A Global Economic and Market Outlook

March 2011

Presented by Dr Chris Caton

2

Production in flooded areas-- % of national production

3

Queensland black coal production

4

US Housing starts are bumping along the bottom

Source: Datastream

0.4

0.8

1.2

1.6

2

2.4

96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Permits Starts

(Millions)

5

It keeps taking longer to get back the jobs (% decline from peak employment)

6

2011 Growth Forecasts (%)

Month of Forecast

A-10 S-10 O-10 N-10 D-10 J-11 F-11

Australia 3.4 3.4 3.5 3.5 3.2 3.1 2.9

New Zealand 3.4 3.3 3.2 3.2 3.3 2.9 2.7

US 2.8 2.4 2.4 2.4 2.7 3.2 3.2

Japan 1.5 1.3 1.2 1.2 1.1 1.2 1.5

China 9.0 9.0 9.0 9.1 9.1 9.2 9.3

Germany 1.7 1.9 2.0 2.1 2.2 2.5 2.5

UK 2.0 2.1 1.9 2.0 2.0 2.1 1.9

“World” 3.3 3.1 3.1 3.1 3.2 3.4 3.5

Source: Consensus Economics

7

Industrial production (2005=100)

8

Food prices relative to US GDP deflator (1970=100, log scale)

9

Real GDP growth in Australia and the US

Source: Datastream

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

USAustralia

Year to % change

10

China is tracking Japan very closely

11

What goes up…..

12

The Labour market is on the mend

Source: ABS

7500

8100

8700

9300

9900

10500

11100

11700

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0000’s %

Employment (LHS)

Unemployment Rate (RHS)

13

Australian Inflation

Source: ABS

-1

0

1

2

3

4

5

6

7

8

9

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Headline CPI Underlying inflation

%

BT Forecasts

GST Effect

14

Proportion of prices in the CPI that went up in the quarter

15

House prices since 2005

16

Gross Domestic Product

Source: ABS

-3

-2

-1

0

1

2

3

4

5

6

7

8

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Qtly growth Year-to growth Non-farm year-to growth

%

BT Forecasts

GST Effect

17

Capital spending is set to grow further

18 Source: Consensus Economics

GDP Inflation

Australia 3.3 2.7

United States 2.9 1.7

New Zealand 2.7 2.6

Canada 2.5 2.0

Norway 2.4 2.9

Sweden 2.5 2.0

United Kingdom 2.3 1.8

Spain 2.0 1.7

Switzerland 1.9 1.4

France 1.9 1.5

Netherlands 1.7 2.2

Euro Zone 1.7 1.8

Germany 1.6 1.6

Japan 1.4 0.2

Italy 1.0 1.8

Global Medium-Term Economic Growth and Inflation Prospects (2011-2023)

19

Asia-Pacific Medium-Term Economic Growth and Inflation Prospects (2010-2020)

GDP Consumer Prices

China 8.4 3.3

India 8.1 6.2

Indonesia 6.3 5.5

Malaysia 5.3 2.8

Philippines 5.1 4.5

Singapore 5.0 2.0

Thailand 4.9 3.2

Taiwan 4.9 2.0

South Korea 4.1 3.0

Hong Kong 3.9 3.0

Australia 3.3 2.7

New Zealand 2.7 2.6

Japan 1.4 0.2

Source: Consensus Economics

20

Financial Market Forecasts

Now(4 March)

End-Jun2011

End-Dec2011

AUD/USD 1.014 0.95 0.87

Official cash rate (%) 4.75 4.75 5.00

10 Year Bond yield (%) 5.59 5.60 5.60

ASX 200 4850 5000 5250

21

The Australian Dollar and US Trade Weighted Index

Source: Datastream

64

80

97

113

129

145

161

177

99 00 01 02 03 04 05 06 07 08 09 10 11

0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10Index AUD/USD

US TWI inverted (LHS)

AUD/USD (RHS)

22

Average daily trading range in the Australian dollar

23

Australian Sharemarket Performance – ASX200

Source: Bloomberg

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

24

The Australian market is again cheap (forward P/E ratio)

25

World share markets are cheap also

26

It makes a difference when you buy

27

Economics does matter!

28

Morgan Stanley Capital Indexes

Source: Datastream

600

900

1200

1500

1800

2100

2400

2700

3000

3300

3600

03 04 05 06 07 08 09 10 11

100

150

200

250

300

350

400

450

500

550

600Developed Index Asian Emerging Markets Index

Asian Emerging Markets Index (RHS)

World Developed Index (LHS)

29

Summary

The global economic recovery continues, albeit at a moderate pace. This makes it a long recovery.

The Australian economy should continue to grow well, led in the short term by mining investment. The floods will have only temporary effects on the macroeconomic data.

Interest rates should eventually rise further.

The exchange rate is above fair value. The rest of the world is on sale for Australians.

Share markets are still cheap.

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31

Australia’s public debt problem is complete fiction!