Australia &

New Zealand
weekly.

Week beginning 12 August 2019

„„ RBA Statement on Monetary Policy sees deterioration in the outlook.

„„ RBA: Deputy Governor Debelle and Assistant Governor Kent speak.

„„ Australia: Westpac–MI Consumer Sentiment, employment, wage price index.

„„ NZ: REINZ house prices, retail card spending.

„„ China: retail sales, fixed asset investment, industrial production.

„„ Europe: GDP 2nd estimate, employment.

„„ US: CPI, retail sales.

„„ Key economic & financial forecasts.

Information contained in this report current as at 9 August 2019.

Westpac Institutional Bank


RBA Statement on Monetary Policy sees
deterioration in the outlook
The RBA updated its forecasts in the August Statement on
Monetary Policy (SMP), as foreshadowed in the August policy
decision statement. The forecast period has been extended
from June 2021 to December 2021.
For real GDP growth, the RBA has revised down its forecast for
2019 from 2¾ per cent to 2½ per cent, in line with our preview.
That is not surprising given that growth in the first half of 2019
is likely to print around 1 per cent, making the previous forecast
of 2¾ per cent highly unlikely. However the RBA has retained
its forecast for 2020 of 2¾ per cent, which is around trend
growth. Westpac still sees those forecasts as too high, favouring
2¼ per cent for 2019 and 2½% for 2020. For 2021, the RBA has
upgraded its growth forecast to 3 per cent from 2¾ per cent in
the year to June 2021 previously and has extended that 3 per
cent for the whole of 2021.
For underlying inflation, the previous forecasts were 1¾ per cent
in 2019, 2 per cent in 2020 and 2 per cent for the year to June
2021. The RBA now expects inflation to be 1½ per cent in 2019,
1¾ per cent in 2020 and then 2 per cent in 2021. This follows
outcomes of 0.3% and 0.4% for the opening two quarters of
2019. We welcome the cautious approach to the new 2020
forecast, recognition that the RBA will likely miss the 2–3%
target band for another year.
However we need to see these “rounded” forecasts in the
context of the detailed forecasts which are provided in the
Appendix. For these forecasts the “trimmed mean” inflation rate
for 2020 is forecast at 1.9% and 2.1% in 2020.
In May the unemployment rate was forecast to hold at 5 per
cent to December 2020 before falling to 4¾ per cent by June
2021. Recall that the new starting point for these forecasts is
5.24% for June 2019, posing a challenge to reach 5% when the
forecast growth rate is below trend in 2019 and only at-trend in
2020. The new forecasts have the unemployment rate at 5¼ per
cent in 2019 and again in 2020, then edging down to 5 per cent
in 2021. Such a forecast is well above the Governor’s estimate of
full employment of 4.5%.
The RBA is now forecasting less progress on the inflation and
unemployment targets than had been expected in the May SMP,
which assumed two rate cuts by year’s end. And of course, we
must bear in mind that these new forecasts are based around
market pricing which now includes two 25bp rate cuts having
been delivered and pricing for two additional cuts (one by end
2019 and one by mid-2020). In addition, the May forecasts
assumed an AUD of USD 0.70, compared to 0.68 currently.
The most important observation from these forecast changes
is around wages growth. The forecasts in May included the
wage price index to increase by 2.5% in 2019 and 2.5% in 2020.
These forecasts have now been lowered to 2.3% in both years.
This is despite the underlying assumptions of lower interest
rates and a lower currency. The motivation behind this decision
which must be very disappointing for the RBA Governor given
his strong focus on lifting wages growth is firstly due to the
RBA’s own liaison program which shows that the majority of
firms anticipate little change in wages growth over the next
year. This adjustment also reflects the increase in the forecast
for the unemployment rate from 5% in both end 2019 and 2020
to 5.2% for both years, indicating more spare capacity in the
labour market than had previously been expected. This forecast
slowdown in wages growth is one of the major factors behind
the downward revision in the inflation forecasts.
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 second important change in the forecasts is around
household consumption growth. These forecasts have been
reduced from 2.0% (2019) and 2.6% (2020) to 1.5% (2019) and
2.4% (2020). These downward revisions reflect the slower than
expected consumption growth, already registered this year and
the associated lower growth rate for household incomes in 2019.
While the RBA emphasises downside risks to the forecasts
from international developments, it is surprising that the actual
forecasts include no adjustments to major trading partner growth,
remaining at 3.7% in 2019, 3.8% in 2020, and 3.8% in 2021.
The most important positive development which is cited in the
discussion is around the earlier than expected stability in the
housing market. While the downturn in activity is forecast to be
weaker than expected in the May SMP in 2019 (–9.0% compared
to –6.7%), there is a marked boost to the construction outlook
for 2020 with the previously forecast downturn being reduced
from –5.7% to –3.3%. This rebalancing of the cycle partially
explains the lift in growth in 2020 relative to 2019.
Despite concerns about the impact of global developments on
business confidence, the broad profile of expected business
investment growth is unchanged. While the theme that public
spending growth will remain solid but slow down somewhat
also holds.
In summary, the key themes from the forecasts and the
tone of the economic commentary includes a slower wages
and inflation outlook, complemented by a higher path for
unemployment, leaves the way open for more monetary
stimulus. We remain comfortable with our current forecasts that
there will be another cut in October to be followed by a move
to a 0.50% cash rate in February next year.
The Statement on Monetary Policy was not the only missive
from the Reserve Bank today. We also saw an appearance
by Governor Lowe and his senior team before the House of
Representatives Standing Committee on Economics.
This appearance must be considered in the context of a
Governor who, despite assuming two more rate cuts for the
purposes of his forecasts, is still not expecting inflation to
return to the 2–3% target band before 2021, and similarly is not
anticipating any progress in reducing the unemployment rate
(which is now higher than three months ago) until 2021. The
outlook for unemployment will be particularly disappointing
given the Governor’s recent revelation that we should be aiming
to bring unemployment down to around 4 ½ per cent.
Naturally, these circumstances triggered a number of pointed
questions around the RBA policy outlook from the Committee.
Firstly, Governor Lowe noted “It’s possible that we end up at
the zero lower bound, I think it’s unlikely, but it is possible. We
are prepared to do unconventional things if the circumstances
warranted it. I hope we can avoid that. It’s clearly prudent for us
to be thinking about it given the global forces that I’ve talked
about before” (source Bloomberg).
To emphasise that the RBA has been considering unconventional
policies he goes on to itemise a number of policies that have
been used overseas, while noting that some policies would not
be appropriate and emphasising that policies should be adapted
to the specific circumstances of the country and the nature of
its financial markets. In particular Australia is not and is highly
unlikely to be facing a liquidity crisis; this policy is targeted at
strengthening the impact of lowering the cash rate.
2
 Westpac weekly

Nevertheless he does seem to give most attention to the

strategy of lowering the risk free rate right across the yield
curve (government bonds).

He also acknowledges that a package of measures works best.

On July 24 Westpac lowered its forecast for the terminal cash

rate from 0.75% (to be reached in November) to 0.50 % to be
reached in February 2020.

We also pointed out that the move from 0.75% to 0.5% could
be linked to a package of other policies that would be designed
to strengthen the pass through from the lower cash rate to
the variable mortgage rate and other private sector rates. This
would be largely achieved by the RBA providing secured long
term funding facilities to banks and other financial institutions
at the overnight cash rate. This policy had been adopted by the
Bank of England in response to concerns around the Brexit vote
in June 2016 (policy implemented in August 2016) when it cut
the bank rate from 0.5% to 0.25%.

The policy successfully lowered private sector rates including

an eventual full pass through of the lower bank rate to variable
mortgage rates. Attractive low cost liquidity also had the effect
of lowering other interest rates including government securities
as these institutions were encouraged to use the attractive
funding.

The attractiveness of this policy prescription was that it was

seen as a package of policies aimed at lowering rates, both
public and private, right across the spectrum.

The Governor’s objective of lowering longer term rates would

be helpful but, given the bulk of private sector debt in Australia
is linked to short term rates, a policy to strengthen the impact
of the lower cash rate directly on short term private sector
rates would be more effective and appropriate for Australia’s
particular financial system.

At the time, we indicated that such a policy could not be

expected in the near term and it certainly sounds as if
the Governor is some way (including implementing more
conventional easing) away from using unconventional
policies but his remarks today have certainly given us some
encouragement that a “package” of unconventional policies
might be used to complement conventional policy at some
stage in this cycle.

While these responses are encouraging for our view, other

details of his speech were less encouraging. He indicated that,
at this stage, the RBA would not adopt an unconventional
package until the cash rate had been reduced to 0.5% and
seemed to emphasise that a sharp deterioration in global or
domestic economic conditions would be necessary to trigger
unconventional policies.

Our theme which we released on July 24 was focussed more on

the need to strengthen the impact of rate cuts in a situation of
extremely low rates rather some global or domestic crisis.

There is plenty of time for the RBA to consider the benefits of

unconventional policies outside some crisis situation.

For now, we are comfortable to retain the themes from the July
24 note.

Bill Evans, Chief 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

The week that was
The past week has been another focused on monetary policy
and political matters, both in Australia and offshore. Markets
have remained volatile as a result, foreseeing a need for
ultra-lose monetary policy to limit the risk of another marked
deterioration in conditions.
Beginning with the RBA’s August meeting, on the whole the
statement was as expected, with the cash rate left unchanged
and guidance in the final paragraph again pointing to a multi-
month pause between cuts as conditions are assessed.
The revised forecasts in Friday’s Statement on Monetary Policy
also subsequently met expectations by remaining constructive
on the outlook. While the growth and inflation forecasts were
lowered for 2019, in 2020 GDP growth is still seen at trend and,
come 2021, inflation is forecast to be back at the low end of the
RBA’s 2-3% target range. These forecasts are predicated on the
two further cuts the market has priced in over the coming year
as well as the 2019 tax cuts.
To our mind, this stimulus notwithstanding, the RBA’s forecasts
are still too optimistic. Whereas the RBA believe that the
unemployment rate will hold at 5.2% in 2020 (previously
4.9%), we instead believe it will rise to 5.6%. In accordance, we
foresee growth below trend in 2019 and 2020, and enduring
disappointment for inflation.
While the rate cuts delivered to date and those we expect
in October and February are justified by domestic weakness
alone, it is worth highlighting that the RBA have also
recognised “increased uncertainty” offshore related to “trade
and technology disputes” and that “the risks to the global
economy remain tilted to the downside”.
Across the Tasman, offshore developments were also clearly
on the mind of the RBNZ as they cut their cash rate by 50bps,
an unprecedented move in a non-emergency setting. Though
domestic considerations were also front of mind, namely
disappointing GDP growth and low business sentiment as
well as housing market weakness, arguably recent global
developments is what led them to decide that ‘getting ahead
of the curve’ was appropriate. With these forces to remain
active in coming months, our New Zealand team now expects
another cut in November. Thereafter however, a much more
constructive domestic economic outlook in 2020 is anticipated
to preclude further action.
Chart of the week: Westpac Market Outlook
We have just released our monthly Market Outlook.
The past month has been an eventful one, leading to a jump in
market volatility. In July, the US FOMC cut rates and described
the move as the beginning of a “mid–cycle adjustment” of policy
“not the start of a long series of cuts”. The following day, US
President Trump announced a 10% tariff on Chinese imports,
largely consumer goods, that had not been covered by the tariffs
imposed to date. China responded, allowing the Renminbi to
depreciate, moving USD/CNY above the critical 7.00 level, which
saw the US label them a “currency manipulator”. Unnerved by
the increased uncertainty, equity markets sold–off sharply and
Australian 10 year government bond yields made fresh record
lows, moving below 1.0%. The Australian dollar slumped, falling
from above USD0.71 in mid–July to briefly dip below USD0.67 in
early August.
For detail on our view on recent events and our forecasts please
see the full report.
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
That being said, it is clear that RBNZ as well as the RBA are
increasingly mindful of the skew of risks and their open-ended
nature. As such, both banks have noted that an assessment of
possible unconventional policy measures is prudent. Highlighting
the views of the RBA, in response to questions during his
testimony to Parliament today, Governor Lowe noted that any
use of such measures would depend on the circumstances of
the situation, but would likely be focused on reducing the risk-
free rate further out the term spectrum (i.e. government bond
yields) and, based on offshore experience, was most likely to be
effective if delivered as a package of measures.
A full analysis of the Governor’s testimony and how it relates to
our view is provided by Chief Economist Bill Evans.
Before moving further afield, Antipodean data out this week
pointed to another positive foundation for consumption and
housing in New Zealand, their unemployment rate falling to a
11-year low and wages growth picking up, as well as an outsized
contribution to Australian GDP growth from net exports in the
June quarter, with the trade balance hitting a new high of $8bn
in June. Note on the latter that, even with a 0.4ppt contribution
from net exports, we still only see GDP growth of 0.5% in the
June quarter as domestic demand remains weak.
Tensions between the US and China continued to flare this
week as China responded to President Trump’s new tariffs by
allowing USD/CNY to lift through CNY7.00 and remain above
that level through the week. Targeting a key ‘good-will’ gesture
from previous negotiations, Chinese authorities also reportedly
told State Owned Entities to halt purchases of US agricultural
goods. It is still early days in assessing the implications of these
developments, but at a minimum it highlights that current
uncertainty is set to persist for an extended period. As we
highlighted late last week, this is cause for the US FOMC to
be pre-emptive with policy so as to avert an undue slowing
in investment and consumption growth. Highlighting the risks
that the US economy is facing, following persistent weakness
in business investment, the July employment report suggested
corporates are now ratcheting back their demand for labour,
the 6-month average nonfarm payrolls gain coming in at its
weakest level since 2013.
For all the implications of recent developments for the US,
China, the global economy and financial markets, see our
August Market Outlook.
US interest rates down sharply
% %
8 8
7 US federal funds 7
6
Fc/s to
6
US 10yr bond end 2020
5 5
4 4
3 3
2 2
1 1
0 0
-1 -1
Sources: Bloomberg, Westpac Economics
-2 -2
Dec-00 Dec-04 Dec-08 Dec-12 Dec-16 Nov-20
4

New Zealand: week ahead & data wrap
This has been a massive week for New Zealand economic news.
It kicked off with China retaliating to the latest US tariff move
in a range of ways, including a devaluation of its currency. It
is becoming clearer that the trade wars are going to impact
Chinese demand for New Zealand products. We were not
surprised, then, to see a decline in dairy prices in this week’s
GlobalDairyTrade auction. We have now reduced our forecast
of this season’s farmgate milk price payment to $6.70/kg milk
solids, on the expectation that Chinese demand for milk will
falter. At the start of the year our forecast was $7.20, so we’ve
gone from expecting a strong dairy season to an average one.
The other key area of fallout is going to be export log prices,
which already fell 25% in June. We anticipate further price
decline given what is happening in China.
The second key development of the week was a surprise drop in
the unemployment rate to an eleven year low of 3.9%. That’s tight,
but not extreme by New Zealand standards – unemployment got
into the low 3s in the mid–2000s. This was no data aberration –
Stats NZ’s suite of labour market indicators was strong almost
across the board. Employment growth was a healthy 0.8%
according to the Household Labour Force Survey, and the
Quarterly Employment Survey (QES) was similarly robust.
Wage growth clearly accelerated on all measures, with the
Labour Cost Index registering 0.7% quarterly and 2.1% annual
growth, the fastest since the GFC. Much of that was a product
of the 7.3% increase in the minimum wage, but not all. We
are finally seeing signs that wage inflation more generally is
warming, albeit gradually.
The labour market may have gotten quite tight, but it is a
lagging indicator. Forward–looking data such as job ads tells
us that the labour market will soon weaken – we expect the
unemployment rate to rise over the remainder of this year,
although it won’t get particularly high.
The final shock of the week was the biggest – the Reserve Bank
lowered the OCR by 50 basis points to 1.0%. In the history of
the OCR, the only meetings at which the OCR has been cut
by more than 25 basis points have been after the 9/11 terrorist
attack, during the most alarming days of the Global Financial
Crisis, and immediately after the Christchurch earthquake. It
was strange to cut 50 basis points in today’s non–emergency
environment, especially given the on–hold decision that was
made just six weeks previously. We think two 25 basis point
moves would have been better – cutting 50 had an unnecessary
whiff of panic to it.
The RBNZ’s thinking is to get ahead of the curve, delivering all
of the monetary easing it deems necessary at once. There was
no explicit signal of another imminent cut. On that basis, we
doubt that the RBNZ will cut the OCR in September.
Round–up of local data released over the last week
Date Release
Mon 5 Jul ANZ commodity prices
Tue 6 Q2 unemployment rate
Q2 employment
Q2 LCI wage inflation (pvte, ord. time)
Q3 RBNZ inflation expectations
Wed 7 GlobalDairyTrade auction
RBNZ policy decision
Fri 9 Jun net migration (annual)
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
But we have learned just how reactive the new Monetary Policy
Committee is to downside economic developments. And we
expect that there will be further downside news in the months
ahead. The recent escalation of the trade war could cause
New Zealand export commodity prices to fall, there is a good
chance that GDP will undershoot the RBNZ’s optimistic near–
term forecasts of 0.6% and 0.7% over the final two quarters of
this year, and there is always the chance of another alarming
Presidential tweet. We have concluded that the RBNZ is quite
likely to reduce the OCR again at the November Monetary
Policy Statement, to a new low of 0.75%.
The detail of the Monetary Policy Statement was mostly
unsurprising – the RBNZ is worried about the global outlook,
and cognisant that the domestic economy has slowed. But
there were a couple of details that stuck out.
First, this week’s decline in the RBNZ’s own survey of inflation
expectations seems to have played a surprisingly strong role in the
decision. Two–year ahead inflation expectations fell from 2.01% to
1.86%, although longer term expectations were stable. This puts
inflation expectations data firmly on the radar going forward,
although the release timetable is unhelpful. The RBNZ will get the
inflation expectations data early, but will release it publically only
one day before the November 13 Monetary Policy Statement.
Second, the RBNZ has abandoned its previous forecast
that house price inflation will accelerate to 5% due to the
cancellation of capital gains tax and the drop in mortgage
rates. Nationwide house prices declined in the second quarter
of this year. The RBNZ has concluded that government policies,
slowing population growth, and ample construction activity are
supressing house prices, and will continue to do so.
We disagree with the RBNZ’s conclusions on house price
inflation. True, there are negative forces acting on the market at
present, but our analysis suggests that the stimulus from falling
mortgage rates will dominate. We were previously forecasting
7% house price inflation for next year, but this week’s OCR cut
is likely to lead to further mortgage rate declines, so the risk to
our house price forecast is to the upside.
There have already been a number of straws in the wind
suggesting we are on the right track. House sales data for June
was very strong, and realestate.co.nz data last week revealed
that the stock of unsold homes fell further in July. This week
Barfoot and Thompson, Auckland’s largest real estate agency,
reported a 10.4% seasonally adjusted lift in house sales for July,
and a further sharp drop in unsold inventory. Next week we
get the July nationwide housing market data. At this stage all
we expect to see is market turnover trending higher, although
the data can be very volatile month to month so it will pay to
interpret the results with caution.
Previous Actual Mkt f/c
–3.9% –1.4% –
4.2% 3.9% 4.3%
–0.1% 0.8% 0.3%
0.3% 0.8% 0.7%
2.0% 1.9% –
2.7% –2.6% –
1.50% 1.00% 1.25%
50,300 49,400 –
5
 Westpac weekly

Data previews
Aus Aug Westpac–MI Consumer Sentiment Consumer Sentiment Index
Aug 14 Last: 96.5 index index
130 130
• The Westpac Melbourne Institute Index fell 4.1% to 96.5
in July from 100.7 in June, a troubling decline given what 120 120
should have been a supportive backdrop in the month –
the RBA cut interest rates by a further 25bps, the Federal
110 110
government's tax package passed through Parliament,
and the Sydney and Melbourne housing markets showed
100 100
clear signs of stabilising. Despite these positives, Australian
consumer confidence fell to a two year low.
90 90
• The August survey is in the field over the week to August
10 – a turbulent week for the global economy, financial 80 80
markets roiled by escalating trade tensions between the US Sources: Westpac Economics, Melbourne Institute

and China. Locally, the RBA left rates on hold at its August 70 70
meeting, pausing after the two cuts in June and July but Jul-03 Jul-07 Jul-11 Jul-15 Jul-19
retaining a clear easing bias; housing markets continue to
stablise; and the Federal government's tax relief may be
starting to see cash flow to some households. That may
not be enough to offset the impact from financial markets
turmoil, the ASX slumping 3.4%, the AUD off 3c US since the
July survey.

Aus Q2 Wage Price Index (WPI) WPI slowly slowly drifting higher
Aug 14, Last: 0.5%, WBC f/c: 0.5% % ann % ann
Mkt f/c: 0.5%, Range: 0.5% to 0.6% In 2014 the RBA estimated that 10% to 15% of
EBA all current
employees’ had rates of pay indirectly influenced
5 WPI 5
• In the March quarter, total hourly wages ex bonuses
by awards via enterprise agreements or
individual contracts
EBA new
rose 0.5% compared to a market median (and Westpac)
Min wage increase
expectation for 0.6%. The print was 0.54% at two decimal 4 4
places with a 0.54% rise in private sector wage rates and a
smaller 0.45% rise in public wages - the smallest quarterly
rise in public sector wages since March 2000. 3 3

• Wage inflation has lifted off its record low of 1.9%yr in June
2017 but running at 2.3%yr in March 2019 it can hardly be 2 2
described as a breakneck pace. We expect wage inflation to
Sources: ABS, Westpac Economics, RBA, Commonwealth Treasury
drift higher from here - our forecasts have it peaking around 1 1
2¾%yr in late 2020 - but given how well contained wage Mar-99 Mar-03 Mar-07 Mar-11 Mar-15 Mar-19
inflation is across the nation, and between sectors, even this
modest increase looks optimistic with the risks meaningfully
skewed to the downside.
• For Q2, there is little to suggest there has been a
meaningful acceleration in wages. Our 0.5% forecast holds
the annual pace flat at 2.3%yr.

Aus Jul Labour Force Survey - employment '000 Westpac employment indicators
Aug 15, Last: 0.5k, WBC f/c: 5k
%yr %yr %yr % invert
Mkt f/c: 14k, Range: -10k to 37k 5 5 -40
Jobs Index employment employment trend %yr (lhs)
unemploy. expectations* (rhs)
-30
• The June Labour Force Survey reported a marginal 500 4 4
-20
gain in employment. Employment has been robust so far
this year; the three month average gain was +29.2k in June 3 3 -10
a modest decline from +35.8k in May but up on +24.45k in 0
April. 2 2
10
• In the year to June, employment has grown 296k or 2.4%. 1 1 20
The pace of employment growth eased back from 2.9%yr 30
in May but it is still stronger than the 2.2%yr pace at the 0 0
40
end of 2018. Our Jobs Index suggests employment should
Sources: ABS, Westpac Economics Sources: Westpac Economics, Melbourne Institute, ABS.
be growing around 2.4%yr currently before slowing to -1 -1 50
2.1%yr through Q4. The fact unemployment expectations Jun-00 Jun-06 Jun-12 Jun-18 Jun-00 Jun-06 Jun-12 Jun-18
deteriorated through the last few months suggest
household are started to experience a softer labour market.

• Our forecasts for a 5k gain in employment will hold the

annual pace of growth flat at 2.4%yr.

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 Jul Labour Force Survey - unemployment % Unemployment and participation rates
Aug 15, Last: 5.2%, WBC f/c: 5.3%
% %
Mkt f/c: 5.3%, Range: 5.1% to 5.3% 67 8
participation rate (lhs) PR trend
PR average
• At one decimal place the unemployment rate was flat at 66 unemployment rate (lhs) since March
2008
since Jan
2014

5.2% in June. However, at two decimal places it lifted from 7

5.19% to 5.24%, only a whisker away from rounding up to
5.3% highlighting a relative underperformance of the labour 65
market. 6
64
• Given the large bump up in participation in May, we were a
little surprised that the participation rate was flat at a record 5
63
high of 66.0% (65.98% from 66.03% in May). This small fall
in participation limited the gain in the labour force to just 7k Sources: ABS, Westpac Economics.
in the month thus limiting the rise in unemployment given 62 4
the flat print for employment. Jun-03 Jun-07 Jun-11 Jun-15 Jun-19

• Given that the participation rate is near a record high,

we are forecasting a modest decline in July to match our
forecasting for a small 5k rise in employment. Holding
growth in working age population steady, unemployment is
forecast to rise to 5.3%.

NZ Jul REINZ House Price Index REINZ house prices and sales
Aug 12 –16, Last: +0.3% sales 000 %yr
14 30
• With mortgage rates pushing downwards, there is a House sales (left axis) 25
substantial amount of stimulus in the pipeline for the 12
House price index (right axis) 20
housing market. That’s been reinforced by the cancellation 10 15
of the proposed capital gains tax.
8 10
• Early signs that those factors are having the expected 5
effect were seen in June, with house sales rising by just 6 0
under 7% in seasonally adjusted terms. The number of sales -5
4
is still down on a year ago, but is now clearly off its lows.
-10
Meanwhile, house prices remained fairly subdued, with 2
another small decline in Auckland and continued modest Source: REINZ -15
gains in the rest of the country. 0 -20
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
• We expect a continued firming in sales in July. Consistent
with this, there has already been a drop in the number of
unsold homes. A pickup in house price inflation should be
more evident by year–end.

NZ Jul retail card spending Card transactions, annual % change

Aug 12, Last: Flat, WBC f/c: +0.6% % %
12 12
• Retail spending was flat in June. In part, that soft result was Core retail
due to a fall in petrol prices over the month that capped 10 10
nominal spending levels. However, for many households the Total retail
fall in petrol prices would have freed up funds for spending 8 8
in other areas. In fact, core (ex–fuel) spending posted a
moderate 0.4% rise over the month. 6 6

• We expect a 0.6% gain in spending over July. In part, that’s 4 4

due to a rise in petrol prices. We also expect modest gains
in core categories. Lingering softness in the housing market 2 2
remains a drag on spending appetites. Source: Stats NZ
0 0
2005 2007 2009 2011 2013 2015 2017 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.
7
 Westpac weekly

Key data & event risk for the week ahead

Market Westpac
Last median forecast Risk/Comment
Mon 12
NZ Jul REINZ house sales 6.8% – – Due this week. While price growth remains soft…
Jul REINZ house prices, %yr 1.7% – – …early signs of a firming in the market are appearing.
Jul card spending 0.0% – 0.6% Moderate gains in core categories expected.
US Jul monthly budget statement –8.5 –123.0 – Deficit trend one way.

Tue 13
Aus RBA Assistant Governor speaks – – – Kent (Financial Markets), Syd, 8:00 am.
Jul NAB business survey 3 – – Conditions index below trend, risk softened further in July.
NZ Jul food price index –0.7% – 0.9% Seasonal rise in produce prices.
Eur Aug ZEW survey of expectations –20.3 – – Sentiment remains negative.
UK Jun ILO unemployment rate 3.8% 3.8% – The labour market remains resilient despite headwinds.
US Jul NFIB small business optimism 103.3 – – Still positive, but becoming a little concerned.
Jul CPI 0.1% 0.3% 0.3% Energy supportive, core prices also robust circa 0.2%.
Q2 NY Fed h'hold credit report – – – Detail on household borrowings.

Wed 14
Aus Aug WBC–MI Consumer Sentiment 96.5 – – In the field over the week to August 10 – a turbulent week.
Q2 wage price index 0.5% 0.5% 0.5% Wages have lagged behind and little change expected.
RBA Deputy Governor speaks – – – Debelle at Redefining Conduct in FX markets, Syd 5:30 pm.
Jpn Jun machinery orders –7.8% –1.0% – Weakness continues.
Chn Jul fixed asset investment ytd %yr 5.8% 5.9% 6.0% Investment growth grinding higher...
Jul industrial production ytd %yr 6.0% 6.0% 6.0% ... downside risks to grow as new tariff uncertainty hits...
Jul retail sales ytd %yr 8.4% 8.4% 8.3% ... weakening jobs trend also puts consumption at risk.
Eur Q2 employment %yr 1.3% – – Employment growth has been strong but signs of slowing.
Q2 GDP 2nd estimate 0.4% 0.2% 0.2% Flash at 0.2%, a modest result weighed down by...
Jun industrial production 0.9% –1.0% – ... an ailing manufacturing sector...
Ger Q2 GDP 1st estimate 0.4% 0.0% 0.0% ... which is particularly significant in Germany.
UK Jul CPI 0.0% –0.1% – Annual inflation close to 2%, lower GBP limiting downside.
US Jul import price index –0.9% 0.0% – Dollar offsetting tariff impact.

Thu 15
Aus RBA Deputy Governor speaks – – – Debelle on "Risks to the Outlook", Sydney 9:00 am.
Aug MI inflation expectations 3.2% – – A broad lack of inflationary pressure in the economy.
Jul employment 0.5k 14k 5k Employment growth to slow but moderating participation...
Jul unemployment rate 5.2% 5.3% 5.3% ...from near record highs to limit rise in unemployment.
Jpn Jun industrial production –3.6% – – Global manufacturing and trade are suffering.
UK Jul retail sales 1.0% –0.3% – The firm labour market is supporting spending.
US Aug Fed Empire state index 4.3 2.0 – Regional surveys have been volatile.
Q2 productivity 3.4% 1.4% – Momentum looks to be subsiding.
Aug Phily Fed index 21.8 10.0 – Regional surveys have been volatile.
Jul retail sales 0.4% 0.2% 0.3% Softening job/wage trend to dampen spending pulse.
Initial jobless claims 209k – – Very, very low.
Jul industrial production 0.0% 0.3% – US manufacturers being hit by tariffs and US dollar.
Aug NAHB housing market index 65 66 – Low rates and unemployment a lasting positive.
Jun business inventories 0.3% 0.1% – Inventory accrual likely to slow.
Jun total net TIC flows 32.9 – – Demand for Treasuries remains robust, even at lower rates.

Fri 16
NZ Jul Business NZ manuf PMI 51.3 – – Businesses are reporting weak trading conditions.
Eur Jun trade balance €bn 20.2 – – Surplus has narrowed but is still large.
US Jul housing starts –0.9% 0.6% – Low rates yet to drive acceleration in activity....
Jul building permits –5.2% 3.1% – ... uncertainties over growth outlook could weigh further.
Aug Uni. of Michigan sentiment 98.4 97.1 – Remains at a robust level.

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

Economic & financial forecasts

Interest rate forecasts

Latest (9 Aug) Sep–19 Dec–19 Mar–20 Jun–20 Sep–20 Dec–20
Cash 1.00 1.00 0.75 0.50 0.50 0.50 0.50
90 Day BBSW 0.97 0.95 0.85 0.70 0.70 0.70 0.70
3 Year Swap 0.71 0.75 0.75 0.80 0.80 0.85 0.90
10 Year Bond 0.94 1.00 1.00 1.05 1.05 1.10 1.10
10 Year Spread to US (bps) -76 –75 –55 –55 –55 –55 –60
International
Fed Funds 2.125 1.875 1.375 1.375 1.375 1.375 1.375
US 10 Year Bond 1.70 1.75 1.55 1.60 1.60 1.65 1.70
US Fed balance sheet USDtrn 3.78 3.78 3.78 3.78 3.78 3.80 3.82
ECB Deposit Rate -0.40 –0.50 –0.60 –0.60 –0.60 –0.60 –0.60
New Zealand
Cash 1.00 1.00 0.75 0.75 0.75 0.75 0.75
90 day bill 1.21 1.00 0.90 0.90 0.90 0.90 0.90
2 year swap 0.99 0.90 0.80 0.80 0.80 0.85 0.90
10 Year Bond 1.08 1.15 1.00 1.05 1.10 1.15 1.20
10 Year spread to US -62 –60 –55 –55 –50 –50 –50

Exchange rate forecasts

Latest (9 Aug) Sep–19 Dec–19 Mar–20 Jun–20 Sep–20 Dec–20
AUD/USD 0.6811 0.68 0.68 0.66 0.66 0.67 0.67
NZD/USD 0.6495 0.64 0.64 0.63 0.63 0.64 0.64
USD/JPY 105.93 106 106 107 108 110 111
EUR/USD 1.1197 1.09 1.08 1.08 1.08 1.09 1.11
GBP/USD 1.2142 1.18 1.19 1.20 1.22 1.24 1.26
AUD/NZD 1.0487 1.06 1.06 1.05 1.05 1.05 1.05

Australian economic growth forecasts

2018 2019 Calendar years
Q2 Q3 Q4 Q1 Q2f Q3f Q4f 2017 2018 2019f 2020f
GDP % qtr 0.9 0.3 0.2 0.4 0.5 0.6 0.7 – – – –
% yr end 3.1 2.8 2.4 1.8 1.4 1.7 2.2 2.4 2.4 2.2 2.5
Unemployment rate qtr avg, yr end 5.4 5.2 5.0 5.0 5.2 5.3 5.4 5.5 5.0 5.4 5.6
CPI % qtr 0.4 0.4 0.5 0.0 0.6 0.5 0.7 – – – –
% yr end 2.1 1.9 1.8 1.3 1.6 1.7 1.8 1.9 1.8 1.8 1.8
CPI trimmed mean %yr 0.5 0.4 0.5 0.3 0.4 0.3 0.5 – – – –
% yr end 1.8 1.8 1.9 1.6 1.6 1.5 1.5 1.7 1.9 1.5 1.8

New Zealand economic growth forecasts

2018 2019 Calendar years
Q2 Q3 Q4 Q1 Q2f Q3f Q4f 2017 2018 2019f 2020f
GDP % qtr 0.9 0.4 0.6 0.6 0.4 0.6 0.8 – – – –
Annual avg change 3.2 3.1 2.9 2.7 2.4 2.3 2.3 3.1 2.9 2.3 3.0
Unemployment rate % 4.4 4.0 4.3 4.2 3.9 4.3 4.2 4.5 4.3 4.2 3.9
CPI % qtr 0.4 0.9 0.1 0.1 0.6 0.7 0.3 – – – –
Annual change 1.5 1.9 1.9 1.5 1.7 1.5 1.7 1.6 1.9 1.7 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.
9
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Disclaimer
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Things you should know.

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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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