Australia &

New Zealand
weekly.

Week beginning 29 May 2017

Major market and economic themes.

Australia: retail, dwelling approvals, capex, credit.

NZ: building consents, business confidence, terms of trade.

US: PCE deflator, nonfarm payrolls, ISMs.

Euro Area: ECB Draghi speaks, unemployment, CPI.

Key economic & financial forecasts.

Information contained in this report was current as at 26 May 2017.

Westpac Institutional Bank


Major market and economic themes
Over the next two weeks I will be visiting customers in Europe
and the United Kingdom.
There is a useful mix of officials; central banks; real money
managers; hedge funds and corporates.
I will be using a detailed document to support discussions at the
meetings.
Below I have set out the Executive Summary of the document
which brings together our key economic and market views.
The Australian economy expanded by 1.1% in the December
quarter, following a contraction of 0.5% in the September quarter.
Overall the economy grew by 2.4% through 2016. Despite
bouncing back from that contraction, growth in Australia remains
disappointing. Prospects for 2017 are more encouraging with 3.0%
growth currently expected. However, despite ongoing low interest
rates and a significantly more competitive Australian dollar, we
expect growth will slow to 2.5% in the year to December 2018.
And that is despite the drag from the contraction in mining
investment easing from subtracting 1.2 percentage points in
2016 to only 0.1 percentage point in 2018. This is because the
significant outperformers from a growth perspective in 2016
and 2017 residential construction and exports are likely to
slow through 2018. In 2016, residential construction and exports
contributed 1.7 percentage points to GDP growth. That is likely to
slow to 0.7 percentage points in 2018.
With confidence remaining muted there appear to be
disappointing prospects for household spending and business
investment to fill the gap. The contribution to growth from
business investment (nonmining) and household spending is
likely to slow from 2.0 percentage points in 2017 to 1.6 percentage
points in 2018.
Australias growth prospects are closely aligned with
developments in China. Chinese direct investment has played a
significant role in the residential construction boom. However,
the Chinese authorities concerns with ongoing capital outflow
are weighing on offshore property investment activity. Recent
guidance from the Commonwealth Treasurer points to a sharp
slowdown in approvals for foreign property investors over the last
year.
The boost to growth from exports has not been restricted to
the boom in LNG production, which is expected to explain over
70% of Australias resource exports growth over the 2016 to
2018 period but also slowing by 2018. It has also stemmed from
a strong lift in services exports, (education; tourism; business
services) which contributed 0.4 percentage points to GDP growth
in 2016. China has been the dominant driver of this growth. To
date there is no evidence that Chinese officials are seeking to
slow tourism and education imports but concerns around the
need to stabilise FX reserves in China might eventually lead to
tighter controls on Australias services exports.
Despite that cyclical concern, the longer term prospects for
Australia are inextricably linked to the likely boom in middle class
numbers in the Asian region, with over 3 billion expected by 2030.
(Source: OECD). That growth will be largely dominated by China
and India representing exciting prospects for tourism; education;
health; property and agriculture.
China's policies also impact national income growth for Australia.
The recent pull back in iron ore prices, partly reflecting funding
pressures on speculators, is likely to hold through the remainder
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.
Westpac weekly
of 2017. Official policies in China to boost infrastructure
investment and housing activity are likely to be sustained through
2017 in the lead up to the elections at the National Congress
in November. Thereafter, as is usually the case after elections,
policies are likely to tighten, weighing on commodity prices;
Australias terms of trade and incomes in 2018. Following a boost
in the terms of trade in 2017 of 5%, we expect a fall of 16% in 2018.
The Commonwealth government has been successful in retaining
Australias AAA debt rating following the release of the 2017/18
Commonwealth Budget. The Budget is forecasting a return
to surplus in 2020/21. This is not an exciting result given that
Westpac believes that the commodity price forecasts are
unrealistically high; real sector growth forecasts are too high; and
the strong link between nominal incomes and the tax take has
broken down in recent years. Policies to boost infrastructure are
welcome but too timid and targeted tightly at Western Sydney
and NSW/Victorian regions. Early responses to the Budget are
disappointing for employment and investment prospects.
Recent further tightening by the banks, partly in response to
regulators; a further tightening of standards; new initiatives in
the Budget and from state governments to slow housing, are
expected to slow house price inflation. We expect that house
price inflation will largely disappear over the next year.
Modest growth in household spending; a contraction in residential
construction activity and a marked slowdown in house price
inflation will restrain employment growth. While prospects for a
modest fall in the unemployment rate in 2017 seem reasonable it
is likely that it will move back to 6% in 2018. In such circumstances
it appears unlikely that the inflation rate will rise much above
the bottom of the 23% target band despite sharp increases in
electricity prices.
World growth is unlikely to provide the Australian economy with
any circuit breaker. With doubts on the success of the new US
government to embrace infrastructure; deregulation and tax
reform, growth prospects have faded in the US. An expected
slowdown in China in 2018 will be a further offset, particularly
for Australia, to any lift in US economic conditions. However the
US labour market continues to tighten and inflation is gradually
closing in on the Feds target zone.
This scenario has clear implications for markets. Evidence that
rate cuts in 2016 revived house price inflation constrains the
Reserve Bank from any further rate cuts despite low inflation and
persistent spare capacity in the labour market. Markets have been
broadly aligned with that view for 2017. However tentative market
expectations for a rising cash rate in 2018 seem misplaced. We
expect the cash rate will remain on hold through 2017 and 2018.
Indeed the case for lower rates in 2018 seems more reasonable
than the case for higher rates. Term rates, including bond and
semi government rates, on the other hand, are likely to rise
further, albeit at a more moderate pace than in the US, closing the
official gap.
Our scenario around FED rate policy in 2017 and 2018, will see
US short term rates exceed Australian rates by the second half of
2018. Coupled with our expectation for falling commodity prices
as China slows through 2018, and low cost producers including
Australia lift production, prospects for the AUD appear bleak with
our end of 2018 target at USD0.65.
Bill Evans, Chief Economist
2

Data wrap
Aus Westpac-MI Leading Index
The six month annualised growth rate in the Westpac-
Melbourne Institute Leading Index, which indicates the likely
pace of economic activity relative to trend three to nine
months into the future, fell from 1.11% in March to 0.92% in April.
This marks the ninth consecutive month where the growth
rate in the Index is at or above trend. That followed a period
of seventeen consecutive months where the growth rate had
been below trend. That sustained period of below trend growth
in the series had been pointing to the weakness we saw in the
economy in the September quarter (although no lead indicator
could have prepared us for a negative growth print).
The resumption of positive growth in the Index in August last
year gave us some comfort that the bounce back in growth in
the December quarter to 1.1% could have been anticipated.
While the strong bounce back in the December quarter
was partly statistical in response to the negative quarter
in September the ongoing positive signal from the Index is
consistent with solid growth through most of 2017.
The Leading Index growth rate has lifted over the last six
months from 0.25% in November to 0.92% in April. Until
recently the key drivers of that improvement had been global
factors: rising commodity prices and the steepening of the
yield curve.
In April both of these components slowed with the change in
the 6 month contribution being -0.19 percentage points for
commodity prices and -0.05 percentage points for the yield
curve (which has recently been flattening).
However, other international factors are still supportive of
the Index US industrial production has contributed 0.33
percentage points to the increase in the Index while ASX200
has contributed 0.29 percentage points.
On the domestic front dwelling approvals have contributed
0.19 percentage points; the Westpac-MI Unemployment
Expectations Index 0.11 percentage points; and Westpac-MI
Consumer Sentiment Expectations Index 0.06 percentage
points.
The only domestic component dragging on the Index is
aggregate monthly hours worked which reduced the index
growth rate by 0.08 percentage points between November and
April.
Aus Q1 construction
Construction work, having trended lower in recent years,
stabilised over the past half year. The drag from the mining
investment downturn has diminished and public works is
providing a boost.
In the March quarter 2017, construction work declined by
a relatively modest 0.7%, following a 0.6% gain in the final
quarter of 2016 (revised up from -0.2%). By comparison, over
Roundup of local data released over the last week
Date Release
Wed 24 Apr Westpac-MI Leading Index
Q1 construction work
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.
Westpac weekly
the year to September 2016, construction work declined by
10.7%, to be $5.6bn below a year earlier.
The March quarter 2017 result broadly met expectations,
(market median -0.5% and Westpac -0.2%).
In NSW and Qld, activity in the most recent quarter appears to
have been disrupted by wet weather and flooding.
The wet weather impact is evident in the private home building
segment, where work nationally on new dwellings fell by 4.8%
and renovations were down by 6.3%. In NSW, total residential
building activity fell by 4.9% in Q1, while Qld experienced
a sharp 13.6% decline. These outcomes are weaker than
suggested by earlier strength in approvals and the sizeable
pipeline of work.
Home building activity is likely to rebound in the June quarter.
Beyond that, there is a looming downturn in home building
activity. Notably, private new dwelling approvals in Q1 2017
were 12% below the level of a year earlier.
The drag from the mining investment downturn has clearly
diminished. Private infrastructure activity surprisingly rose in
the March quarter, up 1.8%. We still expect some further modest
downside over coming quarters.
In the mining state of WA, where work on gas projects under
construction is nearing completion, total infrastructure activity
is declining at a slower rate. Over the past half year, work fell
by 12%, down $0.7bn. For the year prior to that, work fell by
51%, a decline of $5.5bn.
Public works is a growth driver as governments commit to
additional projects. Public works increased in each of the past
seven quarters, up a cumulative 21%. That is the longest run of
consecutive gains since 2008 to 2010, associated with the post
GFC fiscal stimulus package.
Victoria is performing strongly, with construction work in Q1 up
3.4%qtr, 9.2%yr. Strength is evident in building activity, +12%yr,
both residential and non-residential.
In NSW, construction work consolidated over the past year,
with a Q1 outcome of -1.7%qtr, +0.8%yr. While infrastructure
work moved higher, +6.6%yr, building work eased, -2.2%yr, led
lower by a pull-back in commercial work.
In Qld, construction work has stabilised, printing at -1.9%qtr,
-1.0%yr in Q1. This follows falls of 22% in 2014 and 24% in 2015
associated with the mining investment downturn. Over the past
year, infrastructure work rebounded by almost 14%.
In WA, construction work fell by -4.8%qtr, -37.4%yr in Q1.
Previous Actual Mkt f/c
1.11% 0.92% -
0.6% -0.7% -0.5%
3

New Zealand: week ahead & data wrap
New Zealands solid economic performance is allowing the
Government to have its cake and eat it too. Budget 2017 provided
for more spending and put money back in peoples pockets. At the
same time, the Government is still projecting growing surpluses
and falling net debt over the coming years.
Fiscal projections
The Governments books are in good shape. Firm economic
activity and a focus on cost control has seen the operating balance
steadily improving since 2011, with surpluses in each of the past
two years. This positive trend has continued into the current fiscal
year. In fact, the Treasury has upgraded the projected surplus for
FY2017 to $1.6b, compared to a $0.5b surplus in the Half-Year
Economic and Fiscal Update (HYEFU) in December.
The surplus is expected to continue growing over the next few
years, but at a more gradual pace than previously assumed. The
Government is now forecasting an operating surplus of $7.2b in
2021, down from the $8.5b that was forecast in the HYEFU. A key
reason for the more gradual improvement in the operating surplus
over the coming years is that Budget 2017 has introduced a Family
Incomes Package (described below) that includes adjustments to
income tax thresholds. While this is assumed to boost activity and
spending (which will support growth in tax revenue), the reduction
in income tax pulls down core Crown tax revenues by $6.3b over
the forecast period.
Core Crown expenses are also expected to grow more rapidly than
previously assumed. Budget 2017 allows for around $1.8b of new
operating spending expenditure in each of the next four years (up
from $1.5b as previously forecast). On top of this, allowances for
new spending in future years have also been increased.
Despite the increase in spending, firm economic conditions mean
that the Government continues to forecast a decline in debt levels.
As a share of nominal GDP, core Crown debt is still forecast to
fall below 20% in FY2021, though by slightly less than previously
assumed. As already announced, the Government is aiming to
reduce net debt to 10-15% of GDP by 2025.
Policy initiatives
The big policy announcement in Budget 2017 was the introduction
of a $2b Family Income Package targeting those on low to middle
incomes. This package comes into effect from 1 April 2018. It has
four key parts:
1. Income tax thresholds are being increased. The current $14,000
threshold will be increased to $22,000, and the current
$48,000 threshold will increase to $52,000. In terms of cash in
hand, those earning more than $22,000 will now get an extra
$11 per week, rising to $20 per week for those earning more
than $52,000.
2. The Independent Tax Earners credit of up to $10 per week is
being removed. This was available to those on lower incomes
without families. But its removal will be offset by the change in
tax thresholds.
3. Working for Families payments for those with children under 16
will be increased to the same level as those with older children.
This will affect around 310,000 families.
Roundup of local data released over the last week
Date Release
Wed 24 Apr trade balance, $m
Thurs 25 Budget 2017
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.
Westpac weekly
4. Accommodation supplements will be increased for families and
students.
On top of the policy changes themselves, there will be flow-
on effects for superannuitants due to the link between after-
tax wages and NZ Superannuation. The couples rate for
superannuitants will increase by $13/week from 1 April.
Budget 2017 also made allowances for increased spending in four
key areas.
Infrastructure: The Government is investing heavily in in
infrastructure, with $11b in new capital spending assumed over
Budgets 2017 to 2020 on top of existing plans. This includes
$4b of new spending in Budget 2017. The lions share of the
new infrastructure spending introduced in Budget 2017 relates
to transport infrastructure. Other large areas of spending
include prison capacity, defence, schools and classrooms, and
health facilities.
Public services: $7b including spending on health services,
education, law and order, and social services
Business growth agenda: $1b. This includes $373 million as part
of the Innovative NZ program, as well as spending to support
increased trade, the tourism sector, and the film industry.
Social investment: $321m social spending to support those
in need including mental health support and support for
vulnerable children.
Economic implications
The 2017 Budget is generally more stimulatory than last years
effort. Much of this stimulus was well signalled, and is already
incorporated into the forecasts behind our recently-released
Economic Overview.
The pickup in government spending comes at a useful time, when
we expect some private sector sources of growth to be waning.
For that reason, we dont think that this Budget will put significant
upward pressure on inflation or interest rates.
Economic forecasts
Theres a very optimistic view of the economy underpinning the
fiscal forecasts. The Treasury expects average GDP growth of
3.1% a year over the next five years. That would actually be a
faster pace than the previous five years, when the economy was
rebounding from the financial crisis. As weve noted before, it
would be highly unusual for growth to accelerate at this advanced
stage of the cycle.
That may or may not prove to be a serious challenge to the fiscal
projections. Its notoriously difficult to draw the link from GDP
to tax revenue and spending requirements. Indeed, the story of
the last year has been one of much stronger than expected tax
revenue despite lower than expected GDP growth. So for now well
note this as a risk that the next two (non-election year) Budgets
could prove to be a bit more austere if growth doesnt live up to
the Treasurys lofty expectations.
Previous Actual Mkt f/c
332 578 267
4
 Westpac weekly

Data previews
Aus Apr dwelling approvals Dwelling approvals
May 30, Last: 13.4%, WBC f/c: 1.0%
Mkt f/c: 3.0%, Range: -1.0% to 10.0% '000 '000
25 houses, priv. (lhs) units, priv. (lhs) 250
Dwelling approvals fell heavily in March, a 13.4% drop more total annualised (rhs)
than reversing the 10% rise over Dec-Feb and taking total 20 underlying 200
approvals back near their October 2016 low. The detail demand

showed a 50% slump in high rise approvals to the lowest

15 150
level since July 2013 and a material 4.3% pull-back in
private sector house approvals. The state breakdown shows
particularly big swings in NSW and Qld in recent months, 10 100
with weather events likely impacting in March.
5 50
While approvals are now clearly in a downturn, the scope
for further hefty declines in the high rise segment leading Sources: ABS, Westpac Economics
the cycle now look to be limited. Meanwhile, the extent of 0 0
softening in other segments and the impact of state specific Mar-02 Mar-05 Mar-08 Mar-11 Mar-14 Mar-17
factors such as weather events are both uncertain. On balance
we suspect trend approvals are taking another leg lower but
April should see a slight 1% gain.

Aus Apr private credit Credit: momentum shift

May 31, Last: 0.3%, WBC f/c: 0.4%
Mkt f/c: 0.4%, Range: 0.3% to 0.5% 6 mth % chg, annlsd 6 mth % chg, annlsd
25 25
Total
Private credit growth slowed in the opening quarter of 20
Housing
20
2017, to 0.3% per month on average, as business weakened, 15 Business 15
-0.5%qtr, after a blistering Q4, +2.2%qtr.
10 10
For April, we expect credit growth to round up to 0.4%,
supported by a small rise in business. Annual growth edges 5 5
down from 5.0% to 4.9%, the slowest pace since May 2014.
0 0
Housing credit grew by 0.55%mth, 6.5%yr in March. A similar RBA easing cycles

result is likely for April, ahead of a slowing in coming months -5 -5

Sources: RBA,
in response to out of cycle rate increases and tighter lending Westpac Economics
-10 -10
conditions. Note that annual housing credit growth peaked at
Mar-03 Mar-06 Mar-09 Mar-12 Mar-15
7.5% back in November 2015.
Business credit in March was 0.0%mth, 3.4%yr, continuing
a volatile pattern after borrowing appetite was temporarily
impacted by the July 2016 Federal election. New lending
(commercial finance) rebounded over the past couple of
months, pointing to a small rise in business credit in April.

Aus Apr retail trade Monthly retail sales

Jun 1, Last: -0.1%, WBC f/c: 0.3%
$bn % chg
Mkt f/c: 0.3%, Range: -0.1% to 0.6% Qld
3.0
26 floods
mthly % chg (rhs)
2.5
Retail sales dipped 0.1% in March following a 0.2% decline in fiscal level (lhs)
Feb and a 0.5% gain in Jan. Cyclone Debbie and abnormally 24
payments Cyclone 2.0
$1.9bn Debbie
wet weather over the eastern states had a significant impact 1.5
in March Qld, the hardest hit, saw retail sales fall 1.3%. 22
1.0
April will clearly see some rebound from weather effects.
0.5
However, this is against a weak consumer backdrop with 20
sentiment weakening in early 2017 amid increased pressures 0.0
on family finances. Private sector business surveys continue 18
mth%ch (rhs) -0.5
to point to retail underperforming non-retail consumer
Source: ABS; Westpac Economics
sectors as well. With price discounting an ongoing drag on 16 -1.0
nominal sales as well we expect the rebound in monthly retail Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
sales to be fairly muted with just a 0.3% gain overall.

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.
5
 Westpac weekly

Data previews
Aus Q1 private capex CAPEX: by industry by asset
Jun 1, Last: 2.6%, WBC f/c: 0.5%
$bn Equipment Building & structures $bn
Mkt f/c: 0.5%, Range: -5.5% to 2.5%
Sources: ABS, Westpac Economics nominal
20 20
Business spending on capex contracted in each of the past Mining Mining
four years, including a -15.5% for 2016, led lower by mining. 16 Services Services 16

Perhaps surprisingly then, we expect a positive start to 2017,

12 Manufacturing Manufacturing
12
albeit a small one, forecasting a rise of 0.5% for Q1.
The mining investment drag has diminished and some 8 8
businesses appear to be responding modestly to improved
conditions: with incomes boosted by higher commodity 4 4
prices; global growth having strengthened; and the domestic
economy having emerged from the mid-2016 slowdown. 0 0
Dec-00 Dec-06 Dec-12 Dec-00 Dec-06 Dec-12
Building & structures is expected to be flat in Q1, after a 25%
fall in 2016. The Construction Work (CW) survey was +1.2% for
Q1, but we're mindful that the capex at times undershoots CW.
Equipment spend is forecast to rise by 1.2%, after a Q4 result
of 0.4%qtr, 1.5%yr, with gains expected in mining and services.

Aus 2017/18 capex plans, AUDbn Capex plans, by industry: Estimate 1

Jun 1, Last: 80.6
$bn $bn
180 180
Capex plans for 2017/18 will be the key focus, although the 160
Sources: ABS,
Westpac Economics Mining Services Total -9% 160
final outcome for 2016/17 will not be known until late August. 140 Total also includes manufacturing,
140
Est 1 2017/18 at $6.5bn -17%

Mining capex:
Est 1 for 2017/18 capex is $80.6, -3.9% vs Est 1 a year earlier. 120 returning to pre-boom levels 120
-18%
Or, -$3.3bn, fully accounted for by mining, -$6.8bn and -20%. 100 100
-18%

An Est 2 of around $86bn would be a 'neutral' result in our 80

-4%
80
view. This is an upgrade of almost 7% on Est 1, broadly in line 60 60
with the recent historical average (weighted by industry).
40 40
However, Est 2 on Est 2 would print at -6% on this number, 20 20
thus appearing to be a deterioration on 3 months earlier. The
key point, in 2016/17 there was an unusually large upgrade 0 0
2006 2010 2014 2018 2006 2010 2014 2018 2006 2010 2014 2018
between Est 1 and Est 2, of 8.8%. The Est 1 survey that year
(conducted in Jan/Feb 2016) was when the iron price was at
a low of $40/t and China's share market fell 24% in 4 weeks.
Applying average realisation ratios, we calculate Est 1 for
2017/18 implies a fall of 11% on 2016/17. An Est 2 of $86bn
would be broadly comparable, implying a fall of 10%.

NZ Apr building consents NZ housing activity

May 30, Last: -1.8%, WBC f/c: 2.5%
consents sales 000
3,500 12
Residential dwelling consent issuance paused for breath in
March, with a 1.8% decline in the number of consents issued 3,000 10
over the month. But after a large 17% jump in February,
some pull back was to be expected. We expect a return to 2,500
8
moderate growth in April, with strong demand in Auckland
2,000
continuing to be the key driver.
6
While there is a large pipeline of both residential and non- 1,500
residential building work planned over the coming years, 4
1,000
there is a question around how quickly work will occur. Building consents (lhs)
Capacity pressures in the building industry have already 500 2
House sales (rhs)
emerged, and both building costs and borrowing rates have Sources: Stats NZ, REINZ

been creeping higher. At the same time, house price growth 0 0

has levelled off. While the outlook for building is positive, 2000 2002 2004 2006 2008 2010 2012 2014 2016
these factors may constrain the pickup in activity.

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.
6
 Westpac weekly

Data previews
NZ May business confidence NZ business confidence and inflation expectations
May 31, Last: 11.0
net % %
100 5.0
Business confidence held steady between March and April. Business confidence (LHS)
Activity indicators show businesses remain upbeat about 80 4.5
their own prospects and this is likely to pass into stronger Inflation expectations (RHS)
60 4.0
hiring. With the recovery in dairy prices, the sentiment around 40
exports is expected to remain firm. 3.5
20
Businesses view of the underlying inflation pulse in the 0
3.0
economy is looking firmer. Inflation expectations have picked 2.5
up, and thats passing through into an increase in the number -20
of businesses looking to raise prices this year. Since the last -40 2.0
survey, weve seen a strong Q1 inflation outcome and thats -60 1.5
likely to see inflation expectations rising in the May survey. Source: ANZ

Well be watching to see how business pricing behaviour will -80 1.0
2000 2002 2004 2006 2008 2010 2012 2014 2016
respond to the rise in inflation.

NZ Q1 terms of trade NZ Terms of Trade

Jun 1, Last: 5.7%, WBC f/c 4.0%, Mkt f/c: 4.0%
index index
We estimate that the terms of trade rose by 4% in the March 1600 1600
2017 quarter. This would put it marginally ahead of the Terms of trade
previous multi-decade high that was reached in 2014. 1400 Exports 1400

The rebound in world dairy prices in late 2016 continued Imports

to flow through into stronger export receipts in the March 1200 1200
quarter. We expect a 6% rise in export prices, driven by an
18% rise in dairy, along with modest gains for meat and wood 1000 1000
products.
Fuel import prices rose an estimated 12% for the quarter, but 800 800
other import prices remained muted. The New Zealand dollar Sources: Stats NZ, Westpac
was little changed over the quarter. 600 600
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

US May employment report Employed share of population on the rise

Jun 2, nonfarm payrolls Last: 211k, WBC 170k
% %
12 68
The nonfarm payrolls survey has continued to report strong
employment growth through 2017, despite some volatile 66
10
months. At 185k, the 2017 average monthly gain for payrolls is
broadly unchanged from 2016. 64
8
The household survey has been similarly strong, the 62
unemployment rate falling to 4.4% in April. That figure is a 6
material improvement from January's 4.8%, and is also below 60
estimates of full employment. The share of the population 4
58
employed is at its highest level since early-2009.
2 Unemploment rate (lhs)
56
Come May we expect another robust gain circa 170k, a touch Participation rate (rhs)
below the 2017 average. Given stable participation, the Sources: Datastream, Westpac Economics Employment-population ratio (rhs)
0 54
unemployment rate should also be unchanged in the month. 1970 1980 1990 2000 2010

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.
7
 Westpac weekly

Key data &event risk for the week ahead

Market Westpac
Last median forecast Risk/Comment
Mon 29
Eur Apr M3 money supply %yr 5.3% 5.2% Credit data also due.
ECB Draghi speaks Speaks at European Parliament Economic Committee.
UK May Nationwide house prices 0.4% Price growth has eased, low supply and rates limiting downside.
US Memorial Day Markets closed. Start of the summer vacation season.
Fedspeak Williams gives keynote on Asian banking & finance in Singapore.

Tue 30
Aus Apr dwelling approvals 13.4% 3.0% 1.0% Slight bounce from March's fall, but trend taking leg lower?
NZ Apr building permits 1.8% 2.5% Home building levels continuing to rise, esp. in Auckland.
Jpn Apr jobless rate 2.8% 2.8% Unemployment remains at low levels but...
Apr household spending -1.3% -0.9% consumer spending yet to respond.
Eur May economic confidence 109.6 110.1 Sentiment very robust....
May business climate indicator 1.09 1.12 .... across businesses...
May consumer confidence -3.3 -3.3 ... and consumers.
Ger May CPI %yr 2.0% 1.6% Has fluctuated in recent months; broadly at target.
US Apr personal income 0.2% 0.4% Income growth is solid, but lacks upward momentum...
Apr personal spending 0.0% 0.4% ... spending should bounce in Q2.
Apr PCE deflator %yr 1.8% 1.7% Core price pressures to hold a little below FOMC target.
Mar S&P/CS home price index 0.7% 0.8% Robust overall, but signs high flyers may be faltering.
May consumer confidence index 120.3 119.9 Set to remain strong.
May Dallas Fed index 16.8 15.0 Manufacturing surveys volatile but strong.
Fedspeak Brainard speaks on the economy and policy at a luncheon.
Can Q1 current account balance, $b 10.7 Energy and consumer exports have picked up.

Wed 31
Aus Apr private sector credit 0.3% 0.4% 0.4% Growth to round higher, business to advance after weak qtr.
NZ RBNZ Financial Stability Report DTI limits, bank capital requirements still under development.
May ANZ business confidence 11.0 Business conditions expected to remain firm.
Jpn Apr industrial production -1.9% 4.4% Mar surprise expected to reverse with manuf. a strong point.
Chn May manufacturing PMI 51.2 51.0 Likely to lose ground in coming months...
May non-manufacturing PMI 54.0 ... though momentum to remain solid.
Ind Q1 GDP %yr 7.0% Economy pushed past cash disruption; more reforms ahead.
Eur Apr unemployment rate 9.5% 9.4% Slowly trending down.
May CPI %yr 1.9% 1.5% Volatility aside, headline inflation near target; core still soft.
UK May GfK consumer confidence 7.0 Confidence has eased, rising inflation is weighing on households.
Apr net lending on sec. dwellings, b 3.1 3.1 Lending has essentially been flat since the referendum
Apr mortgage approvals 66.8k 66.3 with demand softening despite low rates.
US May Chicago PMI 58.3 57.0 Manufacturing surveys volatile but strong.
Apr pending home sales -0.8% 1.0% Lead for established; starting to soften.
Federal Reserve's Beige book Conditions across the 12 districts.
Fedspeak Kaplan in a Q&A at the Council of Foreign Relations.
Can Q1 GDP, % annls'd 2.6% 3.7% 3.7% Economic conditions have been firming.

Thu 1
Aus Apr retail sales 0.1% 0.3% 0.3% Weather impact in March to unwind. Underlying conditions soft.
Q1 private capex -2.1% 0.5% 0.5% Small rise after run of falls (incl. equipment +1.2%). See textbox.
2017-18 capex plans, AUDbn 80.6 Est 1, -4% vs yr ago, incl. mining -20%. See textbox.
May CoreLogic home value index 0.1% 1.0% To show first monthly fall since Nov 2015, led by Syd & Melb.
May AiG manufacturing PMI 59.2 Index elevated, +ves: low AUD, construction, agri, mining.
NZ May QV house prices, %yr 11.1% House prices have flattened out in the last six months.
Q1 terms of trade index 5.7% 4.0% 4.0% Continued rebound in dairy export prices.
Jpn May Nikkei manufacturing PMI final 52.0 Flash showed expansion pace slowing, uptrend flattening.
Chn May Caixin China PMI 50.3 50.2 Lags the official measure, but still helpful as cross check.
Eur May Markit manufacturing PMI final 57.0 57.0 Conditions have been very strong of late....
Ger May Markit manufacturing PMI final 59.4 59.4 ... despite EUR's rise.
UK May Markit manufacturing PMI 57.3 56.1 Lower pound continues to boost manufacturing and exporting.
May Markit construction PMI 53.1 52.7 Continues to point towards moderate building activity.
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.
8
 Westpac weekly

Key data &event risk for the week ahead

Market Westpac
Last median forecast Risk/Comment
Thu 1
US May ADP employment change 177k 180k Occasionally useful as a lead for payrolls.
Initial jobless claims 234k Very low.
May Markit manufacturing PMI final 52.5 Softer than ISM measure in recent months.
May domestic auto sales (millions) 13.1 13.2 Car loans a burgeoning risk to consumer outlook?
May ISM manufacturing 54.8 54.6 Strength arguably represents sentiment as much as activity.
Apr construction spending -0.2% 0.5% Structures had a good Q1; some offset likely in Q2.
Fedspeak Williams speaks on global economic issues at Bank of Korea conf.

Fri 2
US Apr trade balance US$bn -43.7 -44.0 Inventory data disappointed in Apr; indicator for trade?
May non-farm payrolls 211k 176k 170k Strong employment gains to continue....
May unemployment rate 4.4% 4.4% 4.4% ... on constant participation, unemployment rate unchanged.
Fedspeak Powell talks on the normalisation of monetary policy.

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.
9
 Westpac weekly

Economic &financial forecasts

Interest rate forecasts

Latest (26 May) Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18
Cash 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
90 Day Bill 1.73 1.80 1.80 1.80 1.80 1.80 1.80 1.80
3 Year Swap 1.86 2.20 2.35 2.50 2.40 2.30 2.50 2.80
10 Year Bond 2.41 2.75 2.95 3.05 3.15 3.25 3.40 3.40
10 Year Spread to US (bps) 17 20 20 20 15 15 10 10

International
Fed Funds 0.875 1.125 1.125 1.375 1.625 1.625 1.875 1.875

US 10 Year Bond 2.24 2.55 2.75 2.85 3.00 3.10 3.30 3.30

US Fed balance sheet USDtrn 4.52 4.52 4.52 4.52 4.46 4.40 4.31 4.22
ECB Deposit Rate -0.40 0.40 0.40 0.40 0.30 0.30 0.20 0.20

New Zealand

Cash 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75

90 day bill 1.97 2.00 2.00 2.00 2.00 2.00 2.00 2.15
2 year swap 2.22 2.50 2.50 2.60 2.70 2.80 2.90 2.90
10 Year Bond 2.80 3.30 3.50 3.60 3.70 3.80 3.90 3.95
10 Year spread to US 56 75 75 75 70 70 60 65

Exchange rate forecasts

Latest (26 May) Jun 17 Sep 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18
AUD/USD 0.7425 0.73 0.73 0.73 0.72 0.69 0.68 0.65
NZD/USD 0.7013 0.68 0.68 0.68 0.67 0.66 0.65 0.63
USD/JPY 111.59 114 115 116 119 120 122 122
EUR/USD 1.1204 1.08 1.07 1.05 1.03 1.02 1.00 1.00
AUD/NZD 1.0588 1.07 1.07 1.07 1.07 1.05 1.05 1.03

Australian economic growth forecasts

2016 2017 Calendar years
Q2 Q3 Q4 Q1f Q2f Q3f Q4f 2015 2016 2017f 2018f
GDP % qtr / yr avg 0.8 0.5 1.1 0.6 0.8 0.8 0.7 2.4 2.5 2.5 2.7

% yr 3.1 1.9 2.4 1.9 2.0 3.3 3.0 2.5 2.4 3.0 2.5
Unemployment rate % 5.7 5.7 5.7 5.8 5.6 5.6 5.7 5.8 5.7 5.7 6.2
CPI % qtr 0.4 0.7 0.5 0.5 0.5 0.8 0.3
% yr 1.0 1.3 1.5 2.1 2.2 2.3 2.1 1.7 1.5 2.1 2.2

CPI underlying % qtr 0.5 0.4 0.4 0.4 0.5 0.3 0.4
% yr 1.6 1.5 1.6 1.8 1.8 1.7 1.7 2.0 1.5 1.7 2.3

New Zealand economic growth forecasts

2016 2017 Calendar years
Q2 Q3 Q4 Q1f Q2f Q3f Q4f 2015 2016 2017f 2018f
GDP % qtr 0.8 0.8 0.4 0.8 0.8 0.9 0.7
Annual avg change 2.7 2.9 3.1 3.0 2.9 2.8 2.9 2.5 3.1 2.9 3.1

Unemployment rate % 5.0 4.9 5.2 4.9 4.9 4.6 4.4 4.9 5.2 4.4 4.4

CPI % qtr 0.4 0.3 0.4 1.0 0.2 0.4 0.2

Annual change 0.4 0.4 1.3 2.2 1.9 2.0 1.8 0.1 1.3 1.8 1.9

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.
10
 Disclaimer

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