Westpac Weekly

AUSTRALIA & NEW ZEALAND WEEKLY.

Week beginning 27 September 2021

Editorial: RBA rate hike in March quarter 2023 still likely but inflation target should be lowered.

Australia: Q3 AusChamber–Westpac business survey, retail, housing, private sector credit.

NZ: employment indiator, building consents, business and consumer confidence.

China: PMIs, current account.

Euro Area: unemployment, CPI.

US: durable goods orders, home prices, consumer confidence, personal income, spending and prices.

Key economic & financial forecasts.

INFORMATION CONTAINED IN THIS REPORT CURRENT AS AT 24 SEPTEMBER 2021.

WESTPAC INSTITUTIONAL BANK EDITORIAL

RBA RATE HIKE IN MARCH QUARTER 2023 STILL LIKELY BUT INFLATION TARGET SHOULD BE LOWERED

Last week RBA Governor Lowe gave another brilliant speech on the The contraction in the economy in the September quarter (Westpac Australian economy and the outlook for policy (“Delta, the Economy is forecasting –4%) will certainly widen the output gap near term. and Monetary Policy”, 14 September 2021). But we expect that growth in the economy will be 7.4% in 2022 driven by the reopening of the NSW and Vic state economies, which The single most significant contribution to my understanding of the we expect will be supported by adult vaccine rates nearing 90%. Australian economy over the last 25 years has been the insights in the speeches of Governor Lowe; Deputy Governor Lowe; Assistant Although output levels will return to the path established prior Governor Lowe and Dr Lowe during that period. to Delta, there will be some net loss of output over the period of around 0.75% of GDP – widening the output gap relative to the He is always insightful and often causes the listener to challenge expected path pre–Delta. their thinking about economic issues. But this recovery will be quite different to earlier pre–COVID On June 18 Westpac brought forward its timing for the first RBA recoveries as supply constraints will play a critical role. rate hike to the first quarter of 2023. We expect the cash rate to reach 0.75% by end 2023 and peak at 1.25% by end 2024. Those constraints will be apparent in the labour and goods markets.

That historically low peak reflects the vulnerability of Australia’s We expect foreign borders to be closed until mid–year and the household sector due to the expansion of household debt. It has pace of return to be slow. Relative to March 2020 temporary expanded and is expected to continue expanding to the point where visa holder numbers are down across the board by over 250k – a 1.25% cash rate would be consistent with those peak household including students; skilled employment; and working holiday. We debt servicing ratios which have been associated with a slowing in expect population growth of around 0.4% in the first half of 2022 the Australian economy in previous cycles. followed by 0.6% in the second half compared to pre–COVID annual population growth of 1.6%. In his speech Governor Lowe noted: “I find it difficult to understand why rate rises are being priced in next year or early 2023” – referring There will also be some constraints on labour supply due to to market pricing. workplace vaccination mandates and the prospect of around 10% of the adult population remaining unvaccinated. He restated his own view that “Our judgement is that this condition for a lift in the cash rate will not be met before 2024.” The labour market and wages

He strengthened the statement by raising the stakes in terms of his Consider the dynamic pre–Delta: between June 2020 and June 2021 inflation guideline: “It won’t be enough for inflation to just sneak across the unemployment rate fell from 7.6% to 4.6% with the economy the 2% line for a quarter or two. We want to see inflation around growing by 9.6%. the middle of the target range and have reasonable confidence that inflation will not fall below the 2–3 per cent band again.” We expect that the unemployment rate will start 2022 at around 5.4%. Strong demand growth, constrained by supply This specific point target is more challenging than the usual policy restrictions, including slow population growth, are likely to see the approach of 2–3% on average over the cycle – he wants to see at unemployment rate fall to 3.8% by year end. least one 2.5% print on underlying inflation. We have not experienced a national unemployment rate below 4% The Governor’s forecasts in the August Statement on Monetary in Australia since the early 1970s. Policy show why he is not hopeful of that objective being achieved any earlier than 2024. These supply factors will impact other countries as well, lifting wages growth and containing some of the usual disinflationary By December 2023 he expects the inflation rate to have reached effects of globalisation on wages. 2¼%; the unemployment rate to have reached 4%; and wages growth 2¾%. The steady trend in his forecasts point to 2.5% being Once the unemployment rate falls below full employment (around reached by mid–2024, implying any policy response is likely to be in 4–4.25%) there is likely to be some acceleration in the upswing the second half of 2024. in wages growth. By the September quarter, 2021, wages growth is expected to be around 2.2%yr – a reasonable starting point for It is therefore with some trepidation that we are sticking with our getting close to 3% by end 2022. forecast that the first rate increase (0.15%) will be delivered in the March quarter 2023. Inflation

The Governor would accept that the policy outlook three years into The outlook for inflation has an unusual degree of uncertainty. the future is essentially a forecasting exercise. Goods markets are facing constraints as supply chains have been We expect the conditions necessary to justify that initial rate hike to disrupted. On some measures global container freight costs have be achieved much earlier than indicated in the RBA’s forecasts. increased by a factor of five. Disrupted supply lines are causing difficulties in the face of booming demand with inevitable price We recognise that more than in any other cycle the level of pressures emerging, imported durables including motor vehicles are uncertainty around these forecasts is extreme. experiencing price increases while building materials costs for timber and steel are also being affected. This is not just because of the immense uncertainty around the health situation but also because of the unusual mix of demand Globally, markets and commentators are adjusting to the likelihood and supply forces driving inflation; the labour market and wages. that these factors will persist for much longer into 2022 than previously expected.

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 2 Research from the Dallas Fed points to around 25% of the excess of Is it a good trade–off? headline inflation over underlying feeding back into underlying over the next year in the US – capturing the indirect effects of a sharp This far out and in these uncertain times there is the prospect increase in some components. that we will be wrong with our inflation; unemployment and wage growth forecasts which may fall short of the Governor’s specific Locally, rising housing construction costs have been held down by targets by early 2023. subsidies that have now run off, exposing the CPI to a sharp upward adjustment from that component near term. The question then is the value of the trade–off: a few percentage points on the inflation rate relative to the prospect of significant The expected lift in wages growth will give the key boost to inflation disruption to the Australian economy with a surge in dwelling through 2022. Our point estimate, admittedly surrounded by a wider prices to unsustainable levels and the associated vulnerability of the than normal ring of uncertainty, sees the Governor achieving his economy to the next upswing in rates. 2.5% inflation target in the December quarter 2022. Inflation target needs to be brought into line with other countries Reaching the inflation target earlier than expected should be good news Recently the OECD proposed a review of the RBA, highlighting its failure to achieve its inflation target (annual trimmed mean inflation Readers might sense that our forecasts would be ‘bad news’ for the has not been above 2.5% since mid–2014.) Governor. My view is that the RBA’s inflation target has been too high for too Indeed, quite the opposite. Achieving the inflation and full long. Set at 2–3% over the cycle, it was first referred to in August employment targets much earlier than expected would allow the 1992 when inflation had averaged 6.4% over the previous 7 years; Governor to avoid the dangerous prospect of the impact on asset the 10 year bond rate was around 8.5% and the cash rate was 5.75%. markets of four consecutive years of a 0.1% overnight cash rate. We did not have break–even measures of inflationary expectations Dwelling prices have already lifted by 17.5% over the last year, the in the bond market at the time, but it would be safe to say that strongest annual house price increase since 2002. Affordability expectations were much higher than the 2% we have today. measures for first home buyers are indicating a return to historically stretched levels by the first half of next year. The structure of curve and the level of the cash rate allowed ample flexibility for the central bank to reach its target. Based on our outlook for interest rates we expect that the heat will be coming out of the housing market from the middle of next year as The target was formalised with an agreement between the RBA the prospect of the first rate hike becomes apparent. Governor and the Treasurer in 1996.

But imagine where the housing market might go if our forecasts are Since 1992 the world has changed and the flexibility of central banks wrong and the market expects the official cash rate to hold near has been severely curtailed as policy rates have run into their lower zero until well into 2024! bounds.

Certainly, APRA would introduce some controls on new lending – Yet we are still asking the RBA to achieve the same target. limits on high Loan to Valuation Ratios; other limits on leverage; and likely increases in the threshold lending rate used in loan Other central banks have lower targets – the US Federal Reserve serviceability assessments. and ECB both target a symmetric 2%; the Bank of England targets 2%; and both the Bank of Canada and Reserve Bank of New Zealand These measures are already coming into the frame. Assistant target a 1–3% range with a mid–point of 2%. Governor Bullock noted in a speech on September 23: “Unlike 2014 and 2017 the concerns this time are not specific types of lending such We have recently seen some of these central banks adjust their as investor or interest only. So the tools used at that time are not targets. really appropriate at this time. This suggests that if there were a need for so called macro prudential tools for addressing risks, they should The argument against lowering the RBA target seems to be that be targeted at the risks arising from highly indebted borrowers. Tools it would lower inflationary expectations and change economic that address serviceability of loans and the amount of credit that can behaviour. But measures of expectations, including market be borrowed by individual borrowers are more likely to be relevant.” measures, are much closer to 2% than 2.5%, suggesting there should be limited incremental impact on expectations of a change to 1–3% But such policies will impact first home buyers and upgraders while rather than maintaining 2–3%. investors, who have been slow to enter the market in this cycle, are generally likely to stay ‘under the radar’ with that proposed policy My view is that markets would welcome a move to align the RBA’s approach. target with other central banks.

New lending to investors is around 30% of total new lending The rationale and efficacy of targeting a higher inflation rate than compared to 40–45% in the previous periods referred by Assistant our peers are not clear. Governor Bullock, explaining why any policies would not be targeted at investors. The Treasurer could implement such a change after the next election which must be held by May next year at the latest. Some previous A near zero cash rate and direct controls targeted at first home elections (2010; 2013) have seen the Treasurer and the Governor of buyers and upgraders rather than investors may well lay the the Reserve Bank renew the ‘Statement on the Conduct of Monetary foundations for a second investor–driven leg to the housing boom Policy’ which specifies the Bank’s inflation target. through 2022 and 2023. In the event of a change of government at the next election a Restrictions on the supply of credit may also see more borrowers renewal of the Statement would be necessary but, equally, the move towards less closely regulated sources of credit. A long– current government could also initiate a renewal. extended period of direct controls, covering a number of years, may distort the efficiency of markets. Reducing that target to a 1–3% range rather than the current 2–3% range would recognise the structural changes in our economy since

Westpac weekly 3 1992 when the target was first adopted and align Australia with the central banks in other developed economies.

That decision would allow the Governor the flexibility to pursue his objective of lifting inflation; wages growth and lowering the unemployment rate without risking a dangerous imbalance in the housing market in pursuit of an anachronistic objective.

On the Governor’s own forecasts a 2% print on underlying inflation is expected by mid – 2023. That would be a year earlier than the implied timetable to reach 2.5%.

A long and costly enquiry into an institution which is both admired internationally and is the model of best practice in Australia as to why it has not achieved its inflation mandate when the target is out of line with the changes in the Australian economy over 30 years and with the practices of all the major overseas central banks seems unnecessary.

Conclusion

We think the RBA will achieve its inflation and full employment objectives by early 2023, allowing a move away from the emergency policy settings.

The level of uncertainty is high and, if we are wrong, the prospect of four years of holding the cash rate near zero presents real risks for asset markets given highly leveraged household balance sheets.

To eliminate these risks the Treasurer and the RBA should adjust the current inflation target of 2–3% to 1–3% in recognition of the structural changes in the Australian economy and to move into line with the policies of other central banks.

Bill Evans, Chief Economist

Westpac weekly 4 THE WEEK THAT WAS

This week had a near sole focus on economic policy, here and abroad. While the US dollar gained on the September FOMC meeting communications, it more than reversed the move in 24 hours. For the RBA, the minutes of their September meeting highlighted the Principally this looks to have come about because of the Bank of reasoning behind their decision to take the first step in tapering asset England’s September meeting which saw a greater focus on supply purchases this month, but to then delay the next until 2022. Keeping constraints, wage pressures and hence the persistence of inflation in asset purchases at $5bn per week until “at least November 2021” was 2022. Inbuilt in our currency forecasts is a view that the FOMC will also considered, but the decision to taper this month was eventually be slower to act on tapering (the BoE/ECB respectively stopping/ made given the economy is seen returning “to its pre–Delta path by materially reducing purchases at December 2021/ March 2022) and mid–2022” and as “a number of other central banks are tapering”. potentially could raise rates after some other major central banks, most notably the Bank of England and Canada. The decision to reduce asset purchases based on expectations of our economy over the year ahead and policy abroad contrasts with To March 2022, we therefore continue to expect the US dollar to the RBA’s clear intention with regards to subsequent rate hikes to weaken at the margin before recovering back to near current levels make each decision on actual data instead of forecasts, and to not by end–2023. While the US may take time in beginning both stages let the timing of other central banks impact. Arguably, this is because of normalisation, they are likely to increase interest rates further to QE is seen as an extraordinary measure for times of heightened risk end–2024. Note the ECB is unlikely to increase rates over this entire and uncertainty, and as reducing the pace of asset purchases is not period, leaving the Euro most susceptible to weaker outcomes in regarded as policy tightening, but rather easing at a lesser rate. late–2022 and 2023.

We take from the September minutes and other recent RBA China has also remained in the headlines this week, not because of communications that the RBA believe the outlook is likely to be monetary policy, but instead because of the plight of Evergrande strong enough to see a further reduction in asset purchases from and the impact of broader reforms to the residential construction February, and an end to the program in May/August. Thereafter, the sector which, together, have materially reduced momentum. decision to increase interest rates will be made on progress in the economy, particularly the pursuit of full employment and robust The Evergrande situation is immensely complex and so will take wage gains which are seen as necessary to hold inflation in the time to work through. But there is a way forward, at least for the RBA’s 2–3%yr target range. construction projects being undertaken by the firm. These projects are diversified by region and, even with the Evergrande holding The first steps towards policy normalisation were also front of mind company in a precarious financial position, still in demand. in the US this week as the FOMC held their September meeting. As we anticipated, there was no formal taper announcement. But To protect both the purchasers of these apartments and the Chair Powell and the Committee guided that the conditions for workers, they could be sold or handed over to other developers this decision were “all but met”. Depending on the strength of the for completion. Notably, Evergrande’s spread across tier 2 and 3 September and October employment reports, their decision to locations is important to authorities as it fits with their intention to taper could come at either the November or December meeting. make wealth and quality of life more equitable across the population. At present, risks related to the US’ delta wave of COVID–19 and This means the projects should also be valuable to other developers. developments in China seem to be having little bearing on US monetary policy (more on China below). While such a course would allow existing projects to be completed and prices to stabilise, thereby resetting the sector for another Highlighting the belief that Chair Powell and the Committee have in period of growth, it would do little to alleviate the parent company’s the US economy, not only do they expect to taper asset purchases financial issues, at least in the near term. We expect these would be fully by mid–2022, but a first rate hike by end–2022 is now seen as worked through slowly to not hit confidence or take unnecessary an even bet, with a moderate rate hike cycle to follow, taking the fed risks, at least for domestic investors. These parties will receive the funds rate to 1.8% by end–2024. proceeds that flow from the construction subsidiaries and the other assets of Evergrande, likely in order of sophistication – least to most. Over this period, full employment and growth above trend are Preferencing retail investors and domestic bond holders over the expected to be sustained. This highlights that at no time over the local banks also makes sense given the banks can be helped by forecast period is policy expected to be restrictive. Indeed, if the liquidity provision as necessary. 1.8% for the fed funds rate at end–2024 is achieved, the real fed funds rate would still be negative. These revised FOMC forecasts are Our take home for China’s outlook from the current circumstances broadly in line with Westpac’s existing views, both with respect to is that, while risks will remain near term, like most regulatory change the timing and scale of policy changes. Our terminal fed funds rate China undertakes, authorities actions here will make the economy is a little lower though at 1.625%. and financial sector stronger for the long–term.

Westpac weekly 5 NEW ZEALAND

Week ahead & data wrap

To Level 3 and beyond With those observations in mind, we expect activity to rebound decisively once lockdown restrictions are ultimately eased. While the Auckland region breathed a sigh of relief in regaining Putting some numbers around it, we expect a 6.1% jump in GDP some freedoms (and access to takeaway coffee) with the move over the December quarter, after an expected 5.5% dip in the down to Alert Level 3 this week, the Covid restrictions of now September quarter. varying levels continue to impact short–term activity within the economy. By and large, though, the effects appear to be playing out If the economy performs along those lines, and assuming that Covid in line with our expectations and with previous experiences. restrictions gradually ease, then we expect the economic challenges facing the economy prior to the lockdown to quickly return. On that front, we have had some readings from households These challenges include surging demand, supply constraints, regarding their sentiment. The September quarter Westpac including for labour and things like building materials, and rising McDermott Miller Consumer Confidence survey showed that inflation pressures. consumer sentiment has so far remained relatively resilient. And while household confidence levels did dip compared to prior to the We expect the Reserve Bank to begin its OCR hiking cycle in lockdown, these moves lower were modest and noticeably less than October, after it had hit pause back in August at the time of the the slump we saw at a similar stage of the major 2020 lockdown. reintroduction of lockdown measures. We expect 25 basis point increases in October, November, February and May, with further And in some ways, households appear to be looking through gradual increases to a high tide mark of 2% by the end of 2023. this lockdown. This week’s other major September quarter survey release, the Employment Confidence Index, highlighted Indeed, with the case for rate hikes now widely accepted, the that household views of the labour market actually improved discussion is now turning to one of tactics. Recently financial over the quarter, in particular around perceptions of current job markets have been pricing in some chance of a 50 basis point move opportunities. Businesses have remained in hiring mode even at the October review, just as they were ahead of the August review. through this latest lockdown, wary of the skill shortages that have been building up over recent months. A speech this week by the RBNZ Assistant Governor shed some light on this matter. The bottom line is that different conditions For the same reason, perceptions about job security were little warrant different approaches. Last year, we had no experience of changed in the survey, with firms largely looking to hold on to their what a lockdown would do to the economy, and the risks to activity existing workers. While there has been some lift in the number of and inflation were seen as skewed to the downside. In that situation, people receiving the Jobseeker benefit, it’s been far less than we the ‘least regrets’ option was to move fast and hard. saw in last year’s Level 4 lockdown. And there’s been no discernible movement in the weekly employment snapshots provided by Stats This year, though, there’s much more clarity around how the NZ, albeit based on tax data that is incomplete. We’ll get a fuller economy responds to lockdowns, and the risks are seen as more picture of this with the monthly employment indicator published two side. In these conditions, central banks can operate more next Tuesday. like they normally do: assess the starting point for the economy, run their forecasts, and produce a policy track that’s consistent Meanwhile, household spending has begun to rebound as lockdown with meeting their inflation and employment mandates. And this restrictions around the country have eased. After dipping by as approach generally favours small, predictable moves, to avoid much as much 50% compared to pre–Covid levels (when Alert Level creating unnecessary volatility. 4 was in force nationwide), electronic card spending is now sitting around 15% down on pre–Covid levels. This doesn’t entirely rule out a 50 basis point move at some point in the future. If the RBNZ decided that the risks around inflation Also, and unsurprisingly, the regional Alert Level split is mirrored were becoming skewed to the upside, it could conclude that strong in regional retail spending patterns. Spending in regions outside of action is again needed. And indeed, last week’s whopper GDP result Auckland is back even with pre–Covid levels, while spending remains demonstrated that the economy was already running much hotter around 50% down in Auckland. than expected coming into the current lockdown.

There has also been a change in the mix of spending. Spending on Nathan Penny, Senior Agri Economist NZ grocery items has seen its now familiar spike, while spending on durables has continued its resilience. However, hospitality spending has dived, although it has lifted to a degree following the various relaxations of Covid restrictions and as venues have re–opened to customers.

Round–up of local data released over the last week

Date Release Previous Actual Westpac f/c Mon 20 Aug BusinessNZ PSI 57.9 35.6 – Tue 21 Q3 Westpac–MM consumer conf. 107.1 102.7 – Wed 22 GlobalDairyTrade auction (WMP) 3.3% 2.2% 1.0% Fri 24 Aug trade balance $m –397 –2,144 –2150

Westpac weekly 6 DATA PREVIEWS

Aus Aug retail trade

Sep 28, Last: –2.7%, WBC f/c: –1.5% Monthly retail sales Mkt f/c: –2.0%, Range: –4.0% to –1.5% $bn % chg 32 24 Retail sales fell a further 2.7% in July following a 1.8% fall in June. mthly % chg (rhs) COVID lock–downs had clear impacts with a steep 8.9% drop in 30 level (lhs) 18 NSW as lockdowns tightened but a more mixed result in Vic which 28 mthly % chg - trend (rhs)* was coming out fourth lock–down initially but entered into another 12 26 ‘delta’ 12–day lock–down mid–month – the net effect saw sales tick up lockdowns 6 1.3%mth coming off a 4% fall in June. 24 0 22 August saw restrictions intensify with the delta lockdown continuing COVID-19 national lockdown -6 in NSW, Vic reopening initially but moving back into an extended 20 Vic lockdown from week two, along with ACT, and Qld in lockdown ‘second wave’ 18 -12 initially, albeit with restrictions easing from week three. As always, Source: ABS; Westpac Economics there is some uncertainty around the net effect of measures and 16 -18 periods of eased restrictions, particularly for retail, 40% of which Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jul-20 Jul-21 Jul-22 is basic food which outperforms during lock–downs. Indeed, our Westpac Card Tracker suggests retail sectors were relatively steady in the month. On balance we still expect to see a net decline in sales, but arguably a relatively modest one of –1.5%mth.

Aus Q3 AusChamber–Westpac business survey

Sep 28, Last: 63.1 Westpac-AusChamber Composite indexes Actual & expected, sa index 80 index 80 The AusChamber Westpac business survey for Q3, conducted through August into September, will provide a timely update on 70 Actual Expected 70 manufacturing and insights into economy wide trends. No doubt the latest lockdowns, centred in NSW and Victoria, will 60 60 disrupt activity. Of interest will be the severity of those disruptions 50 50 and the response of businesses around hiring and investment. Recall that manufacturing had considerable momentum ahead 40 40 of the latest lockdowns – with the Westpac–AusChamber Actual Composite index printing at 63.1 for the June quarter. 30 30 Sources: Australian Chamber, Westpac The strong broad–based recovery across the economy provided a 20 20 boost to the manufacturing sector. Notable positives prior to the Jun-95 Jun-99 Jun-03 Jun-07 Jun-11 Jun-15 Jun-19 latest lockdown included: the home building uptrend; the recovery in consumer spending (with a focus on goods); businesses lifting spending on equipment investment; and ongoing strength in government spending, including investment in additional transport infrastructure projects.

Aus Aug dwelling approvals

Sep 30, Last: –8.6%, WBC f/c: –5% Dwelling approvals Mkt f/c: –5.0%, Range: –7.1% to 2.0% '000 '000 300 Dwelling approvals continued to unwind a major policy–induced 25 houses, priv. (lhs) units, priv. (lhs) total annualised (rhs) pull-forward with a further 8.6% drop in July marking a cumulative underlying 250 25% decline from their March peak, associated with the end of the 20 demand (5yr avg) Federal Government’s HomeBuilder scheme. Dwelling approvals had 200 posted a phenomenal 84% surge between last year’s COVID low and 15 March – even with the big decline since then, monthly approvals are 150 still up 21%yr and 8.6% above their pre–pandemic level. 10 100 The HomeBuilder unwind likely has further to run, approvals 5 potentially dropping well below their ‘underlying trend’ pace as the 50 *3mth avg, dotted lines are monthly shadow of the pull–forward effect rolls through. Add to this more Sources: ABS, Westpac Economics meaningful COVID lock–down disruptions in the three biggest states 0 0 Jul-06 Jul-09 Jul-12 Jul-15 Jul-18 Jul-21 and there are some clear downside risks. On balance, we expect approvals to fall another 5%.

Westpac weekly 7 DATA PREVIEWS

Aus Aug private sector credit

Sep 30, Last: 0.7%, WBC f/c: 0.5%, Mkt f/c: 0.5%, Credit: annual growth jumps to 4.0% Range: 0.1% to 0.8% % ann % ann 30 30 Over the first half of 2021, credit growth was on an improving trend, Total Housing Business Sources: RBA, Westpac across residential and business. The monthly pace lifted from around 25 Economics 25 0.2% to 0.4%. This was supported by substantial policy stimulus and 20 20 a reopening of the economy. 15 15

The latest lockdowns represent a temporary setback. 10 10

An initial impact from lockdowns is that firms look to access lines of 5 5 credit to support cash flow. This occurred early in 2020, including a 0 0 2.9% jump in March, and is evident in mid–2021. -5 3 year period -5 For June and July, total credit grew by 0.9% and 0.7%, respectively. -10 -10 This included strong gains in business, 1.6% and 1.1%. Jul-91 Jul-96 Jul-01 Jul-06 Jul-11 Jul-16 Jul-21

For August, we anticipate a 0.5% rise in total credit, factoring in another increase in business (as Victoria returned to lockdown), albeit not on the scale evident in June and July.

Aus Sep CoreLogic home value index

Oct 1, Last: 1.5%, WBC f/c: 1.4% Australian dwelling prices

%ann 21 %mth Australian dwelling prices posted another solid gain in Aug despite 18 mthly (rhs) annual (lhs) 6 significant COVID–related disruptions to the Sydney and Melbourne 15 markets. Prices rose 1.5% nationally after a 1.6% rise in July – a 12 4 relatively strong gain, albeit down on the red–hot pace seen in the 9 first half of 2021 when monthly rises were in the 1.9–2.8% range. 6 2 The 3mth annualised pace of gains has eased back to just over 20% 3 from a cracking 30% peak in May. Market turnover saw much bigger 0 0 COVID disruptions, dropping about 6% nationally, big falls in Sydney -3 and Melbourne partially offset by rises elsewhere. -6 -2 COVID disruptions continues in Sep, Sydney and Melbourne -9 Sources: CoreLogic, Westpac Economics -12 -4 remaining in lockdowns. However, the picture on prices looks Aug-09 Aug-11 Aug-13 Aug-15 Aug-17 Aug-19 Aug-21 similar with daily measures pointing to only a slight further loss of momentum. Nationally these point to a 1.4% gain for the month as a whole.

Aus Aug housing finance approvals

Sep 2, Last: 0.2%, WBC f/c: –3.0% New housing finance approvals Mkt f/c: –2.0%, Range: –3.0% to 0.5% $bn $bn 36 36 Housing finance approvals nudged up slightly by 0.2% in July, 32 total 32 a slight dip in owner occupier approvals more than offset by a owner occupier 28 28 steady rise in investor loans (+1.8%). Weakness continues to centre investor on construction–related loans, where the HomeBuilder boost is 24 *excl. refinance of existing loans 24 unwinding, and loans to first home buyers who are starting to react 20 20 to deteriorating affordability. 16 16 Lock–down related disruptions were minimal in July but should 12 12 become a little more pronounced in Aug, the full effects likely to 8 8 show through from Sep. 4 4 Sources: ABS, Westpac Economics Turnover definitely retraced in Aug but much of this would have 0 0 Jul-03 Jul-06 Jul-09 Jul-12 Jul-15 Jul-18 Jul-21 been ‘unanticipated’, i.e. people may have secured finance in the month but been unable to transact. Overall, we expect finance approvals to fall 3% with some risks to the downside.

Westpac weekly 8 DATA PREVIEWS

NZ Aug Monthly Employment Indicator

Sep 28, Last: 0.8% NZ Monthly Employment Indicator filled jobs

000s 000s The Monthly Employment Indicator, based on data from income tax 2,300 2,300 filings, showed a strong lift in the number of jobs in recent months as the economy continued to gain momentum. Filled jobs in July 2,250 2,250 were 2.4% above their pre–pandemic peak. 2,200 2,200 New Zealand returned to lockdown in the last two weeks of August after a new Covid–19 outbreak. Remarkably, the weekly snapshots 2,150 2,150 provided by Stats NZ (albeit from incomplete data) suggest little impact on jobs so far. The renewed wage subsidy scheme has helped firms to hold on to workers, and businesses are aware that 2,100 2,100 skill shortages will remain an issue as the country emerges from this Source: Stats NZ lockdown. 2,050 2,050 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21

NZ Aug residential building consents

Sept 30, Last: +2.1%, Westpac f/c: –20% NZ building consents

consents $m 5000 1250 Residential consent issuance rose 2.1% in July, taking annual consent Residential (number, left axis) numbers to a fresh all–time high. 4000 Non-residential (value, right axis) 1000 We expect that consent issuance will fall back sharply in August in response to the dialling up of the Alert Level halfway through the 3000 750 month and have pencilled in a 20% decline. However, there is a wide band of uncertainty around this month’s figures. Notably, the ability 2000 500 to continue processing consents during lockdown may limit the downside risk. 1000 250 Despite the expected pull back in August, annual consent numbers Sources: Stats NZ are set to linger at multi–decade highs, with construction activity set 0 0 to remain strong over the year ahead. Jan-03 Jan-07 Jan-11 Jan-15 Jan-19

NZ Sep ANZBO Business Confidence (Final)

Sep 30, Domestic Trading Activity last: 18.2 NZ business confidence

Net % % 100 6 The preliminary reading on business activity for September showed 80 that trading activity eased in the wake of the Delta lockdown but Own activity outlook (left axis) Inflation expectations (right axis) 5 remained firmly above pre–Covid levels. 60 40 4 The final report for September will provide a more detailed look at 20 how business sentiment is faring in the face of ongoing restrictions 3 and will also provide a breakdown by industries. There will most 0 likely be divergences across industries between those that can -20 2 operate with social distancing versus those that are customer facing. -40 In addition, industries that are heavily concentrated in Auckland 1 -60 could see divergences as Auckland was in Alert Level 4 longer than Sources: ANZ the rest of the country. -80 0 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 Underlying inflation gauges will again be an area worth keeping an eye on as inflation expectations from the last survey reached the top of the RBNZ’s inflation target band.

Westpac weekly 9 For the week ahead

Market Westpac Last Risk/Comment median forecast Mon 27 Eur Aug M3 money supply %yr 7.6% – – Policy remains highly supportive. US Aug durable goods orders –0.1% 0.6% – Re–opening should beget confidence and investment. Sep Dallas Fed index 9.0 11.0 – A timely update on manufacturing in Texas. Fedspeak – – – Evans, Brainard, and Williams to speak.

Tue 28 Aus Aug retail sales –2.7% –2.0% –1.5% Basic food spend may buffer against delta lockdown drag. Q3 AusChamber–Westpac survey 63.1 – – Manuf’g sector considerable momentum ahead of lockdowns. NZ Aug employment indicator 0.8% – – Limited impact expected from the latest Covid lockdown. Chn Aug industrial profits %yr 16.4% – – Commodity prices have provided significant support, til now. UK Sep nationwide house prices 2.1% – – May ease on stretched affordabilty and tax break expiry. US Aug wholesale inventories 0.6% – – Rebuild of inventories due, but supply an issue. Jul S&P/CS home price index 19.08% 20.20% – FHFA measure also due. Sep consumer confidence index 113.8 114.6 – Delta resurgence poses a headwind for consumer confidence. Sep Richmond Fed index 9 – – Important gauge on manufacturer sentiment in region. Fedspeak – – – Chair Powell & Secretary Yellen before Senate Banking Panel. Fedspeak – – – Bullard and Bostic.

Wed 29 Eur Sep economic confidence 117.5 – – Supply constraints and shipping capacity may be headwinds. US Aug pending home sales –1.8% 1.0% – Slight uptick expected from shored–up supply. Fedspeak – – – Bullard and Bostic.

Thu 30 Aus Aug dwelling approvals –8.6% –5.0% –5.0% HomeBuilder unwind and lockdowns will weigh on approvals. Aug private sector credit 0.7% 0.5% 0.5% Strong gains in June & July, as firms accessed credit lines. Aug job vacancies 23.4% – – Will provide a timely update on Aus labour market conditions. NZ Aug building consents 2.1% – –20.0% Processing likely to be affected by lockdown, esp. in Auckland. Sep ANZ business confidence –6.8 – – First chance to see impact of latest lockdown on industries. Chn Sep non–manufacturing PMI 47.5 – – Delta hit in August, but risks dissipating. Sep manufacturing PMI 50.1 – – Manufacturing likely to mark time... Sep Caixin China PMI 49.2 – – .... smaller business to see downside risks. Q2 current account balance 52.8bn – – Full view of trade and investment income. Eur Aug unemployment rate 7.6% – – Expected to continue downtrend on reopening tailwinds. UK Q2 GDP 4.80% – – Final release for the Q2 GDP. US Initial jobless claims 351k – – Recovery in labour market to continue. Q2 GDP 6.6% 6.7% – Third release of GDP expected to be at or near prior release. Sep Chicago PMI 66.8 65.2 – To provide a timely indicator on manufacturing in Chicago. Fedspeak – – – Bostic, Evans and Bullard.

Fri 01 Aus Sep CoreLogic home value index 1.5% – 1.4% Still showing only a slight moderation during delta lockdowns. Aug housing finance 0.2% –2.0% –3.0% Lockdown disruptions to be more pronounced in Aug... Aug owner occupier finance –0.4% –0.8% – ...but full effects likely to show through from Sept. Aug investor finance 1.8% – – Housing turnover lull from lockdowns likely to impact. NZ Sep ANZ consumer confidence 109.6 – – Covid restrictions weighing on confidence. Eur Sep CPI %yr 3.0% – – Rising energy and household goods costs may spike CPI. US Aug personal income 1.1% 0.2% – Pandemic relief programs have provided income boost. Aug personal spending 0.3% 0.7% – Rotation to services should be apparent. Aug core PCE deflator 0.3% 0.2% – Re–opening pressures fading. Aug construction spending 0.3% 0.3% – Robust housing demand to lift construction spend. Fedspeak – – – Harker and Mester.

Westpac weekly 10 ECONOMIC & FINANCIAL

Forecasts

Interest rate forecasts

Australia Latest (24 Sep) Dec–21 Mar–22 Jun–22 Sep–22 Dec–22 Mar–23 Jun–23 Dec–23 Cash 0.10 0.10 0.10 0.10 0.10 0.10 0.25 0.50 0.75 90 Day BBSW 0.02 0.07 0.10 0.15 0.20 0.40 0.65 0.70 0.95 3 Year Swap 0.30 0.55 0.70 0.80 0.95 1.10 1.20 1.30 1.50 3 Year Bond 0.49 0.45 0.50 0.60 0.75 0.90 1.00 1.10 1.30 10 Year Bond 1.41 1.55 1.70 1.80 1.90 2.00 2.05 2.10 2.20 10 Year Spread to US (bps) –3 –5 0 0 0 0 0 0 0 US Fed Funds 0.125 0.125 0.125 0.125 0.125 0.375 0.625 0.875 0.875 US 10 Year Bond 1.44 1.60 1.70 1.80 1.90 2.00 2.05 2.10 2.20 New Zealand Cash 0.25 0.75 1.00 1.25 1.25 1.50 1.50 1.75 2.00 90 day bill 0.62 0.95 1.20 1.35 1.45 1.60 1.70 1.85 2.10 2 year swap 1.46 1.60 1.75 1.85 1.95 2.05 2.10 2.15 2.20 10 Year Bond 2.01 2.10 2.15 2.25 2.30 2.40 2.45 2.50 2.60 10 Year spread to US 57 50 45 45 40 40 40 40 40

Exchange rate forecasts

Australia Latest (24 Sep) Dec–21 Mar–22 Jun–22 Sep–22 Dec–22 Mar–23 Jun–23 Dec–23 AUD/USD 0.7297 0.75 0.76 0.77 0.78 0.78 0.79 0.80 0.78 NZD/USD 0.7067 0.71 0.72 0.73 0.74 0.74 0.74 0.74 0.73 USD/JPY 110.45 111 112 112 112 113 113 114 115 EUR/USD 1.1739 1.21 1.23 1.22 1.21 1.21 1.21 1.20 1.19 GBP/USD 1.3720 1.41 1.43 1.44 1.45 1.44 1.44 1.43 1.42 USD/CNY 6.4615 6.35 6.30 6.25 6.25 6.20 6.20 6.15 6.10 AUD/NZD 1.0325 1.06 1.06 1.05 1.05 1.05 1.07 1.08 1.07

Australian economic growth forecasts

2020 2021 2022 Calendar years % change Q4 Q1 Q2 Q3f Q4f Q1f Q2f 2019 2020 2021f 2022f GDP % qtr 3.2 1.9 0.7 –4.0 1.6 3.2 2.4 – – – – %yr end –0.9 1.3 9.6 1.6 0.0 1.3 3.1 2.1 –0.9 0.0 7.4 Unemployment rate % 6.8 6.0 5.1 4.6 5.1 4.8 4.4 5.2 6.8 5.1 3.8 CPI % qtr 0.9 0.6 0.8 0.7 0.6 0.4 0.5 – – – – %yr end 0.9 1.1 3.8 2.9 2.6 2.5 2.2 1.8 0.9 2.6 2.4 CPI trimmed mean %qtr 0.4 0.4 0.5 0.5 0.5 0.5 0.7 – – – – %yr end 1.2 1.1 1.6 1.8 1.9 1.9 2.1 1.6 1.2 1.9 2.6

New Zealand economic growth forecasts

2020 2021 2022 Calendar years % change Q4 Q1 Q2 Q3f Q4f Q1f Q2f 2019 2020 2021f 2022f GDP % qtr –1.0 1.4 2.8 –5.5 6.1 0.3 1.2 – – – – Annual avg change –2.1 –1.4 5.1 4.0 5.1 5.2 1.7 2.4 –2.1 5.1 4.3 Unemployment rate % 4.8 4.6 4.0 3.8 4.2 3.8 3.6 4.0 4.8 4.2 3.5 CPI % qtr 0.5 0.8 1.3 1.2 0.3 0.7 0.5 – – – – Annual change 1.4 1.5 3.3 3.9 3.7 3.6 2.7 1.9 1.4 3.7 2.5

Westpac weekly 11 DISCLAIMER

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Westpac weekly 12 DISCLAIMER

Disclaimer continued

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