Australia &

New Zealand
weekly.

Week beginning 3 September 2018

„„ Q2 GDP, preview: overall activity conditions robust, but wages remain weak.

„„ RBA: policy decision, Governor Lowe speaks at RBA Board Dinner.

„„ Australia: Q2 GDP and Q2 partials, current account, trade balance, retail sales,
CoreLogic home prices, housing finance.

„„ NZ: terms of trade, building work.

„„ China: Caixin PMI's, foreign reserves.

„„ Europe: GDP 3rd estimate.

„„ US: nonfarm payrolls, NY Fed President Williams speaks, ISM's, Labor Day.

„„ Central banks: BoC and BNM policy decisions.

„„ Key economic & financial forecasts.

Information contained in this report current as at 31 August 2018.

Westpac Institutional Bank


Q2 GDP preview: overall activity conditions
robust, but wages remain weak.
Reserve Bank in focus
The Reserve Bank Board meets this Tuesday and is certain
to leave rates on hold at 1.50%. Rates have been unchanged
since a 25bps cut in August 2016, with the most recent hike in
November 2010.
The decision statement by RBA Governor Lowe is likely to be
little changed from that in August. The key line in the closing
paragraph will be repeated, namely: “Further progress in
reducing unemployment and having inflation return to target is
expected, although this progress is likely to be gradual”.
As we have highlighted previously, despite this stability in the
RBA cash rate, lending conditions in the housing market have
tightened. The authorities have actively used macro-prudential
measures, largely focused on investors, while short-term rates
have moved higher, evidence of increased funding costs. New
lending for housing is declining and established property
prices are easing, modestly to date, following strong gains -
developments which will likely weigh on the economic outlook.
Westpac Economics continues to expect the RBA cash rate to
remain on hold throughout 2018 and 2019, as well as in 2020,
as set out in the recent update by Chief Economist Bill Evans.
On Tuesday evening, the Governor will speak at the dinner
of the Reserve Bank Board. His remarks are likely to be both
reflective and broad ranging as they were at corresponding
events in other capital cities. Dr Lowe is of the view that: “the
next move in the cash rate would more likely be an increase
than a decrease”, a line he may well repeat. The Governor will
reflect on key challenges and uncertainties, notably, around the
consumer, weak wages, high household debt and housing.
This is also an opportunity for the Governor to emphasise
current positives: economic growth over the past year was
above trend, at 3.1%; inflation is in the target band, at 2.1%; and
unemployment has declined to a six year low, 5.3%.
The most significant achievement of the Australian economy
over recent years is the successful rotation through the growth
drivers, from the mining investment boom, to a strong upswing
in home building, and now to strength in construction activity
across the rest of the economy. We are investing in our cities
to meet the needs of a rapidly growing population, particularly
in Melbourne and Sydney. Notably, we are investing in: much
needed transport infrastructure; energy, with a focus on
renewables; and offices (with vacancy rates at a decade low),
as well as hotels and student accommodation, in response to
strong demand from international visitors and foreign students.
We would emphasise the divergence in output trends from
that of incomes. National income growth has generally
been sub-par since late 2011, when the terms of trade and
commodity prices for some of our exports were at their peak,
at the height of the mining boom. Importantly, wages growth is
weak, constraining consumers, and is likely to remain so given
arguably still considerable slack in the labour market.
Q2 National Accounts
On Wednesday, the National Accounts will provide an estimate
of economic activity for the period April to June. For the June
quarter, we expect output growth of 0.6%, trimming annual
growth to 2.7%, a trend pace.
By way of context, the March quarter was a strong one, with
a 1.0% quarter and annual growth of 3.1%. The quarterly result
included a sizeable positive contribution from inventories and
net exports, with a combined impact of 0.5ppts. A repeat
of this appears unlikely, which suggests that overall output
growth in Q2 will fall short of the 1% mark. The annual result
to March of 3.1% benefited from a hiring burst in 2017. Jobs
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
growth was an unsustainably brisk 3.4% in 2017, in part a
catch-up after a hiring pause around the July 2016 Federal
election. In 2018, jobs growth has throttled back, to be running
at a still robust 1.7% annualised pace for the year to date.
The arithmetic of Q1 GDP was: domestic demand, 0.6%;
inventories, +0.2ppts; net exports, +0.3ppts; and statistical
discrepancy, -0.1ppt (i.e. the expenditure estimate of GDP was
a little stronger than the income and production measures).
For our Q2 GDP forecast of 0.6%, the arithmetic is: domestic
demand, 0.6%; inventories, -0.2ppts; and net exports, +0.1ppt.
Domestic demand is likely to show gains across the consumer,
home building and public demand, but be constrained by flat
business investment – as discussed in more detail below.
Labour market developments were mixed in the June quarter,
adding to uncertainty around wage incomes and GDP. Hours
worked increased by a brisk 1.0%, to be 2.8% above the level
of a year ago, while employment (on a mid-month of quarter
basis) grew by only 0.2%, to be 2.7% higher over the year.
On the consumer, accounting for 57% of domestic demand,
the national accounts provide us with a detailed update
on spending, saving and incomes. As noted above, a key
ongoing headwind is weakness in wages growth, in part due
to compositional shifts in the labour market, at a time of high
debt levels. More recently, property prices have eased and jobs
growth has moderated, while the household savings rate has
declined to relatively low levels. In this environment, consumer
spending lifting to an above trend pace appears unlikely.
On national income, the June quarter was a less favourable
one, with the terms of trade declining by an estimated 1.3%
in the period, albeit still leaving it some 2% above the level
of a year ago. For nominal GDP, we expect a Q2 outcome of
0.8%qtr, 4.6%yr, a sub-par annual pace.
The Business Indicators survey, on Monday, will provide some
partial information on official estimates of incomes for the
quarter, including an update on wage incomes and profits, key
inputs into our GDP(I) view. The mixed labour market signals
for the quarter add to uncertainty around wage incomes for
the period.
Q2 GDP, detail
Household consumption (0.7%qtr, 2.7%yr): Consumer spending
remains choppy, with a modest start to 2018, +0.3% in Q1,
following a strong end to 2017, +1.0% in Q4. Annual growth is
2.9% currently, which is a little below par. Spending on a per
capita basis is less impressive and is arguably lacklustre. For
the June quarter, we expect a solid 0.7% increase, centred on a
burst of retail spending, +1.2%. Car sales appear to have eased
in the quarter and spending on services has been mixed of late.
Dwelling investment (+1.6%qtr): Home building activity added
to growth over the first half of 2018, in contrast to the 5%
decline for 2017. This profile for activity is consistent with that
of dwelling approvals. Going forward, approvals are expected
to moderate from current record highs, to bring them more
into line with underlying requirements.
New business investment (flat qtr, 2.7%yr): Investment turned
the corner in 2017, after four years of decline, with a diminished
drag from mining and an uptrend in non-mining investment.
Over the first half of 2018, investment consolidated, with a
flat Q1 result and a likely flat Q2 result. Mining capex fell as
work on the remaining gas projects under construction is
now largely complete. Non-residential building rose, so too
spending on computer software and systems, while equipment
spending dipped.
2
 Westpac weekly

Public spending (1.0%qtr, 5%yr): Government spending, in Australian economic conditions

the form of public demand, is expanding at a brisk 5% annual
pace. Public demand directly added 1.3ppts to activity over the
% ann % ann
past year, with additional significant positive spill-over effects. 9 12
Sources: ABS, Westpac Economics Public demand
This dynamic is key to what are currently relatively robust 10
conditions for the economy as a whole. We expect a further 1% Jun 2018 fc/s Private demand Jun 2018 fc/s

increase in public demand in the June quarter. 6 8

6
Public investment is expected to increase by around 2.5%qtr,
9.4%yr in Q2, with a focus on transport infrastructure, as well 3 4
as investment across social infrastructure. Public consumption 2
(including spending on health and education) is also increasing
at a well above trend pace, with a Q2 forecast of 0.6%qtr, 0 0
4.2%yr. Domestic demand
-2
GDP
Net exports (+0.1ppt, -0.6ppts yr): Net exports are expected -3 -4
to be a positive, albeit making a smaller contribution than Mar-98 Mar-06 Mar-14 Mar-98 Mar-06 Mar-14
in Q1, at a forecast 0.1ppt. Export volumes advanced by an
estimated 0.6%, including gains across services, rural goods
and resources, partially offset by a dip in manufactured items.
By contrast, exports rebounded in Q1, after a weak end to
2017. Imports were broadly flat in Q2, we estimate, with weaker
services (associated with rising prices) offsetting a rise in
goods.

Private non–farm inventories (+0.3%, -0.2ppts contribution):

For the June quarter, we anticipate a two-fold correction: (1)
for wholesale and retail, a draw-down of inventories after the
sharp run-up; and (2) across the rest of the economy, a return
to a more typical inventory increase in response to growing
demand. On balance, we expect inventories to increase by
0.3%, implying a slight drag on growth in the quarter, of
around -0.1ppt (potentially rounding to -0.2ppts).

Outlook
Turning the focus to the outlook, in particular to 2019, the RBA
and Westpac views diverge.

The RBA is expecting growth of 3.25%, including consumer

spending at around 3%, an environment which would likely see
the unemployment rate move lower.

Westpac Economics is instead forecasting GDP growth to

slip to a below trend pace of 2.5%. Current challenges and
uncertainties are likely to persist in our view, notably weak
wages growth, with consumer spending expected to slow to
2.5%.

Home building activity, rising over the first half of 2018, is

likely to moderate during 2019, down from historic highs.
At the same time, house prices are likely to remain under
pressure given tighter lending standards. Uncertainty ahead
of the upcoming Federal election, due by May 2019, is another
risk. In addition, the global backdrop is expected to be less
favourable, as world growth moderates and with commodity
prices forecast to ease from current elevated levels.

Andrew Hanlan, Senior Economist

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.
3
 Westpac weekly

The week that was

This week, investment has been in the spotlight for Australia headwind for the sector through this year and next, particularly
ahead of next Wednesday’s June quarter GDP report. in Sydney and Melbourne.

Following on from last week’s construction work done release
(which focused on non-residential construction), the release
of this week was the CAPEX survey. Importantly, the CAPEX
survey not only provides guidance on equipment investment
for the current quarter ahead of GDP but also investment
intentions for the mining, manufacturing and services industry
for the 2018/19 financial year – across both equipment and
construction activity.
On the current quarter, this release was disappointing. While
a 1.0% rise in equipment spending was expected, a 0.9% fall
was instead reported. For June quarter GDP, this result offset
upside risks we had seen to our 0.6% GDP forecast for the
June quarter (see our Australia & NZ Weekly later today for
a full preview). Taking a longer-term view however, it should
be emphasised that the disappointing June quarter outcome
follows strength over the past 12 months. The trend therefore
remains positive. By industry, in the June quarter, total capital
expenditure (for equipment and construction) fell 7% for
mining; pulled back 0.9% in the service sector – after 18 months
of gains; but rose 2.8% in manufacturing.
Looking ahead, estimate 3 for 2018/19 CAPEX expectations was
a broadly neutral outcome, being consistent with a 1% decline
on the comparable estimate for the 2017/18 financial year.
That said, the industry detail was on the soft side, with the all-
important service sector expectation now flat (previously +5%)
and the projected gain for manufacturing having halved, from
+6% three months ago to +3% currently. Mining was a partial
offset however, now –4% versus –6% three months ago. If we
are to see above-trend growth in Australia, we must see an
improvement in non-mining business investment. The problem
is that this is will prove difficult if growth in consumer spending
remains subdued.
The other key outcome for Australia this week was dwelling
approvals. July was another volatile read, with total approvals
down 5% as high-rise approvals plunged 20%. Volatility on this
scale is typical of approvals, making short-term assessments
of momentum difficult. As such, while the high-rise outcome
is in keeping with our expectation of a further move lower
in construction activity in this sub-sector, it will take time to
confirm the trend. Lending standards have been materially
tightened by regulators, and this looks set to remain a material
Turning then to the US, it has been a quiet week for data, with
July personal income and spending the highlight. In that report,
we saw no real surprises, as income and spending remained
robust in the first month of the September quarter, rising 0.3%
and 0.4% respectively. For spending however, it is important
to highlight two things: higher interest rates are weighing on
durables spending; and secondly, while robust, the pace of
spending growth in the second half of 2018 will be materially
below that of the June quarter, which benefitted from delayed
activity from a weather-affected March quarter.
Taking a longer-term view, we expect tighter financial
conditions to progressively weigh on the US economy over the
coming year. FOMC Chair Powell highlighted at the Jackson
Hole Symposium last weekend that the Committee are intent
on at least taking policy back to a neutral setting, albeit while
being mindful not to overreact to or pre-empt inflation. If we
are correct in our belief that neutral equates to a fed funds
rate of around 2.5%, then the three hikes to March 2019 we are
forecasting will take policy there (a mid-point of 2.625%), and
that of June 2019 beyond that benchmark. Along with the end
of fiscal stimulus in September 2019, financial conditions will
slow US growth back to trend (1.7%) from nearer 3% to March
2019. Given trade tensions, it will also be important to continue
assessing the US’ investment pulse as we move into and then
through 2019.
On trade tensions, preliminary agreement between the US and
Mexico to replace or amend NAFTA (depending on if Canada
joins negotiations or not) gave support to financial markets this
week. However, overnight there has been reports that President
Trump will push ahead with the next wave of tariffs on China
as early as next week after the consultation process ends. This
round of tariffs (10% to 25% on $200bn of imports from China)
would dwarf prior actions, and also see China retaliate with
new tariffs on $60bn of imports from the US. We continue
to emphasise that the initial trade shock of these tariffs on
both nations is unlikely to be material. Our focus is instead on
the potential impact on investment from 2019 on. The rise of
protectionism has the potential to hold businesses back from
investing in new capacity not only in the US and China, but also
across the world given we live in the era of globally integrated
production.

Chart of the week: capex plans Capex plans, by industry: Estimate 3

2018/19 capex plans Estimate 3 printed at $102bn, which is -1% vs $bn $bn
Est 3 a year ago. The $102bn figure is a relatively neutral update 180 180
Sources: ABS,
Mining Services Total
(in terms of the headline figure), broadly in line with Estimate 2, 160
Westpac Economics -10%
160
-7%
$88bn. Capex also includes manufacturing,
Est 3 2018/19 at $8.7bn
140 Mining capex: 140
returning to pre-boom levels
-23%
Using calculations based on average realisation ratios (RRs), we 120 -9%
120
-13%
estimated that Est 3 implies capex spending in 2018/19 will be 100 2018/19 Est 3
-2%
-1% 100
-17%
2.7% lower than in 2017/18. This is in line with the -2.3% implied
80 80
by Est 2, hence our interpretation of a relatively neutral headline.
By industry, we estimate: mining -12% (vs -19% 3 months ago); 60 -36%
60
-25%
services +1% (vs +6%) and manufacturing -1% (vs +0.5%). 40 -19% 40
-4%
20 20
In terms of key themes, mining investment will move lower in
0 0
2018/19, while non-mining investment is in an uptrend. 2007 2011 2015 2019 2007 2011 2015 2019 2007 2011 2015 2019

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.
4
 Westpac weekly

New Zealand: week ahead & data wrap

Elephant in the room changes will not be as substantial as the 2000 legislation, which
largely remains in place today). The planned changes include
Business confidence has fallen sharply in recent months, despite increasing unions’ access to workplaces, “fair pay” agreements
an economy that appears to be mixed rather than catastrophic. in some industries, and multi-employer collective agreements.
We suspect that some of this reflects firms’ concerns about Not surprisingly, these changes are not proving popular with
the planned changes to industrial relations policies, and employers or business organisations.
the Government has started to move towards addressing
those concerns. The speech by Prime Minister Ardern this week came closer to
acknowledging this issue as a source of the negativity expressed
The ANZ Business Outlook survey for August saw general in business confidence surveys. Part of the problem is that the
business sentiment fall further to a net -50, setting a fresh ten- ongoing work to develop these policies has left something of an
year low. Firms’ own-activity expectations, which correspond information vacuum as to how they will work.
more closely with GDP growth, were unchanged for the
month. But they remain at their lowest level since 2009, In an attempt to soften these concerns, the Prime Minister has
when the economy was just starting to pull out of the Global committed to no more than one or two industry-level fair pay
Financial Crisis. agreements within the Government’s current three-year term. She
also reaffirmed that the legislation will not allow for strike action
There is an open question as to how to interpret business by workers as part of fair-pay negotiations.
confidence surveys. On the one hand, they can provide timely
warnings of a genuine downturn (or an upturn) in the economy. That still leaves unresolved the framework for these agreements,
On the other hand, respondents are not obliged to give an including the extent of political involvement. In Australia this is
unbiased assessment. As we’ve noted before, the ANZ survey handled by the Fair Work Commission (FWC), an independent
is particular tends to be biased downwards under Labour-led tribunal that handles a range of industrial relations functions.
governments, after accounting for economic conditions at the The FWC determines industry ‘awards’, which in most cases are
time. However, even if opinion surveys are politically slanted, there effectively a hierarchy of minimum wage rates by job level. It also
is still cause for concern if firms act on those views by cutting sets the national minimum wage each year – a decision that is
back on investment and hiring. made by the central government in New Zealand (and has already
been more or less decided for the next three years, as part of the
Economic growth has clearly slowed from its 2016 peak, as some Government’s coalition agreement).
of the previous drivers of growth – population growth, earthquake
reconstruction, and rising house values – have faded. But the Despite these lingering uncertainties, it will be interesting to
weight of evidence points to a shift to more modest growth see if the Government’s willingness to address concerns about
rather than the recessionary levels that the business confidence labour relations will lead to an improvement in future confidence
survey implies. surveys. In the meantime, we’ll be watching the near-term data
closely for any signs that confidence is having a real impact on
Indeed, the next GDP report is likely to be quite upbeat – we activity. Recent indicators of retail spending, job advertisements
expect a 1% rise for the June quarter. Some of that simply reflects and capital imports have remained positive, and building consents
the volatility of quarterly data, but there have been some genuine show a rapidly growing pipeline of homebuilding work in
signs of improvement as well. And looking a bit further ahead, Auckland, where a housing shortage has been most apparent.
we expect increased government spending and transfers to give Business confidence
the economy a temporary fillip over the coming year. We are
forecasting 3.1% growth over 2019, up from 2.9% in 2018.
net % net %
100 100
General business sentiment
So what is driving this steep fall in business confidence? We see 80 Own-activity outlook 80
parallels with mid-2000, dubbed the “winter of discontent”. Then,
60 60
a newly minted Labour-led Government was attempting to pass
the Employment Relations Act, which among other things, placed 40 40
a greater emphasis on collective bargaining between employers 20 20
and unions. Business confidence was little changed in the first few 0 0
months of the new Government, but then plunged in May. The
-20 -20
legislation was passed in August, and by November confidence
had recovered to its previous level. -40 -40
-60 -60
The current Labour-led Government is also aiming to shift -80
Source: ANZ
-80
the bargaining power further towards workers (though the 1991 1994 1997 2000 2003 2006 2009 2012 2015 2018

Round–up of local data released over the last week

Date Release Previous Actual Mkt f/c
Thu 30 Jul building permits –8.2% –10.3% –
Aug ANZBO business confidence –44.9 –50.3 –

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.
5
 Westpac weekly

Data previews
Aus Aug CoreLogic home value index Australian dwelling prices
Sep 3, Last: –0.6%, WBC f/c: –0.4%
%ann %mth
18 4.5
• Australia's housing market continues to correct. The mthly (rhs) annual (lhs)
CoreLogic home value index, covering the eight major 15
3.5
capital cities, fell 0.6% in July to be down 2.4%yr and 2.8% 12
from its peak in September last year. 2.5
9
• The correction continues to be concentrated in the
previously strong Sydney and Melbourne markets with 6 1.5
Perth's longer running period of price declines also 3
continuing. All major capital cities except Brisbane recorded 0.5
price falls in July with notable weakness in Melbourne 0
-0.5
(–0.9%mth) and Perth (–0.8%mth). -3
Sources: CoreLogic, Westpac Economics
• The daily index suggests slippage continued in August, but -6 -1.5
at a milder pace, prices nationally down about 0.4% taking Jul-10 Nov-11 Mar-13 Jul-14 Nov-15 Mar-17 Jul-18
the annual pace of decline to –3%yr.

Aus Jul retail trade Monthly retail sales

Sep 3, Last: 0.4%, WBC f/c: 0.3%
Mkt f/c: 0.3%, Range: -0.1% to 0.6% $bn % chg
3.0
mthly % chg (rhs)
26
• Retail sales posted a third consecutive 0.4% gain in June, level (lhs)
2.5
fiscal
the run of reasonably solid gains following a difficult
24
payments 2.0
March quarter that saw nominal sales up just 0.6%qtr. $1.9bn Cyclone
Debbie
The store-type detail showed reasonably solid gains for 1.5
most categories in the June month with some give back 22
1.0
for department stores more than offset by gains for food;
household goods and clothing retail. 20 0.5

• Indicators were uneven in July. Consumer sentiment posted 0.0

18
a surprise rally to a 5yr high boosted by the government's mth%ch (rhs) -0.5
tax package passing into legislation. Private business Source: ABS; Westpac Economics
16 -1.0
surveys were mixed, retail responses to the NAB survey
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18
suggesting conditions dipped back into negative in the
month but the AIG PSI suggesting some improvement. On
balance, we expect July to show a 0.3% gain. Note that
price discounting pressures look to have eased a touch and
may ease further with GST changes on July 1 that mean low
value imported goods will now be taxed.

Aus Q2 company profits Company profits, Q2: up, but more modest gain
Sep 3, Last: 3.4%, WBC f/c: 1.0%
% qtr % ann
Mkt f/c: 1.3%, Range: -1.0% to 3.0% 70
Mining profits Non-mining profits 24
• Companies have been enjoying rising profits as the Commodity prices Sales, non-mining
Australian economy expands at an above trend pace, 50
18
thereby encouraging firms to boost investment.
Profits: 6%yr LR avg
30 12
• In the March quarter, profits jumped by 5.9% to be 48%
above the level of two years earlier. Mining profits surged 6
122% over the two years, on higher commodity prices, and 10
non-mining profits climbed by 25%, the strongest two year 0
performance since the GFC. -10
-6
• The uptrend in profits likely extended into the June quarter, Sources: ABS, RBA, Westpac Economics
increasing by a forecast 1%, including a 0.5% rise in mining -30 -12
profits and a 1.2% gain in non-mining profits. That would see Mar-10 Mar-16 Mar-10 Mar-16
total profits 10% above the level of a year ago.

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
Aus Q2 inventories Inventories: a potential negative in Q2
Sep 3, Last: 0.7%, WBC f/c: 0.3% (-0.1ppt)
$bn ppts
Mkt f/c: 0.2%, Range: -0.2% to 0.9% 165 3
* private non-farm
Contribution to qtrly GDP (rhs)
• Over the past year, inventories increased by a relatively
Level of inventories * (lhs) Q2 f/c: +0.3%
modest 0.6% with a choppy quarterly profile. 2

• The March quarter outcome was an oversized 0.7% increase 155

1
in total inventories, inflated by a near $1.4bn run-up in
inventories for wholesale and retail. Across other sectors,
inventories had a soft result, down 0.3% to still be 2.6% 0
above the level of a year ago. 145

-1
• For the June quarter, we anticipate a two-fold correction: 21 f/c: -0.2ppts
(1) for wholesale and retail, a draw-down of inventories after Sources: ABS (Business Indicators survey), Westpac Economics
the sharp run-up; and (2) across the rest of the economy, a 135 -2
return to a more typical inventory increase in response to Mar-12 Mar-14 Mar-16 Mar-18
growing demand.
• On balance, we expect inventories to increase by 0.3%,
implying a slight drag on growth in the quarter, of around
-0.1ppt (potentially rounding to -0.2ppts).

Aus Q2 current account, AUDbn Current account: f/c –$11.5bn in Q2

Sep 4, Last: -10.5, WBC f/c: -11.5
Mkt f/c: -11.0, Range: -13.0 to -9.0 AUDbn AUDbn
12 Sources: ABS, Westpac Economics
12
• Australia's current account deficit fluctuated over the past 8 8
year, buffeted by the impact of commodity price volatility 4 4
on export earnings. The quarterly deficit widened from 0 0
$11.7bn last September to $14.7bn in December, reversing to
$10.5bn in March. -4 -4
-8 -8
• For the June quarter, the deficit is expected to be $11.5bn.
-12 -12
• A $2.9bn trade surplus was recorded in Q2, down from -16
Trade balance
-16
$4.1bn in Q1 (subsequently revised lower to $3.35bn). Export Net income position
earnings rose by 2%, eclipsed by a 2½% increase in the -20 -20
Current account f/cs
import bill, boosted by higher energy prices. Notably, the -24 -24
terms of trade declined by an estimated 1¼%. Jun-98 Jun-03 Jun-08 Jun-13 Jun-18

• The net income deficit is expected to consolidate at

$14.4bn, after widening by $1bn to $14.6bn in Q1. Over the
past couple of years, the income deficit has increased on
rising returns to foreign investors in the mining sector.

Aus Q2 net exports, ppts cont'n Net exports: f/c +0.1ppt, exports advance
Sep 4, Last: +0.3, WBC f/c: 0.1
AUDbn ppts
Mkt f/c: 0.1, Range: 0.0 to 0.3
Net exports GDP growth contribution (rhs) 5
• Net exports have been volatile of late largely because of a 100 Export volumes (lhs)
4
choppy export profile, in part reflecting supply disruptions Import volumes (lhs)
to shipments (notably for coal). 3
80
• In the March quarter, net exports added 0.35ppts to activity 2
as export volumes rebounded, up 2.4%, following a soft end 60 1
to 2017, down 1.5% in Q4. 0
• For the June quarter, net exports are expected to be a 40 -1
positive, albeit making a smaller contribution than in Q1, at a Imports: f/c flat
Exports: f/c +0.6% -2
forecast 0.1ppt. Sources: ABS, Westpac Economics
Q2(f): +0.1ppt
20 -3
• Export volumes advanced by an estimated 0.6%, including Jun-98 Jun-02 Jun-06 Jun-10 Jun-14 Jun-18(f)
gains across services, rural goods and resources, partially
offset by a dip in manufactured items.
• Imports were broadly flat, we estimate, with weaker services
(associated with rising prices) offsetting a rise in goods.

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

Data previews
Aus Q2 public demand Public demand: well above trend growth
Sep 4, Last: 1.5%, WBC f/c: 1.0%
% ann % ann
10 10
• The public sector - directly accounting for almost a quarter Sources: ABS; Westpac Economics

of the economy - is a key growth driver, expanding at a 8 8

L-R avg:
well above trend pace in 2015, 2016 and 2017, with annual
growth at 4.8%, 5.5% and 5.0%, respectively. This brisk 6 6
momentum has extended into 2018.
4 4
• Public investment is trending sharply higher, off low levels,
2 2
with a focus on long overdue transport projects. Health
spending (included in 'consumption') is also moving higher. 0 0
• Total public demand grew by 1.5%qtr, 5.5%yr in Q1, with -2
Public consumption
-2
investment 7.4% higher over the year and consumption 5.1% Total public demand
up on a year earlier. -4 -4
Mar-02 Mar-06 Mar-10 Mar-14 Mar-18
• For the June quarter, we anticipate a robust 1.0% rise
in public demand, including a further 2.5% increase in
investment spending.

Aus RBA policy decision Market moved to Westpac RBA forecast

Sep 4, Last: 1.50%, WBC f/c: 1.50% %
RBA cash rate
Mkt f/c: 1.50%, Range: 1.50% to 1.50% 2.00 Sources: Westpac Economics
Market Westpac *market prices implied as at 30/08/18
• The RBA will hold rates unchanged at their September
meeting, as they have since they last cut rates in August
2016. The Governor's decision statement will repeat the 1.75
line that: "further progress in reducing unemployment and
having inflation return to target is expected, although this 1.59
progress is likely to be gradual".
1.51 1.50 1.50
1.50
• Economic growth over the past year was above trend,
at 3.1%; inflation is in the target band, at 2.1%; and
unemployment has declined to a six year low, 5.3%.
1.25
• However, uncertainties and challenges remain, notably Jun 19 Dec 19
around the consumer, weak wages growth, high household
debt levels and housing, as prices ease a little following
strong gains and as lending conditions tighten.

• We expect the RBA cash rate to remain unchanged at 1.50%

throughout 2018 and 2019, and now as well during 2020.

Aus Q2 GDP Australian economic conditions

Sep 5, Last: 1.1%qtr, 3.1%yr; WBC f/c: 0.6%qtr, 2.7%yr
% ann % ann
Mkt f/c: 0.7%, Range: 0.5% to 1.0% 9 12
Sources: ABS, Westpac Economics Public demand
• The economy expanded by an above trend 3.1% in the year Jun 2018 fc/s Private demand Jun 2018 fc/s 10
to March 2018, with domestic demand increasing by 3.2% 6 8
and net exports subtracting 0.2ppts from activity.
6
• The March quarter was a strong outcome, with output up by
3 4
1.0%. Half of this growth was accounted for by inventories
(0.2ppts) and net exports (0.3ppts). 2

• For the June quarter, we expect GDP of 0.6%qtr, 2.7%yr. 0 0

Domestic demand
• The arithmetic is: domestic demand, 0.6%; inventories, -2
GDP
-0.2ppts and net exports, +0.1ppt. -3 -4
Mar-98 Mar-06 Mar-14 Mar-98 Mar-06 Mar-14
• Consumer spending, f/c 0.7%; home building activity, f/c
1.6%; and brisk public demand, f/c 1.0%qtr, 5.0%yr; all likely
advanced in the period. Business investment is expected to
be flat, dented by a decline in mining capex, but is still up
on levels of a year ago.
• See page 2 for further details.

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

Data previews
Aus Jul trade balance, AUDbn Australia’s trade balance
Sep 6, Last: 1.9, WBC f/c: 1.5
Mkt f/c: 1.5, Range: 0.9 to 1.9 AUDbn AUDbn
40 5
G&S trade balance (rhs) Jul f/c: +$1.5bn
4
• Australia's trade account has been in surplus each month so 35 Exports (lhs)
far in 2018. 3
Imports (lhs)
30 2
• In June, the surplus jumped by a little in excess of $1.1bn to
1
$1.9bn. Export earnings increased by 2.6%, with relatively 25
broad based gains. 0
20 -1
• For July, we expect a modest reversal, with the surplus -2
15
narrowing to a forecast $1.5bn.
-3
10
• Export earnings are expected to edge 1% lower. Weaker iron -4
ore shipments in the month outweigh increased volumes for 5
Sources: ABS, Westpac Economics
-5
coal and LNG. Jun-05 Jun-09 Jun-13 Jun-17
• The import bill is expected to be broadly unchanged. The
currency was mixed in the month (down 1.2% against the US
dollar but up 0.6% on a TWI basis), suggesting no material
impact on import prices.

Aus Jul housing finance (no.) Value of finance approvals by segment

Sep 7, Last: –1.1%, WBC f/c: –0.5%
Mkt f/c: -0.1%, Range: -1.5% to 1.0% $bn value of housing finance $bn
16 16
'upgraders', ex-refinancing*
• Australian housing finance approvals softened notably in 14 investor finance^ 14
refinancing* Upgraders
June, with the number of owner occupier loans declining 12 –4%yr 12
1.1% vs and the value of investor loans down 2.7%. The FHBs*
10 *owner occupier loans only; –13%yr 10
decline is consistent with other market indicators showing a ^includes refinancing of
material slowdown in activity through May-July. 8 investor loans 8
6 +3%yr 6
• Industry data covering the major banks suggests July was
more settled. However, other indicators tracking wider 4 +32%yr 4
mortgage activity suggest flows continued to soften in the
2 year to May 2
month. Overall we expect owner occupier finance approvals Sources: ABS, Westpac Economics
to be down 0.5%. The value of investor loans will again be 0 0
of interest given the wider market has continued to slow May-98 May-02 May-06 May-10 May-14 May-18
materially through July-Aug.

NZ Q2 terms of trade NZ terms of trade

Sep 3, Last: -1.9%, WBC f/c: +1.0%, Mkt f/c: +1.0% index
index
1600 1600
• We estimate that New Zealand’s terms of trade improved by Terms of trade
1% in the June quarter. This would leave the index just shy of
1400 Exports 1400
the all-time high that was reached at the end of 2017.
Imports
• Export commodity prices rose across the board in the June 1200 1200
quarter, largely reversing their falls in the March quarter.
This volatility appears to have more to do with the timing of 1000 1000
export shipments than with changes in world market prices.
800 800
• There was a further sharp rise in oil import prices over the
quarter, but prices for New Zealand’s other imports (mainly Sources: Stats NZ, Westpac
manufactured goods) are likely to have remained subdued. 600 600
1990 1994 1998 2002 2006 2010 2014 2018
• We expect the terms of trade to soften over the second half
of this year, given the recent falls in some export prices and
the still-high price of oil.

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

Data previews
NZ Q2 building work put in place NZ real building work put in place
Sep 5, Last -0.9%, Westpac f/c: +2.0%, Mkt f/c: +2.0%
$b $b
1.8 1.8
• Construction activity fell 0.9% in the March quarter. That
1.6 1.6
fall was mainly due to a 1.5% drop in non-residential
construction, which followed a solid rise in the previous 1.4 1.4
quarter. Residential building activity also fell modestly, 1.2 1.2
weighed down by the ongoing wind-back in earthquake 1.0 1.0
reconstruction in Canterbury.
0.8 0.8
• We’re expecting a 3% increase in residential building activity 0.6 0.6
Residential
in June, along with a modest 0.2% increase in the more 0.4 0.4
volatile non-residential category. Underlying this are signs Non-residential
0.2 0.2
of a reacceleration in Auckland, with regulatory changes Sources: Stats NZ, Westpac
supporting a rise in medium-density home building. 0.0 0.0
1990 1994 1998 2002 2006 2010 2014 2018
• Construction activity is expected to remain elevated for
an extended period. However, factors such as stretched
capacity, rising costs, and difficulties accessing finance are
providing a brake on how quickly building activity can ramp
up to meet demand.

US Aug employment report US employment continues to remove slack

Sep 7, last 157k, WBC 185k
% %
18 18
• To date, employment growth has run well ahead of Unemploment rate
population growth in 2018, averaging 215k jobs per month 16 16
U6 measure*
against 182k in 2017. 14 *Includes marginally attached and part time
14
for economic reasons.
12 12
• Come August, we see employment growth remaining strong
at 185k. To this forecast, risks are skewed to the upside. As 10 10
we progress through the remainder of the year, owing to 8 8
where we are in the economic cycle and amid uncertainty 6 6
over trade and financial conditions, jobs growth should slow.
4 4
But the deceleration is likely to be small in scale and, at all
2 2
points, risks will remain skewed upward. Sources: BLS, Macrobond, Westpac Economics

0 0
• Strong emphasis also needs to be placed on income growth. 1994 1999 2004 2009 2014
We remain of the view that hourly earnings growth will
continue to tend towards 3.0%, but is unlikely to move 23

materially above that benchmark until mid-to-late 2019. This

will keep inflation expectations in check.

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
 Westpac weekly

Key data & event risk for the week ahead

Market Westpac
Last median forecast Risk/Comment
Mon 3
Aus Jul retail trade 0.4% 0.3% 0.3% Indicators were uneven in July.
Aug CoreLogic home value index -0.6% – -0.4% Australian housing market continues to correct.
Q2 company profits 3.4% 1.3% 1.0% Commodity prices less supportive than in Q1, see textbox.
Q2 inventories 0.7% 0.2% 0.3% A more modest inventory gain, impact -0.1ppt, see textbox.
Aug AiG PMI 52.0 – – Manufact'g expansion, boosted by construction & lower dollar.
NZ Q2 terms of trade -1.9% 1.0% 1.0% Exports prices bounced back from Q1 softness.
Jpn Aug Nikkei manufacturing PMI final 52.5 – – Steadied in Jul but trending down. Level still in expansion.
Asia Aug manufacturing PMI's – – – India, Indonesia, Thailand, Vietnam and more.
Chn Aug Caixin manufacturing PMI 50.8 50.7 – To follow release of official measures last Friday...
Aug Caixin services PMI 52.8 52.5 – ... continue to tell broadly the same story of robust g'th.
Eur Aug Markit manufacturing PMI final 54.6 – – PMI's across Europe look to be settling at a still robust...
UK Aug Markit manufacturing PMI 54.0 – – While still firm, momentum has cooled.
US Fedspeak – – – Evans speaks on policy panel in Argentina.
Labor day – – – Markets closed.

Tue 4
Aus Q2 current account, AUDbn -10.5 -11.0 -11.5 Deficit widens on smaller trade surplus as terms of trade dips.
Q2 net exports, ppts cont'n 0.3 0.1 0.1 Exports rebounded in Q1 and advanced further in Q2.
Q2 public demand 1.5% – 1.0% Well above trend growth, health & infrastructure boom.
RBA policy announcement 1.50% 1.50% 1.50% On hold. RBA expects gradual progress in meeting targets.
RBA Governor Lowe speaks – – – Remarks at RBA Board Dinner, Perth 7:30pm AEST
US Aug Markit manufacturing PMI final 54.5 – – Continues to point to above-trend growth.
Jul construction spending -1.1% 0.5% – A partial rebound expected.
Aug ISM manufacturing 58.1 57.6 – Continues to point to above-trend growth.
Fedspeak – – – Evans discusses policy normalization.

Wed 5
Aus Q2 GDP 1.0% 0.7% 0.6% Inventories & net exports less supportive than in Q1,
Q2 GDP, %yr 3.1% 2.8% 2.7% consumer spend, home building & public demand +ve in Q2.
Aug AiG PSI 53.6 – – Strength centred on business service segments.
NZ GlobalDairyTrade auction -3.6% – – Fats prices have been particularly weak in recent auctions.
Q2 building work put in place -0.9% 2.0% 2.0% Signs of re-acceleration of homebuilding in Auckland.
Myr BNM policy decision 3.25% 3.25% – New Governor maintaining on hold stance.
US Jul trade balance US$bn -46.3 -47.5 – Will the stronger USD weigh as 2018 progresses?
Fedspeak – – – Williams, Kashkari and Bostic speak at separate events.
Can Bank of Canada rate decision 1.5% 1.5% 1.5% Gov. Poloz's comments downplayed the rise in inflation.

Thu 6
Aus Jul trade balance, AUDbn 1.9 1.5 1.5 Surplus off highs, export earnings down 1%.
US Aug ADP employment change 219k 188k – Continued strength likely.
Initial jobless claims 213k – – Very, very low.
Aug ISM non-manufacturing 55.7 56.9 – Continues to point to above-trend growth.
Jul factory orders 0.7% -0.5% – Underlying trend solid, but not strong.

Fri 7
Aus Jul housing finance -1.1% -0.1% -0.5% Industry data for major banks suggests July more settled.
Chn Aug foreign reserves $bn 3118 – – Have been steady, likely to remain that way.
Eur Q2 GDP 3rd estimate 0.4% – – Revisions unlikely. Full detail finally available.
Ger Jul trade balance €bn 21.8 – – Euro likely to be of benefit in coming year.
US Aug non-farm payrolls 157k 191k 185k Employment growth will soften gradually in late 2018.
Aug unemployment rate 3.9% 3.9% 3.9% Unemployment rate will remain below 4.0%.
Fedspeak – – – Mester & Rosengren at Boston Fed Conf; Kaplan in Dallas.

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been
taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or
by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.
11
 Westpac weekly

Economic & financial forecasts

Interest rate forecasts

Latest (31 Aug) Dec–18 Mar–19 Jun–19 Sep–19 Dec–19 Jun–20 Dec–20
Cash 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
90 Day BBSW 1.95 2.00 1.97 1.97 1.92 1.92 1.83 1.80
3 Year Swap 2.05 2.10 2.20 2.25 2.25 2.30 2.35 2.50
10 Year Bond 2.52 3.00 3.10 3.00 3.00 2.80 2.60 2.60
10 Year Spread to US (bps) -33 –35 –40 –50 –40 –40 –40 –20
International
Fed Funds 1.875 2.375 2.625 2.875 2.875 2.875 2.875 2.875
US 10 Year Bond 2.86 3.35 3.50 3.50 3.40 3.20 3.00 2.80
US Fed balance sheet USDtrn 4.22 4.00 3.89 3.76 3.67 3.58 3.42 3.29
ECB Deposit Rate -0.40 –0.40 –0.40 –0.40 –0.30 –0.20 0.00 0.20
New Zealand
Cash 1.75 1.75 1.75 1.75 1.75 1.75 2.00 2.25
90 day bill 1.91 1.90 1.90 1.90 1.95 2.00 2.20 2.60

2 year swap 1.98 2.10 2.20 2.30 2.45 2.60 2.90 3.05

10 Year Bond 2.53 2.90 3.10 3.15 3.25 3.35 3.45 3.50
10 Year spread to US -32 -45 -40 -35 -15 15 45 70

Exchange rate forecasts

Latest (31 Aug) Dec–18 Mar–19 Jun–19 Sep–19 Dec–19 Jun–20 Dec–20
AUD/USD 0.7252 0.73 0.72 0.70 0.70 0.70 0.74 0.75
NZD/USD 0.6643 0.66 0.65 0.64 0.64 0.64 0.66 0.68
USD/JPY 110.98 112 113 113 112 112 109 106
EUR/USD 1.1664 1.15 1.14 1.13 1.14 1.16 1.22 1.28
AUD/NZD 1.0917 1.11 1.11 1.09 1.09 1.09 1.12 1.10

Australian economic growth forecasts

2017 2018 2019 Calendar years
Q4 Q1 Q2f Q3f Q4f Q1f Q2f 2017 2018f 2019f 2020f
GDP % qtr / yr avg 0.5 1.0 0.6 0.5 0.6 0.7 0.6 2.2 2.8 2.5 2.6
% yr 2.4 3.1 2.7 2.7 2.7 2.5 2.4 2.4 2.7 2.5 2.8
Unemployment rate % 5.4 5.5 5.4 5.4 5.5 5.6 5.6 5.4 5.5 5.4 5.4
CPI % qtr 0.6 0.4 0.4 0.5 0.4 0.4 0.4 – – – –
% yr 1.9 1.9 2.1 1.9 1.7 1.6 1.6 1.9 1.7 1.7 1.7
CPI underlying % qtr 0.5 0.5 0.5 0.4 0.5 0.6 0.6 – – – –
% yr 2.0 2.0 1.9 1.8 1.9 1.9 2.0 2.0 1.9 2.1 2.0

New Zealand economic growth forecasts

2017 2018 2019 Calendar years
Q4 Q1 Q2f Q3f Q4f Q1f Q2f 2017 2018f 2019f 2020f
GDP % qtr 0.6 0.5 1.0 0.6 0.7 0.7 0.8 – – – –
Annual avg change 2.8 2.7 2.7 2.8 2.8 2.9 2.9 2.8 2.8 3.1 2.9
Unemployment rate % 4.5 4.4 4.5 4.5 4.6 4.7 4.7 4.5 4.6 4.6 4.4
CPI % qtr 0.1 0.5 0.4 0.7 0.3 0.4 0.1 – – – –
Annual change 1.6 1.1 1.5 1.7 1.9 1.8 1.5 1.6 1.9 1.3 2.1
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.
12
 Disclaimer

© Copyright 2018 Westpac Banking Corporation

Things you should know.

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141 (‘Westpac’).

Disclaimer

This material contains general commentary, and market colour. The material does not constitute investment advice. Certain types of transactions,
including those involving futures, options and high yield securities give rise to substantial risk and are not suitable for all investors. We recommend that
you seek your own independent legal or financial advice before proceeding with any investment decision. This information has been prepared without
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information contained in this material does not constitute an offer, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any
financial instrument or to enter a legally binding contract. Past performance is not a reliable indicator of future performance. 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 ultimate outcomes may differ substantially from these forecasts.

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denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of
or income from such securities or related derivative instruments.

The author of this communication is employed by Westpac and is not registered or qualified as a research analyst, representative, or associated
person under the rules of FINRA, any other U.S. self-regulatory organisation, or the laws, rules or regulations of any State. Unless otherwise specifically
stated, the views expressed herein are solely those of the author and may differ from the information, views or analysis expressed by Westpac and/
or its affiliates.