federal budget 2013/2014
TRANSCRIPT
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The Federal Budget 2013/14
May 2013
Bill Evans
Chief Economist
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Federal budget: $19.4bn deficit in 2012/13
-3.3
-4.1 -4.2
-60
-40
-20
0
20
40
-6
-4
-2
0
2
4
1981/82 1991/92 2001/02 2011/12
$bn% of GDP
$bn (rhs) % of GDP (lhs)
Sources: Treasury, ABS, Westpac Economics
Govtf/cs to16/17
Underlying cash balance
3
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4
300
325
350
375
400
425
450
300
325
350
375
400
425
450
'11/12 '12/13 '13/14 '14/15 '15/16
$bn$bn
May 2012 May 2013
Sources: budget papers, Westpac Economics
-$20bn
-$23bn
-$20bn
-$21bn
Total receipts
(a)
Four yrs
-$83bn
Revenue, slippage
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General government, net debt
0
20
40
60
80
100
120
0
20
40
60
80
100
120
Aus
NZ
C
anada
Ge
rmany
Spain
UK
F
rance
US
Italy
% %Source: IMF, budget papers, Westpac Economics
Australian Government
including
2014/15 f/c
% of GDP; 2012
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Back-loaded savings of $12.3bn in 2015/16
0.0 0.1 0.10.5 0.3 0.0 0.0
0.9 1.0
11.6
4.2
2.6
5.8
3.4
0.71.7
3.1
10.7
0
2
4
6
8
10
12
14 $bn
2013/14*
over four years
Key savings initiatives*includes savings
in 2012-13
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New spending initiatives in the Budget
0.20.5
0.0
0.6 0.40.2
0.6
3.1 3.0
1.9
1.21.0 0.9 0.8
0
1
2
3
4
0
1
2
3
4
Infrastructure Schools Disability Training Social Health Defence
$bn$bn
2013/14*
over four years
*includes spending
in 2012-13
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Government Westpac
World GDP (2014) 4.0 3.1%
Aust GDP 2.75% 2.4%
Consumption 3.0% 3.0%
Housing 5.0% 4.7%
Investment 4.5% 0.0%
Unemployment 5.75% 6.1%
Government & Westpac forecasts: 2013/14
Sources: Budget papers, Westpac Economics
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Growth to remain below trend in 2013 and 2014
-2
0
2
4
6
-2
0
2
4
6
Dec-90 Dec-94 Dec-98 Dec-02 Dec-06 Dec-10 Dec-14
% chg% chgGDP growth Long term avg Five year avg
Sources: ABS, Westpac Economics
fc/s
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Major gas projects: spending near peak
0
2
4
6
810
12
14
16
0
2
4
6
810
12
14
16
Dec-06 Dec-08 Dec-10 Dec-12 Dec-14 Dec-16
$bn $bn
Quarterly*
Actual, official data #
3qtr moving avg.
Sources: Westpac Economics,Access Investment Monitor
* Westpac estimates
Peak: end 2013, early 2014
# Work on al loil & gas projects
10
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Business confidence fails to respond to rate cuts
70
80
90
100
110120
130
140
150
70
80
90
100
110120
130
140
150
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
indexindex2001-02
2008-09
2011-12
Sources: NAB, Westpac Economics
*index based to 100 in
month prior to first rate cut
months
11
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CAPEX planscollapse in manufacturing
-30
0
30
60
-30
0
30
60
2012 2013f 2014f
% chg, yr avg% chg, yr avgMining
Manufacturing
Services
Total
History in real terms,
Expectations in nominal(calculated using avg.
realisation ratios)
Sources: ABS,Westpac Economics
Financial years
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Consumer sentiment finally responds to rate cuts
70
80
90
100
110120
130
140
150
70
80
90
100
110120
130
140
150
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
indexindex2001-02
2008-09
2011-12
Sources: Melbourne Institute, Westpac Economics
*index based to 100 in
month prior to first rate cut
months
13
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0
10
20
30
40
50
60
0
10
20
30
40
50
60
Mar-97 Mar-99 Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13
%%Sources: Melbourne Institute,Westpac Economics
level of recall: international news items
Consumers very sensitive to European crises
Asian
crisis
9-11
Lehmans
collapseavg
last
2yrs:
28%
European
sov. debt
crisis
14
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Household leverage will contain housing excess
0
20
40
60
80
100
120
140
160
180
Mar-77 Nov-83 Jul-90 Mar-97 Nov-03 Jul-100
20
40
60
80
100
120
140
160
180% %
total (gross)
housing
Sources: RBA, Westpac Economics
Peak in Sep-06
15
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Westpac loan book shows consumer caution
90
9294
96
98
100102
104
106
108
110
80
85
90
95
100105
110
115
120
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12
indexindex*based on median months aheadWestpac customers are on mortgagerepayments
increase in months ahead
decrease in months ahead
16
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New housing lending is picking up very slowly
-30
-20
-10
0
10
20
30
40
50
60
0
10
20
30
40
50
60
70
Mar-99 Mar-02 Mar-05 Mar-08 Mar-11 Mar-14
% ann$bn/qtrHousing finance, level (lhs) Annual growth (rhs)
Sources: ABS, RBA, Westpac Economics
quarterly
30%10%
f/c toSep 13
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The job market in 2012: winners and losers
-50
-25
0
25
50
75
-50
-25
0
25
50
75
Education &health
Businessservices*
Mining Government Construction
thousandsthousandsSources: ABS, Westpac. * Professional, technical & business.
18
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19
Unemployment rate set to peak mid 2014
3
5
7
9
62.5
63.5
64.5
65.5
66.5
Mar-97 Mar-01 Mar-05 Mar-09 Mar-13
% %
unemployment rate (lhs)
Sources: ABS, Westpac Economics
Forecaststo Dec 2015
peak6.25%
mid 2014
19
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Unemployment rate projections by state
2
3
4
5
6
7
8
9
2
3
4
5
6
7
8
9
Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12 Mar-14
%%
NSW Vic Qld
Sources: ABS, Westpac Economics
20
*annual averages, projectionsassume no change in populationgrowth and participation rates
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Durables inflationdomestic margin pressure
-12 -9 -6 -3 0 3 6
Textiles, clothing & footwear
Furniture
Motor vehicles & parts
Toys, books & leisure goods
Household electrical items
ppts
Consumer pricesImport prices
Source: RBA
average annualised inflation since Q1 2011
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Underlying inflation to stay low despite carbon tax
0
1
2
3
4
0
1
2
3
4
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13
%yr%yr
Westpac's estimate of the Carbon Price
RBA core inflation
Sources: ABS, Westpac Economics
Forecasts
Target band
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Housing finance approvals not responding to rates
70
80
90
100
110120
130
140
150
70
80
90
100
110120
130
140
150
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
indexindex2001-02
2008-09
2011-12
Sources: ABS, Westpac Economics
*index based to 100 inmonth prior to first rate cut
months
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House prices are slow to respond to rate cuts
80
90
100
110
120
130
80
90
100
110
120
130
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
indexindex2001-02
2008-09
2011-12
Sources: RP Data-Rismark, Westpac Economics
*index based to 100 inmonth prior to first rate cut
months
24
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House Price Expectations finally picking up
-50
-25
0
25
50
75
100
-50
-25
0
25
50
75
100
Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12
%%
Source: Melbourne Institute, MortgageChoice, Westpac Economics
*grey line is a similar measure from anannual survey by Mortgage Choice;^average of all observations, adjustedfor different survey frequencies
net % expectinghouse prices to rise
avg^
25
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House price expectations boosted in NSW
-20
0
20
40
60
80
100
-20
0
20
40
60
80
100
May-09 May-10 May-11 May-12 May-13
%%
NSW Vic Qld
Sources: Melbourne Institute, Westpac Economics
net % expecting house prices to rise
26
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Sydney house prices have a lot to catch up
60
80
100
120
140
160
180
200
220
240
60
80
100
120
140
160
180
200
220
240
Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-12
indexindex
Sydney
Melbourne
Brisbane
Sources: RP Data-Rismark, Westpac Economics
*all dwellings, Dec 2002 = 100
+33%
+82%
+89%
27
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Rental yields are close to mortgage rates
3
4
5
6
7
8
9
10
11
12
3
4
5
6
7
8
9
10
11
12
Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11
%pa%pa Brisbane
Australia
Sources: REIA, Westpac Economics
*median rent on2bdrm unit as %of median unitprice
investor
housing
boom
variablemortgage rate
3yr fixedrate
28
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Investors are responding to rates/yields in NSW
0.5
1.0
1.5
2.0
2.5
3.0
0.5
1.0
1.5
2.0
2.5
3.0
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
$bn$bn
Vic Qld NSW
Sources: ABS, Westpac Economics
NSW: +33%yr
Vic: +20%yr
Qld: +6%yr
29
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30
First home buyers are not responding to rate cuts
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13
thousandsthousands
NSW Vic Qld
30
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House prices: only modest increases expected
94
9698
100
102
104
106
108
110
112
114116
94
9698
100
102
104
106
108
110
112
114116
Dec-12 Dec-13 Dec-14
indexindex
Sydney
Melbourne
Brisbane
Sources: RP Data-Rismark, Westpac Economics
*all dwellings, Dec 2012 = 100
31
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Office vacancy rates starting to rise
0
5
10
15
20
25
30
35
0
5
10
15
20
25
30
35
Dec-70 Dec-80 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10
%%Sydney Melbourne Brisbane
Sources: Property Council, Westpac Economics
32
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Commercial property yields still very attractive
0
3
6
9
12
15
0
3
6
9
12
15
Dec-85 Dec-91 Dec-97 Dec-03 Dec-09
% annual avg% annual avgRisk free Retail
Office Industrial
Sources: IPD Australia, Westpac Economics.Income only.
33
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Actual
May 12
Forecast
for May
13
Current
level
May-14
forecast
Cash %pa 3.75 3.25* 2.75 2.00
3yr swap 3.42 4.20 2.90 2.75
AUD/USD 102 105 100^ 96
Last years Budget forecasts the report card
*lowered to 2.75% on May 24 2012
^trading at 105 Apr 8-12
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2
3
4
5
6
Jan Apr Jul Oct
% 3yr swap
Cash rate
Source: Bloomberg, Westpac Strategy
Fixed rates turn sharplytime to contain risk now
2
3
4
5
6
Jan Apr Jul Oct
%
fcast
2009 2013
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World growthWBC forecasts slowdown
2012 (%ann) 2013 (%ann) 2014 (%ann)
World 3.2 3.4 3.1
US 2.2 1.7 1.6
Europe -0.6 -0.5 -0.5
China 7.7 8.0 7.8
Australia 3.6 2.5 2.3
36
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Policy to slow down Chinese housing sales
-50
-250
25
50
75100
125
150
175200
-50
-250
25
50
75100
125
150
175200
Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15
%yr%yr
Centre
East
West
Sources: CEIC, Westpac Economics.
37
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Chinese infrastructure spending to slow down
28
2216
23
42
18
3
6
26
19
-10
0
10
20
30
40
50
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
ppt cont.
Transport
Utilities
Total
Sources: CEIC, Westpac.Contribution to full year growth. * Railways, airports, mass urban transit, pipeline, waterways.
forecast
38
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Chinese construction cycleslowdown coming
0
10
20
30
40
Jan 05 Jul 06 Jan 08 Jul 09 Jan 11 Jul 12 Jan 14
%yr %yr
%yr 3mma
Sources: CEIC,Westpac Economics.
39
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40
Europe: unemployment continues to rise
0
5
10
15
20
25
30
0
5
10
15
20
25
30
1995 1997 1999 2001 2003 2005 2007 2009 2011
%France SpainItaly Netherlands
Source: Eurostat
%unemployment rate
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41
Germany and Francecore diverging rapidly
4
6
8
10
12
4
6
8
10
12
1995 1997 1999 2001 2003 2005 2007 2009 2011
% %
Germany France
Source: Eurostat
unemployment rate
41
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42
-15
-10
-5
0
5
1015
20
25
3035
-15
-10
-5
0
5
1015
20
25
3035
Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12
ann%
Euro area 'troubled' economies the rest
Sources: IMF, Westpac
ann%
*private sector, 6mth annualised growth rate^Spain, Italy, Portugal, Ireland and Greece combined
Troubled economies banks just not lending
42
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43
Gross debt ratios keep risingratings risks
0
20
40
60
80
100
120
140
1991 1999 2007 2015
%Spain Italy France
Source: IMF, Westpac Economic growth forecasts
43
% of GDP
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Sovereign risk ratingsSpain/Italy on the cusp !
Current 2011/12
peak
Rating Outlook
France 1.0% 3.4% AA+ Neg
Italy 3.1% 7.7% BBB+ Neg
Spain 3.4% 7.6% BBB Neg
*current yield is generic 7yr yield to match average duration of existing liabilities.
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Non-residents hold EUR 1.35 tr in Spain/Italy debt*
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
France Germany Greece Ireland Italy Portugal Spain
trn
Sources: IMF, Bloomberg.Westpac Economics.
*Marketable debt only.
45
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US unemployment falls due to part. rate, not jobs
54
56
58
60
62
64
66
68
0
2
4
6
8
10
12
1970 1980 1990 2000 2010
%%
Unemploment rate (lhs)
Participation rate (rhs)Employment-population ratio (rhs)
Sources: Ecowin, Westpac Economics
46
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47
US consumption growth is slowing again
-8
-6
-4
-2
0
2
4
6
8
-20
-15
-10
-5
0
5
10
15
20
1997 1999 2001 2003 2005 2007 2009 2011 2013
%%
Durables (lhs) Services (rhs) Non durables (rhs)
Sources: Ecowin, Westpac Economics
annual change
PCE total m/m chg
Dec: 0.2%Jan: 0.2%Feb: 0.3%Mar: 0.3%
47
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48
US house pricesno longer booming
-30
-20
-10
0
10
20
30
-3
-2
-1
0
1
2
3
Jan 01 Jan 03 Jan 05 Jan 07 Jan 09 Jan 11 Jan 13
%%
monthly change (lhs)
6 month ann change (rhs)Source: Ecowin
20-city S&P Case-Shiller Index
48
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49
US commercial banks not supporting housing
0.5
1.0
1.5
2.0
2.5
Dec-02 Dec-04 Dec-06 Dec-08 Dec-10 Dec-122.0
2.5
3.0
3.5
4.0$trn $trn
Mortgages (lhs)
Treasury & MBS
C&I loans
Sources: Federal Reserve
Mortgage charge offs circa
$28bn in 2012; rise inmortgage balance past year $12bn,but GSEs down $95bn.
49
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50
Fiscal policy still a dragnew policies next year ?
0
1
2
3
4
0
1
2
3
4
2013 2014
%
Fiscal cliff (without deal)
Sequester
January deal
%
Source: CBO; Westpac Economics
drag on GDP growth in calendar year
50
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51
Commodity prices will fall through 2014
100
150
200
250
300
350
100
200
300
400
500
600
700
Mar-07 Mar-09 Mar-11 Mar-13
indexindex
Bulks* (lhs)
Exchange traded* (rhs)
Sources: Westpac Economics, Bloomberg, ABS.Bulks includes iron ore and coal. Exchange traded includesrural, crude oil, base metals and gold.
51
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52
Farm commodity prices lag non-rural prices
0
100
200
300
400
500
600
0
100
200
300
400
500
600
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10 Mar-14
indexindex
Farm commodities
Non rural commodities
Sources: Westpac Economics, Bloomberg
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53
Farm commodity prices hit hard by AUD
20
60
100
140
180
220
260
20
60
100
140
180
220
260
Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10 Mar-14
indexindex
In USD In AUD
Sources: Westpac Economics, Bloomberg
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54
Major central banks are committed to QE
0
10
20
30
40
50
0
10
20
30
40
50
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
%GDP
ECB Fed BOJ
Sources: Ecowin, Bloomberg, CEIC, Westpac Economics
%GDP
Indicativeforecasts
54
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55
Australian dollar to fall but retain QE premium
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11
USDUSD
Fair value band
AUD/USD actual & forecast
Sources: RBA, Westpac Economics
Includes WCFI+BI commodities index, 2 year swap spread, and NFD to GDP.
55
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56
2012 Budget talk: QE3 to support market
0.0
0.5
1.0
1.5
2.0
2.5
3.0
Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11 Feb-12100
125
150
175
200
225$trn Index
S&P500* (rhs)
Federal Reserve: securities held (lhs)
Source: Ecowin, Bloomberg, Westpac Economics
*S&P500 March2009 low = 100
QE1 QE2
Operation twistannounced
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US sharemarket has outperformed Australia
30
50
70
90
110
130
30
50
70
90
110
130
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
indexindex
S&P500 S&P200 Euro Stoxx 50
Sources: Bloomberg,Westpac Economics
2 Jan 07 = 100
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58
... but not in AUD terms; Europe woeful
30
50
70
90
110
130
30
50
70
90
110
130
Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
indexindex
S&P500 S&P200 Euro Stoxx 50
Sources: Bloomberg,Westpac Economics
2 Jan 07 = 100
58
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59
MSCI P/E ratiosmarket is no longer cheap
-15
-10
-5
0
5
10
15
-15
-10
-5
0
5
10
15
Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
points points
Australia US Europe
Source: Bloomberg (MSCI indexes)
deviation from long-run average
cheap
expensive
59
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60
Australian P/E ratios; resources better banks
-15
-10
-5
0
5
10
15
20
-15
-10
-5
0
5
10
15
20
Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11
points points
Financials
Materials
Source: Bloomberg (MSCI indexes)
deviation from long-run average
cheap
expensive
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Key messages from Budget presentation
Forecast budget deficits are not significant Australia has very lowsovereign debt ratio; especially with most debt issued in AUDs.
RBA to cut to 2% from 2.75% but fixed rates near lows right now.
Risks around rebalancing of mining/non mining business the key.
House prices to rise but household leverage to contain any boom.
Second wave of cuts to be associated with weak world economy.
Low inflation allows rate flexibility for the authorities.
Commodity prices to fall AUD to USD 0.96 by mid 2014.
World economy to slow in 2014 US to disappoint keep QE;China slows construction cycle; Europe remains in recession.
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