September but given its value as a contrarian indicator that actually supports the broader slowdown story. Indeed the national ISM manufacturing index fell to its lowest for the year so far in September. Its sister non–factory survey posted a rise but this was only a partial rebound from a steep August fall. Private sector payroll employment fell 39k in September according to ADP (the first decline since the start of the year) and as we go to press we await the official payroll count from the BLS.

Tying these and other data sources together, we expect the Q3 GDP report due 29/10 will show the economy expanding just 0.9% annualised, the slowest quarter of growth so far since the recovery began mid last year. That will reflect weaker household consumption growth, a renewed decline in dwelling investment, slower business investment growth, flat public demand, and offsetting declines in inventories and growth in net exports. Our preliminary forecast for Q4 is even weaker at 0.3% annualised, reflecting broadly similar compositional detail apart from falling public spending and net exports.

Previously we argued that we would need to see renewed contraction in GDP growth for the Fed to embark on further quantitative easing. However the FOMC statement from September 21 noted that “measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability... inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate... The Committee is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.” Then at the end of the month, the NY Fed’s influential Bill Dudley concluded that ”further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long”. The new Fed vice chair, Janet Yellen (confirmed October 4) is also thought to favour further QE.

So whilst it won’t be a unanimous decision (Kansas City Fed president Tom Hoenig continues to dissent in favour of tighter language re the policy outlook), it now seems likely that before the year is out, the Fed will have announced further balance sheet expansion. Consequently our forecasts (p. 34) now include projections for the size of the Fed’s balance sheet, which we expect will expand from $2.3trn now to almost $4trn by the end of 2011 (see discussion on p. 4). Another key unresolved issue is what will the new Congress do regarding fiscal policy? That debate will heat up before the year is out.

James Shugg, Senior Economist

The growth profile ...

... is unfolding roughly as forecast ...

... with the pulse fading ...

... as the year goes on.

We now see renewed QE ...

... and plenty of it.

15

Chart 1. Chart 2.

Chart 3. Chart 4.


United States

October 2010

...will see increased asset buying by Fed

0

400

800

1200

1600

2000

2400

Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10

USDbn

CP purchase facility Term auction facility Securities held outright

Source: Ecowin

A weak jobs market…

-1.0 -0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8 1.0

-12 -10

-8 -6 -4 -2 0 2 4 6 8

10 12

Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10

mn private payrolls mthly chg (rhs) annual chg (lhs) jobless rate (lhs)

%

Sources: Westpac Economics, Factset

latest: 9.6%

...deflationary concerns...

-0.2

0.0

0.2

0.4

0.6

0.8

-1

0

1

2

3

4

Aug-03 Aug-05 Aug-07 Aug-09

% %

mthly (rhs) 6-month annualised (lhs)

Sources: Factset, Westpac Economics deflation scares

Core PCE

Macroeconomic variables2009 2010

Monthly data Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug SepConsumer prices %yr –0.2 1.8 2.8 2.7 2.2 2.4 2.2 2.0 1.1 1.3 1.2 –Unemployment rate % 10.1 10.0 10.0 9.7 9.7 9.7 9.9 9.7 9.5 9.5 9.6 –Non–farm payrolls chg '000 –224 64 –109 14 39 208 313 432 –175 –54 –54 –Industrial production %mth 0.3 0.5 0.5 1.0 0.0 0.6 0.4 1.1 0.1 0.6 0.2 –New homes sales %mth 1.3 –7.1 –3.3 –2.0 –0.6 10.7 7.8 –31.9 10.6 –7.7 0.0 –ISM manufacturing composite 55.2 53.7 54.9 58.4 56.5 59.6 60.4 59.7 56.2 55.5 56.3 54.4ISM non–manufacturing composite 50.1 48.4 49.8 50.5 53.0 55.4 55.4 55.4 53.8 54.3 51.5 53.2Retail sales %yr –2.0 2.4 5.5 4.0 4.7 8.5 8.7 6.9 5.2 5.4 3.6 –UoM Consumer Sentiment 70.6 67.4 72.5 74.4 73.6 73.6 72.2 73.6 76.0 67.8 68.9 68.2Trade balance USDbn –32.3 –35.3 –37.1 –34.8 –39.9 –39.7 –40.0 –41.8 –49.8 –42.8 – –

Quarterly data Jun–09 Sep–09 Dec–09 Mar–10 Jun–10 Sep–10f

Real GDP % saar –0.7 1.6 5.0 3.7 1.7 0.9Current account USDbn –84.4 –97.5 –100.9 –109.2 –123.3 –Sources: Government agencies, Bloomberg, Factset

…and a poor growth outlook…

-2

-1

0

1

2

3

-2

-1

0

1

2

3

consumer housing business public net X GDP

ppts cont'

2010H1 2010H2f 2011f

ppts cont'

Sources: BEA, Westpac

contributions to annualised GDP growth

16


October 2010

Forecasts – Japan

Interest rate forecasts

Latest (8 Oct) Dec 10 Mar 11 Jun 11 Sep 11 Dec 11JapanBoJ target rate 0.10 0.10 0.10 0.10 0.10 0.10Market implied* na 0.07 0.15 0.18 0.09 0.10Asset purchase target ¥trn 5 5 10 20 25 3010 Year JGB 1.01 0.90 1.00 1.20 1.40 1.5010 Year Spread to US –153 –160 –145 –125 –130 –135* Market implied rate is the anticipated target rate in the OIS market. Sources: Bloomberg, Westpac Strategy.

Currency forecasts

Latest (8 Oct) Dec 10 Mar 11 Jun 11 Sep 11 Dec 11Yen vsUSD 82.35 83 83 83 90 95EUR 114.70 119 120 125 127 131AUD 80.89 85 85 87 89 91 NZD 61.77 63 65 68 71 74 CAD 80.92 86 86 88 88 89

SGD 63.02 64 65 66 72 77HKD 10.62 10.71 10.71 10.71 11.61 12.26PHP 1.89 1.93 1.94 1.95 2.13 2.27THB 2.75 2.81 2.86 2.91 3.18 3.42MYR 26.63 27.21 27.63 27.91 30.41 32.20CNY 12.33 12.52 12.65 12.77 13.92 14.84IDR 108 107 106 105 96 91TWD 2.68 2.76 2.79 2.82 3.08 3.28KRW 13.62 13.25 13.01 12.76 11.66 10.84INR 1.78 1.89 1.92 1.95 2.13 2.29

Economic forecasts2009 2010 Calendar years

% change Q1 Q2 Q3 Q4 Q1 Q2 Q3f 2008 2009 2010f 2011fPrivate consumption –1.4 1.3 0.6 0.7 0.5 0.0 –0.4 –0.6 –1.0 1.6 0.7Dwelling investment –7.2 –9.6 –7.2 –2.9 0.3 –1.3 0.2 –8.5 –13.9 –8.8 2.7Business investment –9.0 –4.8 –1.8 1.5 0.6 0.5 0.5 –0.1 –19.1 0.2 2.1Private demand –4.8 –0.1 –0.5 0.4 0.6 0.4 0.0 –1.3 –5.8 1.0 1.0Public demand 0.9 1.7 –0.3 0.4 0.3 –0.4 0.2 –3.1 2.4 0.8 0.8Inventory contribution –1.3 0.2 –0.3 –0.2 0.0 0.2 0.2 –0.4 –0.3 0.0 0.0Net exports contribution –1.6 1.7 0.5 0.6 0.7 0.4 0.5 0.2 –2.0 2.4 0.2GDP –4.4 2.5 –0.3 1.0 1.1 0.5 0.4 –1.5 –5.8 3.3 1.1annual chg –8.7 –5.9 –4.9 –1.3 4.4 2.3 3.0 – – – –GDP deflator %yr 0.1 –1.9 –0.4 0.4 –1.0 –0.8 –1.2 0.1 –0.5 –0.9 –0.5

Other macroeconomic variablesUnemployment rate % 4.5 5.1 5.4 5.2 4.9 5.2 5.2 4.0 5.1 5.1 5.0Consumer prices %yr –0.1 –1.0 –2.2 –2.0 –1.2 –0.9 –0.8 1.4 –1.3 –0.8 –0.4Industrial production %yr –34.0 –27.6 –19.6 –5.2 24.8 21.0 15.6 –3.4 –21.8 18.2 3.1Bank lending %yr 3.8 3.1 1.9 0.1 –1.8 –2.0 –2.0 1.9 2.2 –1.9 –1.1Current account % of GDP 1.8 3.0 3.1 3.3 3.9 3.0 3.1 3.3 2.8 3.3 3.4Sources: Official agencies, Factset, Westpac Economics. Calendar year and quarterly data are period averages. GDP is frequently revised.

17


October 2010

Forecasts – Asia & China

Interest rate forecasts

Latest (8 Oct) Dec 10 Mar 11 Jun 11 Sep 11 Dec 11Korea (BoK call) 2.25 2.25 2.25 2.50 2.75 3.00Hong Kong (HKMA base rate) 0.50 0.50 0.50 0.50 0.50 0.50Taiwan (CBC rediscount rate) 1.38 1.38 1.50 1.63 1.75 1.88Singapore (overnight repo) 0.21 0.40 0.55 0.70 0.80 0.90China (PBoC lending rate) 5.31 5.31 5.31 5.31 5.31 5.31Malaysia (Overnight policy rate) 2.75 2.75 3.00 3.25 3.50 3.50Thailand (BoT repo rate) 1.75 2.00 2.50 3.00 3.25 3.50Indonesia (BI rate) 6.50 6.50 6.75 7.25 7.75 8.00Philippines (BSP reverse repo rate) 4.00 4.00 4.50 4.75 5.00 5.25India (RBI repo) 6.00 6.00 6.25 6.50 6.75 7.00

Currency forecasts

USD vs Latest (8 Oct) Dec 10 Mar 11 Jun 11 Sep 11 Dec 11SGD 1.3068 1.30 1.28 1.26 1.26 1.24HKD 7.7552 7.75 7.75 7.75 7.75 7.75PHP 43.62 43.10 42.80 42.50 42.20 41.90THB 29.97 29.50 29.00 28.52 28.28 27.80MYR 3.09 3.05 3.00 2.97 2.96 2.95CNY 6.6785 6.63 6.56 6.50 6.47 6.40IDR 8928 8900 8820 8740 8660 8610TWD 30.75 30.10 29.76 29.43 29.26 28.94KRW 1122 1100 1080 1059 1050 1030INR 46.24 44.0 43.3 42.5 42.2 41.5

Chinese economic forecasts

2005 2006 2007 2008 2009 2010f 2011fReal GDP 11.3 12.7 14.2 9.6 9.1 10.3 9.1Consumer prices 1.8 1.5 4.8 5.9 –0.7 3.0 2.8Producer prices 4.9 3.0 3.1 6.9 –5.4 5.5 2.8Industrial production (IVA) 15.9 16.2 13.5 8.8 10.7 12.9 12.1Retail sales 12.9 13.7 16.8 21.8 15.4 17.0 15.8Money supply M2 16.0 18.1 17.5 16.7 26.5 20.0 15.3Fixed asset investment 29.6 25.5 25.8 26.7 31.9 24.0 22.3Exports 29.3 27.0 26.7 17.9 –15.9 28.9 8.1Imports 17.4 20.3 20.7 19.6 –10.0 35.9 7.3Trade balance USDbn 102 177 262 298 196 201 176Bank lending 13.3 15.2 16.7 15.3 31.0 20.4 14.3Property prices 7.6 5.5 7.6 6.5 1.5 9.5 –0.5Sources: CEIC, IMF, Westpac Economics. Year average growth rates unless specified otherwise

Regional growth forecasts#

Real GDP %ann 2005 2006 2007 2008 2009 2010f 2011fEast Asia 8.7 9.8 10.9 7.1 5.9 8.9 7.4East Asia ex China 5.2 5.8 6.0 3.2 0.4 6.4 4.4NIEs* 4.8 5.8 5.8 1.8 –0.9 6.9 4.1India 9.2 9.8 9.4 7.3 5.7 8.0 9.1#Regional and global groupings are weighted using PPP exchange rates. See notes to world growth table overleaf. * “NIEs” signifies “Newly Industrialised Economies” as defined by the IMF, viz; Republic of Korea, Hong Kong Special Administrative Region of China, Taiwan Province of China, and Singapore. Sources: IMF, Westpac Economics.

18


October 2010

Forecasts – United States

Currency forecasts

Latest (8 Oct) Dec 10 Mar 11 Jun 11 Sep 11 Dec 11USD vsUSD index* 100 97.20 98.03 94.82 98.52 100.42JPY 82.35 83 83 83 90 95EUR 1.3928 1.43 1.45 1.50 1.41 1.38AUD 0.9823 1.02 1.03 1.05 0.99 0.96NZD 0.7501 0.76 0.78 0.82 0.79 0.78CAD 1.0177 0.97 0.96 0.94 1.03 1.06

GBP 1.5877 1.61 1.65 1.79 1.72 1.69CHF 0.9659 0.97 0.97 0.95 1.04 1.06ZAR 7.2944 6.75 6.66 6.54 6.98 7.26

SGD 1.3068 1.30 1.28 1.26 1.26 1.24HKD 7.7552 7.75 7.75 7.75 7.75 7.75PHP 43.62 43.1 42.8 42.5 42.2 41.9THB 29.97 29.5 29.0 28.5 28.3 27.8MYR 3.09 3.05 3.00 2.97 2.96 2.95CNY 6.6785 6.63 6.56 6.50 6.47 6.40IDR 8928 8900 8820 8740 8660 8610TWD 30.75 30.1 29.8 29.4 29.3 28.9KRW 1122 1100 1080 1059 1050 1030INR 46.24 44.0 43.3 42.5 42.2 41.5*Broad (20 MTP) nominal trade weighted index, with latest data compiling the base. Weights from US Fed. A reading above (below) 100 indicates a rise (fall) in the USD.

Activity

2010 2011 Calendar years

% annualised, s/adj Q2 Q3f Q4f Q1f Q2f Q3f Q4f 2008 2009 2010f 2011fPrivate consumption 2.2 1.2 1.2 2.1 2.2 2.6 2.7 –0.3 –1.2 1.4 2.0Dwelling investment 25.6 –5.0 –2.0 4.1 4.9 4.9 4.9 –24.0 –22.9 0.0 3.2Business investment 17.2 4.8 5.7 4.4 5.7 7.8 7.8 –0.1 –16.8 6.1 6.4Public demand 3.9 0.0 –2.8 –5.1 –5.1 –4.3 –4.3 2.8 1.6 0.5 –3.3Domestic final demand 4.5 1.2 0.8 1.0 1.2 1.9 2.0 –0.7 –3.1 1.7 1.4Inventories contribution ppt 0.8 –0.9 0.0 –0.3 0.2 0.1 0.1 –0.5 –0.6 1.3 –0.1Net exports contribution ppt –3.4 0.8 –0.2 –0.2 –0.3 0.0 –0.1 1.1 1.1 –0.4 –0.3

GDP 1.7 0.9 0.3 0.7 1.3 2.0 2.0 0.0 –2.6 2.5 1.1%yr annual chg 3.0 2.8 1.7 0.9 0.8 1.1 1.5 – – – –Other macroeconomic variables

Non–farm payrolls mth avg 231 –40 0 87 96 196 166 –237 –448 53 136

Unemployment rate % 9.7 9.7 9.9 10.1 10.1 10.4 10.3 5.8 9.3 9.8 10.2CPI headline %yr 1.8 0.9 0.8 1.0 1.9 2.7 3.1 3.8 –0.3 1.5 2.2PCE deflator, core %yr 1.5 1.3 1.0 1.1 1.2 1.4 1.6 2.3 1.5 1.4 1.3Current account %GDP –3.4 –3.2 –3.1 –3.0 –2.9 –2.8 –2.6 –4.7 –2.7 –3.2 –2.8Sources: Official agencies, Factset, Westpac Economics

Interest rate forecastsLatest (8 Oct) Dec 10 Mar 11 Jun 11 Sep 11 Dec 11

Fed Funds* 0.250 0.125 0.125 0.125 0.125 0.125Market implied^ na 0.16 0.16 0.19 0.25 0.31Fed balance sheet $trn 2.39 2.80 3.40 3.60 3.80 3.9010 Year Bond 2.54 2.35 2.25 2.50 2.75 3.25^ Market implied rate is the anticipated target rate in the OIS market. * Midpoint of the target range. Sources: Bloomberg, Westpac Strategy.

19


October 2010

Summary of world output

Economic growth forecasts#

Real GDP %ann 2005 2006 2007 2008 2009 2010f 2011f

World 4.5 5.1 5.2 3.0 –0.6 4.4 3.8

United States 3.1 2.7 1.9 0.0 –2.6 2.5 1.1Japan 1.9 2.0 2.4 –1.5 –5.8 3.3 1.1Euro zone 1.7 3.0 2.8 0.6 –4.0 1.6 1.4

Group of 3 2.4 2.7 2.3 0.0 –3.6 2.3 1.2

United Kingdom 2.2 2.9 2.6 0.5 –5.0 1.4 1.1Canada 3.0 2.9 2.5 0.4 –2.6 2.8 3.0Australia 3.2 2.6 4.8 2.2 1.2 3.5 4.0New Zealand 3.2 1.0 2.8 –0.2 –1.7 3.0 5.0

OECD total 2.7 2.7 2.5 0.1 –3.2 2.1 1.5

China 11.3 12.7 14.2 9.6 9.1 10.3 9.1Korea 4.0 5.2 5.1 2.3 0.2 6.5 4.0Taiwan 4.7 5.4 6.0 0.7 –1.9 6.0 3.8Hong Kong 7.1 7.0 6.4 2.1 –2.7 5.8 5.6Singapore 7.6 8.7 8.2 1.4 –2.0 13.0 3.0Indonesia 5.7 5.5 6.3 6.0 4.5 6.0 5.2Thailand 4.6 5.1 4.9 2.5 –2.3 5.0 4.0Malaysia 5.3 5.8 6.2 4.6 –1.7 6.0 4.0Philippines 5.0 5.3 7.1 3.8 0.9 4.5 3.3Vietnam 8.4 8.2 8.5 6.2 5.3 8.0 8.3

East Asia 8.7 9.8 10.9 7.1 5.9 8.9 7.4East Asia ex China 5.2 5.8 6.0 3.2 0.4 6.4 4.4NIEs* 4.8 5.8 5.8 1.8 –0.9 6.9 4.1

India 9.2 9.8 9.4 7.3 5.7 8.0 9.1Russia 6.4 7.7 8.1 5.6 –7.9 4.0 3.3Brazil 3.2 4.0 6.1 5.1 –0.2 5.5 4.1South Africa 5.3 5.6 5.5 3.7 –1.8 2.6 3.6Mexico 3.2 4.9 3.3 1.5 –6.5 4.2 3.5Argentina 9.2 8.5 8.7 6.8 0.9 3.5 3.0Chile 5.6 4.6 4.6 3.7 –1.5 4.7 5.4CIS^ 6.7 8.5 8.6 5.5 –6.6 4.0 3.6Middle East 5.4 5.7 5.6 5.1 2.4 4.5 4.8C & E Europe 5.9 6.5 5.5 3.0 –3.7 2.8 2.8Africa 6.3 6.5 6.9 5.5 2.1 4.7 5.9

Emerging ex–East Asia 6.0 6.8 6.8 5.0 –0.7 4.9 5.0

Other countries 5.1 5.2 5.1 6.7 3.6 3.9 4.1

World 4.5 5.1 5.2 3.0 –0.6 4.4 3.8#Regional and global groupings are weighted using PPP exchange rates updated to reflect ICP 2005 benchmark revisions. Adding ½ppt to the global headline approximates growth under the prior weighting system * “NIEs” signifies “Newly Industrialised Economies” as defined by the IMF, viz; Republic of Korea, Hong Kong SAR, Taiwan Province of China, and Singapore. ^ CIS is the Commonwealth of Independent States, including Mongolia. Sources: IMF, Westpac Economics.

Corporate directory

International

London63 St. Mary AxeLondon EC3A 8LE EnglandTelephone (44-20) 7621 7670Facsimile (44-20) 867 7512

New YorkLevel 39, 575 Fifth AvenueNew York NY 10017–2422 USATelephone (1-212) 551 1820Facsimile (1-212) 551 1997

Hong Kong23/F Entertainment Building30 Queen’s Road Central, Hong KongTelephone (85-2) 2842 9888Facsimile (85-2) 2840 0591

People’s Republic of ChinaRoom 701, 708, Jin Mao TowerNo 88 Century AvenuePudong, P.R. China 200121Telephone (8621) 6165 7688Facsimile (8621) 5047 5008

Singapore77 Robinson Road#19–01, Robinson 77Singapore 068896Telephone (65) 6530 9898Facsimile (65) 6532 6781

Port MoresbyLevel 9, Deloitte TowersDouglas StreetPort Moresby PNGTelephone (67-5) 322 0888Facsimile (67-5) 322 0841

Fiji IslandsWestpac House73 Gordon StreetSuva, Fiji IslandsTelephone: (679) 330 0666Facsimile: (679) 330 0718

This issue was finalised on 8 October 2010

Publication enquiries, Westpac Economics, Telephone (61-2) 8254 8720, [email protected]

Financial markets Australia

SydneyLevel 2, 275 Kent StreetSydney NSW 2000Telephone (61–2) 8254 9470Facsimile (61–2) 8254 6933

MelbourneLevel 9, 360 Collins StreetMelbourne VIC 3000Telephone (61–3) 9602 1900Facsimile (61–3) 9602 1760

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New Zealand

Financial markets New Zealand

WellingtonVodafone on the QuayLevel 15, 157 Lambton QuayWellington, New ZealandTelephone (64–4) 381 1413Facsimile (64–4) 473 7879

AucklandLevel 15188 Quay StreetAuckland, New ZealandTelephone (64–9) 363 1299Facsimile (64–9) 367 3838

Westpac Economics

SydneyLevel 2, 275 Kent StreetSydney NSW 2000Telephone (61–2) 8254 8372Facsimile (61–2) 8254 6934

Bill EvansChief Economist Global Head of Economics & Research

Andrew HanlanSenior Economist

Matthew HassanSenior Economist

Huw McKaySenior International Economist

Justin SmirkSenior Economist(on secondment to St.George Bank)

Anthony ThompsonSenior Economist

Elliot ClarkeEconomist

WellingtonVodafone on the QuayLevel 15, 157 Lambton QuayWellington, New ZealandTelephone (64–4) 381 1413Facsimile (64–4) 381 1406

Brendan O’DonovanChief Economist, New Zealand

Anne BonifaceSenior Economist

Michael GordonSenior Economist

Donna PurdueSenior Economist

Dominick StephensSenior Economist

London63 St. Mary AxeLondon EC3A 8LEUnited KingdomTelephone (44–20) 7621 7061Facsimile (44–20) 7621 7527

James ShuggSenior Economist

asian market perspectives - westpac · this issue was finalised on 8 october 2010 asian market...

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