Westpac Chief Economist Bill Evans' latest presentation

Disclaimer:
These are my notes of the presentation by Bill today and his million graphs so might not be 100% accurate as I was sometimes relying on my memory to recall the fast-talking Bill.
Do not make your investment decisions based on this.
Don't shoot the messenger, if someone has issues with the contents below, email westpac directly.

• Very stimulatory budgets last and current

• Budget numbers for gov rev are too pessimistic, Gov fiscal position lot better - $50 iron ore prices in budget Vs $220 current.

• Debt up from 20% to 40% of GDP but cost of servicing less than it was 10 years ago.

• Aus debt up from Pre-Cvoid 20%- 40% of GDP - around half Vs US and UK with higher debt to GDP ratio- AAA rating affirms ease of payment for debt.

• Virus issues improving rapidly – New cases in US and India (2 largest infected countries) now massively down and improving. Except South America, improvements everywhere.

• Vaccinations levels picking up massively – North America & UK up around 60% and nearing herd immunity – UK fully opening up from next week?

• Confident reopening and living with virus is thew best strategy and the new ‘normal’

• World economy grew 6% last year and 4.5% expected growth 2021.

• AUD languishing around 75 cents against very strong commodity index. Trade tensions with China weighing, our poor vaccination record and strong success offshore, US dollar getting a lot more support – based on historical link b/w commodity prices and AUD, we should be at 95 cents USD.

• Forecast still for AUD to 80 end of this year and mid 80s next year.

• US labour market recovering incredibly strongly – US unemployment level and will be full emp level soon

• Inflation risk in US economy – haven’t seen these levels since 2010-12 period when Aussie dollar was at/ above parity.

• Inflation in US will head to 3% by end this year but down to 2.2% end of next year.

• Fed more confident it can achieve that inflation band of 2-3% on sustained basis

• In Aus, Cash rate will peak at 1.25% in the next cycle of rising rates

• RBA’s 2 programs of $100b each – new weekly program of $4b Vs $5b currently.

• Yield curve control policy not to extend – bond rates will stay down

• RBA has started to blink re rate rise timing – WBC re-forecast the rate rise likely to go up in 2023 Vs 2024.

• In Aus, HY 2 (by Dec 22) – forecasts of Inflation will be 2.25 %, employment rate 3.75%, Wages growth 2.75%

• Modest tightening cycle by Fed and RBA and other central banks globally – Banks will be careful for inflation not to overshoot – neither contractionary nor expansionary and sit conservatively...so cash rate peaking at 1.25% AU and 1.6% in US for that reason.

• Significant tightening in labour market will lead to stronger wage growth –

On why rates will peak at 1.25%?

• Impact on household sector with rates…So for home owners, the DSR at 1.25% cash rate (say 3.8% bank int rate) will be similar to peak rates in 2010/2016 and RBA does not want to see economy suffer as a direct result of weakening house prices.

• In this cycle, anything over 1.25% cash rate will cause serious issues with prop values and economy therefore the rates will peak there.

• GDP Growth of 4.8% this year. Consumer spending contributing 60% of this number.

• Households savings ratio still very high hence consumer spending will keep driving the economy.

• In 2019 Aus spent $55b offshore – this is locked in Aus economy in 2020 and 2021 hence int borders lockdowns for economy a net positive

• Spending highest on durables, services down 20%,

• Pre & post down state lockdowns economies recovering very quickly… Lockdowns’ impact is substantial at the time but grows back to peak within a few weeks of opening up - however hospitality suffers considerably but other sectors pick up significantly more - so net positive post lockdown.

• Consumer sentiment down 10% from its peak.

• Vaccination trajectory is going to massive surge in oct – a lot of Moderna and Pfizer vaccines en-route.

• Vaccination-hesitancy and complacency would cause issues with zero covid transmission. UK with 60%-70% had a huge upsurge in cases but negligible hospitalisations/ deaths hence the world will learn to live with the tail of this virus.

• Fixed rates going up in tandem with swap rates.

• Outlook for house prices growth sentiment is incredibly strong at index of 160 but affordability down for FHB/OO hence the diametrically opposite index of 'buying sentiment' and 'outlook sentiment'.

• Investors are gaining new confidence and new investor lending is strengthening by the week.

• New lending to FHB falling and investors rising. $4b /mth to $8b/mth to investors within 6 mths.

• Investors are still half the proportion of lending now Vs back in 2015/16 when APRA came in.

• Macro prudential tightening by RBA (talked about yesterday in RBA commentary) – LVR limitation, proportion lending to investors, limiting IO loans.. Near the end of thios year and early next year, RBA/ APRA might start putting some 'soft' lending restrictions if market keeps growing lat this rate however not those like 2017.

• Affordability will reach 2017 peak in 2022- that’s when demand for housing will slow. That could be a natural brake on prop values.

• House prices will not fall sharply like in 2017 due to better political considerations – no labour threat etc –

Westpac Forecast of 3 months ago:

2021, 22, 23

Syd 16, 5, -1

Mel 12, 5, -1

Bri 16, 10, 4

Per 10, 8, 3

Ade 10, 8 , 3

Hob 8, 5, 3

Aus 15, 5, 0

• However the above forecast for 2021 have largely been achieved in all cap cities within 6 months, therefore these will be re-forecasted by westpac and revised up.

• Current housing boom likely to fade in 2022.

 

Thanks for sharing

 

Very interesting and insightful. Thanks for sharing

 

The main gist of it, from what I could gather:

• The cost of money will remain cheap for at least 5+ years
• policy is becoming better at tempering property prices
• Property prices are now just as important as the unemployment rate and inflation

 

No RBA rate hike before 2024: NAB
From AFR this morning:

"NAB is bucking the big four bank trend, forecasting that the Reserve Bank will not lift interest rates before 2024 despite the central bank saying the economy was bouncing back stronger than expected."

 

We now hearing that Syd is cooling off, my gut feeling is affordability will hit most markets. Probably see a cooling and perhaps back to target of 2024 for ir rises??

Lets see

 

Thanks for posting this, it was a fascinating read. It will be interesting to see how things play out...

 

Cheers for that

 

As such a small part of the world economy I just wonder if we will get dominated by what happens internationally?

 

Thanks for posting Harris. I don't agree with much of it but don't mean I won't read it.

• 
  He seems to be trying to play down gov debt. Cost of servicing has gone up exponentially in the last 12 years in line with gov debt.

The growth was based on debt in the oecd. Govs borrow money, give it to the people then tell us the economy is great.
You'd think an economist would know better.

Bill doesn't seem to know much about the role of interest rates on the Aud.
If the US raises rates by .25 and Au doesn't, the Aud will drop below 70c.

Given all factors there's no chance of the aud being close to par value with the usd.

That would also mean an aud of around 70c.
The FED would likely want to lower the USD to help the economy, I think will not raise rates until or long after they have to.
In reality none of that fundamental analysis makes any difference, the RBA will decide as usual what is convenient.

I don't see that changing anytime soon.
NSW once again strengthens tenancy rights, calls for landlord to lower rents both commercial and residential, though it announced land rebates.
There still may be some investment activity but I doubt of any significance.

2 REAs told me that "re is going up 20%" last week enquiring about properties.
Both quoting "Bill Evans". I don't see it happening, though it would be good for me if it did.

 

I think what he is doing is highlighting a wide cross-section of financial info to a group of clients through his presentations (inc some instos) and with a lot of graphs. I wouldn't take his analysis as gospel and neither should anyone else.

If the world economy grew by x% then he is not delving too much into why (due to debt) it grew, but simply showing the increase. It is a one hour presentation and I enjoy looking at a lot of data and graphs.. of which there is plenty of. And I especially like the Q&A session at the end which gets interesting...

 

Stop making sense

 

Well the link you posted show's it's not. Interest stabilised at 2015.
And the idea that others borrow more so it's ok for Australia is stupid. Unless you're a bank.

Thanks.

Well it's true he does have all that data and his mates at the RBA will probably take his calls and give him more info.
And yet while the financial press reports on his "track record" here's an example.
Economic and Property Outlook August 2019 with Bill Evans - Sydney Listings
"Some outlets are predicting 10% increases in prices in Sydney over the next 12 months. Evans strongly disagreed with this idea, and few could doubt this stance. Increases of this size would not be sustained as affordability thresholds would hamper these gains."
Most of what he says is commentary on what has already happened or 2 way bets, may go up may go down.
I can post oodles of bad predictions from economists who are paid 100s of thousands every year.
Anyone who bought RE in 2019 did great. Even better when WPC predicted a 5% drop.

He did predict rate cuts, but even random posters been saying that for years.
And of course constant revision make sure he's rarely wrong.
There's a reason people make jokes about economists, and Bill is one of them.

PS I'm assuming the presentations you see are part of some membership as they don't seem publicly available.

 

Last post from me on this.

It's important that if there is a large data set with updated financial info, that it is reviewed in the same way one would review say a report in AFR or WSJ or FT...

I don't walk into his presentations or Ric Deverell's with a view that their point of view is the last word and neither would I counsel anyone does that either.

The critical element is that they are 'reporting' a set of numbers and you can dissect those in a million ways but I find that info valuable and I post it here because I think in the general scheme of things, it is helpful to most of us here.

Bill or Ric are not 'selling' anything when they do these nor should they be seen like that. I am hoping you don't go on picking the brains out of every single financial report you read in a newspaper with your own slant on data.

I share them because these are invitation-only events to their Private-Wealth clients and there is a lot of commentary that I find fascinating and the only reason I have started jotting down all the notes throughout their presentations last few times is to share it here, but I don't take ownership of this post so I don't see why I have to be posting these presentation updates anymore in the forum.

 

PS I love these posts @Harris - thank you very much for sharing.

 

Thanks for your time and effort to share your notes @Harris

 

You have to have thick skin to play on forum.
Your posts are valued, keep posting so we can all learn something, we dont always have to agree

 

@Harris this is very insightful. It’s great to have the debate back and forth. Competition of thought is great when there are unknowns, like the future. Helps someone make weighted decisions.

It would be nice to keep seeing posts like yours, one of the main reasons I like this forum