1. Economic Research Sydney +61 2 8254 8720 economics@westpac.com.au New Zealand +64 9 336 5671 London +44 20 7621 7061
Australia & NZ weekly
Week beginning 31 August 2015
„„ The case for Australian rates to remain on hold despite confident market
pricing – we still expect a FED hike in September.
„„ RBA: policy announcement.
„„ Australia: Q2 GDP, retail, dwelling approvals, trade balance, credit.
„„ New Zealand: building consents, building work, house prices,
business confidence, terms of trade.
„„ China: business surveys, PMIs.
„„ Europe: ECB policy meeting.
„„ US: Fed Beige book, payrolls, ISMs.
„„ Key economic & financial forecasts.
Information contained in this report was current as at 28 August 2015Follow
@WestpacMacro
2. Westpac weekly
2
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.
The case for Australian rates to remain on
hold despite confident market pricing
– we still expect a FED hike in September
Last week we discussed our expectations that the FED was set to
begin raising rates in September.
Events of the last few days around extreme market volatility have
led markets and most commentators to revise down the prospects
of a September move. This is a reasonable response with the
new risk for the FED being the feedback loop of this volatility on
business and consumer confidence (note the 10% jump in the
Conference Board’s Consumer Confidence Index immediately prior
to the recent volatility).
For now, we are maintaining our call for a move in September
with market developments and data releases, the most important
of which will be the August jobs report, still holding the key as to
whether the FED will move in September.
In that regard the Thursday report of the upgraded US GDP growth
rate in the June quarter to 3.7% will provide further food for thought
for the FED.
No move in September will encourage markets to expect that the
FED will be on hold for the remainder of 2015 (October, being a
non-press conference; non-forecasting meeting and December
being a period of questionable liquidity – an inappropriate timing for
the first move). That timing might not suit a FED that seemed quite
committed to September particularly if markets settle and the data
flow remains strong.
Indeed the markets have now priced in only around 2.5 x 0.25%
hikes by end 2016. It is reasonable that the FED would be quite
uncomfortable with such a benign outlook from the market.
For Australia markets are now pricing in a full 0.25% RBA rate cut
by year’s end and a 40% chance of a follow up move in 2016. That
contrasts with our own view that rates will be on hold over the
course of the remainder of 2015 and 2016.
One explanation for this development in market pricing (from only
around a 40% chance of a rate cut by year’s end before the recent
volatility) is that with prospects for a FED move fading the RBA will
be more disposed to cut rates in order to further pressure the AUD.
However this argument overlooks a clear change in approach to the
AUD by the RBA. In the Governor’s statement following the August
board meeting, with the AUD at USD0.73, having fallen from around
USD0.75 over the previous month, he desisted from the consistent
“line” since May of “further depreciation seems both likely and
necessary”.
It is reasonable that this implies that the Bank is now comfortable
with the level of the AUD so its subsequent fall to USD 0.715 would
certainly eliminate any need to cut rates with a view to lowering the
AUD.
But markets may have other factors in mind – it is always dangerous
to dismiss market pricing.
Next week’s release of the June quarter national accounts might be
a trigger. We are predicting GDP growth of 0.4%. While that would
see annual GDP growth round down to 2.2% from 2.3% in March,
the six month annualised pace will be about 2.6%. We expect the
June quarter update to include a “below trend” 0.6% for consumption
(trend around 0.8%); a 1.2% fall in equipment investment; and a 2%
fall in dwelling investment. However we see a 0.7% lift in domestic
demand with a big (but clearly unsustainable) lift in “new engineering
construction” contributing 0.5ppts to domestic demand. That
surprise result appears to be a “bring forward” of mining expenditure
as contractors are moving to meet construction deadlines. As we
saw in the recent CAPEX report that really only implies a larger fall in
mining expenditure in future periods.
Recall that the release of the September quarter national accounts
on December 3 last year triggered our call for two rate cuts in
early 2015. That was because it was clear that the economy was
losing momentum and the Reserve Bank would have to significantly
revise down its growth forecast for 2015. That release showed that
domestic demand actually contracted by 0.3% and GDP increased by
only 0.3%. Six month annualised GDP growth slowed to less than 2%
from 3% posing enormous risks to the Bank’s 3% growth forecast for
2015.
Note that in the current circumstances the RBA is forecasting 2.5%
growth in 2015 with a lift to 3% in 2016. Six month annualised
growth is set to remain around 2.5% indicating that a lift to 3% in
2016 is still “reasonable”.
Of course we must also note that the Bank is now likely to be
predicting trend growth to be 2.75% making the 3% growth forecast
for 2016 consistent with a stable or falling unemployment rate
rather than the situation in December last year when trend was
estimated as 3% and a likely downward revision to 2.5% growth in
2015 would have posed considerable difficulties to maintaining
steady rates.
Hence our forecast for the GDP print and its components would
not be consistent with the Bank seeing the need for further rate
relief. However, as we saw in December last year, the GDP report is
always a significant event for the policy outlook.
It is also important to note that the Bank has changed its
forecast for the unemployment rate. In May it assessed that the
unemployment rate would gradually rise to 6.5% through 2015. It
now believes that the unemployment rate has peaked at around
6.0%. This confidence around the unemployment rate coincides with
the report that Australia has added 235,000 jobs over the year to
May at a growth pace of 2%.
Of course that strong jobs performance stands in stark contrast
with the clear evidence that non mining business investment
intentions have weakened (the services component of the CAPEX
survey confirmed an expected fall in nominal investment of around
7% in 2015/16 compared to a lift of 12.5% in 2014/15).
However we do need to consider the source of this strong
employment growth (health: 93,000; accommodation/food: 53,000;
recreation: 39,000; and business services: 90,000). There is a
clear “flavour” that the service sectors are benefitting from the
lower AUD while the business services growth reflects the boost in
property markets including construction; and out-sourcing by both
government and other sectors (e.g. finance).
3. Westpac weekly
3
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.
The tourism effect is not really captured by household spending
(which is growing around trend after adjusting below trend
consumer spending for strong dwelling investment and consistent
with jobs growth of “only” 1.5%) while population ageing explains
much of the boost to health jobs.
In short, while it is easy to be sceptical about the strong jobs
growth of late there are some reasonable explanations as to why we
have seen this phenomenon. It seems unlikely to us that a jobs turn
around over the next few months might cause the Bank to revise its
recent “about turn” on the employment outlook.
Finally, markets might be focussing on the recent rate increases by
banks in their investor loan books. Rather than a move to slow the
growth in new investor lending this might represent a recognition
that due to higher capital requirement mortgage assets have
become more expensive and “user pays”.
Markets might be anticipating further moves by the banks which
might eventually have to be offset by further rate cuts. With the RBA
seeking to slow growth in certain sectors of mortgage lending such
a response, if at all, is likely to be slow to emerge – certainly not in
line with the “end of year” timing envisaged by market pricing.
In summary, we remain comfortable to maintain our “out of market”
view that rates in Australia will remain on hold. We expect that with
the passage of time markets will move back in line with our view in
particular pricing out prospects for a rate cut by November, even if
the FED “blinks” in September.
Bill Evans, Chief Economist
4. 4
Westpac weekly
Data wrap
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.
Q2 construction work done
• Construction activity surprised to the high side, advancing
by 1.6% in the June quarter. Expectations were for a decline
(Westpac and market median –1.5%).
• Private infrastructure, dominated by mining, was the source of
surprise, jumping 10.2% in the quarter, centred on a 35% spike
in WA.
• Total construction work ex WA infrastructure was weak in the
quarter, declining by 5.3%.
• The construction report reads more like an update from 2011,
when the mining investment boom was in full swing. However,
this spike in infrastructure work will not be sustained. Rather
prospects are for sizeable falls ahead, even more so given this
burst of work.
• The positive, is that the construction sector (which accounts
for around 15% of the economy) will add to growth in the June
quarter 2015. This will provide a partial offset to the drag from
net exports, which have swung from a positive contribution in Q1
of 0.5ppts to an estimated subtraction of –0.4ppts in Q2.
• Infrastructure work in WA jumped to $11.3bn in the quarter,
a $2.9bn increase on Q1 or a rise of 35%. Construction of the
$10bn Roy Hill iron ore project and the $61bn Gorgon LNG
project will have contributed to this spike. It appears that there
has been a ramping up of work in an effort to make up for past
delays.
• Elsewhere, it was a weak quarter for construction.
• Public works fell further, down a sharp –8.4%qtr, to be 15% lower
than a year ago. In the year ahead, public infrastructure is likely
to improve as state governments begin work on new transport
projects.
• Commercial building was little changed, ahead of likely falls
with approvals falling sharply in 2014, particularly in the mining
states.
• Private new residential building surprised, declining by 3.6% in
the quarter. Although, this dip follows a 16% rise over the past
year, including a near 8% increase in Q1. With approvals hitting
fresh record highs early in 2015 new home building activity is
set to strengthen in coming quarters.
• Private home renovations strengthened, up 0.9% in the quarter
to be 4% higher than a year ago. This is likely the beginnings of
a modest upturn, following a period of softness, consistent with
the upturn in the housing market more generally.
• By state, Q2 construction work was: up sharply in WA,
+25.5%qtr, 14%yr; broadly flat in NSW; edged lower in Victoria,
–2.8%qtr, but was still up over the year, +7%; and fell further in
Qld, –11%qtr, –32%yr.
Q2 private capex & 2015/16 plans
• The latest ABS survey of private business CAPEX (which
provides partial coverage of total business investment) provided
information on actual spending in Q2, as well as the third
estimate of spending plans for 2015/16.
• In Q2, capex spend surprised to the downside, declining by 4.0%
(market median –2.5%).
• Equipment spending edged 1.2% lower, a touch softer than
forecast our (–0.5%). Building & structures provided the surprise,
with a reported fall of 5.6%. However, the construction work
survey reported strength in actual work for the quarter, centred
on a spike in infrastructure activity in WA.
• By industry in Q2, a further rise in services, +4.4%, was offset by
weakness in both mining, –11.3%, and manufacturing, -3.4%.
• The key takeout is that capex plans for 2015/16 remain
particularly weak, albeit marginally less so than three months
ago.
• Mining plans are for a sharp cut in capex spending and the
service sectors are also looking to reduce investment.
• Estimate 3 for 2015/16 is $114.8bn, some 23.4% lower than Est
3 for 2014/15. That is a marginal improvement on Est 2 on Est
2, reported as -24.6% three months ago.
• By industry, Est 3 on Est 3 is: mining, -37% downgraded from
-35% (as reported 3 months earlier); services, -6%, upgraded
from -10%; and manufacturing, -1%, upgraded from -13%.
• The survey, on current estimates, points to downside risks to the
growth outlook for 2015/16.
• However, we continue to expect that investment by the service
sectors, while unlikely to be strong, will be more resilient than
suggested by the capex survey - which is just one of a number
of indicators. The improvement in household demand and
international services points to a more positive outlook than the
downbeat capex survey.
Round–up of local data released over the last week
Date Release Previous Latest Mkt f/c
Wed 26 Q2 construction work done –0.8% 1.6% –1.5%
Thu 27 Q2 private capex –4.7% –4.0% –2.5%
2015/16 capex plans, AUDbn 104 114.8 –
5. 5
Westpac weekly
New Zealand: week ahead & data wrap
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.
Down, up … then down again
In this week’s report we take a look at what’s been happening with
inflation, and what key forward indicators are currently pointing
towards. Inflation in New Zealand is already low. And as we’ve
highlighted in recent weeks, strengthening headwinds for the New
Zealand economy are expected to result in a marked slowdown in
GDP growth over the coming year. It’s a combination of conditions
that means the Reserve Bank will have its work cut out to achieve a
sustained pick-up in inflation back to 2%.
In the year to June consumer price inflation was 0.3%. That’s only a
touch above the 15 year low it reached in early-2015, and still well
below the Reserve Bank’s 1 to 3% target inflation band.
In large part the current low level of inflation is a result of earlier
falls in global oil prices. But that’s certainly not all that’s going on.
Excluding petrol prices, inflation in the year to June was just 0.7%
- the lowest it’s been in more than 15 years. And that picture of
low inflation is echoed across the range of core inflation measures
produced by Statistics NZ and the Reserve Bank (core inflation
measures strip out noisy movements in prices, giving us a better
feel for the trend in inflation).
Dampening inflation over the past year has been broad based
softness in import prices. Over the coming months, the fall in
the NZD will see some of this softness reverse, driving a pick-up
in overall inflation. However, this will provide only a temporary
boost to inflation. Also, with petrol prices pushing down again
in recent weeks, it’s likely to be a more modest pick-up than
previously anticipated.
Looking past the volatility in import prices, a greater concern
for the Reserve Bank is the continued softness in the domestic
components of inflation. Despite firm growth over the past year,
domestic inflation has failed to pick up. In fact, the Reserve
Bank’s sectoral model of core non-tradables inflation has been
trending down for around five years, leaving it at very low levels.
Similarly, wage inflation (as measured by the Labour Cost Index)
hasn’t shown any material pick-up since falling during 2009’s
financial crisis.
There are some areas where we are seeing domestic inflation
lifting. These are mainly related to housing and construction, with
pressures increasingly centred on Auckland. However, this doesn’t
change the more general picture of soft inflation in New Zealand.
Contributing to the subdued domestic inflation environment in
recent years have been low input costs. In addition, there has been
strong growth in the economy’s productive capacity as a result
of population growth and capital spending by businesses. This
combination of factors has meant that the economy has been able
to grow without generating a significant increase in inflation.
Looking forward, we expect that the Reserve Bank is going to
have its work cut out for it in order to get inflation back to 2% on
a sustained basis. On top of a rocky global economy, dairy prices
have fallen sharply and the Canterbury rebuild is levelling off. Given
these headwinds, we expect GDP growth to slow from rates over
3% over the past year, to a below-trend 1.8% by the end of 2016.
The resulting softening in demand will make it harder for business
to push through price increases. Consistent with this, business
surveys have highlighted that only a very low proportion of firms are
currently planning on increasing prices.
The latest surveys of inflation expectations have reinforced this soft
medium-term outlook for inflation. Expectations play a key role in
determining wage and price setting decisions. And while we did see
some modest pick-up in inflation expectations in the Reserve Bank’s
most recent surveys of households and businesses, this follows very
sharp falls over the past year. Households and businesses continue
to expect very low inflation over the next one to two years.
The above conditions have already seen the Reserve Bank cut rates
by 50bps over recent months, and they have signalled that some
further reduction is likely. Market pricing is currently consistent with
just under 50bps of easing by March 2016. However, in light of the
headwinds for growth and already soft inflation, we expect that they
will need to cut by more, and more rapidly. We continue to expect
that the OCR will drop to a low of 2% over the coming year.
There will be a number of key data releases over the coming
week. First up will be August business confidence on Monday.
On Wednesday morning we’ll receive the results of the latest
GlobalDairyTrade auction. We’ll also receive updates on the
construction sector with building consent numbers for July on
Monday and building work put in place figures for the June quarter
on Thursday.
Round-up of local data released over the last week
Date Release Previous Actual Mkt f/c
25 Aug Q3 RBNZ 2 year ahead inflation expectations 1.85% 1.94% –
26 Aug Jul trade balance $m –194m –649m –600m
6. Westpac weekly
Data previews
6
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.
Aus Q2 company profits
Aug 31, Last: 0.2%, WBC f/c: –1.5%
Mkt f/c: –1.8%, Range: –4.5% to 2.0%
• Company profits trended lower in 2014 and are set to take a
further step down.
• For Q2, profits are forecast to decline by 1.5%.
• Miners have been hit by plunging global commodity prices. This
was again the case in the June quarter, with commodity prices
in AUD terms falling –8%qtr, –16%yr.
• Profits across the broader economy have been mixed, reflective
of uneven conditions. On balance, we anticipate a broadly
flat result for the quarter. Profitability has improved in the
consumer related sectors, as well as construction and finance.
By contrast, profits in the goods distribution sectors have come
under pressure.
Aus Q2 inventories
Aug 31, Last: 0.4%, WBC f/c: 0.5%
Mkt f/c: 0.2%, Range: –0.5% to 1.5%
• Private non-farm business inventories are expected to be
neutural for growth in Q2. We anticipate a 0.5% increase in
inventory levels in the quarter, in line with the outcome for the
opening months of 2015.
• Firms have responded to the strengthening of household
demand by expanding inventories. Over the past year,
inventories ex mining and ex manufacturing grew by 2.9%,
following a flat period in the year to March 2014.
• However, total inventories rose by a more modest 1.3% over
the past year. The manufacturing sector has been reducing
inventories since 2008 and in mining, inventories consolidated
over recent quarters.
Company profits
-40
-20
0
20
40
60
Mar-07 Mar-13
Mining profits
Commodity prices
% qtr
Commodity prices
–8% in Q2 (AUD)
-15
-10
-5
0
5
10
15
20
25
Mar-07 Mar-13
Non-mining profits
Sales, non-mining
% ann
Sources: ABS, RBA, Westpac Economics
Profits: 6%yr LR avg
Inventories*: f/c neutral in Q2
-2
-1
0
1
2
3
120
130
140
150
160
Jun-07 Jun-09 Jun-11 Jun-13 Jun-15
ppts$bn
Contribution to qtrly GDP (rhs)
Level of inventories (lhs)
Sources: ABS (Business Indicators survey), Westpac Economics
* Inventories, private non-farm
Q2: neutral
Q2: 0.5%
Aus Jul private sector credit
Aug 31, Last: 0.4%, WBC f/c: 0.5%
Mkt f/c: 0.5%, Range: 0.3% to 0.7%
• Credit to the private sector grew 0.5% per month on average
over 2015 H1, to be up 5.9% from the middle of 2014.
• For July, credit growth is forecast to be 0.5%, following a 0.4%
rise in June.
• Business credit has been choppy over recent months, following
a strong six months to February. With new lending, commercial
finance, rebounding of late we expect business credit to
advance in July, up 0.3%, after a flat June, to be 4.1% higher than
a year ago.
• Housing credit grew by 0.6%, 7.3%yr in June. Low and falling
interest rates and strong investor interest are driving the sector
forward. A similar outcome is likely in July.
Credit momentum
-10
-5
0
5
10
15
20
25
30
-10
-5
0
5
10
15
20
25
30
Jun-01 Jun-04 Jun-07 Jun-10 Jun-13
Total
Housing
Business
Sources: RBA, Westpac Economics
6 mth % chg, annl’sd 6 mth % chg, annl’sd
Business exceeds housing
7. Westpac weekly
Data previews
7
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.
Aus Jul dwelling approvals
Sep 1 Last: –8.2%, WBC f/c: 3.0%
Mkt f/c: 3.0%, Range: –3.0% to 8.5%
• Dwelling approvals fell sharply in June, the 8.2% drop driven
by a big reversal in previously strong high-rise approvals. An
apparent pull-forward in Victoria ahead of a new levy on metro
area approvals from July 1 had been expected to hold approvals
at a higher level but failed to do so. Ex high-rise, approvals
were actually up in the month, a testimony both to the
steepness of the June high-rise decline and the sizeable portion
this segment now accounts for in total approvals.
• Further weakness is likely in July as the Victorian pull-foward
unwinds. That said, the June drop looks a little overdone – the
sharp fall in high-rise in particular looks like an 'air pocket'
that should post a partial reversal. On balance we expect July
approvals to lift 3% but the underlying trend story still looks to
be of a strong upswing cycle that has now passed its peak.
Aus Q2 net exports, ppt cont'n
Sep 1, Last: 0.5, WBC f/c: –0.4
Mkt f/c: –0.3, Range: –0.5 to flat
• Net exports have been making a sizeable positive contribution
to growth of late, led by rising resource exports as new projects
begin production. This was evident in Q1, with a +0.5ppt result.
• However, for Q2, we expect a sizeable subtraction, forecasting a
–0.4ppts contribution.
• Export volumes gave back some of Q1's surge, down an
estimated 2.5%, following a 5% jump. Fewer weather disruptions
than usual early in the year resulted in stronger Q1 shipments of
coal and iron ore. This was partially reversed in Q2.
• Import volumes fell an estimated 0.8% in Q2, following a
sizeable 3% rise in Q1. Imports have generally been soft of late,
as mining investment returns to earth, the lower AUD makes
overseas travel less affordable and given the mixed domestic
demand backdrop.
Dwelling approvals, high rise vs the rest
0
50
100
150
200
250
0
5
10
15
20
25
Jun-00 Jun-03 Jun-06 Jun-09 Jun-12 Jun-15
'000'000
houses, med. density (lhs) high rise units (lhs)
total annualised (rhs)
underlying
demand
Sources: ABS, Westpac Economics
Net exports: f/c –0.4ppts in Q2
-3
-2
-1
0
1
2
3
4
5
-60
-40
-20
0
20
40
60
80
100
Jun-95 Jun-99 Jun-03 Jun-07 Jun-11 Jun-15(f)
pptsAUDbn
Net exports GDP growth contribution (rhs)
Export volumes (lhs)
Import volumes (lhs)
Sources: ABS, Westpac Economics
Q2(f): –0.4ppts
Imports: f/c –0.8%
Exports: f/c –2.5%
Aus Q2 current account, AUDbn
Sep 1, Last: –10.7, WBC f/c: –16.2
Mkt f/c: –15.8, Range: –17.2 to –13.5
• Australia's current account deficit widened sharply in the June
quarter, to $16.2bn, a $5.5bn deterioration on the March
quarter. This represents –4.0% of GDP, up from –2.7% in Q1.
• The trade deficit blew out to $9.6bn from an originally reported
$3.7bn deficit, revised to –$4.7bn. The slump in the terms of
trade continued, down an estimated 4.3% to be 17% lower than
at the end of 2013. In addition, net exports were a negative in
the quarter.
• The net income deficit is expected to continue to narrow, to a
forecast –$6.6bn, down from –$7.0bn in Q1 and from –$9.2bn
a year earlier. Notably, the returns for overseas investors in
Australia have been under performing those for Australia's
investments abroad.
Current account: f/c –$16.2bn in Q2
-24
-20
-16
-12
-8
-4
0
4
8
12
-24
-20
-16
-12
-8
-4
0
4
8
12
Jun-95 Jun-00 Jun-05 Jun-10 Jun-15
AUDbnAUDbn
Trade balance
Net income position
Current account
Sources: ABS, Westpac Economics
f/cs
8. Westpac weekly
Data previews
8
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.
Aus Q2 public demand
Sep 1, Last: 0.2%, WBC f/c: flat
• Public demand, representing just over 20% of the economy, has
stalled. A focus on budget repair and a lack of urgency around
public infrastructure are key constraints.
• For Q2, we expect a flat quarter, following a 0.2% rise in Q1.
That would see public demand 1% lower over the year.
• Public consumption is running at around a 2% annual pace,
which is below the long-run average of 3%.
• Public investment, which accounts for a little less than 20% of
public demand, is the key source of weakness. Investment fell
10% over the past year and a further fall in the June quarter is a
risk. Public construction work slumped 8% in the period. Going
forward, an improvement is likely, as state governments begin
to lift spending on key transport projects.
Aus RBA policy announcement
Sep 1, Last: 2.00%, WBC f/c: 2.00%
Mkt f/c: 2.00%, Range: 2.00% to 2.00%
• The Reserve Bank Board is expected to leave interest rates
unchanged in September, for the fourth consecutive month.
• The Bank lowered rates in February and May, taking the cash
rate to 2.00% from 2.50%, having been on hold since August
2013. The RBA is in "watch and see mode", assessing the
impact of this additional policy stimulus.
• The most recent statement from the RBA was relatively
balanced. The Bank highlighted that the unemployment rate has
stabilised of late and argued that this will continue, ahead of a
decline during 2017.
• We expect rates to be hold on for the remainder of 2015 and
in 2016. As to the risks, they are tilted to the downside, with
economic growth below par and the terms of trade in decline.
Public demand: declined over the past year
-4
-2
0
2
4
6
8
10
-4
-2
0
2
4
6
8
10
Mar-99 Mar-03 Mar-07 Mar-11 Mar-15
% ann% ann
Public consumption
Total public demand
Sources: ABS; Westpac Economics
L-R avg: 3.0% ann
Latest: –0.6%yr
RBA cash rate
0
2
4
6
8
0
2
4
6
8
Aug-01 Aug-03 Aug-05 Aug-07 Aug-09 Aug-11 Aug-13 Aug-15
%%
RBA cash rate implied by market pricing (27 Aug 2015)
Sources: RBA; Bloomberg, Westpac Economics
Aus Q2 GDP
Sep 2, Last: 0.9%qtr, 2.3%yr, WBC f/c: 0.4%qtr, 2.2%yr
Mkt f/c: 0.4%, Range: –0.1% to 0.7%
• Overall conditions in the Australian economy are lacklustre, with
growth uneven. For Q2, GDP growth is forecast to be 0.4%, with
annual growth edging lower to 2.2% from 2.3%.
• A dip in exports, partially reversing a surge in Q1, will see net
exports subtract 0.4ppts from Q2 growth.
• Domestic demand is forecast to rise by 0.7%qtr, 0.9%yr in Q2,
after stalling in Q1. A late cycle burst of infrastructure work
on mining projects has inflated activity in the quarter, adding
0.5ppts to domestic demand.
• Consumer spending grew a modest 0.5%qtr, 2.6%yr in Q1. We
anticipate a 0.6% rise in Q2, with households lowering their
saving rate to partially offset weak wage incomes.
Australian economic conditions
-4
-2
0
2
4
6
8
10
12
Jun-95 Jun-03 Jun-11
Domestic demand GDP
% ann
forecasts
Sources: ABS, Westpac Economics
-4
-2
0
2
4
6
8
10
12
Jun-95 Jun-03 Jun-11
Public demand
Private demand
% ann
9. Westpac weekly
Data previews
9
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.
Aus Jul retail trade
Sep 3, Last: 0.7%, WBC f/c: 0.4%
Mkt f/c: 0.4%, Range: 0.1% to 0.5%
• Retail sales posted a 0.7% gain in June, driven by a solid 2.2%
rise in household goods retail. Some of this directly linked
to new construction. However we suspect part of the lift
also related to Budget measures encouraging small business
investment ahead of the end of financial year. A similar modest
lift in June vehicle sales retraced in July.
• July will see any Budget-related spending lift reverse. Consumer
sentiment also fell quite sharply following renewed instability
in Europe and a slump in China's sharemarket. However, the
evidence from private sector business surveys and anecdotal
reports suggests Q2 sales momentum has been sustained.
Housing-related spending in particular should remain a solid
positive. On balance we expect a decent 0.4% gain in July.
Monthly retail sales
-3
-2
-1
0
1
2
3
4
5
6
16
18
20
22
24
Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15
% chgAUDbn
mthly % chg (rhs)
level (lhs)
Qld
floods
Trend mth%
(breaks in Dec-13
& Sep -15)
fiscal
payments
$1.9bn Source: ABS;
Westpac Economics
NZ Jul building consents
Aug 31, Last: -4.1%
• Residential building consents are expected to edge up slightly,
as Auckland continues to expand delivery of housing. This
is likely to include an increasing proportion of multi-unit
developments (terraced housing and apartments) as land value
drives higher densities although there is a lot of variation in
multi-unit consents from month to month.
• Growth in Auckland will be offset by declining residential
activity as part of the Canterbury residential rebuild.
Aus Jul trade balance, AUDbn
Sep 3, Last: –2.9, WBC f/c: –3.2
Mkt f/c: –3.1, Range: –3.7 to –2.0
• Australia is running sizeable trade deficits as plunging
commodity prices dent export earnings.
• In July, the trade deficit is expected to deteriorate a little further,
widening to $3.2bn from $2.9bn in June.
• Export earnings fell a forecast 1% in the month. Iron ore was
hit by lower prices and fewer shipments, while oil prices also
declined in the month.
• Imports are forecast to be broadly flat in the month. The ABS
advise that goods imports edged 0.2% higher and we anticipate
that services will be little changed.
• Note, the Australian dollar slumped in July, down 4% against the
US dollar and 3% lower on a TWI basis. This acts to raise the
cost of imports and boost AUD export earnings.
0
2
4
6
8
10
12
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Building consents (lhs)
House sales (rhs)
Sources: Statistics NZ, REINZ
consents sales 000
NZ housing activity
Australia’s trade position
-5
-4
-3
-2
-1
0
1
2
3
5
10
15
20
25
30
35
Jun-02 Jun-06 Jun-10 Jun-14
AUDbnAUDbn
G&S trade balance (rhs)
Exports (lhs)
Imports (lhs)
Sources: ABS, Westpac Economics
Jul f/c
–$3.2bn
10. Westpac weekly
Data previews
10
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.
NZ Aug business confidence
Aug 31, Last: -15.3%
• Business confidence has fallen sharply in recent months.
Notably, businesses in both the agricultural and construction
sectors have signalled that they expect sharp declines in activity
over the coming year.
• Given the magnitude of recent falls in confidence, and the
recent recovery in dairy prices, it wouldn’t be surprising to see a
modest bounce in confidence in August. Nevertheless, business
confidence is expected to remain at low levels.
• We’ll be closely watching the survey’s inflation gauges to
see how businesses’ pricing intentions are being affected by
the combination of a lower NZD and a deteriorating demand
outlook.
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
-80
-60
-40
-20
0
20
40
60
80
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Business confidence (left axis)
Inflation expectations (right axis)
Source: ANZ
net % %
NZ business confidence and inflation expectations
NZ Q2 building work put in place
Sep 3, Last: 1.5%, Westpac f/c: 1.9%
• Residential construction is expected to have been broadly
flat over the June quarter. However, underlying the aggregate
numbers is a shift in the geographic centre of activity.
Residential reconstruction activity in Canterbury is now well
advanced and building levels have levelled off. At the same
time, we are seeing strengthening demand in Auckland.
• There is a significant pipeline of non-residential building work
in both Canterbury and elsewhere. We expect growth of around
5.7% over the June quarter.
NZ Q2 terms of trade
Sep 1, Last: 1.4%, Westpac f/c: 1.1%
• We estimate that New Zealand's terms of trade recorded its
second straight increase over the June quarter. No, that's not a
typo.
• World dairy prices spiked in Feb/Mar this year in response to
short-lived concerns about drought. Given the typical three-
month lag between pricing and shipment, this meant that prices
for dairy exports were about 8% higher over the June quarter.
• Elsewhere, there were modest price increases for wood, wool
and fish, against a small decline in meat prices. Overall, we
expect a 2.4% rise in export prices.
• Import prices rose an estimated 1.3%, largely due to a 10%
rebound in oil prices. The NZD was down only slightly on a
trade-weighted basis, suggesting little in the way of imported
inflation this quarter.
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1990 1993 1996 1999 2002 2005 2008 2011 2014
Residential
Non-residential
Sources: Statistics NZ, Westpac
$bn $bn
NZ real building work put in place
600
800
1000
1200
1400
1600
600
800
1000
1200
1400
1600
1990 1993 1996 1999 2002 2005 2008 2011 2014
Terms of Trade index
Exports
Imports
Sources: Statistics NZ, Westpac
index index
NZ Terms of Trade
11. Westpac weekly
Data previews
11
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.
US August nonfarm payrolls & unemployment
Sep 4, nonfarm payrolls Last: 215k, WBC f/c: 230k
Sep 4, Last: 5.3%, WBC f/c: 5.3%
• Nonfarm payrolls rose 215k in July, following gains of 231k and
260k in June and May respectively. Three-month average growth
stands at 235k; and six-month average growth is 213k.
• In the household survey, the unemployment rate remained
steady at 5.3%, thanks to moderate job gains and a steady
participation rate.
• In August, we expect to see further robust growth in
employment, with a nonfarm payrolls gain circa 230k likely.
Initial claims data continues to point to a low pace of firing; and
the business surveys are supportive of continued robust hiring.
Participation may tick higher, but the unemployment rate will
likely remain unchanged.
US labour market: full employment on horizon
-5
-4
-3
-2
-1
0
1
2
-5
-4
-3
-2
-1
0
1
2
1992 1997 2002 2007 2012
ppt
Momentum
Level
Source: Kansas City Fed, Westpac Economics
pptKansas City Fed version
12. Westpac weekly
Key data & event risk for the week ahead
12
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.
Last
Market
median
Westpac
forecast Risk/Comment
Mon 31
Aus Q2 company profits 0.2% –1.8% –1.5% Profits hit by lower commodity prices and uneven conditions.
Q2 inventories 0.4% 0.2% 0.5% Inventories rise to meet a lift in household demand. Neutral for Q2 GDP.
Jul private sector credit 0.4% 0.5% 0.5% Housing supported by lower rates. Business choppy month to month.
Aug TD inflation gauge, %yr 1.6% – – Inflation benign consistent with current economic backdrop.
NZ Jul building consents –4.1% – – Demand is being driven by strengthening activity in Auckland.
Aug business confidence –15.3 – – Following recent sharp falls, confidence is expected to remain low.
Jpn Jul industrial production %mth 1.1% flat – IP trending modestly higher, but recovery ceiling is low.
Krw Jul industrial production %yr 1.2% – – Exports declining and home demand underwhelming.
Inr Q2 GDP (production) %yr 6.1% 7.0% – New estimates have scant resemblance to partials, lrg wedge to E @ 7.5%
Eur Aug CPI %yr 0.2% 0.1% – Headline inflation still non-existent; core at 1.0%yr.
US Aug ISM Milwaukee 47.1 – – Has fallen to low levels in recent months.
Aug Chicago PMI 54.7 54.8 – Has picked up, but remains moderate.
Aug Dallas fed manufacturing survey –4.6 –2.5 – Remains a little below average.
Can Q2 current account balance –17.5b – – US demand has been supporting exports.
Tue 01
Aus Aug CoreLogic-RP Data home value index 2.8% – 0.4% Daily index slowed in Aug after big gains June-July. Sydney prices >15%yr.
Jul dwelling approvals –8.2% 3.0% 3.0% June's big fall in high-rise looks overdone. Underlying cycle has peaked.
Q2 net exports, ppts cont'n 0.5 –0.3 –0.4 A negative in Q2 as exports dip following surge in Q1.
Q2 current account, AUDbn –10.7 –15.8 –16.2 Current account deteriorates as trade deficit blows out. ToT down sharply.
Q2 public demand 0.2% – flat Public demand has stalled. Declining investment key weakness.
Aug AiG PMI 50.4 – – Manufact'g index avg'd 48.7 since April - pluses are housing & lower AUD.
RBA policy announcement 2.00% 2.00% 2.00% Rates to be unchanged for a 4th consecutive meeting, following 2 cuts.
NZ Q2 terms of trade 1.5% –3.7% 1.1% Temporary drought-induced spike in dairy export prices.
Aug QV house prices %yr 10.1% – – Signs of housing strength spreading beyond Auckland.
Chn Aug manufacturing PMI 50.0 49.7 – Flash Caixin scared the horses, manufacturing still under pressure.
Aug non-manufacturing PMI 53.9 – – Similar level to Caixin version - sub trend but not alarmingly so.
Aug Caixin PMI manufacturing - final 47.1 47.3 – Level close to Krw/Twd reflecting common factor of weak global trade.
Aug Caixin PMI services 53.8 – – Under new mgt release date brought forward to compete with NBS.
Jpn Q2 capital spending %yr 7.3% – – Key source data for second estimate of GDP.
Aug Nikkei PMI manufacturing - final 51.9 – – A North Asian standout at present, lapping China, Korea and Taiwan.
Krw Aug Nikkei PMI manufacturing 47.6 – – Domestic and external demand are both weak.
Inr Aug Nikkei PMI manufacturing 52.7 – – Stop-start rebound to date, domestic demand improving modestly.
Idr Aug Nikkei PMI manufacturing 47.3 – – Presenting ugly facades to the world on a number of fronts.
Twn Aug Nikkei PMI manufacturing 47.1 – – Tech cycle in a weak phase, global trade volumes lacklustre.
Viet Aug Nikkei PMI manufacturing 52.6 – – Mainland ASEAN standout, seems to have beaten stagflation blues.
Myr Aug Nikkei PMI manufacturing 47.7 – – New series. Growth headwinds include capital ouflows, politics, ToT.
Eur Aug Markit manufacturing PMI (final) 52.4 52.4 – Decent, albeit not spectacular, momentum.
Jul unemployment rate 11.1% 11.1% – Unemployment still very high; a major hindrance for policy.
Ger Aug Markit manufacturing PMI (final) 53.2 53.2 – German manufacturers continue to benefit from EUR.
UK Jul net lending secured on dwellings 2.6b – – Lower mortgage rates have boosted the housing market.
Jul mortgage approvals 66.6k 67.8k Housing market conditions have been strengthening.
Aug Markit manufacturing PMI 51.9 52.0 – Domestic demand has firmed, but export orders remain weak.
US Aug Markit manufacturing PMI (final) 52.9 52.9 – Has come back into line with ISM of late.
Aug ISM manufacturing 52.7 52.8 53.0 USD impacting sector, but growth persists.
Jul construction spending 0.1% 0.8% – Revisions to Q2 GDP point to better momentum in construction.
Fedspeak – – – Fed's Rosengren to speak on economic outlook.
Can Q2 Jun GDP, % annualised –0.6% –0.9% – Canadian activity is being dampened by fall in oil prices.
Manufacturing PMI 50.8 – – RBC measure; momentum lacking, but positive.
Wed 02
Aus Q2 GDP 0.9% 0.4% 0.4% Net exports swing from +0.5ppts in Q1 to -0.4ppts. See textbox.
NZ GlobalDairyTrade auction 14.8% – – Anticipated cutbacks in milk production have lifted dairy prices.
Aug commodity prices –11.2% – –1.0% Recent dairy price bounce likely to show through next month.
Sing Aug PMI manufacturing 49.7 – – Exports are weak, IP likewise.
Eur Aug Markit services PMI (final) 54.3 54.3 – Final read for month; composite at 54.1.
UK Aug Markit construction PMI 57.1 57.5 – Remains at firm levels.
US Aug ADP employment change 185k 200k 210k Undershooting nonfarm payrolls of late.
Aug New York ISM 68.8 – – Businesses reported improved conditions in recent months.
Jul factory orders 1.8% 0.7% 0.9% Revisions to durables welcome; overall trend still soft.
Federal Reserve Beige Book – – – Fed reviews regional economic conditions.
13. Westpac weekly
Key data & event risk for the week ahead
13
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.
Last
Market
median
Westpac
forecast Risk/Comment
Thu 03
Aus Jul retail trade 0.7% 0.4% 0.4% Budget effects & sentiment hit a drag in July but other indicators +ve.
Jul trade balance, AUDbn –2.9 –3.1 –3.2 Deficit widens. Exports -1%, led lower by iron ore. Imports flat.
NZ Q2 building work put in place 1.5% – 1.9% Activity is shifting from Canterbury to Auckland.
Jpn Aug Nikkei PMI services 51.2 – – Large non-manufacturers in good shape in the official surveys.
Inr Aug Nikkei PMI services 50.8 – – Soft July probably overstated how 'flat' conditions are.
Sing Aug Nikkei PMI composite 51.3 – – New series, useful addition given status as regional financial hub.
HK Aug Nikkei PMI composite 48.2 – – 'New business from China' at 44.5: CNY(H) fix shock may spark finance.
Eur ECB policy meeting – – – No change, in stance or in tone of communications.
UK Aug Markit services PMI 57.4 57.5 – Remains at firm levels; composite measure at 56.6.
Ger Aug Markit services PMI (final) 53.6 53.6 – Composite measure at 54.0.
US Initial jobless claims 271k – – Claims remain at very low levels, consistent with firm jobs growth.
Jul trade balance –43.8b –44.3b –45.0 Jul to see slightly wider deficit; USD supportive of imports.
Aug Markit services PMI (final) 55.2 – Final release for month; composite at solid 55.0.
Aug ISM non-manufacturing 60.3 58.3 57.0 Startling strength in Jul; pullback seems assured.
Fri 04
Jpn Jul labour cash earnings %yr –2.4% 2.0% – Wages a vital but missing link in the Abenomics playbook.
Ger Jul factory orders 2.0% –0.8% – Activity likely dipped in Jul after strong June.
US Aug non-farm payrolls 210k 215k 230k Hiring robust and firing limited; another strong employment print.
Aug unemployment rate 5.3% 5.3% 5.3% Participation may tick higher, but unemp rate to remain unchanged.
Fedspeak – – – Fed's Lacker gives speech "The case against further delay".
Can Aug Ivey PMI 52.9 – – Conditions have softened in recent months.
14. Westpac weekly
Economic & financial forecasts
14
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.
Interest rate forecasts
Latest (28 Aug) Sep 15 Dec 15 Mar 16 Jun 16 Sep 16
Cash 2.00 2.00 2.00 2.00 2.00 2.00
90 Day Bill 2.13 2.20 2.20 2.20 2.20 2.20
3 Year Swap 2.12 2.50 2.60 2.70 2.75 3.00
10 Year Bond 2.74 3.00 3.10 3.25 3.40 3.60
10 Year Spread to US (bps) 55 40 30 25 20 20
International
Fed Funds 0.125 0.375 0.625 0.875 1.125 1.375
US 10 Year Bond 2.19 2.60 2.80 3.00 3.20 3.40
US Fed balance sheet USDtrn 4.53 4.5 4.5 4.5 4.5 4.5
ECB Repo Rate 0.05 0.05 0.05 0.05 0.05 0.05
New Zealand
Cash 3.00 2.75 2.25 2.00 2.00 2.00
90 day bill 2.91 2.70 2.20 2.10 2.10 2.10
2 year swap 2.83 2.60 2.30 2.20 2.10 2.10
10 Year Bond 3.23 3.10 2.90 2.90 3.00 3.10
10 Year spread to US 104 50 10 -10 -20 -30
Exchange rate forecasts
Latest (28 Aug) Sep 15 Dec 15 Mar 16 Jun 16 Sep 16
AUD/USD 0.7180 0.71 0.70 0.70 0.70 0.71
NZD/USD 0.6490 0.64 0.63 0.62 0.63 0.65
USD/JPY 120.97 121 123 123 124 125
EUR/USD 1.1240 1.09 1.07 1.07 1.07 1.08
AUD/NZD 1.1070 1.11 1.11 1.13 1.11 1.09
Australian economic growth forecasts
2014 2015 Calendar years
Q2 Q3 Q4 Q1 Q2e Q3f Q4f 2013 2014 2015f 2016f
GDP % qtr 0.6 0.3 0.5 0.9 0.4 0.7 0.7 2.1 2.7 2.4 3.0
annual change 2.8 2.7 2.4 2.3 2.2 2.5 2.7 – – – –
Unemployment rate % 6.0 6.2 6.2 6.2 6.1 6.3 6.5 5.8 6.2 6.5 6.2
CPI % qtr 0.5 0.5 0.2 0.2 0.7 0.8 0.5 – – – –
annual change 3.0 2.3 1.7 1.3 1.5 1.9 2.2 2.7 1.7 2.2 2.2
CPI underlying % qtr 0.6 0.4 0.6 0.7 0.5 0.5 0.6 – – – –
annual change 2.7 2.5 2.2 2.4 2.3 2.4 2.4 2.7 2.2 2.4 2.4
New Zealand economic growth forecasts
2014 2015 Calendar years
Q2 Q3 Q4 Q1 Q2f Q3f Q4f 2013 2014 2015f 2016f
GDP % qtr 0.7 1.0 0.7 0.2 0.7 0.5 0.3 – – – –
Annual avg change 2.8 3.0 3.3 3.2 3.0 2.7 2.2 2.2 3.3 2.2 1.8
Unemployment rate % 5.7 5.5 5.7 5.8 5.9 6.2 6.4 6.1 5.7 6.4 6.3
CPI % qtr 0.3 0.3 -0.2 -0.3 0.4 0.5 0.1 – – – –
Annual change 1.6 1.0 0.8 0.1 0.3 0.4 0.7 1.6 0.8 0.7 1.7
16. Disclaimer continued
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