Review of Westpac’s Federal Budget Dinner with Bill Evans (Westpac’s Chief Economist)

Was lucky enough to score another invite to the evening. So I will try and summarise Bill’s 1 hour presentation last night.

I did notice MichaelW also mentioned here that he would be going to a lunchtime briefing, so it will be interesting to see his take on the information presented.

Budget
Not much opinion, just went Dragnet i.e just the facts ma’am. Government nebt debt will go to around 11.5% of GDP and doesn’t have concern about that level. In fact he called for infrastructure spending of $25b per annum and if needed to increase the level of debt to fund that.

It is interesting that some of his comments confirmed Chris Caton’s presentation summarised here .

One thing I didn’t realise was the increase in the Medicare levy will generate $11.6 b over 4 years. In the next 4 years disability spending will only be $1.9b. So the next 4 years, it is actually reducing the deficit not finding the NDIS. Its only from year 4 onwards that the real cost of the NDIS ramps up significantly and the increase in the levy will then be insufficient to fund it.

Revenue slippage from last years budget, is $83b over 4 years. All the savings initiatives identified in the budget are back-loaded ie minimal savings in this budget.

Of these key initiatives, Medicare levy raises $11.6b, the next item is ‘Other’ at $10.7b. Interestingly Senator Mitch Fifield was asking in the Senate yesterday for an overview from the Government. They couldn’t answer but simply referred him to the Budget papers.

Forecasts
WBC is more pessimistic about the forecasts in the budget about the Australian and world economy. WBC’s forecasts are in brackets afterwards.
Aus GDP at 2.75% (2.4%), World GDP at 4% (3.1%), Investment at 4.5% (0%) and unemployment at 5.75% (6.1%).

Our GDP has been below trend since the GFC and will continue for the next two calendar years.

Major gas projects peak at the end of this year/start of next and will by definition be a drag on our economy year on year. In 2012, it added 1.5% to GDP, in 2014 it will be -1%

Confidence
Compared to last two interest rate cycle reductions (2001-02 & 2008-09), business confidence is taking far more time to respond to rate cuts.

This FY, manufacturing investment is forecast to reduce by 30%. Unprecedented.

Consumer sentiment is only now responding to rate cuts but like business confidence has taken far longer and is more muted than previous increases
Australia seems to be uber-sensitive to European crises, moreso to other significant historical events such as Asian crisis, 9-11, Lehman’s collapse. So if there is more European crises, we will be affected.

Housing & Price Expectations
Household leverage peaked in September 2006 and has remained fairly constant with a slight reduction. This will contain any ‘boom’ in prices.
Based on WBC loan book, mortgage holders are significantly ahead. From July 2006, their index of this is at 108. (100= no increase or decrease in mortgages being paid off). This has gone from 95 in July 2008 to 108 in July 2012.

New housing lending is picking up very slowly and like confidence is not responding to rate cuts. First home buyers not responding to rate cuts
Price expectations have started to increase in late 2012 and early 2013. Strongest and most consistent in NSW, although VIC & QLD not far behind. Vic is the most variable over the course of the last 12-18 months.
Was very bullish on Syd house prices. Historically because they are playing catch-up (10 yr rise od 33% compared to 82% in Melbourne) and pent up demand sees a 14% increase over the next 2 years. Brisbane 8% and Melbourne 4% over the same time period. Was also bullish on Perth.

Commercial property yields attractive and believes there is more downside, especially as overseas investors still think we have a very attractive commercial property sector.

Interest Rates
Believes that cash rate will be at 2% by May 2014. 3 year swap rate will reduce by another 15basis points, suggesting fixed rates will not fall much more. Did say that locking in to fixed rates soon would be prudent.

Also acknowledged some challenging internal dialogue at the bank about what is says about our economy with cash rates forecast to be 2%


Unemployment & Job Market
Set to peak at 6.25% in mid-2014, with Victoria & Qld being the worst at 7.1 but NSW only in the mid 5s.

Inflation
Benign and negligible. It was one of the key reasons why Treasury missed their forecasts. Price deflation in durables was far more than expected, hypothesised that online is driving this new round of deflation.

International
Chinese infrastructure slowing down and whilst their GDP growth is around 8%, this masks the impact for our mining, as more of the GDP growth will come from domestic consumption.

Europe’s a basket case and austerity is not the policy prescription. Believes Spain will be downgraded again soon. Currently on BBB-. Divergence in German economy and France’s will cause stress in the relationship and have potential EC & Euro implications.

US recovery story a bit over-exaggerated and believes QE3 will continue the end of 2014.

Aussie Dollar
Overvalued, but believes it will be around 96 cents my May 2014. Its fair value is between 85 and 95. As soon as the US recovery takes hold, AUS will drop
 
yes thanks for that. nothing too controversial tho those medicare figures are a slap in the face for working families. the IR outlook is interesting, was Evans suggesting there is internal debate about whether they will actually go that low?
 
Major gas projects peak at the end of this year/start of next and will by definition be a drag on our economy year on year. In 2012, it added 1.5% to GDP, in 2014 it will be -1%

Thats pretty scary, a 2.5% swing. That is the whole anticipated GDP growth next year. No wonder they are expecting more rate decreases to stabilise the economy and lower the exchange rate.
 
Thats pretty scary, a 2.5% swing. That is the whole anticipated GDP growth next year. No wonder they are expecting more rate decreases to stabilise the economy and lower the exchange rate.

Bill indicated that the RBA, in such a low inflation environment, will have to cut rates more aggressively to kick off construction and housing. These are the two sectors that they believe will need to provide growth for the gap left by mining.
 
unless reducing interest rates encourages construction of new homes; encouraging sale of existing homes has no real benefit for the economy because there is no multiplier effect this seems to be a surprisingly common misunderstanding.
 
unless reducing interest rates encourages construction of new homes; encouraging sale of existing homes has no real benefit for the economy because there is no multiplier effect this seems to be a surprisingly common misunderstanding.

The RBA only has 1 lever, so that is what they will be pulling.
 
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