SydneyCorporateCorporatedinner

September 2012

Bill EvansChief Economist

Current Forecasts – September 2012Current Forecasts September 2012

Latest Dec-12 Jun-13 Dec-13

RBA C h 3 50 3 00 2 75 2 75RBA Cash 3.50 3.00 2.75 2.75

3yr swap 3.10 3.25 3.50 4.20

10yr 3.08 3.40 3.55 4.00

US 10 yr 1 60 1 90 2 20 2 40US 10 yr 1.60 1.90 2.20 2.40

AUD/USD 1.02 1.01 1.04 1.06

USD/EUR 1.26 1.24 1.23 1.16

2

10 year real bond yields- US bonds look expensive

1010 %%

10 year real bond yields US bonds look expensive

8

10

8

10

US 10yr AU 10yr

66*Nominal 10yr yield less annual changein core inflation – RBA core measure for Australia and PCE (ex food & energy)for US.

2

4

2

4

0

2

0

2spread

-2-2Mar-92 Mar-96 Mar-00 Mar-04 Mar-08 Mar-12

Sources: RBA, Bloomberg, Westpac Economics

3

Swap rate turns before cash rate at turning points

1212 %%

Swap rate turns before cash rate at turning points

10

12

10

12

Cash rate 3yr swap

88

Cash rate 3yr swap

66

44

22Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12

Source: Bloomberg

4

Rate cut expectations: Westpac versus marketRate cut expectations: Westpac versus market

200200bps bpstotal cuts expected over coming year

150

175

200

150

175

200Market pricing*Westpac Economics

Source: Westpac Economics

125

150

125

150 * as implied by OIS market

75

100

75

100

25

50

25

50

00Sept'12 Dec '12 Mar '13 Jun '13 Sep'13

5 2

The changing Australian growth mixThe changing Australian growth mix

33 ppts cont' ppts cont'contributions to GDP growth

2

3

2

3Sources: ABS, Westpac Economics

11

-1

0

-1

0

-2

1

-2

1

'98 - '07 '10 - '13 '15 - '20

-3-3Consumer* Mining Business Public Net X

updated: Aug ’12* includes housing

6

Household debt to income ratiosHousehold debt to income ratios

180 180% %debt to income (lhs)

140160180

140160180

total (gross)own-occ housingi t h i

–0.8ppt a year

100120140

100120140investor housing

other debt

y

+0.8ppt *dashed lines show trend

6080

100

6080100pp

a yearsince Jun-07; Jun-12 is Westpac estimate

204060

204060

Sources: RBA,

–0.3ppt a year

–1.3ppt

020

Mar-77 Mar-87 Mar-97 Mar-070

20ABS, Westpac

1.3ppt a year

7

Mining projects – gas dominates , for now!Mining projects gas dominates , for now!

200200$bn$bn

160

200

160

200

Under construction

Sources: Deloitte Access Economics,Westpac Economics

updated: Jul ’12

120120Committed

Under consideration

Total: $415bn

8080Possible excludes “other”,

$3bn in projects

4040

00Oil & gas Metal ores Coal

8

Recoverable gas resources – watch ChinaRecoverable gas resources watch China

120120trillion cubic metres

100

120

100

120Conventional

Unconventional

Source: The Economist(International Energy Agency; BP)

8080

Unconventional

40

60

40

60

20

40

20

40

00Nth

A iChina Russia Middle

E tLatin

A iAustralia

America East America

9 3

Production cost – Australia uncompetitiveProduction cost Australia uncompetitive

2040 $bn mn tpa 20

30

40Source: The Economist

$30bn30 Cost (lhs)

Capacity (rhs)

1020 8.9mn8mn

10$5bn

00Wheatstone (Aust) Sabine Pass (US)

10

Gas prices – Protected by transport costsGas prices Protected by transport costs

2020 $mBtu $mBtu

16

15

20

15

20Source: The Economist

121515

1010

355

00US Europe Asia

11

LNG imports – China growing fastLNG imports China growing fast

300300 billion cubic metres

250

300

250

300 Europe ChinaSouth Korea Japan Source: The Economist (Waterborne LNG;

Oxford Institute for Energy Studies)

200200

100

150

100

150

50

100

50

100

002010 2011 2012 2013 2014 2015

12

Largest contractionary stance in 40 yearsLargest contractionary stance in 40 years

44 % GDP % GDPNet change in underlying cash balance

2

3

4

2

3

4

Expansionary

1

2

1

2

f/c

-1

0

-1

0

-3

-2

-3

-2 Contractionary

-4-41981/82 1991/92 2001/02 2011/12

Sources: Treasury, ABS, Westpac Economics

13 4

Confidence: weak – business mirrors consumersConfidence: weak business mirrors consumers

net bal. net bal.

20

30

120

130 Consumer (lhs) Business * (rhs)monthly

0

10

100

110

-10

0

90

100

-30

-20

70

80

-4060Jul-00 Jul-04 Jul-08 Jul-12

Sources: Westpac MI, NAB, Westpac Economics * Rebased to avg 0

14

Unemployment likely to move higherUnemployment likely to move higher

200indexbps

180

200

300

400 annual change in unemployment rate smoothed (lhs)unemployment expectations trend (rhs)

160200

300

120

140

0

100unemployment rising

100

120

-100

0

unemployment

80-200Aug-87 Aug-92 Aug-97 Aug-02 Aug-07 Aug-12

Sources: Westpac-MIunemployment

falling

15

Male participation trending lowerMale participation trending lower

76%

60%

75

76Sources: ABS, Westpac Economics

59

60

female

73

74 male

57

58

72 56

70

71

54

55

69Jul-02 Jul-08

53Jul-02 Jul-08

16

Unemployment supported by participationUnemployment supported by participation

88 % %

7

8

7

8

if part-rate held 65.62% from Jul 11

Sources: ABS, Westpac Economics

66

unemployment rate

55

44

33Jul-00 Jul-03 Jul-06 Jul-09 Jul-12

17 5

Labour market: remains softLabour market: remains soft

6412 %%

62

64

10

12 Sources: ABS, Westpac Economics

Peaked:Jul ’08 & Dec ’10

608 Soft jobs market:

employment to

56

586

pop’n ratio declines

54

56

4 Unemployment rate (lhs)

Employment to pop'n ratio* (rhs) Latest: 5.1%* smoothed

522Aug-88 Aug-92 Aug-96 Aug-00 Aug-04 Aug-08 Aug-12

Employment to pop'n ratio* (rhs) Latest: 5.1% smoothed

18

RBA cash rate: just below neutral – more cuts

88 %%

RBA cash rate: just below neutral more cuts

7

8

7

8Source: Bloomberg, Westpac Economics

66

4

5

4

5

3

4

3

4Actual cash rateNeutral cash rate

22Jan-98 Jan-01 Jan-04 Jan-07 Jan-10

19

World growth – Asia supports recovery in 2013World growth Asia supports recovery in 2013

2009 2010 2011 2012f 2013fWorld –0.6 5.3 3.9 2.9 3.7

US –3.5 3.0 1.8 2.1 1.7

Euro –4.2 1.8 1.5 –1.0 –0.2

China 9.6 10.4 9.3 7.8 8.7

Australia 1.4 2.5 2.1 3.5 3.5

20

Change in world growth contributionsChange in world growth contributions

1 001 00 ppt ppt

0 500.75

1.00

0 500.75

1.00Sources: Westpac Economics.Shares of world output in parentheses.

0 000.25

0.50

0 000.25

0.50

-0 50

-0.250.00

-0 50

-0.250.00

Other (53%)

-1.00

-0.750.50

-1.00

-0.750.50

USA (19%)Europe (14%)China (14%)

-1.251.00

-1.251.00

2012 versus 2011 2013 versus 2012

( )

21 6

Chinese GDP & the money supply

3016 %yr%yr

Chinese GDP & the money supply

25

30

14

16

GDP (lhs)

Sources: Westpac Economics, CEIC

25

12

GDP (lhs)

M2 (rhs)

2010

158

106Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

22

China -Housing and auto sales are recoveringChina Housing and auto sales are recovering

150150%yr%yr

100

125

150

100

125

150

Auto sales

75

100

75

100 Housing sales

25

50

25

50

-25

0

-25

0

S CEIC W t E i

-50-50Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Sources: CEIC, Westpac Economics.Autos are unit sales. Housing sales are by value.

23

China :Credit demand & supply perceptions

45108 index% LR avg

China :Credit demand & supply perceptions

42

45

104

108 Bank assessment of loan demand (lhs)Firms on lending attitude of banks (rhs)

“Prudent”“AppropriatelyTight”

39100

of banks (rhs)

3692

96

Sources: Westpac

Ships in the night

3388

92 Sources: Westpac Economics, CEIC, Shu & Ng 2010.

“S ” “S ” “S ”“Appropriately

L ”“Tight”

3084Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11

“Sound”, Easing bias

“Sound”, tightening bias

“Sound”, tightening bias

Loose”“Tight”

24

Chinese total credit supply (up 6.2% for year)Chinese total credit supply (up 6.2% for year)

9RMBtrn

0 6310.701

1.0730.293 0.181

7

89

+53%45%

–38%

0.9150.9801.1540.631

567 –45%

+7.2%

5 67934

5EquityBondsBill finance +13.5%

5.005 5.679

123 Bill finance

Trust & entrustedBank loans

Source: CEIC,

0

1

Year to July 2011 Year to July 2012

Westpac.

25 7

Chinese investment projects by ‘sponsor’Chinese investment projects by sponsor

5050 %ytd%ytd

40

50

40

50Central government

Local government

3030

g

10

20

10

20

0

10

0

10value of projects

-10-10Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

Sources: CEIC, Westpac Economics.

26

Chinese infrastructure investment growthChinese infrastructure investment growth

7575%ytd%ytd

60

75

60

75Transport

Energy and water

Sources: CEIC, Westpac Economics.

4545

Energy and waterforecast

15

30

15

30

0

15

0

15

-15-15Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

27

Indicative policy impact on capex: then & nowIndicative policy impact on capex: then & now

4 %GDP

3

4Hard InfrastructureHeavy industry

2Real estateOther investment

0

1

-1

0Sources: CEIC, Westpac Economics. Estimates of “excess” nominal investment over and above what would have prevailed under ‘normal’ conditions in the major stimulus periods. Note the comparison is between one year of GDP and 1½ years of capex. Data scaled to be

-26 qtrs to June 2010 6 qtrs to Dec 2013

consistent with national accounts GFCF.

28

US :Unemployment rate with stable part rateUS :Unemployment rate with stable part rate

1212 %%

10

12

10

12

Actual unemployment rateConstant part rate from Oct '09

Sources: Ecowin, Westpac Economics

1010 Constant part rate from Oct '09

88

66

44Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

29 8

Part rate not due to retireesPart rate not due to retirees

100100 %% employment to population ratio by age group

80

100

80

100

16–24 25–34 35–44 45–54 55+

8080

6060

4040

20201970 1980 1990 2000 2010

Sources: Ecowin, Westpac Economics

30

Coming soon: the US’ fiscal cliffComing soon: the US fiscal cliff

11 % %Drag on GDP growth in 201311

00

-1-1 11

-2-2Obama stimulus Unemployment

b fit iTax increases Budget control

t

Source: Westpac

benefit expiry act

31

Current composition of CongressCurrent composition of Congress

70no.

275 no.

60

70

Up for re-election

Senate

250

275

U f

House

40

50Up for re election

200

225Up for re-election

Source: UBS

30175

10

20

125

150

0Democrats GOP

100Democrats GOP

32

Candidate approval ratings for key topicsCandidate approval ratings for key topics

6060 % %

50

60

50

60

Obama RomneySource: UBS

4040

20

30

20

30

10

20

10

20

00Economy Caring Women's issues

33 9

Unemployment – a key factorUnemployment a key factor

Election UE rate Result

Obama (2012) 8 3% (from 10 0%) ???Obama (2012) 8.3% (from 10.0%) ???

Ford (1976) 7.7% LOST (to Carter)

Carter (1980) 7.5% LOST (to Reagan)

Reagan (1984) 7.4% (from 10.8%) WON (def Mondale)g ( ) ( ) ( )

G.H.W Bush (1992) 7.3% LOST (to Clinton)

Wins: 3.7% – 5.6% (6 Presidents)

34

Euro job markets continue to deteriorate...Euro job markets continue to deteriorate...

25 25% %unemployment rate

20

25

20

25Portugal Spain Italy Greece

15 15

10 10

5 5latest

0 01980 1988 1996 2004 2012

Source: CEIC (OECD Economic Outlook)

35

Public cost of Euro exit (€bn) – watch IOU’sPublic cost of Euro exit (€bn) watch IOU s

Greece PICS*

Aid 50 100Aid 50 100

Bailouts 127 56

Bonds (ECB) 40 80

IOU’s (ECB) 106 596IOU s (ECB) 106 596

Total 323 832

Total cost as % of German GDP: 40%*Portugal, Ireland. Cyprus, SpainSource: The Economist; BIS; EC

36

Deposit flight a concernDeposit flight a concern

1800 350€bn €bnconsolidated resident deposits

1600

1800

300

350Greece (rhs)Portugal (rhs)

1200

1400

200

250Italy (lhs)Spain (lhs)

1000 150

600

800

50

100

400 01998 2000 2002 2004 2006 2008 2010 2012

Source: Eurostat

37 10

German liabilities: actual and contingent?German liabilities: actual and contingent?

4040 €trn €trn

30

35

40

30

35

40GermanyFranceIt l

25

30

25

30 ItalySpainOther

*Aggregate Monetary and Financial Institution liabilities as at May 2012

15

20

15

20Other

Source: IMF, ECB

Institution liabilities as at May 2012

5

10

5

10

00Net gov't debt Net gov't debt Bank liabilities* Bank liabilities*

38

Global QE operations- expansion of bsheetsGlobal QE operations expansion of bsheets

5 05 0 trntrn

4.04.55.0

4.04.55.0

ECB in eurosForecasts

3.03.5

3.03.5 Fed in dollars

1 52.02.5

1 52.02.5

0 51.01.5

0 51.01.5

0.00.5

0.00.5

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Feb-13

Source: Ecowin, Bloomberg

39

The Australian dollar now overvaluedThe Australian dollar now overvalued

1 201 20 USDUSD

1 00

1.10

1.20

1 00

1.10

1.20

AUD/USD actual

Source: Westpac Economics.

0.90

1.00

0.90

1.00Model estimate

0.70

0.80

0.70

0.80

0.50

0.60

0.50

0.60

I l d l h d t d d diti l ti i ld i k d t f i d bt t GDP

0.400.40Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

Includes coal, exchanged traded commodities, relative yield curve, a risk proxy and net foreign debt to GDP.

40

Australian commodity pricesAustralian commodity prices

indexindex

350

600

700 Bulks* (lhs)Exchange traded* (rhs)

250

300

500

600

200

250

300

400

150200

300

Sources: Westpac Economics, Bloomberg, ABS.B lk i l d i d l E h t d d i l d

100100Mar-06 Mar-08 Mar-10 Mar-12 Mar-14

Bulks includes iron ore and coal. Exchange traded includesrural, crude oil, base metals and gold.

41 11

Foreign interest in ACGBForeign interest in ACGB

250250 A$bnA$bn

200

250

200

250

Total CGS On Issue

Sources: RBA, Westpac

150150

Resident Holdings

Non-Resident Holdings

100100

5050

001986 1989 1992 1995 1998 2001 2004 2007 2010

42

ConclusionsConclusions

L d i th i hi t• Leverage driven growth is now history.

• Mining boom is near spending peak.

• Unemployment rate set to rise.

• RBA to cut rates by 75 bp’s by March next year.

• Stable house price outlook and no collapse.

• Manageable China recovery and US disappointing. g y pp g

• Europe risky outlook – will affect global momentum.

• AUD and commodities to strengthen in 2013• AUD and commodities to strengthen in 2013.

• US and ECB QE; policy stimulus in China and EM’s.

43

DisclaimerDisclaimerDisclaimerDisclaimer

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12