Economic Perspectives from Global to Local What It Could Mean for Your Business

Dean Pearson Head of Industry Analysis, NAB November 29, 2011

Global Economy

3 3

Global share markets & commodity prices Equity markets have been extremely volatile amid mounting fears that the world economy is facing a return to recession - generally 15% down compared to June. But at the height of GFC (Sept-Nov 2008) they fell 30-35%. That is because commodity prices not reacting as if a global crunch is underway….albeit recent weakness in iron ore prices needs to be watched.

Change in Equity Markets since 1 June 2011

-50

-40

-30

-20

-10

0

10

1/0

6/2

011

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CHINA

JAPAN

UK

USA

AUSTRALIA

GFC Sept - Dec USA

4 4

Global industrial production The industrial slowdown is quite synchronised across the world. The fundamental problem is shown in the 2nd chart - the world's richest economies are in the doldrums. Beyond debt, the problem is a lack of economic growth.

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Europe government bond spreads and net debt EURO looks like now entering a mild recession (Q4 2011 & Q1 2012). Clearly markets now very much focused on risk of European default. Initial phase of the crisis was on risk of disorderly default by Greece, Portugal, Ireland. Focus really turning to Italy. European rescue fund simply not enough for Spain and especially Italy.

0

5

10

15

20

25

30

35

Jan-10 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11

Greece Portugal Ireland Italy Spain

Benchmark 10-year bond yields: daily (bps)

Source: Datastream

Sovereign debt panic mark I

Sovereign debt panic mark II

3

4

5

6

7

8

Jan-10 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11Italy Spain

6 6

Emerging market economies Emerging economies continue to out-perform. While “Big 3” developed economies at best only just back to pre GFC levels, developing world much stronger. That said, with the outlook for the developed world deteriorating, growth will slow in most emerging economies.

70

80

90

100

110

120

130

140

150

Sep-05 Sep-07 Sep-09 Sep-11 Sep-05 Sep-07 Sep-09 Sep-11

US Japan Euro areaChina India Brazil

GDP: Sep qtr 2007 = 100Developed world Emerging world

Sources: OECD Main Economic Indicators, CEIC, NAB

Global liquidity crisis Global liquidity crisis

7 7

Why China & India are so important Industrialisation and urbanisation in China and India are following a familiar path. The Chinese economy is however 4 times the size of India's. Already China accounts for 50% of global steel.

0

20

40

60

80

1950 1960 1970 1980 1990 20000

20

40

60

80Japan

South Korea

China

India

Relative Economic DevelopmentGDP per capita relative to advanced economies, equivalent prices

% %

Source: Maddison database

Australia

8

Global food demand to be driven by China & India Emerging market economies are becoming more dependent on imports of staples. Food security is now a hot political issue in developing world.

Protein Consumption and GDP

20

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60

80

100

120

140

0 10000 20000 30000 40000 50000GDP per capita

Prot

ein

Con

sum

ptio

n (g

per

per

son

per d

ay)

Source: WHO, UN FAO, World Bank, NAB Economics

India

China

• As average incomes increase over time, there is a tendency to consume more protein, especially meat.

• Over the years ahead, this switch in diets is likely to generate strong underlying growth in demand for a wide range of agricultural commodities.

9

Is China a threat or a promise for agribusiness? Australia has a comparative advantage in terms of land intensive agribusiness: broad-acre crops, cattle, dairy and sheep. But we are now much more vulnerable to Chinese growth.

• Key developing economies have a comparative advantage in more labour intensive sectors: – mainly pork and poultry,

horticulture and meat processing.

Land Mass per Capita (sq kms)

0.00

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0.15

0.20

0.25

0.30

0.35

0.40

China

Indon

esia

Malays

ia

United S

tates

Brazil

Canada

Austra

lia

Source: World Bank, NAB Economics

Australian Economy

11 11

Australian business conditions & confidence Conditions recover and businesses take comfort from better sales, a lower AUD and talk of interest rate cuts. Global uncertainty still weighing on near-term activity indicators. Business confidence improving after recent battering during Greece crisis.

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IV I II III IV I II III IV I II III IV

2008 2009 2010 2011

Seasonally adjusted TrendConds 1990s recn

Business conditions (net balance)

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IV I II III IV I II III IV I II III IV

2008 2009 2010 2011

Seasonally adjusted TrendConf 1990s recn

Business confidence (net bal., s.a.)

12 12

New ASX300 business survey - September qtr Business conditions for ASX300 firms declined further in Q3, narrowing the gap to the broader economy. Confidence among large firms has turned negative and is weaker than average.

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Q12011

Q22011

Q32011

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Q22011

Q32011

Conditions Confidence

NAB QBS ASX300

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20

ASX300

NABQBS

ASX300

NABQBS

ASX300

NABQBS

Q2 2011 Q3 2011 Q4 2011Trading conditions Profitability Employment

ExpectationsActuals

13 13

Business conditions by state Business conditions (seasonally adjusted) deteriorated across all states in October, with the exception of Queensland, where they were marginally higher. Trend conditions trend conditions remain strongest in WA, followed by NSW, and were weakest in SA, Tasmania and Victoria.

-40

-30

-20

-10

0

10

20

30

40

IV I II III IV I II III IV

2009 2010 2011

Australia NSW VIC

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0

10

20

30

40

IV I II III IV I II III IV

2009 2010 2011

Australia QLD WA

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0

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30

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IV I II III IV I II III IV

2009 2010 2011

Australia SA TAS

14

Labour market Labour market job growth still slowing – reflecting basically a flat H1 2011. While employment growth has slowed, hours worked are still robust – reflects shedding in weak and much stronger hours in strong sectors. Hours data shows labour market not as weak as rising unemployment suggests. Manufacturing has lost over 100,000 jobs in 3 years.

14

Dec2007

Dec2008

Dec2009

Dec2010

Dec2011

Dec2012 2013

Dec

4

3

2

1

0

-1

6.5

6.0

5.5

5.0

4.5

4.0

Australian labour market

Sources: ABS, NAB forecasts

Employment (12-months-to, LHS)Unemployment rate (%, RHS)

Sep2009

Sep2010 2011

Sep

250

200

150

100

50

0

-50

-100

-150

Employment changecum. change past 3 years ('000)

MiningManufacturingEducation & trainingHealth care & social assistance

15

Unemployment by region There are big disparities between unemployment both within and across Australian regions. Some suburbs and towns have clearly missed out on the boom.

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QLD NSW V I C SA WA TAS

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Population growth and net interstate migration In recent years, the population has been growing by >2%, outstripping the Philippines, Malaysia, India, Indonesia & Vietnam. However, growth slowed to 1.5% in 2010, with net migration -35%. Victoria’s population growth has increased notably since the turn of the century. This trend softened significantly last year.

16

Australia

-60000

-40000

-20000

0

20000

40000

60000

1982 1987 1992 1997 2002 2007 1982 1987 1992 1997 2002 2007

VIC QLD NSW WA SA

Annual Net Interstate MigrationPersons

Source: ABS, NAB Economics

17

Carbon tax In the near term net negative to GDP & boost to inflation. But, overall impact moderate. Some sectors better off, some worse. Modelling by Commonwealth Treasury suggests the largest negative impact on output growth for coal fired electricity generators (-10% by 2020). Also a marginal negative impact on output of some metal and cement manufacturers and coal miners.

• Inflation - accept 0.7% increase in 2012/13

• Growth - around 0.3% off GDP in 2012/13. Reflects lower consumption from falling real wages and lower business investment reflecting uncertainty and increased cost of capital.

• Employment - not enough to change unemployment much but net negative to near term jobs growth.

• Costs of living - dangers re cost of living increases feeding into wage pressures. The rise likely to be most apparent by mid 2012.

• Longer run - suspect more negative than current modelling (wages are not fully flexible).

Output Growth by Sector, 1990 to 2050

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5

6

7

-1

0

1

2

3

4

5

6

7

Medium global action 90s 00s 10s 20s 30s 40s

per cent per cent

Agriculture Mining Manufacturing Construction Services

18 18

Australia’s GDP profile Australia is slowing to a touch below trend with multi speed economy becoming more pronounced as restructuring occurs. Longer run we see accelerating growth but significant rebalancing challenges. In the near term, the carbon tax is a net negative to GDP & boost to inflation. But, overall impact moderate. For 2011 we have growth of 1 3/4% and around 4% in 2012.

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Financial markets - interest rates RBA has been surprised by the softness in local domestic orientated sector. Global uncertainties have also mounted. A very low core CPI gave them the scope to cut rates in November. Unusual for RBA to go only once and probably we will get another in early 2012 (Feb) . But….forecasts don’t point to aggressive cuts being needed – so not really in a period of significant cuts.

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4

5

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7

8

Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

%

Source: RBA, NAB Economics

Forecasts

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Financial markets - exchange rates $A a proxy for global (& especially Chinese) growth. So far AUD volatility not like GFC. Our model says AUD good value USD 1.05c (+/- 5c). We see AUD around 1.02 by late 2011, then back to 1.05 by mid 2012. Long run around 95c (late 2013).

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0.65

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0.75

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0.85

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0.95

1

1 15 29 43 57 71 85 990.7

0.75

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0.85

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0.95

1

1.05

1.1

GFC JULY TO NOV 2008FROM 1 JUNE 2011

Days from peak to trough

AUD V USD - LAST 3 months v GDC

Model AUD and Forecasts v Actuals

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ACTUALPlus 1 std errorLess 1 std error

NASDAQ BUBBLE

Industry Conditions

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Industry share of state production When comparing conditions across states, important to review the contribution of industry sectors to each economy! It is easy to bundle Queensland in with WA as a resource state, but it has a much more diversified economy. VIC is clearly vulnerable to the multi-speed economy. While the VIC economy is largely service based, we also have a larger than average share in manufacturing.

NSW VIC QLD SA WA TAS Australia

Agriculture 1 2 3 5 3 7 2Mining 4 2 15 4 32 2 10

Manufacturing 9 11 8 13 7 12 9Construction 6 7 8 7 10 6 8

Wholesale Trade 5 6 5 5 3 3 5Retail Trade 4 5 5 5 3 5 5

Finance & Insurance 16 13 7 9 5 10 11Property & Business

Services13 14 10 10 10 6 12

Other 40 39 39 43 27 47 39

2009/10 Share of State Production (%)

Source: ABS

23

Value chain for food in Australia, 2009-10 The food industry is one of Australia's major manufacturing industries. Food and beverage processing, grocery and fresh produce generate a turnover of in excess of $100bn. But, Australia is a net importer of food and grocery products, with a trade deficit of $A1.8bn in 2009/101.

Source: Department of Agriculture, Fisheries & Forestry

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Business conditions by industry sector Industry conditions provide stark evidence of a multi-speed economy, with conditions strongest in mining and weakest in manufacturing, construction, & retail. The surprise has been that the weak are getting weaker. The economy is restructuring. And…the strong are not just mining - professional services, health and personal services also strong.

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IV I II III IV I II III IV

2009 2010 2011

Mining Manuf Constn

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IV I II III IV I II III IV

2009 2010 2011

Retail Wsale Transp

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IV I II III IV I II III IV

2009 2010 2011

Fin, bus, prop Rec, pers

Mining strongest; manufacturing still weakest

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ASX300 conditions and confidence by industry – September qtr Business conditions remain mixed by industry with large mining particularly strong and large manufacturing the weakest overall. The range of confidence by industry is narrower – with large retail, recreation and manufacturing among the weakest.

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Business Conditions Business Confidence

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MIN

MFG

CO

N

RET

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TUC

TOTA

L

ASX300 Previous ASX300 NAB QBS

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60

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MFG

CO

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TUC

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L

ASX300 Previous ASX300 NAB QBS

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Capital expenditure by industry The terms of trade boom is reshaping the Australian economy. The commodity price boom sparks is lifting mining profits and investment (particularly in WA) - but not much elsewhere.

0

5

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15

20

1990 1994 1999 2003 2008 1990 1995 1999 2004 20080

5

10

15

20

WA

QLD

NSW

VIC

SA

Mining Manufacturing

Capital Expenditure by Industry*Proportion of Total Australian Capital Expenditure, annual sum

* Data not available for TasmaniaSource: ABS, NAB

% %

0

10

20

30

PrimaryMetal

Machinery Chemicals TCF TransportEquipment

Furniture Total0

10

20

Export OrientationExports as a proportion of total sales, 2007

30

Source: ABS

%%

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Tourism Some segments clearly struggling under high AUD. Signs that occupancy rates have been a concern in Qld & Tasmania for several years. Short-term visitor arrivals are stagnating. Remember, domestic tourism still makes up three quarters of the sector.

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Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

Australia Queensland

Room occupancy rate (%, s.a.)

Source: ABS

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0.7

Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11

Short-term visitor arrivalsShort-term resident departures

Tourism movements (millions per month)

Source: ABS

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House prices and expectations Flat to falling housing prices don’t help. Professionals expect further falling prices. Victoria has fallen sharply with poor outlook. WA the strongest. Broadly we see flat markets – but regional differences.

Source: NAB Quarterly Australian Residential Property Survey

House Price Expectations

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Australia Victoria NSW Qld SA/NT WA

%

Expectations

House Price Expectations (next 12 months)

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2

Victoria Qld Australia NSW SA/NT WA

Mar-11 Jun-11 Sep-11

%

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Housing price dynamics Fundamental to house prices is the chronic under supply of housing market. Currently under built by around 250,000 (or nearly 2 years worth at existing take up). Overseas arrivals now declining as global economy improves, but shortage likely to underpin housing prices in future. Also other demands on construction sector from infrastructure and mining.

1.0

1.5

2.0

2.5

Jun-99 Jun-02 Jun-05 Jun-08 Jun-11

Dwellings Population 15+

Dwelling stock & civilian population (% growth p.a.)

Sources: ABS, NAB

1.02

1.03

1.04

1.05

1.06

Sep-96 Sep-01 Sep-06 Sep-11

2.45

2.50

2.55

2.60

2.65

Adults (LHS) Persons (RHS)

Population per dwelling

Sources: ABS, NAB

30

Business conditions - cyclical sectors Survey suggests that retail overall is experiencing extremely weak conditions Consumers are more cautious and we don’t see this changing significantly over the next year or so. As a result, the saving ratio has moved up significantly. But consumers they are happy to spend on personal services.

30

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

Trend Seasonally adjusted

Household saving ratio(% of household income)

Source: ABS

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IV I II III IV I II III IV

2009 2010 2011

Retail Manuf Constn All

Business conditions (net bal., trend)

31

Retail trade turnover - by sector

Sector 2010/11 % chg – 2009/10 v 10/11

% chg – 5 year average

% chg – 10 year average

Food retailing 98,429.1 3.2 6.0 6.2

Household goods retailing 42,830.2 0.7 3.0 5.4

Clothing, footwear & accessories 19,175.1 -0.6 3.5 5.0

Department stores 18,432.8 -1.3 2.1 3.1

Cafes, restaurants & takeaway food 32,044.9 5.0 6.7 6.6

Other retailing 34,321.8 4.5 5.3 5.2

Total Retail Turnover 245,240.4 2.5 4.9 5.6

Retail Trade Turnover by Sector ($ millions)

Mar Sep2010

Mar2011

Sep

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

Retail turnover (current prices)monthly trend, % change

Source: ABS

FoodHousehold goodsClothing, footwear & accessories

Dec Mar Jun Sep Dec2010

Mar Jun2011

Sep

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

Retail turnover (current prices)monthly trend, % change

Source: ABS

Department storesCafes, restaurants & takeaway foodOther

32 32

Important information

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