industry focus professional services issue 1 july 2011 · services in sydney, is the nsw head of...

INDUSTRYFOCUSProfessional Services

ISSUE 1

PROFESSIONAL SERVICES

We’re delighted to launch our quarterly publication that will focus on important issues for the professional services sector. We hope this will become essential reading for helping you make the most of your business.

Each edition will feature regular updates from Bill Evans, Westpac Chief Economist and his team on the Australian economy, interest rates and the Australian dollar.

Planning to succeed: In this issue you’ll find the first in a two part series on Business Succession from Bill Shew of Grant Thornton Australia. It focuses on equity models and practice structures.

Industry reform in the post GFC era: The Future of Financial Advice reforms have been announced and we’re starting to see what the landscape will look like for the professional services sector. Shane Walker from Westpac Marketing and Julia Newbould from BT Adviser Communications, offer some great insights into what your business can expect from the reforms in the post GFC environment.

How Carbon Trading might impact your business environment: With environmental issues hot on the political agenda, Helen Gillies, from Sinclair Knight Merz assesses reforms in Environmental and Climate Change Law and the Energy and Resource sectors as well as the impact of increasing competition and carbon trading on the sector.

Commercial property: back to basics: In the commercial property market Frank Allen, Director of Property Markets for Westpac Institutional Bank is predicting slow but steady growth and offers a sound “Back to Fundamentals” approach.

Let us know what you think: We hope you enjoy the first edition of Industry Focus. Please let us know what you think, suggest topics you’d like to see examined in future editions and how we can continue to meet your business and personal financial needs.

Jarrod Coysh General Manager, Working Capital and Industry Specialisation

Welcome to the first edition of Industry Focus

INDUSTRY FOCUS

Practice succession: Equity and structures ................................ 3

When will the winds of regulatory change gather speed? ........... 5

The right fees are essential for business feasibility .................... 6

Interview with Helen Gillies ........................................................ 7

Commercial property: Back to fundamentals ............................. 8

The Australian economy ........................................................... 10

Australian Dollar ...................................................................... 12

Australian interest rates ........................................................... 14

Consumer confidence .............................................................. 16

Business confidence ................................................................ 17

Economic forecasts.................................................................. 18

Financial forecasts ................................................................... 19

Contents


Practice succession: Equity and structures

By Bill Shew, Grant Thornton Australia

Introduction

Dealing with succession in your practice is a complex issue – one that requires both significant planning and an understanding of what motivates your existing and future Partners. How can you facilitate succession? What is the right equity model? Does the practice structure impact on succession? Is it a combination of both, or is it more?

One thing is clear. Equity is about attracting, rewarding and retaining your future leaders and fee generators. Structure is about how the practice sets itself up for the future. While both can be considered in isolation, the right combination can deliver a powerful result.

In the first of a 2 part article on the subject of succession, I will discuss Equity models and how they impact the practice. In part 2, I will discuss practice structures. In future articles, I will cover the vexed question of how your practice can work through a succession strategy.

Equity Models

There are two common equity models in the legal and accounting profession, the “No Goodwill model”, and the “Goodwill model”, which is calculated either by a formula or independent valuation.

The No Goodwill Model

In the No Goodwill model, newly admitted Partners generally pay a nominal sum as a contribution to working capital with the funds returned on exit. The Equity Partner takes out their “goodwill” annually as they receive a greater share of practice profits than the “Fixed Draw” Partners. This model facilitates the entry of new Partners at a low cost. This also sits more comfortably with up and coming Partners as many take the view that they have contributed to the goodwill of the practice along the way.

In addition, new Partners often have other commitments (e.g. housing loans, school fees etc) and could otherwise have difficulty with funding their entry.

While barriers to entry are low in the No Goodwill model, there is no incentive for the more senior Partners to leave. As no lump-sum payout is made on retirement, there is a risk that more senior practitioners may hang on in an attempt to maintain the income streams to which they have been accustomed.

Unless there are robust Remuneration and Governance models in place, a No Goodwill practice may not succeed in retaining high performing practitioners, and may not facilitate retirement when appropriate. Also, Partners will be attracted by higher earnings per partner from other firms with insufficient financial penalty for leaving.

The Goodwill Model

While the various Goodwill models may address the weaknesses of a No Goodwill model in relation to transition, exit and restraint, attracting young practitioners and asking them to pay for equity, especially in the current market, is a difficult proposition.

So how does the Partner progress up the equity ladder?

Is the progression lock-step, creeping up a certain number of percentage points every year based upon tenure or performance, or is it all or nothing, from 0% to 100% on entry to the equity partner ranks?

The progression of equity is important from a retention and motivation point of view, and also in managing the equity on offer. For example a lock-step model may allow senior Partners to “step down” while junior Partners “step up” thus ensuring that the profit “pie” is not diluted for the remaining 100% equity Partners. A lock-step model also maintains the motivation for a junior partner to continue to perform and earn the next tranche while ensuring that performance of Partners remains on the agenda.

A lock step model can also assist junior Partners when acquiring equity in a Goodwill model, as they can buy in over time in more “affordable” chunks.

Determining how you introduce your equity Partners is an important part of how you transition equity and manage succession, and should be considered in the light of the equity goodwill and partner performance models.

Bill Shew is a Director of Privately Held Business Services in Sydney, is the NSW Head of Professional Services and National Head of Legal Professional Services. Grant Thornton Australia is a National Accounting and Business Advisory firm and a member of Grant Thornton International.

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INDUSTRY FOCUS

Which model is better?

The real questions that should be asked are “what remuneration strategy will deliver rewards for performance that can also act as an attraction and retention strategy?” and “what will reward a senior partner for transitioning clients to newer Partners?” I would argue that remuneration strategies, as much as the value of equity owned and culture, drives today’s professional, both young and old.

Certain practice structures lend themselves to a Goodwill model and others don’t. An incorporated practice may lead you to think that shareholding of a company must have a value, but not always. Similarly a Trust structure may not have any “equity” per se, so how do you attribute a share of goodwill to a Partner?

Conclusion

Whether a professional practice is a Goodwill or No Goodwill model or is, say, incorporated or un-incorporated, are primarily questions of the long term strategic vision and culture of the practice and the Partners’ own objectives. In my discussions with Managing Partners and CEOs in the profession, the No Goodwill model, with performance based remuneration, is the most common.

This article is general in nature and its brevity could lead to misrepresentation. No responsibility can be accepted for those who act on its content without first consulting the writer and obtaining specific advice.

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When will the winds of regulatory change gather speed?

By Shane Walker, Westpac Industry

Traditional literature has often emphasised that rapid change is not a concept that you would use to define the legal and accounting industries. This view of the world is now being challenged in a way not previously experienced, with a series of rapid shocks that have left a deep imprint on the global economy leading the way.

In a feature series of articles over coming months, we will take a deep look into regulatory change, and take a practical view on how the changing environment will impact the operation of your firm in coming years. Before we jump in, let’s take a step back and consider exactly what has happened in the last 2-3 years.

One needs to look no further, when considering the time it took for things to play out, than the recent case involving One Tel, where executives Jodee Rich and Mark Silbermann waited eight years to be exonerated. A substantial amount of this time was spent navigating through a long and complicated process that involved numerous deliberations amongst lawyers, accountants and everyone in between to figure out exactly what happened. But was anyone surprised? Not really.

Enter the Global Financial Crisis in 2008. Using the above as an indication of lead times for the industry to process events, one could reasonably expect the waves of regulatory change to roll through for a number of years to come. Ironically, it was the US Financial Crisis Inquiry Commission that concluded in January 2011 that ‘the crisis was avoidable and was caused by widespread failures in financial regulation’. But does anyone actually have a firm view of what this will look like? Everyone appears to be at the start line, but with a number of false dawns, a key question being asked at the moment is how much of what is being proposed in the United States and Europe will be adopted in Australia?

Perhaps a good place to start is with the former treasurer, Peter Costello. In a 2009 Industry Leadership Forum in Sydney, Costello highlighted the importance of financial regulation in weathering the GFC. Further, that Australia should resist the temptation to over-regulate the industry in response to the crisis. It is fair to say that Costello was backing a fairly sure thing in making this comment. Regulatory change is a long and drawn

out process in Australia unless there are significant events that force the hand of key decision makers.

Is Costello right though? In any event, it is important to consider what any new regulation would mean for the accounting and legal industries. There were a number of key call outs and lessons from the GFC, but a fundamental theme that drove much of the bubble related to people living beyond their means. Further, beyond what the economy and many analysts would refer to as sustainable. Simple logic dictates that for the majority of people, it simply isn’t possible to:• double your income every year,• buy a new house every year• have shares in a company that doubles their dividends year

on year

The history books will reflect that many people bought in to that dream though. Which leads to the core question, how does the government respond to the challenge, and to what point will the accounting and legal fraternities be asked to regulate these behaviours?

The provision of financial advice has been a focal point of the Australian government in recent years. The Ripoli report, which was delivered by minister Chris Bowen late last year, dug deep in to the behaviour that drives the industry today, and what needed to change. Of note was a recommendation from Bowen, ‘that financial advisers must act in the best interests of their clients’. Further, that this advice must be ‘ahead of their own’. The alarm bells should have well and truly been set off many quarters around Australia as the impact of such a comment was digested. Whilst legislation has gone some way to addressing the conflict, the real impact of Chris Bowen’s commentary will not be fully understood until it is tested in the courts.

Challenging financial times will often lead to clients reflecting on advice that they received at key decision points along their journey. In the world of professional services, it is hard to conclude that there would be industries who will be more squarely in the spotlight than accounting and legal practices should this happen. The volume of work over coming years could quite conceivably be driven by two things:• a substantial allocation of time to reviewing past advice/

recommendations provided• responding to the regulatory changes that emerge from this

Recent movement in local and international economies suggests that the speed of regulatory change is gathering pace as governments around the world grapple with the economic fallout from the GFC and other subsequent events. The question is, what will be the response should some of what has unfolded overseas makes its way to Australia in a more pronounced way?

Shane Walker is a graduate of University of Technology Sydney (Bachelor of Business.). He commenced as a graduate for Westpac in 2005, and has worked in a variety of roles across the bank including large scale projects, business policy, business strategy and marketing.

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INDUSTRY FOCUS

The right fees are essential for business feasibility

By Julia Newbould, BT Advisor Communications

The Future of Financial Advice (FOFA) reforms have seen the financial planning community hit with an even more onerous raft of mandated changes to the way they do business.

Two of the key elements of the reforms are:

• Commissions and volume payments – or any payments which could potentially influence adviser recommendations – are banned which means fees will need to be charged by all planners instead of commissions. This will become effective from 1 July 2012 for financial products other than risk insurance, and from 1 July 2013 for all commissions on insurance within a superanuation fund.

• Opt-in - which means that advisers will have to “sell” their value to clients on a two-yearly basis to allow them to charge an ongoing fee for their advice.

What does this mean for Advisers?

This will mean putting in place a system where the client is contacted, each two years, to ensure they wish to receive ongoing advice services. This may require the adviser or planner outlining exactly, the agreed services currently being offered and providing options for different service models.

The process will provide the client with regular contact and help advisors to differentiate between those clients that would like more contact and those that want less, and applying the appropriate fee structure for the level of work involved.

For most service based industries, fees need to reflect the service that clients receive. Putting a price on financial advice, however, can be more difficult as the results are unlike an accountant or doctor or lawyer. The value of the service isn’t always immediately apparent.

Alan Weiss, author of Million Dollar Consulting: the Professional’s Guide to Growing a Practice, suggests that in changing to fees, you should submit your proposal to long-time clients by first citing what your billing practice has been – and then explain that in view of your excellent relationship you’d like to provide an alternative fee structure whereby the client doesn’t have to make an investment decision every time your assistance is required, and proposing a monthly or annual retainer.

Pricing the fee correctly is vitally important to the continued feasibility of a business. The process involves the business owner, other advisers and key support staff figuring out what feels comfortable for them. It is recommended that when deciding between flat fees or asset based fees, each advisory practice analyses the pros and cons of each option.

If it’s a significant change in the business, then practice owners should give sufficient thought to how they can adapt their business along the way.

Important when re-pricing your services is to look at your cost structure and your profit margins. Profit expectations will differ between businesses - some will be satisfied by 30 per cent whereas others might require 50 per cent. Revenue needs will vary according to the number of staff and location of the practice – city or country.

For some clients, the repricing of the service can represent a great increase in fees. This has to be managed effectively also, through correctly valuing the service they receive.

For many advisers, particularly Independent Financial Advisors IFA’s, the changes relating to the ban on commissions will not impact them greatly, as they are already applying a fee for service model or moving in that direction.

Julia Newbould is Senior Marketing Specialist – Adviser Communications for BT Financial Group. Previously Julia was managing editor at Morningstar where she had launched the retail website and managed financial services titles IFA, InvestorDaily, Investor Weekly, SMSF and Masterfunds Quarterly. Julia has worked in financial services media for more than 10 years. She trained as a journalist on a local paper after completing her Bachelor of Economics at the University of Sydney.

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Interview with: Helen Gillies

General Manager Risk & Corporate Counsel, Sinclair Knight Merz

Westpac: There is significant change and reform currently occurring in the areas of Environmental and Climate Change Law, and the Energy and Resource sectors. Do you think these areas will present significant growth in the legal industry in the near future?

Helen Gillies: Change and reform in the areas of Environmental and Climate Change Law and the Energy and Resource sectors will provide significant challenges for the legal industry, especially in the short term as we grapple with the specifics of the treatment of these areas. We expect new legislation in both these areas, which is always a fertile ground for interpretation. There is also the challenge of how the legislation will be dealt with at a project level, which is of great interest to a company such as Sinclair Knight Merz. It’s also interesting to note the significant development of climate change advisory teams in most leading legal, accounting and engineering firms. This stems largely from advice required around delegation of “risk” and “liability” associated with increasing energy prices, a potential price on carbon, and responsibilities relating to mandated carbon reporting, as well as material risks to business, infrastructure, settlements and communities through climate change and the need to adapt.

Westpac: Can you comment on the impact that Carbon Trading will have more broadly on the Professional Services sector, and has it started to have an impact in your sector and the work you do as yet?

Helen Gillies: Carbon trading or carbon tax will absolutely impact the professional services sector. In fact, the absence of a clear position on carbon trading is a source of great uncertainty for our energy providers, and is having impacts on the project pipeline around the globe.

Westpac: It is expected that governments will introduce significant reform in the Legal Services industry over the next five years to 2015-16 in an attempt to increase competition. Do you think the general landscape of the sector will fundamentally change as a result of this?

Helen Gillies: I think the landscape of legal providers has already changed, and in my view is on the crest of even greater change. We have increasing competition in Australia from UK and US law firms, new innovation in the way legal services are procured and an increasingly global marketplace in Australia. All these competitive forces will shape change.

Westpac: There is also discussion about the increasing costs in the legal industry over the last few years and shrinking margins, is this something you can comment on?

Helen Gillies: As someone who manages an internal legal budget I feel your pain! The Global Financial Crisis provided a jolt for all industries, particularly the service sectors, and increased focus on cost structure and more importantly value, which has meant that the way legal services are procured in most organisations has come under additional scrutiny. We are now seeing lump sum fees in some areas, and better elements of cost management in external legal providers, which I believe is a sound response to a changing landscape.

Helen Gillies has undergraduate degrees in Commerce and Law (Hons) and post graduate degrees in Business Administration and Masters of Construction Law. Helen is a Director of SKM, chairs the Risk Committee and is also member of the Governance Committee. Helen won the Australian Corporate Lawyers Association award for In house Lawyer of the Year (Corporate) in 2008. Helen also holds the external appointment of director of the Civil Aviation Safety Authority Board.

Sinclair Knight Merz is a leading projects firm, with global capability in strategic consulting, engineering and project delivery. It operates in three regions: Asia Pacific, the Americas and EMEA (Europe, Middle East & Africa), deploying some 6,500 people from more than 40 offices while serving the Buildings and Infrastructure, Mining and Metals, Power and Energy and Water and Environment sectors. Formed in 1964 in Sydney as a private company, SKM has retained its independence through employee ownership, with fee income now greater than A$1 billion (£700 million). The firm continues to grow with its clients, and since 1996 has completed more than 60 mergers, acquisitions and outsourcings. www.globalskm.com

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INDUSTRY FOCUS

Commercial property: Back to fundamentals

By Frank Allen, Director Property Markets Westpac

If we were to sum up the commercial property market in one phrase it would be “back to fundamentals”. Total returns will largely be driven by the income streams, and capital value increases will be low but steady.

Capital values in the IPD investment index rose 2.7 per cent over the year to March 2011, showing a gradual recovery following falling values between 2008 and mid 2010. The first quarter of 2011 also recorded the fourth consecutive quarter of growth at 0.7 per cent.

Although the impact from the floods early in the year caused GDP to fall in Q1 2011, the consideration is that Australia’s economic outlook is healthy. Solid investment prospects from mining, plus a lift in investment by other business sectors is expected to boost growth. A level of doubt has crept into some minds in recent months, which is not surprising given the anaemic US recovery, sovereign debt problems in Europe and China slowing. In addition, a recent comment from the Governor of the Reserve Bank of Australia shows that he isn’t in that camp of doubters, considering higher interest rates will be needed at some point.

Investment interest and activity for commercial property continues to rise slowly, with the focus remaining on income streams and avoiding much market risk. Poorer commercial properties remain difficult to sell and could possibly be over priced.

While the fundamentals look good for an increase in commercial property prices, periods following falls in value have historically been ones of low capital value growth.

If the global economy and commercial property markets follow past cycles there should be limited pressure for a commercial property market correction until 2017-18, before the next cyclical economic downturn impacts on tenant requirements and income.

Higher interest rates to keep yields stable

While a positive economic outlook is welcome, it is likely to bring with it pressure on interest rates to rise, largely in 2012. This in itself should keep yields at similar levels to where they sit today and ensure any value growth is low, or restricted to rental growth or value add to the individual property. However, slow growth in commercial property prices should actually help the sector withstand any shocks to the system that may come from high rates or global uncertainty.

Short-term economic slowdowns occurred in 1994-95, 1997-98 and 2000-01 without impacting too greatly on overall commercial values. The key was that income drove total returns not capital growth.

Strong growth on the mid-term horizon

As we move further away from the global recession and memories fade, rising confidence among commercial property investors and lenders may start to increase pressure on yields to firm. Considerations of a sustained resource-based, plus a consumer-led economy, should deliver continued healthy economic growth into the middle of the decade.

Sentiment will then become more positive and property prices should grow as confidence returns among investors and financiers alike. Looking at how commercial property prices and yields have acted historically, a 7-8 per cent yield should be attractive to investors in a low inflation environment, delivering 10 per cent total return as rentals increase.

As capital value growth quickens, higher prices in commercial property will start to deflate yields. In the 1980s the boom drove yields to about 6.5 per cent nationally, compared with closer to 6 per cent in the recent boom. While we don’t expect as strong a compression this time, yields could well be pushed too low early into the second half of this decade.

If history is followed, the next global slowdown is due around 2018

The challenge arises in around eight to 10 years, when, if past cycles are followed, the next global slowdown is likely. While Australia has managed to avoid the past two global recessions in 2001 and 2009, we were caught in the 1991 downturn and in 1982 and 1974-75. The cycle suggests eight to 10 years between downturns, which suggests the next is due around 2017-18.

The 1990s experience

If we track what happened to commercial property values following the last crash in the 1990s, prices did nothing for 10 years. They increased by somewhere around inflation.

However, the fundamentals of the commercial markets are a lot better now than they were in the 1990s and the economic scenario is a lot stronger too.

The crash of the 1990s was led by yields that went too low, high speculative supply in the office and industrial sectors and a recession that decimated the need for property. The recovery in prices was slow, and growth did not exceed 2 per cent in any quarter until 2005. Highest annual growth achieved was 5.85 per cent in the year to September 1994.

While the recent crash was partly due to low yields, the economy, although slowing significantly, did not move into

8


recession and few jobs were lost. There are also differences as the current market does not have the high vacancy in office and industrial that prevailed for much of the 1990s.

In the recent crash, the correction in yields drove values down for around 2 years, with Q3 2010 posting the first positive quarter since Q1 2008.

Snapshot around the marketsRetail

Retail sales remained weak throughout the year, with an inflation-adjusted fall in sales turnover in the last quarter of 2010. Recent retail figures show an increase, but growth is volatile and many retailers are indicating times are tough. This is despite a jump in the number of people employed since 2009 lifting household income. People are choosing to save or pay down debt, suggest a challenging time for retail is likely until confidence rises . A key factor for retail owners is to manage both the property and their tenants to ensure no surprises arise to affect income.

Supply remains low, with completion of bulky goods centres taking properties under construction down to about 8 per cent of stock. The completion of major projects in Sydney and Melbourne will reduce future CBD supply.

However, projects at mooted stage amount to 25 per cent of neighbourhood stock and 34 per cent of bulky goods. While not all will commence, continued expansion plans by Woolworths, Coles, Aldi etc will ensure some do, as similar trends in the bulky goods sector should lead to Woolworths’ expansion.

Rents and yields continued to stabilise into 2011 Values rose marginally (2.9 per cent). Investor interest remains healthy, for good centres. CBRE suggest more than $2bn in sales in second half of 2010, slightly higher than the first half.

Industrial

Despite the strengthening economy in the second half of 2010, tenant demand remained weak.

Supply under construction has lifted slightly. Most supply remains pre-commitment led, although some speculative supply is evident. This year, we expect supply to continue to grow.

Investors remain wary of industrial property, despite yields remaining around 10-year averages. Limited rental growth suggests that yields should remain steady for some time, with values stable.

Offices

In the office market it appears as if vacancies have peaked, as demand surged in 2010. Demand is likely to slow from current high levels, in line with normal patterns after a crash. Net absorption over the second-half of 2010 was 303,000 square metres, 10 per cent down on first half. However, it remains above the average of 175,000 square metres for six months.

Demand is expected to remain solid for office space around the country. The total office vacancy rate fell from 10 per cent in June to 9.5 per cent in January 2011.

For CBD property, the vacancy fell from 8.9 per cent in June to 8.6 per cent in January. While the rate is above the 10-year average of 7 per cent, it remains below the 20-year average of 10.3 per cent. Short term we expect the best opportunities lie in the undersupplied markets of Melbourne CBD, Adelaide and West Perth, which have below-average vacancy.

Although rents mostly stabilised in second half of 2010, our expectation is for varying levels of growth through to 2012. With vacancy around equilibrium, strong growth is unlikely this year, the exception being Melbourne and possibly Sydney prime space.

Most city centres recorded falls in office vacancies. The Brisbane CBD surprised with a drop in vacancies to 9.4 per cent as 32,000 square metres, or 1.6 per cent of stock, was taken up. However, Adelaide’s vacancy rate rose to 7.3 per cent after 2140 square metres of office space in the South Australian capital was vacated.

Outside of the nation’s CBDs, vacancies also fell from 12.2 per cent in the first half of 2010 to 11.3% in January 2011. They remain well above both the 10-year average of 8.7 per cent, and 20-year average of 10.6 per cent. The highest vacancies remain on the Gold Coast (24 per cent), Chatswood (18 per cent), St Leonards (15 per cent) and St. Kilda Road at 13 per cent.

Future supply remains low at about 3 per cent of total stock.

Sales activity lifted in second half of 2010, with the third quarter the highest since the global financial crisis. Values rose 3.1 per cent in the year to March 2011 according to IPD. Melbourne recorded strongest growth at just over 5 per cent while Brisbane and Canberra value growth was the lowest.

Capital values for Australian commercial property rose in Q2

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The Australian economyAndrew Hanlan, Senior Economist

The Australian economic expansion, which was interrupted by severe weather disruptions early in 2011, has resumed. Economic growth is forecast to average 1.6% in 2011, moderating from 2.7% for 2010. Growth is expected to accelerate to average 4.0% in 2012, boosted by a return to more normal conditions following the weather disruptions and as business investment, dominated by the mining sector, gathers strength in response to an historic high in Australia’s terms of trade. In short, the overall economic outlook for Australia is positive.

This view on the Australian economy is premised upon an expectation that world growth will exceed 4% in 2011 and again in 2012. Such an international backdrop is, on balance, favourable for a major commodity exporter such as Australia. However, the European crisis poses a very real downside risk to this central case scenario.

For Australia, the start to the 2011 year was a bumpy one. The economy went backwards in Q1, with GDP declining by –1.2%, as severe weather events disrupted activity. The export sector was hard hit by the January floods and cyclones in WA. Export shipments slumped 8.7% in the quarter and net exports sliced 2.4ppts off growth. The slow retreat of flood waters in Qld suggests the coal sector will take time to recover. The risk is that export volumes will not exceed the Q4 2010 level until Q4 of this year. This path for exports points to above par, but not rapid, GDP growth in Q2. Our forecast is 1.3%, with net exports adding 0.1ppt.

Why are our growth forecasts not stronger, given the income boost from the 35% jump in the terms of trade over the last six quarters, rapid growth in the Asian region and activity generated by the mining investment boom? We stress that while there are these positives there are also a number of headwinds: rising interest rates, the high Australian dollar, stretched housing affordability, household debt and fiscal consolidation. Together, these factors suggest the consumer, housing construction and public investment will restrain growth.

Recent trends in consumer sentiment and the labour market caution against expecting a rapid acceleration of the Australian economy over the remainder of 2011.

The Westpac-MI Consumer Sentiment index declined to a two year low in June, down 2.6%, to be just in positive territory at 101.2. Notably, consumers have a negative perception of their own finances. The measure of how respondents feel about

their financial position compared to a year ago was at 75.9 in June. The outlook for finances over the next 12 months was at 95.5, the lowest since mid-2008, at the height of the global downturn. Respondents also indicated an increased desire to save and pay down debt (chart 4). This update confirms that the household sector is going through a period of structural change. Going forward, we anticipate the household savings rate, which climbed to average 10% over the last 2½ years, will be flat to higher over the forecast period and that consumer spending growth will be sub-par.

Labour market weakness over the first half of 2011 raises further questions about the outlook.

Does the run of weak employment reads represent a soft patch or something more troubling? Our analysis indicates this is most likely temporary weakness, representing a consolidation following excessive strength during 2010. The backdrop is that firms, mindful of the difficulties of attracting skilled labour during the boom years ahead of the downturn, hired aggressively during 2010. Employment surged 4.3% annualised (up 236k) over the six months to November.

With this surge in jobs overshooting domestic demand conditions a correction was in the offing (chart 5). Employment was subdued over the first half of 2011, rising just 46k. Our calculations suggest that this consolidation has now largely corrected for the overshoot.

The domestic demand environment in 2011 will be critical to whether the jobs market correction evolves into a more troubling and longer lasting downturn. The year began well enough, from a demand perspective, with growth of 1.3% in the March quarter. So, where to now? We are forecasting demand to expand by a moderate 0.8% per quarter, with an uptrend in business investment (centred on the mining sector) to account for virtually half of this gain.

Such demand growth should be sufficient to see employment expand at an annualised pace of 2% or more over the second half of this year. It’s also worth noting that the recent reads on business conditions suggest that employment levels are likely to advance modestly in coming months, with gains in the order of 15k to 20k a month (chart 6). What could change this scenario? A bout of self fulfilling business pessimism is one possibility. Another is an unravelling of the European crisis that spills into local confidence levels..

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Terms of trade: fresh 60 year high

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120

40

60

80

100

120

Mar-50 Mar-60 Mar-70 Mar-80 Mar-90 Mar-00 Mar-10

index index

Australia's terms of trade

Sources: ABS; Westpac Economics

+22% yr

71% above avg

Wool boom 1950/51

Australia: positive economic outlook

-3

0

3

6

9

-3

0

3

6

9

Mar-86 Mar-91 Mar-96 Mar-01 Mar-06 Mar-11

% ann % ann

Domestic demand GDP

Sources: ABS, Westpac Economics

forecasts to

end '12

Disruption from severe weather evens

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-11

%%

SharesReal estate Repay debt/deposits/super

Sources: Westpac, Melbourne Institute

seasonally adjusted by Westpac *’repay debt’ and ‘super’ options only included from 1997

Consumers: ‘wisest place for savings’

Domestic demand and jobs

-6

-4

-2

0

2

4

6

8

10

-4

-2

0

2

4

6


% ann % ann

Jobs * (lhs)

Domestic demand, adv 2qtrs (rhs)

Demand, forecasts

Sources: ABS, Westpac Economics Jobs correction

* qtrly average

Business conditions and jobs

-4

-2

0

2

4

6

-50

-40

-30

-20

-10

0

10

20

30

40


net bal. % ann

Business conditions, adv 6mths (lhs)

Jobs (rhs)

Jobs outlook Sources: ABS, NAB, Westpac Economics

Quarterly average

Consumer Sentiment weakens

60

70

80

90

100

110

120

130

60

70

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index index

Family Finances next 12 mnths

Consumer Sentiment

Sources: Westpac Economics, Melbourne Institute

Chart 2Chart 1

Chart 4

Chart 6

Chart 3

Chart 5

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.

11

INDUSTRY FOCUS

The Australian dollarHuw McKay, Senior International Economist

The Australian dollar traded a range in June/early July that was broadly reminiscent of the one it traded in May/early June. AUD/USD spent a little bit of time below $1.05 and a little bit of time above $1.07, but for the majority of the last month it was within touching distance of $1.06.

Our forecasts for the Australian dollar remain unchanged: $1.01 by December and below parity in the first half of 2012.

The above description might indicate that it was a bland month in terms of the domestic and external environment. That was not the case. There were a number of events and data releases that impacted on market sentiment – many of them negatively – yet the AUD was quick to bounce in the wake of the various news related sell-offs, leaving it broadly unchanged over the month. After the violence of the 10¢ appreciation seen in March and April, recent trading has been downright becalmed.

On the external front, the European sovereign debt crisis rolled on, with a drumbeat of pessimism hindering risk sentiment leading into the various confidence votes; the passage of austerity packages; EC and IMF pronouncements and commitments; French and German bank voluntary sacrifices; rating agency forebodings; ISDA semantics et cetera.

Global concerns with Europe were transmitted to Australia in the same way they were in May and November of 2010: through the short end of the yield curve anticipating rate cuts by the RBA. In the wake of the Bank’s July meeting, traders are speculating that there is a 40% chance of a cut before year end.

In May and November last year (not to mention the similar impact on pricing in the aftermath of the Japanese nuclear disaster) the RBA was able to reassure the market that their bias was to raise rates, not cut them, and the AUD quickly recovered any lost ground associated with the interest rate outlook. This time around, the domestic data and the RBA’s latest commentary isn’t supportive of a near-term tightening. Indeed, with a soft patch in employment, cautious households and a global activity deceleration underway that includes the major emerging markets, there is no urgency to lift rates. For more details on Australian interest rates see page 14. For the currency, suffice to say that we do not expect the kind of bounce

associated with prior episodes of transitory rate cut pricing. We just don’t see the events emerging in the short term to push the market aggressively back towards anticipating higher rates.

The global data flow has taken a material downward shift in the June quarter. While supply chain disruptions associated with Japan are contributing to the softness, the easing in momentum is genuine. Our views on the US, Chinese, Indian and European economies all incorporated a slowing around mid year. The business surveys were pointing tentatively in this direction prior to Japan and the data flow since has been choppy at best.

It is important to emphasize that we are talking about a reduced rate of expansion rather than a return to outright contraction. But given the heavy influence of loose US monetary policy on the asset price universe (non-USD currencies, commodities, equities up, bond yields and the US dollar down), the coincident timing of the slowdown and the end of QE2 is not a good combination for the markets. For the next little while, we anticipate markets will reflect the cessation of the unique circumstances brought about by QE2 and the moderating growth trajectory, which should put the AUD under some pressure in the second half of this year.

On an Australia specific front, commodity prices are not expected to provide a great deal of support for the AUD in coming months. As a high beta risk asset, exchange traded commodities have done very well out of the tail end of the Chinese recovery arc and the global liquidity boost provided by the Fed, and are thus susceptible to the changes coming on each front. The bulk (non exchange traded) commodities that are most important to Australia have also seen dramatic uplifts in price, but we are anticipating they will roll over also. After contributing around 12¢ to the change in our estimate of AUD/USD fair value in the year to May 2011, we project that commodity prices will be a 6¢ drag on fair value in the year to May 2012. With prospective interest rate support looking modest at best, it seems likely that the currency will lose ground in the second half.

12


AUD/EUR & AUD/NZD

1.00

1.10

1.20

1.30

1.40

Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 0.40

0.50

0.60

0.70

0.80NZD EUR

AUD/EUR (rhs)

AUD/NZD (lhs)

Sources: Factset, Westpac Economics.

AUD/USD & AUD/JPY

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 50

60

70

80

90

100

110 USD JPY

AUD/JPY (rhs)

AUD/USD (lhs)


US monetary policy and risk assets

0.5

1.0

1.5

2.0

2.5

3.0

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Aug-11 100

125

150

175

200

225$trn Index

AUD/USD* (rhs) S&P500* (rhs) Federal Reserve: securities held outright (lhs)

Sources: Ecowin, Bloomberg

*S&P500 March 2009 low = 100

2EQ 1EQ

Australian dollar & US equities: volatility

5

10

15

20

25

30

35

40

45

50

0

10

20

30

40

50

60

70

80

90

100

Jan-07 Feb-08 Mar-09 Apr-10 May-11

volvol

US equity volatility (lhs)

AUD/USD volatility (rhs)

Sources: Bloomberg, RBA, Westpac

The Australian dollar & 2yr swap spreads

-2

-1

0

1

2

3

4

5

6

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

Jan 90 Jan 93 Jan 96 Jan 99 Jan 02 Jan 05 Jan 08 Jan 11

%paUSD

AUD/USD (lhs)

AU-US 2yr swap spread (rhs)

Sources: Bloomberg, Westpac

Change in AUD fair value: past and future

Chart 2Chart 1

Chart 4

Chart 6

Chart 3

Chart 5

-15

-10

-5

0

5

10

15

20

25

-15

-10

-5

0

5

10

15

20

25

May 10 to May 11 May 11 to May 12

Interest rates

Foreign debt

Commodities

Source: Westpac Economics

US ¢ US ¢


13

INDUSTRY FOCUS

Australian interest ratesAndrew Hanlan, Senior Economist

The Reserve Bank Board, as widely expected, decided at its July meeting to leave the cash rate unchanged at 4.75%. The pause in the tightening cycle has now extended to eight months.

Rates were last increased in November, by 0.25%, the first move since the RBA rapidly normalised interest rates between October 2009 and May 2010. We remain comfortable with our expectation that the interest rate pause will most likely extend until this November.

While the first half of 2011 was characterised by interest rate stability, the language of the RBA has fluctuated. Official comments took on a decidedly hawkish tone during May. This proved to be short lived. Comments have been progressively moderated and suggest that, on current information, there is no urgency to move rates. The strange thing is that we were very surprised when the Bank suddenly adopted their hawkish tone during May as we judged that the case for a rate hike had not been made. The questions are what was it that made the Bank suddenly adopt such a hawkish stance? And what made it change its mind just as suddenly?

The re-emergence of the mining boom, briefly punctuated by the global downturn of 2008, has been uppermost in the RBA’s thinking. Australia has experienced a number of mining booms and for policy makers managing the inflation pressures generated by these booms has always been challenging. Given this framework, the latest updates on inflation, business investment plans, as well as terms of trade and labour market developments, explain the shift to more hawkish comments. Core inflation jumped from quarterly rises of 0.5% during 2010 to a 0.9% increase in Q1. Meanwhile, the unemployment rate moved below the key 5.0% level. Also, the Q1 CAPEX survey revealed a further upgrade to already bullish mining investment plans, against the backdrop of upside surprises to commodity prices over the first half of the year.

Notwithstanding all of these developments, cross currents domestically and global uncertainty loomed large of late. The RBA, having normalised rates, has the luxury of watching and waiting.

Domestically, while mining investment advanced by 20% over the last year, overall growth was restrained by a number of factors. So much so, that inflation risks over the next 12 months may not be as great as feared. We have stressed for some time that there are a number of headwinds: higher interest rates,

the high Australian dollar, stretched housing affordability, household debt and fiscal consolidation. The upshot is that much of the income boost from the recent terms of trade surge has been saved. These factors suggest the consumer, housing construction and public investment will restrain growth. With this in mind, it has been our long held view that, at most, there would be only one rate rise in 2011.

There was a considerable softening of the labour market over the first half of 2011 in response to these cross currents. This will act to temper wage and inflation pressures. Employment increased by just 46k over the first half of 2011, in contrast to the unsustainable 4.3% annualised increase over the six months to November. For the RBA, it’s prudent to wait to see if the recent consolidation is just a correction to the overshoot in 2010, or something more.

Globally, the European public debt and banking crisis continues to fester. Concerns about the crisis intensified over the last two months. This is having an impact upon global financial markets, including our share market. Up until now, the RBA had been suggesting that the recent soft patch in global growth would pass. The Bank continues to note that “banking and sovereign debt problems in Europe have also added to uncertainty and volatility in financial markets over recent months”. While they may attach a small probability to a default event, the RBA is also aware the significant impact such a “tail event” can have on markets and activity.

The RBA Governor has signalled that the Q2 inflation update, to be released on 27 July, is a potential rate trigger. We’re forecasting quarterly core CPI to moderate from 0.9% to 0.7%, an outcome that should extend the rate pause. Given current domestic and global developments the Board is likely to need to see another 0.9% rise for it consider an immediate move on rates at the August meeting.

In closing, we see November as the likely timing of the next rate hike by the RBA. That would require an improvement in consumer spending and more clarity on the situation in Europe.

We anticipate greater momentum in the domestic economy as we head into 2012. By then, the disruptions from the floods and cyclones of early this year will have faded and the mining investment upswing will be gaining momentum and greater breadth, as construction on a number of new projects commences.

14


-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09

%%

US 10 yr bond yield AU 10yr bond yield


spread

updated 6 July

Australia – US 10 yr spread

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11

%%

Cash rate 3yr swap

Sources: RBA, Factset, Westpac Economics

weekly average

updated 6 July

3yr swaps -0.5% over first half of 2011

RBA cash & 3yr swaps

Inflation: qtly core CP I to moderate in Q2

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-1

0

1

2

3

4

5

6

7

8

9

Jun-95 Jun-99 Jun-03 Jun-07 Jun 11(f)

%qtr%yr Core CPI* %qtr (rhs) Headline CPI %yr (lhs) Core CPI* %yr (lhs)

Sources: ABS, RBA, Westpac Economics

* average of s.a. trimmed mean & weighted median CPI ex GST effect in 2000/01

Credit: housing soft, business volatile

-16

-8

0

8

16

24

32

-16

-8

0

8

16

24

32

May-91 May-95 May-99 May-03 May-07 May-11

Total Housing Business

Sources: RBA, Westpac Economics 3 mth % chg, annl’sd 3 mth % chg, annl’sd

Jobs market cools

-6

-4

-2

0

2

4

6

2

3

4

5

6

7

8

9

10

11

12

Jun-90 Jun-95 Jun-00 Jun-05 Jun-10

Unemployment rate (lhs)

Employment, 6mth chg annls'd * (rhs)

Sources: ABS, Westpac Economics % chg, 6mth annls’d %

Employment levels out following surge in 2010

* smoothed

Terms of trade at 60-year high

40

60

80

100

120

40

60

80

100

120

Mar-50 Mar-60 Mar-70 Mar-80 Mar-90 Mar-00 Mar-10

index index

terms of trade, goods & services

Sources: ABS; Westpac Economics

+22%yr Mar

77% above avg

Wool boom 1950/51

Chart 2Chart 1

Chart 4

Chart 6

Chart 3

Chart 5


15

INDUSTRY FOCUS

Consumer confidenceThe June Westpac–Melbourne Institute Consumer Sentiment Survey finds consumers under increasing pressure with bleak views on family finances, signs of a renewed swing towards more cautious behaviour and a sharp loss of confidence around job prospects.

The mix points to a higher saving, lower spending growth mix ahead. Although there are one-off factors at work, the rise in the savings rate to 11.5% in the March quarter now appears to be partly a renewed uptrend. How strong an uptrend is unclear.

So far it looks likely to only shave a little off spending growth but a stronger rise, of 1.5ppts for example, could take 1ppt off spending growth. Also of concern is the sharp deterioration in labour market expectations. So far this stops short of marking the sort of ‘tipping point’ for consumers that would see a cyclical downturn in spending – the June reading indicates an outlook for basically flat unemployment rather than significant job losses that would see many consumers put a ‘stop’ on discretionary and big ticket spending items.

That is reinforced somewhat by the still positive views on ‘time to buy’ major household items and vehicles. That said, the high AUD and associated price falls may be behind some of this rather than a genuine intention to spend. Recent official ABS data suggests current spending is tracking okay, although volatility and measurement problems continue to dog the retail sales estimates and vehicle sales have registered a substantial hit as supplychain disruptions emanating from the Japanese earthquake/tsunami disaster. This and the impact of local weather events in earlier months makes interpretation difficult particularly around spending in the most cyclical ‘durables’ and vehicles segments.

On balance we see a clear loss of momentum heading into the second half of the year. Risks are to the downside with the RBA threatening to raise rates and a soft housing market having the potential to further unsettle an already fragile consumer.

Housing may already be doing so. Our July survey will include an update on consumers’ house price expectations. As at April views were still resilient but a shift may be afoot.

-3 -2 -1 012345678

-3 -2 -1 012345678

Mar-86 Mar-91 Mar-96 Mar-01 Mar-06 Mar-11

ann%ann%real consumer spending real consumer spending per capita

Sources: ABS, Westpac Economics

Consumer spending: softer outlook

16


The 199th Westpac-ACCI Survey of Industrial Trends was closed in the week ending 3 June. That was against the backdrop of slowing global growth, further confirmation that the mining sector is set to embark on an investment boom, a cautious household sector, the RBA leaving interest rates unchanged (in a close decision) and an Australian dollar not far from record post-float levels.

The Actual Composite Index fell 10.2 points to 48.9 and the Expected Composite Index fell by 11.8 points to 53.3 in June. It is now 5% below the average in 2010 but is still consistent with expectations of a modest expansion. The unexpectedly strong results for the March quarter have been unwound in spectacular fashion. This is a combination of excessive optimism in March and clearly weaker conditions in June.

Labour demand softened in line with the general theme of the survey. Whereas the March print of the Labour Market Composite was 10.3, it has now fallen to 0.8. That level is below the average for 2010 of 3.8 but is still consistent with trend employment growth in the second half of 2011, down from the rapid 3%yr pace being implied in March.

While employment softened there was no real relief with respect to the availability of labour. Labour markets have tightened appreciably over the last six quarters. Our measure of labour availability remains in the range historically associated with moderately tight employment conditions. Consistent with this, expectations for rising wage pressures, which jumped in 2010, remain elevated.

For the first time since the June quarter 2009 more respondents expect the general business situation to deteriorate than improve. The net balance for the question on the general business outlook fell from 25 to –9. That is the sharpest turnaround since December 2008.

Plans for spending on plant and equipment over the next 12 months fell sharply. Firms’ profit expectations also slumped. The net balance on the profit outlook for the next 12 months fell from 22 to 0, the lowest level since the June quarter 2009. Consistent with the high Australian dollar and the weak momentum of global manufacturing of late, exports slumped, recording their lowest read since the June quarter in 2009.

Average selling prices improved modestly (from –5 to 0) but are fall from keeping pace with average unit costs (+15 to +28). There is no relief anticipated on wages.

Business confidence

Manufacturing & the business cycle Westpac-ACCI composite index & private demand

15

25

35

45

55

65

75

-6

-4

-2

0

2

4

6

8

10

Jun 83 Jun 87 Jun 91 Jun 95 Jun 99 Jun 03 Jun 07 Jun 11

index % ann

private final demand (lhs) actual composite (rhs)

Sources: ACCI, Westpac

Activity & capital investment Westpac-ACCI composite & plant & equipment investment

20

25

30

35

40

45

50

55

60

65

70

-20

-10

0

10

20

30


index % ann

P&E investment - 3qtr MA (lhs)

Westpac-ACCI composite (rhs)

Sources: ACCI, Westpac, ABS

Westpac-ACCI composite indexes Actual & expected, sa

20

30

40

50

60

70

20

30

40

50

60

70


index index

actual expected

Sources: ACCI, Westpac

17

INDUSTRY FOCUS

Economic forecasts: Australia

INDUSTRY FOCUS

Activity*

2010 2011 2012 Calendar years

% change Q4 Q1 Q2f Q3f Q4f Q1f Q2f 2009 2010 2011f 2012f

Private consumption 0.7 0.6 0.8 0.6 0.6 0.8 0.6 1.0 2.8 2.9 2.8

Dwelling investment -0.5 4.6 -1.5 1.5 0.1 -0.1 -0.1 -4.2 4.0 4.0 0.0

Business investment* 1.4 2.8 2.2 2.4 2.7 3.5 3.5 -5.2 -0.8 8.5 13.5

Private demand* 0.6 1.3 0.9 1.0 1.0 1.3 1.2 -0.7 2.0 3.9 4.8

Public demand* 0.7 1.0 0.5 0.2 0.2 0.4 0.5 1.9 9.2 2.0 1.5

Final demand 0.6 1.3 0.8 0.8 0.8 1.1 1.0 -0.1 3.6 3.4 4.0

Stock contribution 1.0 -0.5 0.4 -0.4 0.0 0.0 0.0 -0.4 0.4 0.1 -0.1

GNE 1.6 0.8 1.2 0.4 0.8 1.0 1.0 -0.7 4.1 3.5 3.9

Exports 2.5 -8.7 4.5 4.8 3.5 2.1 2.1 2.8 5.3 -0.5 12.0

Imports 3.8 1.3 3.5 1.8 2.2 2.6 2.7 -9.0 13.3 9.5 10.5

Net exports contribution -0.3 -2.4 0.1 0.6 0.3 -0.2 -0.2 2.8 -1.6 -2.3 0.1

GDP (1) 0.8 -1.2 1.3 1.0 1.1 0.9 0.8 1.3 2.7 1.6 4.0

Annual change 2.7 1.0 1.0 2.0 2.3 4.4 3.9 - - - -

Other macroeconomic variables

2010 2011 2012 Calendar years

% change Q4 Q1f Q2f Q3f Q4f Q1f Q2f 2009 2010 2011f 2012f

Employment (1) 0.9 0.4 0.1 0.5 0.8 0.3 0.3 0.7 2.7 2.2 1.7

annual change 3.4 2.9 2.2 1.9 1.7 1.7 1.9 - - - -

Unemployment rate % (1) 5.2 5.0 4.9 4.8 4.7 4.8 4.9 5.6 5.2 4.9 5.0

Wages (WPI) (sa) (2) 1.0 0.8 1.1 0.9 1.1 1.0 1.3 - - - -

annual change 3.9 3.8 4.1 3.9 4.0 4.2 4.4 3.6 3.3 3.9 4.2

CPI Headline (2) 0.4 1.6 0.7 0.3 0.6 0.6 0.7 - - - -

annual change 2.7 3.3 3.4 3.0 3.2 2.3 2.2 2.1 2.7 3.2 2.6

CPI average RBA core 0.4 0.9 0.7 0.6 0.7 0.8 0.8 - - - -

annual change 2.2 2.3 2.5 2.6 2.9 2.9 2.9 3.3 2.2 2.9 3.0

Current account AUDbn -8.1 -10.4 -7.5 -5.0 -6.0 -10.6 -14.3 -52.9 -34.6 -29.0 -54.0

% of GDP -2.3 -3.0 -2.1 -1.4 -1.7 -2.9 -3.9 -4.2 -2.6 -2.0 -3.6

Terms of trade annual change (1) 22.8 22.4 13.7 12.0 7.6 -4.3 -11.8 -10.0 16.4 13.5 -9.0

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.

Macroeconomic variables - recent history

2010 2011

Monthly data Aug Sep Oct Nov Dec Jan Feb Mar Apr May June

Employment ‘000 27.3 43.3 33.3 52.4 -1.1 13.5 -10.0 47.5 -28.3 -0.5 23.4

Unemployment rate % 5.1 5.1 5.4 5.2 5.0 5.0 5.0 4.9 4.8 4.9 4.9

Westpac-MI Consumer Sentiment 119.2 113.2 117.0 110.7 111.0 104.6 106.6 104.1 105.3 103.9 101.2

Retail Trade %mth 0.3 0.0 -0.8 0.3 0.1 1.0 1.0 -0.4 1.2 -0.6 -

Dwelling approval %mth 3.2 -10.0 11.5 -4.6 7.4 -11.8 -5.3 7.2 -0.3 -7.9 -

Private sector Credit %ann 3.1 3.2 3.2 3.5 3.3 3.2 3.4 3.5 3.3 3.1 -

Trade balance AUDbn 2.68 2.12 2.51 2.07 1.83 1.53 -0.28 1.75 1.62 2.33 -


18

Financial forecasts: Australia Interest rate forecasts

Latest (8 July) Sep 11 Dec 11 Mar 12 Jun 12 Sep 12

Cash 4.75 4.75 5.00 5.00 5.00 5.25

Market implied* na 4.70 4.66 4.67 4.69 4.73

90 Day Bill 4.97 5.00 5.25 5.25 5.25 5.50

3 Year Swap 5.07 5.20 5.50 5.60 5.75 5.80

3 Year Bond 4.68 4.80 5.10 5.20 5.40 5.50

10 Year Bond 5.17 5.20 5.40 5.50 5.60 5.70

10 Year Spread to US (bps) 206 200 210 210 210 210

* Market implied rate is the anticipated target rate in the OIS market. Sources: Bloomberg, Westpac Strategy.

Currency forecasts

Latest (8 July) Sep 11 Dec 11 Mar 12 Jun 12 Sep 12

AUD vs

AUD index* 100 99.9 97.8 96.0 94.4 95.3

USD 1.0771 1.04 1.01 0.99 0.97 0.99

USD forward^ na 1.07 1.05 1.04 1.03 1.01

JPY 87.48 87 86 86 86 86

EUR 0.7503 0.74 0.74 0.72 0.72 0.73

NZD 1.2935 1.31 1.31 1.30 1.29 1.29

CAD 1.0396 1.04 1.02 1.03 1.02 1.02

GBP 0.6744 0.65 0.64 0.61 0.59 0.60

CHF 0.9103 0.92 0.93 0.93 0.96 0.96

DKK 5.5960 5.52 5.49 5.36 5.39 5.42

SEK 6.8115 6.59 6.52 6.33 6.37 6.40

NOK 5.7907 5.74 5.89 5.65 5.65 5.67

ZAR 7.1865 7.28 7.30 7.32 7.33 7.31

SGD 1.3226 1.27 1.23 1.19 1.16 1.18

HKD 8.3829 8.11 7.87 7.67 7.52 7.67

PHP 46.22 44.91 43.36 42.07 40.97 41.66

THB 32.81 31.82 30.73 29.83 29.06 29.49

MYR 3.2433 3.13 3.03 2.94 2.87 2.91

CNY 6.9654 6.70 6.48 6.29 6.13 6.23

IDR 9203 8904 8610 8370 8164 8296

TWD 31.03 29.80 28.82 28.01 27.33 27.77

KRW 1145 1103 1064 1031 1003 1016

INR 47.85 46.27 44.67 43.35 42.21 42.82

*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.



19

INDUSTRY FOCUS

Westpac Directory

WESTPAC CORPORATE DIRECTORY

Head Office Westpac Place 275 Kent Street

Sydney NSW 2000

Editor Jodie Stucki

Senior Manager, Westpac Marketing

02 8254 1129 [email protected]

WESTPAC INDUSTRY SPECIALISTS

Jarrod Coysh General Manager,

Industry Specialisation 0478 310 859

[email protected]

Jason Roach National Industry Leader,

Professional Services 0448 455 556

[email protected]

Chris Brell State Industry Leader, Professional Services

0419 435 949 [email protected]

WESTPAC ECONOMICS

Bill Evans Chief Economist

Andrew Hanlan Senior Economist

Matthew Hassan Senior Economist

Huw McKay Senior International Economist

Justin Smirk Senior Economist

Anthony Thompson Senior Economist

Elliot Clarke Economist

Things you should know: Focus is published by Westpac Banking Corporation ABN 33 007 457 141 AFSL 233714 ACL 233714. No part of Focus may be reproduced without the prior approval of Westpac. The information in this report (“Information”) is based on information available at [1 July 2011]. The Information is general in nature and is not intended to provide financial, investment or taxation advice. No decision should be made on the basis of the Information without first seeking expert financial advice. The Information has been prepared without taking into account your objectives, financial situation or needs and so you should, before acting on the Information, consider its appropriateness, having regards to these factors. The information may contain material provided directly by third parties. While such material is published with necessary permission, no company in the Westpac Group accepts responsibility for the accuracy or completeness of any such material.The views of the authors in the information do not necessarily represent the views of Westpac Banking Corporation or other members of the Westpac Group.Westpac Banking Corporation ABN 33 007 457 141 229790 (07/11)

20

industry focus professional services issue 1 july 2011 · services in sydney, is the nsw head of...

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