The New Zealand Economy:

Fork in the RoadAugust 2013

Dominick StephensChief Economist

New Zealand GDP growth

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-3

-2

-1

0

1

2

3

4

5

6

7

-3

-2

-1

0

1

2

3

4

5

6

7

Quarterly % change Series2

% %

Source: Statistics NZ, Westpac

Westpac forecast

Electronic card transactions

Residential building consents, by value

Net migration

House prices

REINZ house price index by region (seasonally adjusted)

Page 7

‘How would you spend a $10,000 windfall?’

1999 2001 2003 2005 2007 2009 2011 201320

25

30

35

40

40

45

50

55

60

Spend it (left axis)

Bank it/pay down debt (right axis)

% %

Source: Westpac McDermott Miller

Household debt and servicing costs

Page 9

Inflation – opposing forces

2001 2003 2005 2007 2009 2011 2013 2015-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8CPI inflation Tradables Non-tradables

% %

Source: Stats NZ, Westpac

NZD/USD and NZD/AUD

Low Global Inflation Global

QE

Higher NZD

Low NZ Inflation

Low NZ Interest Rates

Rising NZ House Prices

Stronger Consumer Spending

GDP Growth

Imbalances

Chain reaction from Abenomics to NZ

Global QE is generating “bubbly” asset prices in NZ

Fonterra milk production, daily

Whole milk powder price

China New Zealand EU US Argentina Brazil China Australia-400

-200

0

200

400

600

800metric tons (000s)

Consumption Source: USDA, WestpacProduction

Growth in milk production / consumption since 2007

Regional economic confidence, June quarter

Quake-related construction forecasts

People per house in Auckland

Jun-96 Jun-99 Jun-02 Jun-05 Jun-08 Jun-112.75

2.80

2.85

2.90

2.95

3.00

3.05

3.10

3.15

2.20

2.25

2.30

2.35

2.40

2.45

2.50

2.55

2.60

AucklandNZ ex Auckland and Can-terbury

Source: Stats NZ, Westpac

House building as share of GDP

NZ domestic inflation in construction booms

Average of 2 & 5-year mortgage

rate

Quarterly house price

inflation

Page 21

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%Source: RBNZ, Westpac

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

Source: QVNZ

Quarterly house price inflation

Average of 2 & 5 yr mortgage rates

?

Investment value of houses

2000 2002 2004 2006 2008 2010 20120

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

Actual House PriceInvestment Value

Index Index

Source: QV, Westpac

House price inflation and consumer spending

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-6

-4

-2

0

2

4

6

8

10

12

-30

-20

-10

0

10

20

30

40Private consumption (left axis)

House prices (right axis)

ann % ann %

Source: QV, Statistics NZ, Westpac

Westpac forecast

Impact of fiscal policy on GDP growth

NZ inflation forecasts, tradables versus non-tradables

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

CPI inflation Tradables Non-tradables

% %

Source: Statistics NZ, Westpac

Westpac forecast

OCR forecast

1999 2001 2003 2005 2007 2009 2011 2013 2015 20170

1

2

3

4

5

6

7

8

9%

Source: Stats NZ, Westpac

Westpac forecast

90 days bank bills, 2 year swap and 5 year swap rates

1999 2001 2003 2005 2007 2009 2011 2013 2015 20172

3

4

5

6

7

8

9

10

11

2

3

4

5

6

7

8

9

10

11

90 day bank bill rate

2 year swap rate

% %

Source: RBNZ, Bloomberg, Westpac

Westpac forecast

NZD/USD, NZD/AUD and TWI

1999 2001 2003 2005 2007 2009 2011 2013 2015 20170.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

45

50

55

60

65

70

75

80

85

NZD/USD (left axis)NZD/AUD (left axis)TWI (right axis)

Source: RBNZ, WestpacWestpac forecast

New Zealand employment and unemployment

1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-3

-2

-1

0

1

2

3

4

5

6

2

3

4

5

6

7

8

9

Employment growth (left axis)Series2

ann % %

Source: Statistics NZ, Westpac

Westpac forecast

DisclaimerWestpac operates in the United States of America as a federally licensed branch, regulated by the Office of the Comptroller of the Currency. Westpac is also registered with the US Commodity Futures Trading Commission (“CFTC”) as a Swap Dealer, but is neither registered as, or affiliated with, a Futures Commission Merchant registered with the US CFTC. Westpac Capital Markets, LLC (‘WCM’), a wholly-owned subsidiary of Westpac, is a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (‘the Exchange Act’) and member of the Financial Industry Regulatory Authority (‘FINRA’). This communication is provided for distribution to U.S. institutional investors in reliance on the exemption from registration provided by Rule 15a-6 under the Exchange Act and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors in the United States. WCM is the U.S. distributor of this communication and accepts responsibility for the contents of this communication. All disclaimers set out with respect to Westpac apply equally to WCM. If you would like to speak to someone regarding any security mentioned herein, please contact WCM on +1 212 389 1269. All disclaimers set out with respect to Westpac apply equally to WCM.Investing in any non-U.S. securities or related financial instruments mentioned in this communication may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the SEC in the United States. Information on such non-U.S. securities or related financial instruments may be limited. Non-U.S. companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect in the United States. The value of any investment or income from any securities or related derivative instruments denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related derivative instruments. The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/or its affiliates.For the purposes of Regulation AC Certification only: Each analyst whose name appears in this report certifies that (1) the views expressed in this report accurately reflect the personal views of the analyst about any and all of the subject companies and their securities and (2) no part of the compensation of the analyst was, is, or will be, directly or indirectly related to the specific views or recommendations in this report.