Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a...

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Trends. Westpac Regional Economic Report

Transcript of Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a...

Page 1: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

Trends.Westpac RegionalEconomic Report

Page 2: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at date above. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. Westpac's financial services guide can be obtained by calling 132 032, visiting www.westpac.com.au or visiting any Westpac Branch. The information may contain material provided directly by third parties, and while such material is published with permission, Westpac accepts no responsibility for the accuracy or completeness of any such material. Except where contrary to law, Westpac intends by this notice to exclude liability for the information. The information is subject to change without notice and Westpac is under no obligation to update the information or correct any inaccuracy which may become apparent at a later date. Westpac Banking Corporation is registered in England as a branch (branch number BR000106) and is authorised and regulated by The Financial Services Authority. Westpac Europe Limited is a company registered in England (number 05660023) and is authorised and regulated by The Financial Services Authority. If you wish to be removed from our e-mail, fax or mailing list please send an e-mail to [email protected] or fax us on +61 2 8254 6934 or write to Westpac Economics at Level 2, 275 Kent Street, Sydney NSW 2000. Please state your full name, telephone/fax number and company details on all correspondence. © 2011 Westpac Banking Corporation. Past performance is not a reliable indicator of future performance. The forecasts given in this document 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 ultimate outcomes may differ substantially from these forecasts.

Contents

The Westpac Regional Economic Report is a quarterly publication

Editor:Neil BurgessSenior Commodities Analyst, AgribusinessCommercial & AgribusinessLevel 2, 275 Kent Street, Sydney, NSW 2000Telephone: (61 2) 8253 7912email: [email protected]

Overview 3

Macro overviewGrains: What is driving the markets? 4The Australian economy 6Australian interest rates 8Australian dollar 10

Commodity outlooksBeef and dairy 12Grains and oilseeds 14Sugar and cotton 16Sheep and wool 18

Summary forecast tablesFinancial forecasts – Australia 20Economic forecasts – Australia 21Forecasts – commodity prices 22Summary of world output 23

Page 3: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

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Chart 1. Chart 2.

Volume Three 2011 Trends Report

Overview

After a relatively peaceful second quarter of the year, the third quarter, being the winter months was shaping up nicely to be one of quiet progression. The weather conditions had remained reasonably stable, with welcome rain events in the west, although becoming a little dryer in the east of the country. It appeared that more ‘normal’ conditions had returned. Sub-soil moisture was plentiful, winter crops were planted, the cotton crop was harvested and generally there was an air of optimism.

Unfortunately, the third quarter of the year didn’t turn out quite so uneventful for the live cattle exporters. The export ban placed some considerable strain on the industry and not just at the exporter level. The related logistical support industries and local communities also were affected as the trade ground to a halt. The live export of cattle has resumed, however, it will take the industry some considerable time to get back to the levels seen prior to the ban being instigated. There are still on-going ramifications from the initial ban and these will take some time to be rectified. Meanwhile, the cattle exporters continue to re-build their operations and export volumes as efficiently as they can.

In other parts of the cattle market, sluggish global demand has seen cattle prices come under some pressure and have eased from their highs. Lamb prices have also retreated from their record highs as conditions have pushed greater volumes of lambs into the sale yards. Despite the easing in the national price indicators, livestock in good condition are still generating strong prices.

For the grains markets, the big news was the re-entry into the export markets of Russian wheat after their self-imposed export ban from the previous year. A better season had allowed producers to have sufficient wheat to meet their domestic needs and offer wheat to the export markets. This added some volatility to prices as the market digested the prospects of increased wheat availability. Unseasonable weather conditions in the US also added to market nervousness and volatility in prices as yields for corn remain uncertain. There is the very real prospect of corn being in short supply and rationing of demand will be done through higher prices. This is spilling over into other grains markets and is making the price picture rather blurred.

Outside of agriculture, the global economic conditions in the US, UK and Europe are making their effects felt. Markets in equities, currency and commodities have remained nervous and volatile as investors weigh up the associated risks. While the fundamentals of supply and demand for the agricultural commodities remain sound, it is the technical markets that are adding to the recent volatility.

In this quarter’s edition, the special feature article is on the grains industry.

Over the last twelve months wheat prices have shown some considerable volatility. This is as a result of a number of factors such as the Russian export ban, difficult growing conditions in Europe and the US and difficult harvest conditions in Australia. With the Russians now back in the market and a potential for a good Australian crop, it would appear that the wheat market may be in for some interesting times.

Farm Output

3

4

5

6

7

8

Dec-85 Nov-89 Nov-93 Nov-97 Nov-01 Nov-05 Nov-09

Farm GDP

Source: ABS, Westpac Economics

$bn/Qtr

Westpac Commodity Index Price

0

50

100

150

200

250

300

Feb-85 Feb-89 Feb-93 Feb-97 Feb-01 Feb-05 Feb-09

USD Index

AUD Index

Source: MLA, Bloomberg, Westpac Economics

Index

Page 4: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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Volume Three 2011 Trends Report

Grains: What is driving the markets?

The global grains markets are always an interesting place to watch. There are so many competing factors, so much hearsay and innuendo for both the fundamental and technical traders to assimilate, digest and then make their calls on what this all means for prices. Currently, the grains markets are in a sort of ‘no man’s land’. There is a multitude of activity taking place, particularly in the northern hemisphere where harvest is currently under way. Guesstimates and estimates are being made about crop sizes and yields, but until harvest has been completed and the grain is in the bin, no one really knows the true extent of season.

The market activity at this moment in time can be divided into roughly three parts, the wheat market, the corn market and for Australian growers, the state of the current domestic crop that is in the ground.

The overall supply situation in the global wheat market could be easily described as comfortable. The current estimates for global production stand at 678 million tonnes. This is on the back of a current surplus stock of 193 million tonnes, which gives a total global available supply of approximately 872 million tonnes. Global consumption of wheat is expected to continue on its upward trend. Global consumption in the 2011/12 year is expected to be 677 million tonnes. Despite this record level, it will still result in a potential surplus of 195 million tonnes.

If this estimated production figure materialises, this will be the world’s third largest crop on record. To put the production number into some perspective from previous years, the estimates for the 2011/122 year are approximately 30 million tonnes above the 2010/11 production year. It is important to note that in the 2010/11 year, there were some significant issues with production, namely the drought conditions which caused the Russian wheat export ban and tougher conditions through Europe. The 2011/12 year has been considerably kinder to the Former Soviet Union (FSU) region; as such there has been a dramatic shift upwards in production from last year’s levels. Of the 30 million tonnes in estimated additional production, Russia, the Ukraine and Kazakhstan account for roughly 26 million tonnes. These three countries will account for a combined estimated production volume of some 94 million tonnes, which represents an 11% increase over their combined 5 year averages. Another notable contributor to the increases in production is Canada, whose total production volume is estimated to have increased by 2.5 million tonnes to around 24 million tonnes.

Not everything on the production side of the ledger has been a positive. There has been a considerable fall in production in Argentina and of course there have been falls in production in the US. The very dry conditions that have prevailed in the US wheat belt continue to dog production. While the USDA has reduced the potential crop estimates from US producers by 3.6 million tonnes, there is still the potential for this to decline further. As estimated crop production numbers have come to the market, one would have expected there to be some significant falls in price as the overall supply of wheat and ending stocks of wheat have increased. While some falls have been seen, the wheat market has gained some considerable mutual support from the activities in the corn market.

The current US corn production season has severely tested the patience of the growers. After an incredibly wet start to the season in the corn-belt which extended the planting season, the growing conditions have ranged between the sublime to the ridiculous. While some corn growing states have experienced excellent growing conditions, the bulk of the corn-belt has experienced hot and dry weather, particularly during the all important pollination phase. These conditions have negatively impacted on corn pollination and as such yields have been reduced significantly. There is still some conjecture over the USDA numbers for the estimated corn harvest; some consider their estimated harvest of 855 million tonnes to be bullish. Despite increases in planted acres, yields per acre are still in dispute. Whatever the outcome, consumption levels of corn, at an estimated 862 million tonnes are still in excess of production. This means that corn stocks are expected to hit their lowest levels since 2006/07 at an estimated 118 million tonnes.

With a tight corn market the only effective way to ration supplies against a bullish demand curve is to see prices rise. If this is the scenario and corn prices start to get close to the US$8/bushel price, then the feed-lot industry, who have high corn demand for animal feed will start to substitute the corn for wheat in their dry ration mix. Should this start to occur on large scale, it will provide some significant impetus and additional upward pressure on wheat

Estimates are made.

Global stocks remain sound.

Yield improvements are seen.

Argentinian and US production back.

Corn market suffer weather effects.

Will rationin start?

Page 5: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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

Chart 1. Chart 2.

Volume Three 2011 Trends Report

Grains: What is driving the markets?

demand to begin to push the price of wheat in an upward trajectory. While the corn harvest is still progressing, the full extent of the harvest is not yet verified and there is still time for further reductions to take place. If this is the case, expect further pressures to be seen on prices.

From an Australian perspective, a tight corn market, increased substitution from corn to wheat and rising prices across the grains markets will be a positive as this should help push up the price of Australian produced wheat.

The 2011/12 Australian crop is at the proverbial ‘cross road’. A positive start to the growing season with fields displaying excellent moisture profiles have given crops a solid start. However, a dry winter in many parts of the wheat growing regions has started to negatively affect crop potential.

Western Australia has experienced a solid start to their growing season, one considerably better than previous years. While crops are currently looking healthy with good yield potential, good rains are still required to ensure that potential is realised. South Australia and the Eyre Peninsula have experienced some very hot and dry conditions earlier than expected and this has cut yield potential already, while parts of central and southern NSW have also been experiencing dry conditions. The recent release of the ABARES crop estimations placed wheat production at 26.2 million tonnes; however, after recent conditions this estimation would appear bullish. Estimations from various sources now place Australia’s wheat crop closer to the 22.5 – 23 million tonne range. This slightly smaller crop than originally estimated will certainly ease pressures on wheat industry logistics. Current estimates from the Australian Bureau of Statistics put the current wheat stock at just over 12.5 million tonnes with a total of approximately 8.9 million tonnes uncommitted. This is a considerable increase on the corresponding period last year where uncommitted stock volumes were 4.406 million tonnes.

With the northern hemisphere harvest slowly coming to a close and with several months before Australia’s crop is ready, there is still plenty of time for rumour and weather to make their presence felt in an already volatile and highly charged market. For Australian producers, it’s a time to watch this space.

Positives for Australian.

Rain stops falling.

Crop estimates ease volumes.

Corn: Global production and consumption.

500

550

600

650

700

750

800

850

900

2002/03 2004/05 2006/07 2008/09 2010/11

Production Consumption Source: International Grains Council

Million m/t

Wheat: Global production and consumption

400

450

500

550

600

650

700

750

800

2002/03 2004/05 2006/07 2008/09 2010/11

Production Consumption Source: International Grains Council

Million m/t

Page 6: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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Volume Three 2011 Trends Report

The Australian economy

On 15 July we downgraded our growth forecasts for the world economy and Australia. Recent developments, globally and domestically, have reinforced our expectations that activity will be weaker than suggested by the consensus view. We are forecasting Australian GDP growth to average 1.2% for 2011, upgraded fractionally from 1.0% following the release of the June quarter national accounts, and we have left our growth forecast for 2012 unchanged at 2.5%. The RBA view stands in contrast to ours, with the Bank in their 5 August quarterly Statement on Monetary Policy forecasting growth of 2% for this year and 4½% for 2012.

The Australian economy has rebounded from the severe weather disruptions of early this year, expanding by 1.2% in the June quarter. This was in line with our forecast of 1.1%, although Q1 growth was upgraded a little to a contraction of –0.9% from –1.2%. However, the mix of Q2 activity was disappointing. Domestic demand growth slowed, to 0.7% from 1.4%. Net exports remained a drag on growth, as exports were slow to recover. A one–off inventory build–up, in part because of the mining sector returning to more normal conditions, was the saviour in Q2, adding 0.8ppts to growth. But, an inevitable slowing in the rate of inventory accumulation will see inventories make a sizeable subtraction from growth over the second half of 2011.

Our analysis indicates that the economy is entering a mid–cycle slowdown. Domestic demand growth, which was just a little below par at 3.4% in the year to June quarter 2011, is forecast to slow to 2.0% over the year to June 2012. The domestic economy faces a number of headwinds: interest rates, the high Australian dollar, stretched housing affordability, household debt and fiscal consolidation. This is against the backdrop of a deteriorating international environment. Together, these factors suggest the consumer, housing construction and public investment will restrain growth.

One major surprise in the national accounts update, which challenges our view, was a stronger starting point for consumer spending. Consumption increased by 1.0% in the June quarter, to be up 3.2% over the year. On the face of it, this is inconsistent with a “cautious consumer”. Although, it was also notable that the household savings rate remained elevated, at 10.5%, a little lower than the 11.7% for the March quarter but above the 8.7% of a year–ago. The national accounts result – which suggested that retail sales increased by 1.4% – is at odds with the retail sales survey, which reported a rise of just 0.3% and is inconsistent with anecdotes and earning results of retailers.

Much has happened since April to June. There has been a loss of confidence amongst consumers and business, the labour market has taken a turn for the worse and private business surveys report that business conditions have softened to below trend. Consumer Sentiment declined to be at 96.9 in September, down from an average 103.5 for the June quarter. Employment contracted in both July and August, down a total of –14k, and the unemployment rate increased to 5.3%, up from 4.9% in April. This will weigh on household income growth and reinforce recent consumer concerns about their job security. In this environment consumer spending is set to revert to the sub–par pace that has been evident for much of the time since the global downturn. We are forecasting a slowing of consumer spending growth to a sub–2% pace for the four quarters to June 2012.

As noted above, we expect weakness in housing activity and public demand. Housing activity is forecast to decline by 1% over the year ahead, with a drop in new dwelling construction only partially offset by a rise in renovation work. Public demand growth is forecast to expand by just 1% over the year ahead as the Government’s fiscal stimulus package continues to unwind.

On the trade front, while net exports improved substantially from the weather disruptions of Q1, they remained a drag in the June quarter, slicing –0.5ppts off GDP growth. The loss of competitiveness associated with the high Australian dollar is a significant negative. While the Qld coal sector is recovering from the January floods, the return to normal production levels is taking longer than anticipated. We do expect net exports to add to growth over the second half of this year, but we are forecasting only a small addition in Q3.

In closing, business investment will provide a growth pulse for the economy over the year ahead. However, the strength of this pulse is a matter of debate. We are forecasting only a modest strengthening in the year ahead.

Andrew Hanlan, Senior Economist

Demand slowed in Q2 ...

... despite a decent rebound ...

... from the disaster hit Q1 contraction.

Confidence surveys ...

... paint a sombre picture.

Mining capex has a lot to offset ...

... with weakness in both housing & public.

Page 7: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

The Australian economy

Australia: economic outlook

-3

0

3

6

9

-3

0

3

6

9

Jun-87 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11

% ann % ann

Domestic demand (lhs) Demand, forecast (lhs) GDP GDP, forecast (rhs) forecasts

to end '12

Sources: ABS, Westpac Economics

Australia: the domestic growth mix

-2

0

2

4

-2

0

2

4

consumer housing business public demand

ppts cont'

2009 2010 2011f 2012f

ppts cont'

Sources: ABS, Westpac Economics

contributions to year end domestic demand growth

Household savings rate climbs

0

3

6

9

12

15

-6

-3

0

3

6

9

12

15

Jun-87 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11

% income % income

Sources: ABS, Factset, Westpac Economics

Australia: household demand to soften

-3

0

3

6

9

-3

0

3

6

9

Jun-87 Jun-91 Jun-95 Jun-99 Jun-03 Jun-07 Jun-11

% ann % ann

Household demand H'hld D, forecast (lhs) GDP GDP, forecast (rhs)

Sources: ABS, Westpac Economics

Jobs market cools, unemployment rises

-4

-3

-2

-1

0

1

2

3

2 3 4 5 6 7 8 9

10 11 12

Aug-89 Aug-94 Aug-99 Aug-04 Aug-09

Unemployment rate (lhs)

Full Time employment * (rhs)

Sources: ABS, Westpac Economics % chg, 6mth %

* smoothed

Mining investment boom

0

2

4

6

8

10

50

70

90

110

130

Jun-86 Jun-92 Jun-98 Jun-04 Jun-10

index $bn /qtr

Terms of trade (lhs) Infrastructure ** (rhs)

Sources: ABS, Westpac Economics

** Commencements for resource projects (2 qtr avg) excluding Pluto & Gorgon

private

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8

Volume Three 2011 Trends Report

Australian interest rates

Markets are now pricing in a much more aggressive rate cut profile than even Westpac expects. Readers will note that on July 15 we forecast that the RBA would begin cutting rates by 100bps with the first 25bp cut scheduled for December. At the time Westpac was the only forecaster (in the market poll of 23) predicting lower rates. We expected the RBA’s cash rate to be 3.75% by September 2012. The remainder predicted a range of 5% to 6%.

Markets are now pricing a rate level of around 3.25% by September next year with rates down by around 75bps by the end of this year. We feel market pricing is too aggressive partly because pricing is not being driven solely by assessments of the likely decisions by the Reserve Bank but by large investors who see Australian interest rates as an appropriate hedge for a major global shock.

Even so, recent data developments inside the Australian economy have strengthened the case for a rate cut.

The Australian Bureau of Statistics has implemented a more sophisticated seasonal adjustment methodology to recalculate the inflation print for the June quarter (and previous history). Core inflation has now been revised down from an original estimate of 0.9% in the quarter to just 0.6%. Prior to this revision the Reserve Bank (which relies upon past inflation prints as the key indicator of inflation trends due to inertia in the series) felt constrained to deal with the clear slowing in the domestic economy due to inflation risks. Now those fears would be largely allayed as the 0.9% initial print for core inflation can be seen as an aberration rather than the beginning of a trend.

As we have discussed many times previously a key trigger for a rate cut will be the state of the labour market. The unemployment rate has now risen from 4.9% to 5.3%. Previous rate cut cycles have been triggered by a deterioration in the labour market. If we consider the first rate cut in September 2008 (BEFORE Lehman), the unemployment rate had risen from 4.0% to 4.3%. Before the easing cycle in 2001, the unemployment rate had risen from 6.0% to 6.3%, and in 1996, from 8.4% to 8.6%.

In previous cycles, 0.4ppt increase in the unemployment rate was enough to inspire some action. The RBA will be aware that the unemployment rate continues to rise long after the first rate cut in the cycle, as it takes a considerable time for changes in monetary policy to have their maximum impact on activity. In the 1996/97 cycle, the unemployment rate peaked in February 1997, long after the first hike in August 1996. In 2001, the unemployment rate peaked in October 2001 following the first cut in February 2001. In 2008/09, the rate peaked in June 2009 following the first cut in September 2008.

Further increases in the unemployment rate are likely to be on the way. Unemployment expectations, as measured by the Westpac–Melbourne Institute as part of the Consumer Sentiment Survey, rose 8.5% in September following on from a 2.0% gain in August. Remembering that a rise in unemployment expectations is consistent with a deterioration in the labour market, it is quite revealing that this indicator has risen almost 35% so far this year to be up 44% over the last 12 months. This suggests that households are observing a softer jobs market and are becoming increasingly insecure in their jobs.

Another result from the Westpac survey showed that Consumer Sentiment rose by 8.1%: probably because the Reserve Bank stopped threatening to raise interest rates. It is still weak in absolute terms, being 15% below last year’s average, and household finances are still a cause of considerable concern and vulnerability. Take into account that house prices are falling, equity markets are in the red and the cost of staples (food, fuel, utilities) remains high, and it is not difficult to see where household concerns are emanating from.

The Reserve Bank Board next meets on October 4. We can be confident that there will be no more talk about raising interest rates. Confirmation of steady rates, with no threats to raise them, is likely to calm those households who still fear rate hikes. However, given ongoing uncertainty around the global economy and signs of deterioration in the labour market which has already been weighing on household assessments of job security, we suspect that, on their own, steady rates will not be enough to restore the consumer to normal levels of confidence. The case for rate cuts is strengthening.

Bill Evans, Chief Economist

Market pricing is looking for steep cuts ...

... that far exceed our forecast.

Revised CPI data ...

... and the softening job market ...

... strengthen the case ...

... for rate cuts ...

... to be delivered ...

... on the timeframe we envisage.

Page 9: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

Australian interest rates

2

3

4

5

6

7

8

9

2

3

4

5

6

7

8

9

Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11

% %

Cash rate 3yr swap

Sources: RBA, Factset, Westpac Economics

weekly average

updated 15 Sep

3yr swaps -1.3% so far in 2011

3yr swaps move below RBA cash rate

-2

0

2

4

6

8

10

12

-2

0

2

4

6

8

10

12

Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06 Dec-09

% %

US 10 yr bond yield AU 10yr bond yield

Sources: Factset, Westpac Economics.

spread

updated 15 Sep

10 year bonds drop sharply

Established house prices decline

-20

-10

0

10

20

30

40

50

Jun-99 Jun-07

Sydney

Melbourne

% ann

Sources: ABS, Westpac Economics

-20

-10

0

10

20

30

40

50

Jun-99 Jun-07

Brisbane

Perth

% ann

Inflationary pressures not as great as thought

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

0.0

1.0

2.0

3.0

4.0

5.0

Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

%yr %yr avg core qtr 15th sa (rhs) avg core qtr 16th sa (lhs) avg core yr 15th sa (lhs) avg core yr 16th sa (lhs)

Sources: ABS, Westpac Economics

Terms of trade: record high

40

60

80

100

120

40

60

80

100

120

Jun-50 Jun-60 Jun-70 Jun-80 Jun-90 Jun-00 Jun-10

index index

terms of trade, goods & services

Sources: ABS; Westpac Economics

+39%yr from low

77% above avg

Wool boom 1950/51

Credit growth weakens

-16

-8

0

8

16

24

32

-16

-8

0

8

16

24

32

Jul-91 Jul-95 Jul-99 Jul-03 Jul-07 Jul-11

Total Housing Business

Sources: RBA, Westpac Economics

3 mth % chg, annl’sd 3 mth % chg, annl’sd

Page 10: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

10

Volume Three 2011 Trends Report

Australian dollar

Since our last report the Australian dollar has traded in quite a wide range between $1.00 and $1.08. As we go to print it has settled around 1.03¢, in the lower half of the month’s trading range. We see no reason to change our call that the AUD will be around parity with the USD by year’s end.

Key forces that will drive the currency over the remainder of the year and into 2012 will be:

1. The response of the US Federal Reserve to the ongoing parlous state of the US economy - and the labour market in particular. We have consistently forecast that the Fed will eventually embrace a third round of quantitative easing. The recent FOMC Minutes indicate that some members favour such a policy and announcements are expected following the two day FOMC meeting on September 20/21. However we expect that the next stage will be more about lengthening the maturity structure of the Fed’s portfolio of Treasuries rather than expanding its size. By selling shorter dated Treasuries and purchasing longer maturities the Fed would expect to flatten the yield curve, pushing down the long rates which directly affect the fixed rate mortgage rate. Assessments of the success of this policy, which has been used in the past, are mixed but by not expanding the portfolio no significant effect is expected for the USD in a broad sense. Nearer year’s end more radical policies are likely. Recall that Chairman Bernanke, in his famous speech in 2002, which canvassed various policy options once rates have reached zero, favoured targeting the level of term rates rather than the volume of quantitative easing. Such a policy would be open ended and would certainly be a “last resort” but in due course may well be the preferred approach.

2. Australian monetary policy will be a major factor for the Australian dollar. While interest rate markets are factoring in a cut in rates of 75bps by December we feel that currency markets are still in denial and even the more modest 25bp cut which we expect will unsettle the Australian dollar. Our expected sequence of rate cuts through the course of 2012 will provide an ongoing burden for the Australian dollar.

3. Until recently, the Australian dollar had been quite resilient to the turmoil in Europe. However, markets are now focussing on the relative health of the European and US financial systems and selling the Euro in anticipation of further instability emanating from banking sector concerns. That indirect boost to the US dollar is undermining AUD/USD. As we have anticipated, and embedded in our own forecasts, an eventual rate cut by the ECB (which may come even sooner than our current forecast of the March quarter next year) that should see EUR/USD under downward pressure.

4. After a sharp downward adjustment in our 2012 global growth forecast last month from 4.2% to 3.5% we have further lowered our forecast to 3.3% this month, with east Asia the main source of the recent revisions. Weaker global growth next year will weigh on the AUD.

5. The Australian dollar will continue to be affected by the outlook for growth in China. We expect that policies to slow the residential construction cycle including restrictions on credit to developers and investors will have a meaningful impact on China’s growth dynamic.Although they will be partially offset by policies aimed at encouraging consumer spending, including wage increases and subsidies, the net effect will be to slow growth. The nature of the slowdown, with construction activity losing altitude, will particularly impact the demand for commodities including coal and iron ore. Despite there being no discernible impact on iron ore pricing to date, we continue to expect prices to come down in due course.

Despite this expected combination of forces which should lower the AUD we are still only looking for a 2-3¢ fall in the AUD over the remainder of the year, with some of the work having been done already. Markets adjust to new information swiftly and it is rarely a good strategy to chase the spot. We have been well served by our formidably stable forecasts over the second half of this year, at a time when the AUD has traded very wide ranges.

The Australian dollar’s core fundamentals remain strong – positive interest differentials; a strong banking system with a diminishing reliance on offshore funding; a trade surplus; and ongoing interest in AUD assets from foreign central banks and sovereign wealth funds.

Companies are slowly coming to terms with the reality of dealing with an average AUD/USD around parity rather than the much desired, but increasingly nostalgic, 75¢.

Bill Evans, Chief Economist

The key forces that will shape ...

... the FX markets in coming months ...

... are US and Australian monetary policy ...

... Europe’s malaise ...

... and global growth prospects ...

... particularly those of China.

A lot of news is already in the price.

Page 11: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

Australian dollar

AUD/USD & AUD/JPY

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 Oct-11 50

60

70

80

90

100

110 USD JPY

AUD/JPY (rhs)

AUD/USD (lhs)

Sources: Factset, Westpac Economics.

AUD/EUR & AUD/NZD

1.00

1.10

1.20

1.30

1.40

Jan-07 Dec-07 Dec-08 Nov-09 Nov-10 Oct-11 0.4

0.5

0.6

0.7

0.8 NZD EUR

AUD/EUR (rhs)

AUD/NZD (lhs)

Sources: Bloomberg, Westpac Economics.

The Australian dollar & 2yr swap spreads

-2

-1

0

1

2

3

4

5

6

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan 90 Jan 93 Jan 96 Jan 99 Jan 02 Jan 05 Jan 08 Jan 11

%pa USD

AUD/USD (lhs)

AU-US 2yr swap spread (rhs)

Sources: Bloomberg, Westpac

The Australian dollar: USD trend is crucial

0.45

0.55

0.65

0.75

0.85

0.95

1.05

1.15

60

70

80

90

100

110

120

130

Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

index USD

USD majors index (lhs)

AUD/USD (rhs)

Source: RBA

The Australian dollar: actual versus fitted

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

Jan-91 Jan-95 Jan-99 Jan-03 Jan-07 Jan-11

USD USD

Fair value band

AUD/USD actual & forecast

Sources: RBA, Westpac Economics

Includes coal price, exchanged traded commodities index, relative yield curve, net foreign debt to GDP.

Australian dollar & US equities: volatility

5

10

15

20

25

30

35

40

45

50

0 10 20 30 40 50 60 70 80 90

100

Jan-07 Feb-08 Mar-09 Apr-10 May-11

vol vol

US equity volatility (lhs)

AUD/USD volatility (rhs)

Sources: Bloomberg, RBA, Westpac

Page 12: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

12

Volume Three 2011 Trends Report

Beef and dairy

Beef: Weather plays its part.The third quarter of the year has effectively been one of two halves. The early part of the quarter experienced drier conditions, while the second half has experienced welcome rains which have seen pastures given a much needed boost. The EYCI opened the quarter at 377.50c/kg/cwt and with adequate supplies through the sale yards, values struggled to find much support. As conditions improved and supplies and competition tightened, this has given the EYCI a much needed boost and has subsequently pushed values back through the 400 c/kg/cwt levels.

The export markets continue to remain a mixed bag throughout the quarter. The strong Australian dollar, against its much weaker US counterpart, has done no favours to Australian beef in the key export markets of Korea and Japan. It is in their two major markets where the US beef exports are endeavouring to claw back some market share. Australian beef exports to Japan remain subdued. Their economic conditions remain tough and demand is still relatively soft, particularly on the back of reduced seasonal demand and the continued fears from the radioactivity contaminations from earlier in the year. The US market also appears to be under some significant pressures as Australian beef exports have declined. The US has been facing some very dry climatic conditions within the beef producing regions. This drought has resulted in a significant increase in the culling of cows and the build-up of frozen boneless beef in store. Sluggish consumer demand has not helped the situation. On a positive note, the slaughter levels currently seen are expected to ease, and this, in turn, should help to reduce the available supplies, which, in turn, could add some impetus for supplies to be sought from Australia.

There are some positives in the export markets. The emerging markets continue to offer some opportunities for Australian beef and increased volumes in exports during August have been noted. According to market numbers, the CIS - predominantly Russia (5,346 t/ swt), the Middle East (2,584 t/swt), Taiwan (3,107 t/swt) and the EU (1,225 t/swt) have all recorded increased volumes. The live export of cattle from Australia have gathered some pace over the second quarter and have recorded a 32% increase over the first quarter in volume terms, and a 39% increase in value terms. The major destination for live cattle exports continues to be Indonesia, accounting for 64.1% of volume. Turkey and China were the other major destinations accounting for 11.5% and 6.3% respectively. These 3 markets account for 82% of live exports.

Dairy: A promising year ahead.The third quarter of the year is generally a quieter time for the dairy industry, gearing up for the spring and prospects of a profitable year ahead. Conditions over winter have been mixed with some areas in the prime dairy regions still reporting overly wet conditions. However, as this is very early spring, expect conditions to improve significantly. Dairy production is estimated to increase in the 2011/12 year by between 1% and 2%. With dairy producers having a favourable end to the previous season, the focus is on expansion, however, production increases will be limited as herd sizes will be slow to grow.

According to official figures, production across Australia at the start of the production year is down 1.1% on the corresponding period in 2010 at 640.74 million litres. Tasmania and NSW are the two states to post positive production numbers, however, these two states only account for 20% of production volumes. As expected, Victoria has commenced the production year strongly, accounting for 65% of the regional production volumes.

The export of live dairy cattle continues at a relatively healthy rate. The first half of 2011 has seen volumes decline by 8.6% to 34,731 head, however, in value terms, this has actually increased by 2.1% to AUD71.87 million. This equates to an average head value of AUD2, 069 compared to AUD1, 851 over the corresponding period last year. The major export destinations for dairy cattle (volume basis) remain China (62.7%), Russian Federation (13.3%), Turkey (8.8%) and Pakistan (5.8%). In value terms, despite Pakistan being a smaller volume market than Turkey, its value is almost 38% greater.

In the international markets, dairy prices have eased as seasonal demand and adequate supplies have been available. The start of the exporting year for Australia has seen a subdued start with both volumes and values in negative territory from the corresponding period in 2010. According to official numbers, volumes are down by 9.8% to 54,572 tonnes with values down 15.4% to AUD192.9 million. As the year progresses, demand is expected to build, especially for Oceania production.

Rain tightens supplies.

Export markets remain subdued.

Emerging markets offer hope.

Industry prepares for spring.

Production starts at lower levels.

Live exports return strong AUD returns.

International demand eases on seasonal factors.

Page 13: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

13

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

Beef and dairy

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

50

75

100

125

150

175

200

225

Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

Index, AUD AUD/kg

Export prices *

Eastern Young Cattle Indicator (rhs)

Sources: Bloomberg, MLA, Factset, Westpac Economics

* average

Beef prices

0

40

80

120

160

200

0

40

80

120

160

200

Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08

index index

AUD index USD index

Sources: MLA, Westpac Economics

Average beef export prices index

350

400

450

500

550

600

650

700

750

800

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09

AUDkg '000

number of beef slaughters (rhs) eastern young cattle indicator (lhs)

Sources: ABS, Bloomberg, Westpac Economics

Cattle slaughtering

200

250

300

350

400

450

8/01/2007 8/01/2008 8/01/2009 8/01/2010 8/01/2011

4 year average (338.86)

Source: MLA, Westpac Economics

AUD¢/kg/cwt

Eastern young cattle indicator

500

1500

2500

3500

4500

5500

6500

500

1500

2500

3500

4500

5500

6500

Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09

US$/t US$/t

skim milk powder butter

whole milk powder cheese

Sources: USDA, Westpac Economics

Global dairy prices

1000

2000

3000

4000

5000

6000

1000

2000

3000

4000

5000

6000

Mar-05 Mar-06 Mar-07 Feb-08 Feb-09 Mar-10 Mar-11

USD/t USD/t

Oceania

Western Europe

Sources: USDA-FAS, Westpac Economics

Global powdered skim milk prices

Page 14: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

14

Volume Three 2011 Trends Report

Grains and oilseeds

Wheat: market looks for direction.The third quarter of the year has witnessed continued volatility within the wheat markets. Mixed weather conditions in the wheat growing regions of the world have affected yields and quality and this has been reflected in pricing. However, the wheat market is also being influenced by the volatile conditions being seen through the corn markets. With corn prices rising to ration demand, wheat is now a viable substitute for corn in the feed-lots and this in turn is adding to wheat price volatility.

The second half of the year has seen no respite in the drought conditions which are gripping the US southern wheat belt. Exceptional drought conditions have been declared in Texas, Oklahoma and large areas of Kansas, with severe conditions in Arkansas and Missouri. Winter wheat and spring wheat harvests are behind schedule and quality is below previous year’s averages. US wheat crop volumes are expected to come in lower than the previous year. On the positive side of the global balance sheet, slightly improved yields are being expected from EU, CIS and China, although rain at harvest in parts of the EU has increased the volumes of feed grade wheat. The lifting of the Russian wheat export ban has added some considerable volumes of export wheat into the market and at very attractive prices to buyers. In some cases, Russian wheat has been trading at over USD45/tonne discount to US wheat.

On the domestic scene, the focus is now split between the continued marketing of the old crop and the production mechanics of the new season crop. With such a large crop in 2010, the focus will be to try and ensure there is as little carry over stock as possible occupying the available storage. The initial reports at the start of the season estimated the current crop to be around 26 million tonnes, however as time has progressed, this estimate has been wound back considerably. According to latest numbers from ACF (Australian Crop Forecasters) the winter wheat crop will be a touch over 23 million tonnes. Despite the recent rains across many of the wheat producing areas, a number of regions are starting to suffer from an overly dry winter. Should these conditions persist, then there is a real chance that crop estimations will continue to fall.

At the time of writing, export demand has remained relatively buoyant and this continues to be reflected in certain prices. Fed1 wheat in many instances still commands around the AUD$200/t delivered port and while H2 and APW1 continue to ease at around AUD260/t and AUD240/t delivered port respectively. However, APH1 has significantly eased from its highs and now currently in the AUD$280+/t delivered port.

Coarse grains & Oilseeds: High prices and robust demandCorn prices continue to remain well supported. Unfavourable seasonal weather conditions have continued to dog the US crop in many parts of the corn-belt. The wet start has transitioned into very hot dry conditions, particularly at the crucial time of pollination. This has resulted in considerable yield reduction in many corn growing regions. This reduction in yield has added to the existing pressures of low stocks and strong demand which has been reflected in rising prices. As the corn harvest continues in the US a truer reflection on the current crop will start to appear, however, due to the extended planting season, it will be some time before the final numbers become available. This uncertainty and the rising prices will keep the market nervous and will maintain the current volatility.

Soybean prices have been very well supported through strong export demand, particularly from China. However, as the quarter has progressed, the large South American harvest has now become available and this has taken some of the steam out of the price, logistical issues out of Brazilian ports, however, keep access to beans supply somewhat limited. A key issue to note is the events in the US and the wet conditions preventing the planting of corn. As soybeans have a later planting window, there may well be a substitution effect from corn to soybeans. If this eventuates, it will provide the market with a clear signal that there is the potential for increased soybean volumes and therefore place some downward pressure on prices. Everything, it seems, is trading on weather events. The oilseeds market is facing similar issues to corn as poor weather conditions in Canada have seriously delayed the planting of canola. Add to this the dry conditions being experienced in the EU and we start to see some pressures building on the supply side of the equation.

Chinese imports of soybeans, canola and palm oil are expected to remain solid as dry conditions have been reported across a number of their growing regions. It is predicted that this will lead to a reduction in their production volumes and so should be translated into imports of raw material. This should be translated into well supported prices for Australian growers over the short term.

Quality and yields in the spotlight.

Russia re-enters the export markets.

Australian crop forecast to ease.

Export prices soften.

Stocks could tighten.

Soybean market looks positive.

Chinese buying remains strong.

Page 15: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

15

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

Grains and oilseeds

$/tonne

100

150

200

250

300

350

4/01/10 4/04/10 4/07/10 4/10/10 4/01/11 4/04/11 4/07/11

CBOT wheat futures – USD/tonne CBOT wheat futures – AUD/tonne

Source: Westpac Economics, Reuters

Wheat prices – volatility returns

0 5

10 15 20 25 30 35 40 45 50

1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12(f)

Source: ABARES, Westpac Economics

Million Tonnes

Australia – winter crop production

10

15

20

25

30

35

40

200

400

600

800

1000

1983-84 1988-89 1993-94 1998-99 2003-04 2008-09 2013-14(f)

% US¢/bu stocks to use (rhs) price (lhs)

Sources: ABARE, Westpac Economics

Wheat dynamics – potential consolidation

50

100

150

200

250

300

350

400

450

50

100

150

200

250

300

350

400

450

Jan-89 Jan-94 Jan-99 Jan-04 Jan-09

US$/t AU$/t

CBOT wheat futures, US$ (lhs)

CBOT wheat futures, AU$ (rhs)

Sources: Factset, Bloomberg Westpac Economics,

Wheat prices

0

1

2

3

4

5

6

7

8

70

110

150

190

230

270

Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10

US$/t US$/bl

barley (lhs) corn (rhs)

Sources: Factset, Westpac Economics

World corn and barley prices

300

500

700

900

1100

1300

1500

1700

150

250

350

450

550

650

750

850

Feb-74 Feb-79 Feb-84 Feb-89 Feb-94 Feb-99 Feb-04 Feb-09

CAD$/t USc/bu

canola (lhs) soybean (rhs)

Sources: Factset, Westpac Economics

World canola & soybean prices

Page 16: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

16

Volume Three 2011 Trends Report

Sugar and cotton

Sugar: Production volumes set to increase.After a period of relative price volatility, which saw prices fluctuate by close to 50% between January and May 2011, sugar prices have regained some ground, currently sitting at around the USc26/lb to USc 29/lb. Buoyed by these increased prices, global production is set to increase, led by higher production in Brazil, China, India, Russia and Thailand. Australian sugar production, however, is forecast to increase to only 3.85 million tonnes, as producers are still feeling the effects from tropical cyclone Yasi, which has reduced yield potential by around 30%.

Prices in the international market have remained somewhat volatile, with both fundamental and technical issues driving price movement. Over the last 3 months sugar prices have fluctuated close to 40%. A low on June 1, 2011 of USc22.46/lb then saw prices steadily increase to a high of USc31.34/lb on July 22, with the period closing at USc29.41 on September 13.

The Brazilian raw sugar crop has once again been downgraded on the back of poor weather in the Centre South Region which has had a flow on effect increasing pressure in Brazil’s ports. The Brazilian cane crop is expected to be below the 556.74 million tonnes cut in 2010/11.The late start and downgrading of the Brazilian 2010/11 crop has contributed to world prices rising since May, with early estimates for 2011/12 season indicating a significant rise in global production as producers respond to the higher sugar prices.

India is the second largest producer of raw sugar with production forecast to increase by 1.4 million tonnes in 2011-12 to 28.5 million tonnes, assuming average yields. India relies heavily on the June to September monsoon for agricultural output, and rainfall so far has been average with forecasts predicting below normal rainfall for the rest of the season.

Cotton: Prices and supply issues ease.The Australian cotton harvest is well and truly in full swing with completion expected around the end of June, should favourable conditions persist. Some recent rain events have caused slight delays to cotton picking, as additional time has been needed after the rains to ensure the crop is sufficiently dry. Crop quality is generally good across both dry land and irrigated plantings, although, as expected, yields are quite variable. While irrigated cotton has yielded well, dry land has been highly variable depending on location and rain fall received. Estimate yield ranges are between 0.75 – 1.5 bales per acre for dry land plantings.

The 2011–2012 Cotton season will see ginning capacity and efficiency tested. Increased yields from the traditional cotton producing regions, and ‘opportunistic’ regions such as southern NSW, will push infrastructure to the limits. Ginning capacity in Southern NSW is limited and with the larger expected harvest, many growers will have little option but to send cotton northwards for ginning. This will add some significant and unwanted addition to cotton growers’. While calls are being made to establish new infrastructure to the south of the state, especially after this current season’s production, it is difficult to see where this investment will come from on the back of one good season’s production.

Over the past quarter, the cotton price has continued to display price volatility; however, prices overall have significantly eased from the heady numbers seen earlier in the year. Prices peaked at USc215.15/lb on Mar 04, 2011 but subsequently eased to a low of USc144.30/lb on May 12, 2011. At the time of writing, cotton prices have continued their slide lower on the back of poor demand and currently stand at USc102.99/lb.

The story for cotton over the last quarter has been built around three significant issues. Firstly, at the beginning of the quarter prices were driven by tightness in short term supply together with strong demand coming from China. As the quarter progressed and planting intentions became a reality, together with higher prices rationing demand, prices began to ease. The short term tight supplies would be eased by the bumper Australian crop becoming available. However, the final part of the story comes in the form of unseasonal weather conditions across the cotton belt of the US. There is a mixture of extreme drought conditions along the southern half of the cotton belt and extreme wet conditions around Mississippi river valley regions. These poor conditions have sparked sufficient nervousness back into the market and volatility has returned.

Stronger prices to drive production.

Market remains volatile.

Tough conditions downgrade Brazil crop.

Indian production to increase.

Australian crop in good condition.

Logistics to be tested.

Cotton prices ease.

Weather plays its part.

Page 17: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

17

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

0

5

10

15

20

25

30

35

40

Aug-83 Aug-89 Aug-95 Aug-01 Aug-07

US¢/lb

spot sugar (lhs)

Sources: Factset, Westpac Economics

Sugar prices remain volatile

0

30

60

90

120

150

0

20

40

60

80

Aug-83 Aug-89 Aug-95 Aug-01 Aug-07

US$/blUS¢/lb

spot sugar (lhs) spot crude oil (rhs)

Sources: Factset, Westpac Economics

Sugar prices ease against crude

Sugar and cotton

5

15

25

35

45

55

65

30

50

70

90

110

130

150

170

1980-81 1985-86 1990-91 1995-96 2000-01 2005-06 2010-11

% US¢/lb stocks to consumption ratio (rhs) Ave cotton price (lhs) Forecast (lhs)

Sources: ABARE, Westpac Economics

Cotton prices: rebound & supported

0 20 40 60 80 100 120 140 160 180 200

0 20 40 60 80

100 120 140 160 180 200

Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08

AU¢/lb US¢/lb

US¢ (lhs) AU¢ (rhs)

Sources: Bloomberg, Westpac Economics

AU¢ period avg

Cotton prices continue to fall Australian cotton production to surge

200

400

600

800

1 000

1 200

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12(f)

Source: Westpac Economics, ABARE

‘000’ Tonnes

0

30

60

90

120

150

180

0

30

60

90

120

150

180

1974 1979 1984 1989 1994 1999 2004 2009

Mt Mt

stocks production consumption

Sources: ABARE, Westpac Economics

ABARE est. & f'cst

Global sugar market – tight in the short term

Page 18: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

18

Volume Three 2011 Trends Report

Sheep and wool

Sheep & Wool: Markets remain buoyant.Despite the Australian dollar remaining well above parity for the quarter, and seasonal factors such as religious holidays and holiday seasons, the markets have remained relatively buoyant. Existing tight supplies and producers inability to introduce immediate additional supplies, due to production timeframes, is ensuring that current supply/demand imbalance is underpinning prices.

The export of live sheep through 2011 has continued at a slightly reduced level compared to the corresponding time the previous year. Shipments are currently around 4% lower in volume terms at 1.176 million head. Tight supplies at the sale yards continue to put some strain on shipments. In value terms, shipments are worth AUD152.4 million, which is a staggering 20.6% ahead of the corresponding period in 2010. While volume numbers are down, the price per head is clearly well ahead on previous years, averaging AUD130 against the AUD103 per head at the corresponding period last year. As the shipping year progresses, the 2 major supply states remain as WA and Victoria, supplying 70.9% and 27.7% respectively. As expected, the major Middle Eastern markets of Kuwait, Qatar and Bahrain remain popular destinations and between them have accounted for 72.2% of volume. Turkey continues to grow in importance for sheep exports. To date, Turkey has received almost 183,000 head and now represents 15.6% of Australia’s export market to date.

On the wool front, price and demand has seen less volatility over the last quarter. Prices eased over the early and mid parts of the quarter. The traditional holiday period of the Europeans mills is August and generally little activity is seen. Since then, as demand has slowly started back into the market, prices have started to improve. Fine wools once again have been very well supported, despite the Australia dollar remaining above parity. The Eastern Market Indicator (EMI) is back through the 1300 ¢/kg.

Lamb & Mutton: Weather and offerings affect prices.This winter quarter has witnessed some significant price and supply volatility at the sale yards. There have been a number of influencing factors behind this volatility with cold dry weather, reduced animal condition and increased supplies all having contributed to push sale yard prices lower. Prices fell to levels below the corresponding period last year and were well below the 500 c/kg (cwt) level.

Towards the latter part of winter and into spring, welcome rains have been received across most of the lamb producing regions, and this added some considerable impetus to the industry. The rapid improvement in pastures resulted in supplies tightening, which has helped to push prices back over the 500 c/kg (cwt) levels. Lamb condition and weight has improved, and together with the improvement in pastures, this has seen some considerable re-stocker activity. On the processing front, the increased competition from re-stockers has seen processors lift their pricing as they look to secure a healthy supply of young lambs. As the numbers of good quality trade and heavy lambs were in short supply through the sale yards, the “direct to works” prices offered by processors has seen an improvement, as the need to secure supplies increases.

On the international front, the continued global supply of lamb remains limited. The harsh weather experienced in NZ at the beginning of winter had a significant effect on the numbers of lamb deaths. Another bout of harsh conditions at the end of winter has added to lamb losses, which further tightens supplies available for the export markets. This is resulting in increased demand from alternative sources such as Australia. Lamb exports are currently 5% ahead of the corresponding period in 2010. This, in part, has been assisted by the increased lamb slaughter through the earlier part of winter. Demand has been increasing across all of Australia’s major lamb markets, with significant shipments made in August to the Middle East, Greater China and the US.

Mutton prices, which have been well supported for months have started to ease. During the past quarter prices have fallen through the 400 c/kg (cwt) but with a late reprieve and some very welcome winter rain to improve pastures, market prices have improved to ease back above this level. The fact is that the improvement in conditions has seen an improvement in weights on offer. This has fuelled some buyer interest and has helped the price limp back over the 400c/kg (cwt) hurdle. Interestingly enough, offerings are still around 10% lower than the corresponding period last year, yet prices are around 10 c/kg (cwt) lower. With improved conditions in Western Australia, mutton prices have seen some price support as supplies have started to tighten. Prices are up a healthy 30% on the corresponding period last year.

Markets still remain attractive.

Live exports volume down, value up.

Middle East remains target market.

Wool value starts to climb.

Cold weather affects prices.

Welcome rains arrive.

Lamb exports improve

Mutton prices take a breath.

Page 19: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

19

Chart 1. Chart 2.

Chart 3. Chart 4.

Chart 5. Chart 6.

Volume Three 2011 Trends Report

Sheep and wool

0

25

50

75

100

125

150

175

200

0

25

50

75

100

125

150

175

200

1986 1991 1996 2001 2006 2011

mn Sources: ABARE, Westpac Economics

mn

forecast

Australia’s flock gradually rebuilds

0

1

2

3

4

5

6

7

8

0

50

100

150

200

250

300

350

400

450

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

AUD value (LHS) Number of head (RHS)

AUD Millions Million head

(f)

Live sheep exports – returns remain strong

0

200

400

600

800

1000

400

600

800

1000

1200

1400

1600

1980 1985 1990 1995 2000 2005 2010

kt A¢/kg

stocks (rhs)

eastern market indicator (lhs)

Sources: ABARE, Westpac Economics

Wool stocks remain supportive of prices

0

100

200

300

400

500

600

700

Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08 Dec-10

Lamb market price

Sources: ABS, MLA, Westpac Economics

Lamb prices ease from peak

0

200

400

600

800

1000

1200

1400

1600

1800

0

200

400

600

800

1000

1200

1400

1600

1800

Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Dec-08

A¢/kg A¢/kg

A¢/kg avg price

Sources: Bloomberg, Westpac Economics

Wool prices continue above trend

0 2 4 6 8

10 12 14 16 18 20

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11

AUD/kg Average price

Source: AWEX, Westpac

AUD/k

Fine wool price remains robust

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20

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.

Volume Three 2011 Trends Report

Financial forecasts – Australia

Interest rate forecasts

Latest (16 Sep) Dec 11 Mar 12 Jun 12 Sep 12 Dec 12

Cash 4.75 4.50 4.25 4.00 3.75 3.75

Market implied* na 3.74 3.38 3.22 3.27 na

90 Day Bill 4.78 4.75 4.50 4.25 4.00 4.00

3 Year Swap 4.17 4.40 4.50 4.60 4.60 4.60

3 Year Bond 3.63 3.95 4.05 4.15 4.20 4.25

10 Year Bond 4.21 4.30 4.30 4.40 4.50 4.70

10 Year Spread to US (bps) 214 220 210 200 200 210* Market implied rate is the anticipated target rate in the OIS market. Sources: Bloomberg, Westpac Strategy.

Currency forecasts

Latest (16 Sep) Dec 11 Mar 12 Jun 12 Sep 12 Dec 12

AUD vs

AUD index* 100 97.0 94.7 93.0 94.9 95.8

USD 1.0328 1.01 0.99 0.97 0.99 1.00

USD forward^ na 1.02 1.01 1.00 0.99 0.99

JPY 79.24 77 75 73 77 81

EUR 0.7446 0.76 0.75 0.74 0.75 0.75

NZD 1.2554 1.25 1.25 1.24 1.25 1.25

CAD 1.0168 1.03 1.04 1.04 1.03 1.03

GBP 0.6541 0.66 0.63 0.61 0.61 0.61

CHF 0.8989 0.91 0.90 0.89 0.90 0.90

DKK 5.5461 5.64 5.59 5.54 5.57 5.58

SEK 6.8102 6.70 6.60 6.47 6.43 6.44

NOK 5.7505 5.83 5.77 5.80 5.75 5.69

ZAR 7.6321 7.82 7.84 7.86 7.84 7.77

SGD 1.2836 1.25 1.22 1.19 1.21 1.21

HKD 8.0457 7.90 7.70 7.53 7.67 7.75

PHP 44.80 43.24 42.18 41.27 41.96 42.06

THB 31.29 30.48 29.73 29.09 29.52 29.46

MYR 3.1852 3.06 2.98 2.92 2.96 2.97

CNY 6.5986 6.46 6.30 6.16 6.26 6.26

IDR 9081 8723 8510 8331 8465 8476

TWD 30.55 29.70 28.98 28.37 28.83 28.86

KRW 1144 1109 1082 1058 1072 1067

INR 49.11 47.44 46.27 45.29 46.00 46.00

*Nominal trade weighted index, with latest data compiling the base. Weights from Reserve Bank of Australia. A reading above (below) 100 indicates a rise (fall) in the AUD. ^Approximate mar-ket forward price for AUD/USD, not a forecast. Sources: Bloomberg, Westpac Economics.

Page 21: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

21

Volume Three 2011 Trends Report

Economic forecasts – Australia

Activity*

2010 2011 2012 Calendar years

% change Q4 Q1 Q2 Q3f Q4f Q1f Q2f 2009 2010 2011f 2012f

Private consumption 0.6 0.6 1.0 0.6 0.3 0.3 0.5 1.0 2.8 3.0 2.0

Dwelling investment –0.3 2.7 –0.1 –1.1 –2.7 0.8 0.5 –4.2 4.2 1.5 –0.5

Business investment* 0.4 4.9 1.7 1.4 1.3 1.5 2.3 –5.3 –0.1 9.5 7.5

Private demand * 0.4 1.6 1.0 0.6 0.3 0.6 0.9 –0.7 2.2 4.0 3.0

Public demand * 0.8 0.6 –0.3 0.3 0.2 0.1 0.2 2.0 9.3 1.5 0.7

Final demand 0.5 1.4 0.7 0.6 0.3 0.5 0.7 –0.1 3.8 3.4 2.5

Stock contribution 1.0 –0.3 0.8 –0.6 –0.4 –0.1 0.0 –0.4 0.4 0.4 –0.4

GNE 1.4 1.1 1.5 –0.1 –0.1 0.4 0.7 –0.7 4.2 3.7 2.0

Exports 2.7 –6.6 2.6 3.0 4.0 1.5 0.6 2.6 5.7 –1.0 8.0

Imports 2.5 2.4 4.3 1.8 1.2 0.9 0.9 –9.0 13.7 10.5 6.0

Net exports contribution 0.0 –2.1 –0.5 0.2 0.6 0.1 –0.1 2.7 –1.6 –2.7 0.3

GDP (1) 0.8 –0.9 1.2 0.2 0.5 0.5 0.6 1.4 2.7 1.2 2.5

annual chg 2.7 1.0 1.4 1.3 1.0 2.4 1.9 – – – –

Other macroeconomic variables

2010 2011 2012 Calendar years

% change Q4 Q1 Q2 Q3f Q4f Q1f Q2f 2009 2010 2011f 2012f

Employment (1) 0.9 0.3 0.0 0.1 0.1 0.0 –0.1 0.7 2.7 1.7 0.3

annual chg 3.4 2.8 2.2 1.3 0.5 0.2 0.0 – – – –

Unemployment rate % (1) 5.2 5.0 4.9 5.2 5.3 5.4 5.6 5.6 5.2 5.1 5.6

Wages (WPI) (sa) (2) 1.0 0.8 0.9 0.9 1.0 0.8 1.0 – – – –

annual chg 3.9 3.9 3.8 3.8 3.8 3.7 3.8 3.6 3.3 3.8 3.7

CPI Headline (2) 0.4 1.6 0.9 0.6 0.5 0.7 0.6 – – – –

annual chg 2.7 3.3 3.6 3.5 3.6 2.8 2.4 2.1 2.7 3.6 3.1

CPI average RBA core 0.5 0.8 0.6 0.5 0.6 0.6 0.6 – – – –

annual chg 2.3 2.3 2.6 2.5 2.6 2.3 2.3 3.5 2.3 2.6 2.6

Current account AUDbn –8.6 –11.1 –7.4 –6.5 –6.0 –7.7 –13.0 –52.9 –36.0 –31.0 –50.0

% of GDP –2.5 –3.2 –2.1 –1.8 –1.7 –2.1 –3.6 –4.2 –2.7 –2.2 –3.4

Terms of trade annual chg (1) 22.8 23.9 12.9 11.4 8.2 1.2 –11.0 –9.9 16.2 13.5 –8.5Calendar year changes are (1) period average for GDP, employment and unemployment, terms of trade (2) through the year for inflation and wages. * GDP & component forecasts are reviewed following the release of quarterly national accounts.** Business investment and government spending adjusted to exclude the effect of private sector purchases of public sector assets.

Macroeconomic variables – recent history

2010 2011

Monthly data Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Employment ’000 51.5 –2.1 12.6 –11.4 44.7 –29.1 5.3 14.4 –4.1 –9.7 –

Unemployment rate % 5.2 4.9 5.0 5.0 4.9 4.9 5.0 5.0 5.1 5.3 –

Westpac–MI Consumer Sentiment 110.7 111.0 104.6 106.6 104.1 105.3 103.9 101.2 92.8 89.6 96.9

Retail Trade %mth 0.5 0.2 0.2 1.0 –0.4 1.0 –0.6 –0.1 0.5 – –

Dwelling approvals %mth –4.4 7.5 –11.9 –4.8 7.6 –1.2 –5.9 –3.6 1.0 – –

Private sector Credit %ann 3.5 3.3 3.2 3.3 3.5 3.3 3.1 2.7 2.7 – –

Trade balance AUDbn 2.05 1.81 1.31 –0.47 1.55 1.46 2.42 1.82 1.83 – –

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22

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.

Volume Three 2011 Trends Report

Forecasts – commodity prices

latest***latest*** Dec–11Dec–11 Mar–12Mar–12 Jun–12Jun–12 Sep–12Sep–12 Dec–12Dec–12 Mar–13Mar–13 Jun–13Jun–13all commodities index# 400 379 362 323 340 357 383 413

bulk commodities index# 647 646 618 522 526 532 552 600

iron ore fines contracts @ 62% US$/t 179 165 143 140 140 148 160 175

coal (USD/t)* 175 179 171 140 143 143 148 165

WCFI**# 314 286 272 263 292 321 358 383

crude oil (USD/bbl) Brent ICE 110 102 90 86 96 106 122 132

gold (USD/oz) 1,832 1,675 1,631 1,576 1,660 1,738 1,848 1,915

base metals index# 226 202 192 186 211 237 260 278

copper (USD/t) 8,708 7,500 6,950 6,701 7,773 9,035 9,500 10,191

aluminium (USD/t) 2,345 2,100 2,010 1,950 2,210 2,508 2,687 2,845

nickel (USD/t) 21,353 20,000 19,250 18,750 20,875 22,963 26,044 28,057

zinc (USD/t) 2,172 1,950 1,877 1,828 2,035 2,239 2,539 2,736

lead (USD/t) 2,399 2,100 1,990 1,917 2,135 2,348 2,663 2,869

rural commodities index# 167 156 145 141 156 170 191 205

wool AU¢/kg 1,351 1,250 1,100 1,000 1,214 1,344 1,556 1,732

wheat US¢/bu 723 720 700 675 738 799 887 944

sugar US¢/lb 28 25 24 23 26 28 31 33

cotton US¢/lb 112 95 91 89 97 104 115 122

levels % change

annual 2009 2010 2011f 2012f 2009 2010 2011f 2012f

all commodities index# 228 299 385 345 –20 31 29 –10

bulk commodities index# 314 452 614 550 –31 44 36 –10

iron ore (USD/t)* 65 112 160 145 –23 72 42 –9

coal (USD/t)* 103 130 169 149 –35 26 30 –12

ave coking price (USD/t) 129 171 237 197 –42 33 39 –17

ave thermal price (USD/t) 77 86 111 105 –23 11 30 –6

iron ore lump contracts (US¢ dltu) 112 212 301 283 –44 90 42 –6

iron ore fines contracts (US¢ dltu) 97 185 260 234 –33 91 40 –10

coal coking contracts (US$/t) 129 201 289 239 –58 56 44 –17

coal thermal contracts (US$/t) 70 91 122 104 –44 30 34 –15

WCFI**# 223 260 313 287 –3 16 21 –8

crude oil (USD/bbl) Brent ICE 71 81 109 95 –18 14 35 –13

gold (USD/oz) 1,024 1,227 1,563 1,651 17 20 27 6

base metals index# 178 213 235 206 2 19 11 –12

copper (USD/t) 6,124 7,564 8,882 7,615 5 24 17 –14

aluminium (USD/t) 1,887 2,190 2,424 2,169 –16 16 11 –10

nickel (USD/t) 17,073 21,871 23,416 20,459 3 28 7 –13

zinc (USD/t) 1,949 2,178 2,225 1,995 23 12 2 –10

lead (USD/t) 1,992 2,164 2,437 2,098 20 9 13 –14

rural commodities index# 109 125 169 153 –3 14 36 –10

# Chain weighted index: weights are Australian export shares. * Average Australian export prices fob – Source ABS 5432.0 Merchandise Trade Exports. ** WCFI – Westpac commodities futures index. *** Weekly averages except for bulks. Sources for all tables: Westpac Economics, Bloomberg, ABS.

Commodity futures contracts

Future contracts latest*** 3rd 6th 9th 12th 18th 24th

crude oil (USD/bbl) NYMEX 179 170 163 157 151 145 142

crude oil (USD/bbl) Brent ICE 89 89 90 90 91 91 91

gold (USD/oz) COMEX 110 110 109 108 107 106 104

aluminium (USD/t) LME 1,832 1,844 1,848 1,853 1,871 na na

copper (USD/t) LME 2,345 2,371 2,402 2,415 2,435 2,473 2,509

nickel (USD/t) LME 8,708 8,842 8,859 8,870 8,875 8,872 8,854

zinc (USD/t) LME 21,353 21,484 21,508 21,524 21,526 21,501 21,441

lead (USD/t) LME 2,172 2,203 2,224 2,244 2,260 2,288 2,308

Page 23: Trends. - Westpac · Trends. Westpac Regional Economic Report. Westpac Institutional Bank is a division of Westpac Banking Corporation ABN 33 007 457 141. Information current as at

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.

23

Volume Three 2011 Trends Report

Summary of world output

Economic growth forecasts#

Real GDP %ann 2006 2007 2008 2009 2010 2011f 2012f

World 5.2 5.3 2.8 –0.6 5.0 3.9 3.3

United States 2.7 1.9 –0.3 –3.5 3.0 1.5 1.2

Japan 2.2 2.2 –1.5 –6.6 4.3 –0.4 3.2

Euro zone 3.2 2.8 0.3 –4.0 1.7 1.7 –0.4

Group of 3 2.8 2.3 –0.3 –4.1 2.7 1.3 0.9

United Kingdom 2.8 2.7 –0.1 –4.9 1.4 1.0 0.5

Canada 2.8 2.2 0.5 –2.5 3.1 3.0 2.8

Australia 2.6 4.6 2.6 1.4 2.7 1.2 2.5

New Zealand 1.0 2.8 –0.2 –2.0 1.7 2.5 4.4

OECD total 2.7 2.5 –0.1 –3.7 2.5 1.4 1.1

China 12.7 14.2 9.6 9.2 10.3 9.3 8.2

Korea 5.2 5.1 2.3 0.2 6.1 3.3 2.5

Taiwan 5.4 6.0 0.7 –1.9 10.8 4.4 2.4

Hong Kong 7.0 6.4 2.3 –2.7 6.8 5.7 3.9

Singapore 8.7 8.8 1.5 –0.8 14.5 3.1 0.2

Indonesia 5.5 6.3 6.0 4.6 6.1 6.2 5.0

Thailand 5.1 5.0 2.5 –2.3 7.8 4.1 2.9

Malaysia 5.8 6.5 4.7 –1.7 7.2 3.9 1.8

Philippines 5.3 7.1 3.7 1.1 7.3 4.7 2.1

Vietnam 8.2 8.5 6.3 5.3 6.8 4.2 4.2

East Asia 9.8 11.0 7.2 6.0 9.4 7.6 6.4

East Asia ex China 5.8 6.1 3.2 0.4 7.7 4.4 3.0

NIEs* 5.8 5.9 1.8 –0.8 8.4 3.9 2.4

India 9.7 9.9 6.2 6.8 10.4 7.6 7.4

Russia 8.2 8.5 5.2 –7.8 4.0 4.8 4.0

Brazil 4.0 6.1 5.2 –0.6 7.5 4.2 3.4

South Africa 5.6 5.6 3.6 –1.7 2.8 3.5 3.3

Mexico 5.2 3.2 1.5 –6.1 5.5 4.6 3.6

Argentina 8.5 8.6 6.8 0.8 9.2 6.0 3.8

Chile 4.6 4.6 3.7 –1.7 5.3 5.9 3.8

CIS^ 8.8 9.0 5.3 –6.5 4.2 4.7 3.8

Middle East 5.8 6.0 5.0 2.0 3.9 4.0 4.0

C & E Europe 6.5 5.5 3.0 –3.6 4.2 3.6 2.6

Africa 6.4 7.0 5.5 2.6 5.0 5.5 4.5

Emerging ex–East Asia 6.8 7.0 4.8 –0.4 6.1 5.1 4.5

Other countries 6.4 6.7 6.3 4.5 5.0 4.7 3.7

World 5.2 5.3 2.8 –0.6 5.0 3.9 3.3

#Regional and global groupings are weighted using PPP exchange rates updated to reflect ICP 2005 benchmark revisions. Adding ½ppt to the global headline approximates growth under the prior weighting system * “NIEs” signifies “Newly Industrialised Economies” as defined by the IMF, viz; Republic of Korea, Hong Kong SAR, Taiwan Province of China, and Singapore. ^ CIS is the Commonwealth of Independent States, including Mongolia. Sources: IMF, Westpac Economics.

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24

Notes

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25

Notes

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26

Notes

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Corporate directory

Publication enquiries, Neil Burgess, Senior Commodity Analyst, Agribusiness Telephone: (61 2) 8253 7912

SydneyLevel 2, 275 Kent StreetSydney NSW 2000Telephone (61-2) 8254 8372Facsimile (61-2) 8254 6934

Bill EvansChief Economist

Andrew HanlanSenior Economist

Matthew HassanSenior Economist

Huw McKaySenior International Economist

Justin SmirkSenior Economist

Elliot ClarkeEconomist

SydneyLevel 29, Westpac Place275 Kent Street Sydney NSW 2000 Telephone (61-2) 9220 1083Facsimile (61-2) 8253 0955

Graham JenningsChief Executive, Commercial and Agribusiness, Regional BankingTelephone (61-2) 8254 1083

Rick AylettState General Manager, Commercial and Agribusiness, Regional Banking VICTelephone (61) 427 249 059

Rodney KellyState General Manager, Commercial and Agribusiness, Regional Banking QLDTelephone (61-7) 4688 6063

Ben MariniState General Manager, Commercial and Agribusiness, Regional Banking WATelephone (61-8) 9426 2831

Steve HannanState General Manger, Commercial and Agribusiness, Regional Banking NSW Telephone (61-2) 6580 3926

Richard HockneyState General Manager, SA/NT/TAS Regional, Westpac Retail & Business Banking Telephone (61-8) 8230 2225

Westpac Commercial and Agribusiness BankingWestpac Economics

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