NAB June 09

8/14/2019 NAB June 09

1/14

Embargoed until 11.30am Tuesday 14 July, 2009

NABs Monthly Business Survey& Economic Outlook June 2009

Business confidence improves further while business conditions jump sharply. Trading and profitability back to levels not seen since the collapse in global activity in late 2008

while labour shedding significantly slower. Key drivers of the jump in activity include betterperformances in manufacturing, construction, wholesaling and finance. Suggesting governmentstimulus continues to temporarily boost growth.

Forward orders jump very sharply (retail & cars). But capacity utilisation unchanged as stocks fall. Survey suggests domestic demand returned to growth in mid 2009. Global forecasts for 2009 unchanged at -1% but signs of stabilisation in the rate of fall in global

activity continue to emerge. While growth still some way off, the worst appears to have passed. We have maintained our domestic GDP forecasts for 2009 at - per cent and 1% in 2010. We see

some of the current strength as temporary with activity to continue to decline in H2 andunemployment to rise significantly (to around 8% next year).

Wage pressures ease further but retail prices only just starting to slow. Core CPI could disappoint. RBA now on hold - less inclined to cut rates further, but we would not rule out late cycle cuts as

unemployment rises (albeit this is no longer our base case). Rate rises not likely till H2 2010.June Survey Key Results

Business conditions jumped sharply with the overall index up from -14 to -2 index points. This returns the index to the levels ofSeptember 2008 just prior to the collapse of Lehman Brothers. All components of the index improved significantly. Trading andprofitability improved 10 and 7 points respectively (to index readings of +3 and -2 respectively) in both cases bringing the indexesback to around the levels of December 2008 when the Governments first cash payments impacted.

The improvement in employment was even sharper albeit still implying moderate labour shedding. Overall the employment index jumped 18 points to -7 index points the biggest monthly improvement in the history of the Monthly Survey to around levels lastseen in October 2008.

Forward orders also jumped sharply - again a record monthly improvement with the index increasing 14 points to an overall indexof zero points. That surge in orders was however driven by very strong retail orders especially car retailing given the investmentallowance. Against that, capacity utilisation edged only marginally higher to a still low 79.3 per cent (79.2 per cent last month).

Confidence again increased up 6 points to +4 index points the first positive reading since December 2007. That improvementreflected improved confidence in manufacturing and finance. However, taking on board recent improvements all sectors are nowtrending higher on confidence. Capital spending also improved to +6 points (-10 last month), with exports also up.

Labour costs were flat in June with wage rises offset by lower employment. As a result labour cost increases have slowed to 1.8%over the last year (2.1% last month). Economy wide prices fell by 0.3% in June, reflecting flat purchase costs and the strong AUD.As a result annual inflation fell from 2.7% to 2.2%. Retail prices were also subdued up 0.3 per cent but have only just started toslow. Hence the core CPI in Q2 2009 could surprise on the upside (above 0.7%).

Credit availability eased somewhat with 15% of respondents reporting tougher credit availability (22% in May). Those reporting nodemand for credit increased to a record 43% (33% in May) pointing to continued reluctance to borrow in the current environment.

Economic & Financial Forecasts Key Points Global There are signs that global economic activity is starting to

stabilise in a range of national business surveys, trade andindustrial production data. While equity and commodity marketshave eased back a touch recently that probably reflectedmarkets getting somewhat ahead of still poor fundamentals. At

this stage we see no reason to revise our global 2009 forecast of-1% in 2009 and a moderate 2% in 2010. Recovery will beheld back by an on-going reluctance to borrow and a gradualtightening in both monetary policy (from late 2010) and fiscalpolicy (in 2011). Also weakness in global labour markets willlimit private sector consumption and especially businessinvestment.

I n d e x

B u s i n e s s C o n f id e n c e & C o n d i ti o n s

S e p -

8 9

S e p -

9 0

S e p -

9 1

S e p -

9 2

S e p -

9 3

S e p -

9 4

S e p -

9 5

S e p -

9 6

S e p -

9 7

S e p -

9 8

S e p -

9 9

S e p -

0 0

S e p -

0 1

S e p -

0 2

S e p -

0 3

S e p -

0 4

S e p -

0 5

S e p -

0 6

S e p -

0 7

S e p -

0 8

O c t

0 7

F e b

0 8

J u n

0 8

O c t

0 8

F e b - 0 9

J u n -

0 9-40

-35

-30

-25

-20

-15-10

-5

0

5

10

15

20

25

30

35

-40

-35

-30

-25

-20

-15-10

-5

0

5

10

15

20

25

30

35

C o n d i t i o n s

I n d e x

MonthlyQuar te r ly

* S e a s o n a l l y a d j u s t e d b y N a t i o n a l

C o n f i d e n c e

Australia While the Survey points to some upside to current levels of activity we have not changed our Australian GDP forecast for 2009 of

%. That in part reflects some scepticism as to the recorded strength in Q1 national accounts (especially in the expenditureestimates) but, more fundamentally, given the extent of recent wealth destruction we still expect very low growth in consumptionespecially after the cash bonuses wash out and unemployment increases. Also private investment is expected to continue todeteriorate significantly given reduced spending and lower incomes through the terms of trade. Notwithstanding very strong public

spending we see final demand falling by 1% in 2009. For 2010 we have also maintained our forecast of +1%. As a result we stillsee unemployment reaching 7% by end 2009 and 8% by late 2010.

At the margin, the stronger current business results have changed the RBAs balance of risks. With an economy holding up betterthan expected we now see the RBA on hold, watching for longer. While the deteriorating labour market might well see furthermoderate rate cuts in late 2009, we now marginally see the RBA more likely to try to tough it out notwithstanding risingunemployment and sub target inflation. Rate increases are clearly a story for the second half of 2010 with a target of around 3%by year end.

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Key Monthly Bus iness Statistics - 3 Months to June, 2009 Apr 2009

May2009

Jun2009

Apr 2009

May2009

Jun2009

Business Confidence -14 -2 4 Forward Orders -11 -14 0Business Conditions -10 -14 -2 Stocks -16 -15 -10Trading -3 -7 3 Labour Costs (% q/q) -0.6 -0.4 0.1Profitability -10 -9 -2 Purchase Costs (% q/q) -0.1 0.0 0.2Employment -18 -25 -7 Final Products prices(% q/q) -0.1 0.2 -0.3Export Sales -4 -27 -11 Capacity Utilisation Rate (%) 79.7 79.2 79.3*All data is seasonally adjusted, except purchase costs and export sales. Cost and prices data are percentage changes expressed at a quarterly rate. All other data are net balance indexes, except capacityutilisation, which is an average rate, expressed as a percentage. See Quarterly Business Survey for more details on technical data specifications. Time series data are available by subscription. Fieldwork for thisSurvey was conducted from June 24 to June 30 and covered over 400 firms across the non-farm business sector.

MORE DETAILED COMMENTARY

Business Conditions & Confidence

Undoubtedly the key message and surprise in the June Survey is the strength in current activity. For a number ofmonths we have seen business confidence improve and that has continued led in June by improving sentiment inmanufacturing and finance. Much of that, however, could be put down to the prospect that Armageddon had beenavoided. Thus, until this Survey, actual outcomes have been much less buoyant and indeed had continued to fall.The June Survey however suggests that improved confidence has now been reflected in better business outcomes.Indeed, business conditions appear to have rebounded to a level roughly similar to that reported prior to the collapseof Lehman Brothers in September 2008 and the near global meltdown in activity that ensued.

Index

Business Confidence

J u n -

9 9

D e c - 9

9

J u n -

0 0

D e c - 0

0

J u n -

0 1

D e c - 0

1

J u n -

0 2

D e c - 0

2

J u n -

0 3

D e c - 0

3

J u n -

0 4

D e c - 0

4

J u n -

0 5

D e c - 0

5

J u n -

0 6

D e c - 0

6

J u n -

0 7

D e c

0 7

J u n

0 8

D e c - 0

8

J u n

0 9

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30Monthly

Seasonally adjusted*

Index

IndexBusiness Conditions

J u n -

9 9

D e c - 9

9

J u n -

0 0

D e c - 0

0

J u n -

0 1

D e c - 0

1

J u n -

0 2

D e c - 0

2

J u n -

0 3

D e c - 0

3

J u n -

0 4

D e c - 0

4

J u n -

0 5

D e c - 0

5

J u n -

0 6

D e c - 0

6

J u n -

0 7

D e c

0 7

J u n

0 8

D e c - 0

8

J u n

0 9

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30

Monthly


Index

* Seasonally adjusted by NAB

Average

Trend (SA)


Average

Trend (SA)

All components of the business conditions index improved significantly (see chart below left hand panel). Trading andprofits (up 10 and 7 points respectively) are now around levels last seen in December 2008 at the time of the firstgovernment cash handout. That is not insignificant, as there is little doubt that the second round of cash handoutstogether with the extension of the first home owners grant and the investment allowance, has impacted significantly on

the June readings. That is also suggested by the sharp improvements in manufacturing, construction and wholesalingin June together with ongoing out performance in retail. Easing in global financial markets at the same time hashelped the finance sector. That said perhaps the most surprising aspect of the Survey was the much improved labourmarket outcomes. The monthly increase of 18 points in June is the largest monthly movement in the Surveys history.In brief, the Survey suggests that the better trading and profits has seen business significantly slow the rate of labourshedding.

Overall, based on the average of recently Monthly Survey results for both business conditions and forward orders, theSurvey suggests domestic demand growth of around % or nearly 2% at an annualised rate (see chart below righthand panel). While the Survey results for the March quarter were less negative than the Statisticians actual estimatesfor demand, a relatively flat outcome in the first half of 2009 would be an extremely credible performance.

While the Survey clearly points to much better than expected outcomes, the real question is whether this improvementcan be sustained into the second half of 2009 as the impact of cash handouts and the first home owners grants start tofade. Here we are less certain albeit increased infrastructure spending will clearly boost public sector demand.Overall we are still very much in the camp that, however welcome the current strength might be, it will not be able tobe sustained. Clearly much depends on that judgment and future Survey results will need to be closely watched.

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Index Index

A u g - 9

8

J a n -

9 9

J u n -

9 9

N o v - 9

9

A p r - 0

0

S e p - 0

0

F e b - 0

1

J u l - 0 1

D e c - 0

1

M a y - 0

2

O c t - 0

2

M a r - 0

3

A u g - 0

3

J a n -

0 4

J u n -

0 4

N o v - 0

4

A p r - 0

5

S e p - 0

5

F e b - 0

6

J u l - 0 6

D e c - 0

6

M a y - 0

7

O c t

0 7

M a r

0 8

A u g - 0

8

J a n -

0 9

J u n

0 9-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

-30

-25

-20

-15

-10

-5

0

5

10

15

20

25

30

Trading, Profits & Employ me ntMonthly, seasonally adjusted 3 month moving average*

-6

-4

-2

0

2

4

6

8

10

D e c - 8

9

D e c - 9

0

D e c - 9

1

D e c - 9

2

D e c - 9

3

D e c - 9

4

D e c - 9

5

D e c - 9

6

D e c - 9

7

D e c - 9

8

D e c - 9

9

D e c - 0

0

D e c - 0

1

D e c - 0

2

D e c - 0

3

D e c - 0

4

D e c - 0

5

D e c - 0

6

D e c - 0

7

D e c - 0

8-6

-4

-2

0

2

4

6

8

10

DEMAND 6Mthly Annualised

Forward Orders

Forward Orders (Change & Level) As an Indicator of Domestic Demand- 6 Mthly Annualised % in Demand

Profits

Trading

* Seasonally adjus ted by National using TRAMO SEATS

Employment

In terms of some of the more forward looking indicators in the Survey, the very sharp jump in forward orders isencouraging - see chart below (left hand panel). While retail forward orders are clearly the strongest (helped by theGovernments cash hand outs) and motor vehicle retailing orders surged on the back of the investment allowance(contributing by itself 3 of the 14 point increase) the bottom line is orders in other cyclical sectors have also moved offtheir previously extreme lows. That said, and allowing for one off elements, the trend level of orders has againreturned to levels around that of September 2008. Also it appears that higher general confidence levels have helpedtemporarily increase investment spending (albeit again the investment allowance has had an impact) see chartbelow right hand panel. Whether that translates into an upward revision to longer term investment intentions is moredoubtful with information on that issue to be released in the full Quarterly Business Survey in a few weeks time.

Capital Expenditure: Monthly, Quarterly & Annual

D e c - 9

0

D e c - 9

1

D e c - 9

2

D e c - 9

3

D e c - 9

4

D e c - 9

5

D e c - 9

6

D e c - 9

7

D e c - 9

8

D e c - 9

9

D e c - 0

0

D e c - 0

1

D e c - 0

2

D e c - 0

3

D e c - 0

4

D e c - 0

5

D e c - 0

6

D e c - 0

7

D e c - 0

8

D e c - 0

9

J u n -

0 7

O c t - 0

7

F e b - 0 8

J u n -

0 8

O c t - 0

8

F e b - 0

9

J u n -

0 9-30

-20

-10

0

10

20

30

40

50

-30

-20

-10

0

10

20

30

40

50

Annual Expectations - LHS

Qtrly Acutal - LHS

Monthly Trend

IndexNew Forward Orders

J u n -

0 0

J u n -

0 1

J u n -

0 2

J u n -

0 3

J u n -

0 4

J u n -

0 5

J u n -

0 6

J u n -

0 7

J u n

0 8

J u n

0 9-30

-25

-20

-15

-10

-5

0

5

10

15

-30

-25

-20

-15

-10

-5

0

5

10

15

MonthlyIndex


Trend


Average

Qtrly Expectations - LHS

Jun '07 to Jun '09

Index IndexOriginal

Monthly

Elsewhere in the Survey there was evidence ofimproved export orders with the index moving up 16points to an overall reading of -11points. As shown inthe chart (right hand side) this data is quite spiky butlooking through that volatility does suggest sometrend improvement in recent months.

IndexExports

J u n - 0

2

J u n - 0

3

J u n - 0

4

J u n - 0

5

J u n - 0

6

J u n - 0

7

J u n 0

8

J u n 0

9-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

MonthlyIndex

Trend

Original

Average

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Against all the positives, it was notable that the level of capacity utilisation in the economy overall did not reallyimprove much with the aggregate level of capacity in June at 79.3% compared with 79.2% last month (see chartbelow left hand panel). In broad terms there was little change across industry albeit with some evidence of abottoming at very low levels in (especially) manufacturing and construction. Retail and wholesale capacity utilisationrates have not really changed much in recent months. It appears as evidenced by the aggregate stock index seechart below right hand column that recent improved trading has been very much driven by further de-stocking (withthe aggregate index still around -10 points). Indeed the de-stocking indices are especially large in manufacturing (-

24), construction (-32) retail (-17) and wholesale (-15).

IndexStocks

J u n -

9 9

D e c - 9

9

J u n -

0 0

D e c - 0

0

J u n -

0 1

D e c - 0

1

J u n -

0 2

D e c - 0

2

J u n -

0 3

D e c - 0

3

J u n -

0 4

D e c - 0

4

J u n -

0 5

D e c - 0

5

J u n -

0 6

D e c - 0

6

J u n -

0 7

D e c

0 7

J u n

0 8

D e c - 0

8

J u n

0 9-20

-15

-10

-5

0

5

10

15

20

-20

-15

-10

-5

0

5

10

15

20

Monthly


IndexCapacity Utilis ation

J u n -

9 9

J u n -

0 0

J u n -

0 1

J u n -

0 2

J u n -

0 3

J u n -

0 4

J u n -

0 5

J u n -

0 6

J u n -

0 7

J u n

0 8

J u n

0 978

79

80

81

82

83

84

85

86Seasonall y adjusted & trendUtilisa tion rate %


Trend


Average

Trend (SA)


Since late 2008 we have included a question asking how businesses view the availability of credit. As shown by thechart below there has been a slight decrease in difficulty in accessing credit with 15% of respondents reportingtougher credit availability (22% last month). Further, those not requiring credit rose to 43% in May (33% last month).As such, the key driver of slowing growth in credit in Australia (unlike overseas) still remains slower demand for credit

rather than credit rationing.

Availability of Finance Constraint

0

10

20

30

40

50

60

Significantlymore

difficult

Slightlymore

difficult

No Change Slightlyeasier

Significantlyeasier

NoBorrowings

reqd

% o f

f i r m

November December January FebruaryMarch April May June

NETDIFFICULTY

Trends by Sector and State

In trend terms, as can be seen from the charts below, the improvement in business confidence has been broad-based.Clearly, retail confidence has been particularly helped by the Government cash payments, while mining confidencehas recovered somewhat due to an improving sentiment in commodity markets.

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B u s i n e s s C o n f i d e n c e b y I n d u s t r y

J u n -

0 6

S e p -

0 6

D e c - 0

6

M a r - 0

7

J u n -

0 7

S e p -

0 7

D e c

0 7

M a r

0 8

J u n

0 8

S e p

0 8

D e c - 0

8

M a r - 0

9

J u n

0 9-40

-30

-20

-10

0

10

20

30

40

Trans & UtilMining

Fin Bus & PropRec&Pers

I n d e x I n d e xM o n t h l y , S e a s o n a l l y A d j u s t e d 3 m o n t h M o v i n g A v e r a g e *

J u n -

0 6

S e p -

0 6

D e c - 0

6

M a r - 0

7

J u n -

0 7

S e p -

0 7

D e c

0 7

M a r

0 8

J u n

0 8

S e p

0 8

D e c - 0

8

M a r - 0

9

J u n

0 9-40

-30

-20

-10

0

10

20

30

40

MfgConstruction

RetailWholesale

The trend improvement in business conditions is also broad based with the exception of recreational services. Retailcontinues to lead the way on the back of cash handouts while mining has also strengthened noticeably on the back ofa less bleak global outlook. Most sectors appear to have bottomed with manufacturing still at very depressed levels.

B u s i n e s s C o n d i t i o n s b y I n d u s t r y

J u n -

0 6

S e p - 0

6

D e c - 0

6

M a r - 0

7

J u n -

0 7

S e p -

0 7

D e c

0 7

M a r

0 8

J u n

0 8

S e p

0 8

D e c - 0

8

M a r - 0

9

J u n

0 9-40

-30

-20

-10

0

10

20

30

40

50

Trans & UtilMining

Fin Bus & PropRec&Pers

I n d e x I n d e xM o n t h l y , S e a s o n a l l y A d j u s t e d 3 m o n t h M o v i n g A v e r a g e *

J u n -

0 6

S e p - 0

6

D e c - 0

6

M a r - 0

7

J u n -

0 7

S e p - 0

7

D e c

0 7

M a r

0 8

J u n

0 8

S e p

0 8

D e c

0 8

M a r - 0

9

J u n

0 9-40

-30

-20

-10

0

10

20

30

40

50

MfgConstruction

RetailWholesale

Across states the trend improvement in confidence has also been broad based and consistent in keeping witheconomy wide influences such as fiscal initiatives and lower interest rates. There is hence little difference inconfidence across the states. Turning to business conditions, it is notable the previous power states of WesternAustralia and Queensland are reporting the weakest conditions albeit the differences are not large. Most states arehowever sharing in the recent improvement in conditions. That said NSW and South Australia continue to report theleast negative outcomes - albeit business conditions in all states remain poor.

Business Confidence by State

-40

-30

-20

-10

0

10

20

30

J u n - 0

7

A u g - 0

7

O c t - 0 7

D e c - 0

7

F e b - 0

8

A p r - 0 8

J u n - 0

8

A u g - 0

8

O c t - 0 8

D e c - 0

8

F e b - 0

9

A p r - 0 9

J u n - 0

9

I n d e x ,

s a

3 m m a

SA NSW

Queensland WA

Australia Victoria

Business Conditions

-30

-20

-10

0

10

20

30

40

J u n - 0 7

A u g - 0 7

O c t - 0 7

D e c - 0

7

F e b - 0

8

A p r - 0 8

J u n - 0 8

A u g - 0 8

O c t - 0 8

D e c - 0

8

F e b - 0

9

A p r - 0 9

J u n - 0 9

I n d e x ,

s a

3 m m a

WA QueenslandAustralia NSW

Victoria SA

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Cost and Price Trends

NABs Survey suggests that the still softening labour market is being reflected in further slowing in labour costs (awage bill measure). Indeed, as shown in the charts below, employers are continuing to reduce labour costs with theyear on year growth rate of labour costs falling sharply in all sectors. In June, total labour costs were unchanged andthe annual growth in labour costs slowed to only1.8% (2.1% last month).

Wage growth

0

1

2

3

4

5

6

7

8

9

10

J u n - 0

6

S e p - 0

6

D e c - 0

6

M a r - 0 7

J u n - 0

7

S e p - 0

7

D e c - 0

7

M a r - 0 8

J u n - 0

8

S e p - 0

8

D e c - 0

8

M a r - 0 9

J u n - 0

9

Mining Rec etc All Wholesaling Retail

oya %

Wage growth

0

1

2

3

4

5

6

7

8

9

10

J u n - 0

6

S e p - 0

6

D e c - 0

6

M a r - 0 7

J u n - 0

7

S e p - 0

7

D e c - 0

7

M a r - 0 8

J u n - 0

8

S e p - 0

8

D e c - 0

8

M a r - 0 9

J u n - 0

9

Construction FBP ALL Mfg Trans

oya %

Purchase costs are also continuing to ease with no growth in June. As a result the 12-months-to rate of increasedecelerated to 4.7% down from a 5.5% increase in May and from a peak of 7.2% increase as recently as January2009. Economy-wide price pressures are also easing with a decline of -0.3% in June, bringing the annual rate downsignificantly to 2.2% (2.7% last month).

Retail prices have however been somewhat stickier. In June retail prices increased by 0.3% on a 3 month seasonallyadjusted rate. While well down from 0.7% in May and 1.2% in April, these readings still point to the probability of anunderlying CPI result in the June quarter of 0.7% or above. As a result the 12-months-to retail inflation rate remainedsurprisingly high at 4.1% (4.3% last month). This is not to say that core retail inflation will not fall going forward, butthe lags may cause some consternation in the near term.

A n n u a l - %

C o s t s & P r i c e s

J u n -

0 0

D e c - 0

0

J u n -

0 1

D e c - 0

1

J u n -

0 2

D e c - 0

2

J u n -

0 3

D e c - 0

3

J u n -

0 4

D e c - 0

4

J u n -

0 5

D e c - 0

5

J u n -

0 6

D e c - 0

6

J u n -

0 7

D e c

0 7

J u n

0 8

D e c - 0

8

J u n

0 90

1

2

3

4

5

6

7

8

0

1

2

3

4

5

6

7

8

L a b o u r c o s t s

R e t a i l p r i c e s

A n n u a l - %

P u r c h a s e c o s t s

1 2 M o n t h s e n d e d , o r i g i n a l d a t a

E c o n o m y - w i d e p r i c e s

NABs Economic and Financial Forecasts:

Global Forecasts

After recording a strong recovery from their exceptionally low levels in March, global financial, freight and commoditymarkets have lost some of those gains through the last few weeks. Some of the lift across these markets reflected arelief rally as traders priced in a much lower likelihood of extreme financial and economic weakness and sentimentshifted toward the expectation of a severe recession with still functioning financial systems rather than somethingworse. At the same time, economic data from many parts of the world have shown clear evidence of an easing in the

pace of output declines and the markets have been looking forward to a resumption in economic growth through themiddle of the year. Despite those fundamental underpinnings for market recovery, it does appear as if the greenshoots advocates got a little ahead of the economic reality. Outside China, there is not much evidence yet ofsustained economic growth and the process of recovery is still fragile and in its early days.

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The most timely indicators of global economic activity suggest that conditions could finally be stabilizing after the mostsevere downturn of the postwar period. The pace of decline in global industrial output has settled at around 15% yoythrough the first four months of the year which suggests that the level of production could have stabilized at a very lowlevel. The CPB measure of world export volumes shows a similar picture with the drop in volumes settling at almost

20% yoy through March and April and the pace of decline tapering off quite sharply in the recent monthly numbers.Our forecast for the global economy involves a slowing in the rate of decline and then stabilisation in activity by theend of the September quarter, followed by the commencement of modest economic growth toward the end of the year.So far, that looks on track and we have not changed our global forecasts.

The various national purchasing managers surveys bottomed out around the turn of the year and have becomesteadily less negative since then. Most survey results still fall short of the 50 mark that signifies expansion but the rateof decline is steadily slowing and a few of the June results even show that modest expansion has resumed in a fewindustries and markets. An alternative set of business surveys (the US Philadelphia Fed, the UK CBI, the FrenchINSEE and the German IFO) show current activity declining less rapidly, consistent with industry nearing the bottom ofthe cycle. On the other hand, business expectations for 6 months or so into the future have become much moreoptimistic in the last few months and business thinks that activity will be growing by the end of the year.

Sustained recovery, however, requires ongoing growth in final demand, particularly private demand. Our forecasts arefor a rather weak recovery from the current deep recession. Several deep recessions in the postwar period have beenfollowed by rapid recoveries, producing V-shaped profiles for economic activity. For instance, global growth reachedalmost 5% in 1976, after the mid-1970s recession, and 4% in 1984, after the early 1980s downturn. The milderrecessions seen in the early 1990s and at the start of this decade were followed by more moderate upswings in globaleconomic activity. We expect global output to fall by almost 1% this year, the first decline of the postwar period andeasily the worst outcome since the Great Depression. However, we are only expecting a fairly subdued recovery withgrowth of 2 % next year and it is only in 2011 that growth gets back to the 3% trend seen in the last 40 years.

This rather muted upturn is the outcome of opposing forces. Large amounts of stimulus are coming from economicpolicies around the world with near zero interest rates in several key economies and budget balances shifting heavily

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into deficit, even after allowing for the impact of the downturn on the fiscal bottom line. Normally, such powerful policystimulus would lead to a very strong upturn in economic activity. However, there are structural factors that should limitthe impact of these policies. Household balance sheets became over-extended during the previous boom and there islikely to be a prolonged period of increased savings and lower borrowing as consumers seek to cut their debt/incomeratios and restore their asset/liability positions in the wake of big reductions in wealth. Large parts of the internationalbanking system are likely to take a more cautious approach to lending and that should limit credit growth and allow thepricing of risk to be more appropriate than it was before 2007. Finally, the legacy of the downturn will be much higherunemployment and large amounts of idle capacity and that should limit incentives and ability to spend amonghouseholds and business. Taken overall, the powerful policy stimulus puts a floor under global economic activity andgets the recovery started but private sector imbalances and fragilities limit the extent of the upturn.

The synchronised nature of the global downturn means that no region has emerged unscathed but there are bigdifferences between them in the extent to which output has suffered. Initially it appeared as if the spending, borrowingand importing economies like the US and UK would suffer the most in the recession as the imbalances andvulnerabilities appeared most obvious there. In the event, however, it is the exporting and saving driven economieslike Japan and Germany that have suffered the sharpest downturns as activity levels in their export-orientedmanufacturing sectors fell sharply. Recently Japanese output has started rising again but it is still well below year-earlier levels.

The charts below show how industrial output declined sharply in virtually all areas of the world after the collapse ofLehmann Brothers last September. The main exception is China where output probably fell through late last year but

year on year growth was maintained. Even big closed economies like India and Brazil, where there had been someexpectation that they might not see too much impact from a US/UK focused recession, found themselves caught upwhen the downturn became deeper and world-wide. The pace of decline in industrial output has been slowing acrossEast Asia and Latin America but there is no sign yet of an upturn in production.

Just as the downturn was synchronised with all regions being affected, the upturn should be synchronised too. Therewill, however, still be significant differences between economies in the timing and extent of recovery. The US andChina should be among the first to emerge from the downturn, largely reflecting the extent of stimulus to domesticdemand in both economies. Chinese economic growth has slipped from a peak of 14% yoy in mid-2007 to just over6% yoy by early 2009 as exports and real estate turned down. The Chinese economy should bottom-out in the firsthalf of 2009 with growth accelerating through 7% by the end of this year and reaching almost 8% by the end of 2010.The US economy should continue to shrink, but at a declining rate, until September quarter with growth resuming inthe final months of the year. Year-average growth should swing from almost -3% in 2009 to nearly 1% next year.

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IMF ANNUAL GROWTH TOTALS WEIGHTS 2006 2007 2008 2009 2010 2011

GDP US 0.213 2.8 2.0 1.1 -2.9 1.3 2.5GDP JAPAN 0.066 2.0 2.3 -0.7 -8.0 0.8 2.5EURO GDP 0.161 3.0 2.6 0.6 -4.6 0.4 1.8UK GDP 0.033 2.9 2.6 0.8 -4.1 0.8 2.5nonjap asia 0.046 5.4 5.6 2.2 -4.9 2.4 4.5latin america 0.083 5.3 5.4 4.2 -1.3 1.6 3.8china 0.108 11.0 11.8 9.5 6.6 7.7 8.5canada 0.02 3.1 2.7 0.8 -3.0 1.0 2.5India 0.046 9.9 9.3 7.5 5.4 5.3 6.0Africa 0.03 6.1 6.3 5.2 3.4 4.0 5.0CIS 0.045 8.2 8.6 6.0 -5.0 2.0 3.0E Europe 0.04 6.7 5.7 3.2 -3.5 2.2 2.8Middle East 0.038 5.7 5.9 6.4 3.9 2.0 4.0Other advanced 0.07 4.5 4.7 1.9 -3.0 2.2 2.5GLOBAL TOTAL 0.999 5.0 4.9 3.1 -1.8 2.3 3.5

The weakness in economic activity and commodity prices has flowed into producer and consumer price inflation,

facilitating the reduction of central bank policy interest rates to historically low levels. The sharp decline in industrialoutput has been paralleled by a steep decline in capacity utilisation rates and the percentage of capacity lying idleacross the US, Japan, Canada and big Eurozone economies has risen from around 15% in late 2007 to almost 35% inmid-2009. Unemployment is also rising rapidly with the jobless rate across that same group of big economiesincreasing from around 5% in late 2007 to almost 9% by mid-2009 and rates of over 10% seem likely by the end ofthe year.

This is clearly a very difficult environment to seek wage and price rises and all the main measures show sharpdeclines in inflation or even the onset of deflation. The collapse in headline inflation is shown in the chart below of G7price changes with the rate of increase of the headline CPI dropping from a peak of almost 4% yoy in mid-2007 to atiny fall in prices by April 2009 and at least temporary deflation is expected in some economies for parts of the year.Stripping out the volatile energy and food components on consumer prices, however, shows a more modest reductionin price pressures with the G7 core CPI inflation rate dipping from a peak of around 2% yoy in mid-2007 to just under1% yoy in April 2009.

There is now a great deal of debate and uncertainty over the inflation outlook with opinion split between those who seethe massive increase in central bank balance sheets and the return of the printing of money as a harbinger of higherinflation to come and those who focus on widespread unemployment and idle capacity as factors keeping prices down.Our view of ongoing modest inflationary pressures depends critically on both monetary and fiscal authoritieswithdrawing their current emergency policy stance. That process will however be gradual with consumers less willingto take on debt and banks generally more risk adverse. Globally interest rates will remain quite low through the nextfew years.

Australian Outlook

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While the Survey (and other data) points to an improved growth momentum domestically we have not fundamentallychanged our view of the economic outlook over the next 18 months or so.

That reflects a number of factors relevant here: The first relates to some skepticism as the reported growth in GDP in the first quarter of 2009 and in

particular the very strong GDP(E) measures driven by net exports. Indeed the gap between the averagemeasure of GDP and GDP(P) - which many including ourselves see as probably the more reliable measure

is the largest since September 1982.

Gap Between GDP(A) and GDP(P)

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

J u n - 8

2

J u n - 8

6

J u n - 9

0

J u n - 9

4

J u n - 9

8

J u n - 0

2

J u n - 0

6

While the Survey itself suggests acceleration in demand recently the actual demand estimates in the nationalaccounts were even weaker than implied by the survey. If we combine both quarters we suspect the bottomline is an economy that has at least stalled if not gone backwards in the first half of 2009.

Beyond that we see elements of pull forward in the recent data e.g. via the investment allowance and firsthome buyers scheme or stimuli that will not be there in the second half of 2009 e.g. cash hand outs toconsumers and continuing strength in net exports.

That suggests that the second half of 2009 will see negative growth with the turning point either in late 2009or early 2010.

This means, that while the pattern of growth between quarters may change, the bottom line in key aggregates doesnot at least in calendar year terms

Thus in calendar 2009 we still expect GDP to fall by around % and then grow by around 1% in 2010. For the financial year however the forecasts have been raised to % in 2008/09 and -1/2% (unchanged) in

2009/10.

Looking forward it is hard to see the pace of consumption being maintained in the face of less cash handouts, risingunemployment and the damage done to household balance sheets. Indeed the chart below (left hand panel) shows

how robust consumption has been relative to what might have been expected without Government specialmeasures. Equally, while interest rates have no doubt helped, we see the current improvement in construction asvery much more tied to the boost to the first home owners scheme which is due to be phased out over the next 6months. Nor are we convinced that business investment post some bring forward from investment allowances will do anything other than continue to fall significantly. Currently the forecasts imply falls of around 20% during2009.

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Underlying Business Investment - Actual v Model F orecasts

-30

-25

-20

-15-10

-5

0

5

10

15

20

25

30

35

J u n - 9

0

J u n - 9

1

J u n - 9

2

J u n - 9

3

J u n - 9

4

J u n - 9

5

J u n - 9

6

J u n - 9

7

J u n - 9

8

J u n - 9

9

J u n - 0

0

J u n - 0

1

J u n - 0

2

J u n - 0

3

J u n - 0

4

J u n - 0

5

J u n - 0

6

J u n - 0

7

J u n - 0

8

J u n - 0

9

J u n - 1

0

o y

a

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Model Ac tual plus f

Real Consumption - Annual Growth

-4.0

-2.0

0.0

2.0

4.0

6.0

D e c - 8 8

D e c - 8 9

D e c - 9 0

D e c - 9 1

D e c - 9 2

D e c - 9 3

D e c - 9 4

D e c - 9 5

D e c - 9 6

D e c - 9 7

D e c - 9 8

D e c - 9 9

D e c - 0 0

D e c - 0 1

D e c - 0 2

D e c - 0 3

D e c - 0 4

D e c - 0 5

D e c - 0 6

D e c - 0 7

D e c - 0 8

D e c - 0 9

D e c - 1 0

-4%

-2%

0%

2%

4%

6%

Model lhsActual plus f

Forecasts

Model

In a fundamental sense we still expect exports to fall around 5% over the next year and the terms of trade to declineby another 12%. Of course public demand will be very strong likely on current estimates to increase by around 3%in 2009 rising to around 5% in 2010. Against that private sector demand is likely to fall by more than 2% in 2009.

Domestic Demand - Private & Public

-6%

-4%

-1%

2%

4%

7%

D e c - 8 6

D e c - 8 7

D e c - 8 8

D e c - 8 9

D e c - 9 0

D e c - 9 1

D e c - 9 2

D e c - 9 3

D e c - 9 4

D e c - 9 5

D e c - 9 6

D e c - 9 7

D e c - 9 8

D e c - 9 9

D e c - 0 0

D e c - 0 1

D e c - 0 2

D e c - 0 3

D e c - 0 4

D e c - 0 5

D e c - 0 6

D e c - 0 7

D e c - 0 8

D e c - 0 9

D e c - 1 0

A n n u

a l %

c h a n g e

-6%

-4%

-1%

2%

4%

7%

Underlying Public Demand

Private Demand

Australia's Terms of Trade

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

S e p - 9

6

S e p - 9

7

S e p - 9

8

S e p - 9

9

S e p - 0

0

S e p - 0

1

S e p - 0

2

S e p - 0

3

S e p - 0

4

S e p - 0

5

S e p - 0

6

S e p - 0

7

S e p - 0

8

S e p - 0

9

S e p - 1

0

I n d e x

o f E x

p o r t t o I m p o r t P r i c e s

Average - 1985 to 2000

Source: ABS, &, NAB Economics

As shown below with GDP likely to go backwards in the second half of 2009 and not return to trend growth till late2010 unemployment continues to rise approaching 7% by late 2009 and around 8% by late 2010 forecasts that,not surprisingly, remain unchanged.

Real Output/Expenditure (GDP) - Quarterly

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

D e c - 8

4

D e c - 8

5

D e c - 8

6

D e c - 8

7

D e c - 8

8

D e c - 8

9

D e c - 9

0

D e c - 9

1

D e c - 9

2

D e c - 9

3

D e c - 9

4

D e c - 9

5

D e c - 9

6

D e c - 9

7

D e c - 9

8

D e c - 9

9

D e c - 0

0

D e c - 0

1

D e c - 0

2

D e c - 0

3

D e c - 0

4

D e c - 0

5

D e c - 0

6

D e c - 0

7

D e c - 0

8

D e c - 0

9

D e c - 1

0

Quarterly GDP 4 per. Mov. Avg. (Quarterly GDP)

Australian Labour Market

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

D e c - 8

5

S e p - 8

6

J u n - 8

7

M a r - 8 8

D e c - 8

8

S e p - 8

9

J u n - 9

0

M a r - 9 1

D e c - 9

1

S e p - 9

2

J u n - 9

3

M a r - 9 4

D e c - 9

4

S e p - 9

5

J u n - 9

6

M a r - 9 7

D e c - 9

7

S e p - 9

8

J u n - 9

9

M a r - 0 0

D e c - 0

0

S e p - 0

1

J u n - 0

2

M a r - 0 3

D e c - 0

3

S e p - 0

4

J u n - 0

5

M a r - 0 6

D e c - 0

6

S e p - 0

7

J u n - 0

8

M a r - 0 9

D e c - 0

9

S e p - 1

0

% c

h a n g e -

1 2 m o n t h s t o

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

% -

r a t e

EMPLOYMENT - LHS

UNEMPLOYMENT RATE - RHS

Finally, on inflation, the Survey continues to show sharply slowing levels of wages growth and lower capacityutilisation. In the near term (i.e. the June quarter) core inflation may remain higher than expected but that largelyreflects lags. Over the forecast period however we see core inflation falling back to the RBAs target by early 2010and moving sharply lower through the rest of the year. Inflation targeting suggests that interest rates should beadjusted according to where inflation is expected to be in 12 months time - both our and the RBA forecasts have

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inflation at the bottom of the 2-3% target (see chart below) at this horizon and going lower into 2011. Against that,Taylors rule would suggest that current rates should be around appropriate.

Inflation (CPI) - Nab's Headline & Core v RBA Forecast & TargetThrough the year percentage change

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jun-02

Dec-02

Jun-03

Dec-03

Jun-04

Dec-04

Jun-05

Dec-05

Jun-06

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Core CPICore CPI RBAHeadline CPI

RBA Target

Australian Cash Rate

0

2

4

6

8

10

12

14

16

18

20

S e p - 8

5

S e p - 8

6

S e p - 8

7

S e p - 8

8

S e p - 8

9

S e p - 9

0

S e p - 9

1

S e p - 9

2

S e p - 9

3

S e p - 9

4

S e p - 9

5

S e p - 9

6

S e p - 9

7

S e p - 9

8

S e p - 9

9

S e p - 0

0

S e p - 0

1

S e p - 0

2

S e p - 0

3

S e p - 0

4

S e p - 0

5

S e p - 0

6

S e p - 0

7

S e p - 0

8

S e p - 0

9

S e p - 1

0

%

Cash - Taylor's rule dd

Cash - actual + forecasts

Cash - Taylor's rule gdp

On interest rates:

We now see the RBA in data watching mode and they are clearly comfortable at the current cash rate;

The RBA will continue to be on hold for some time assessing the impact of what it has already done and theimpact of the Government Budget. It will also want time to assess whether recent improvements in theglobal outlook will be sustained.

If the RBA is to move in the next 3-6 months it will be down. The key drivers here are the extent of thedeterioration in activity in the second half of 2009 and the labour market. If these deteriorate more thanexpected the RBA can use the scope provided by a lower than target inflation forecast to provide additionalstimulus;

Against that the RBA clearly sees the current cash rate as significantly below a sustainable medium termoutcome and will wish to raise it back to more normal levels once recovery becomes entrenched. Thattiming could see the upward adjustment process starting, moderately, in late 2009;

While it is still a very close call the current improved growth momentum probably gives the RBA enoughsolace to sit out the next 6 months. And hence we have removed our previous expectation of additional 50points of cuts in late 2009. Clearly however this judgment is very data dependent;

We have the RBA starting to moderately tighten around September 2010 with the cash rate around 3% byyears end and continuing into 2011 to reach neutral (5 to 5 %) by late 2011.

For more information contact:

Alan Oster

Chief Economist

03 8634 29270414 444 652

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Australian Economic and Financial ForecastsFiscal Year Calendar Year

2008/09 -F 2009/10- F 2009 - F 2010 - F

Private Consumption 1 1 1Dwelling Investment -1 -5 -8 4Underlying Business Fixed

Investment 3 -15 -13 -6

Underlying Public Final Demand 3 4 3 5

Domestic Demand 1 -1 -1 1

Stocks (a) -1 -

GNE -1 -2 1

Exports 2 -3 -1 -3

Imports -2 -6 -11 GDP - - 1

Non-Farm GDP - - 1

Farm GDP 10 1 3 1

Federal Budget Deficit: ($b) -32 -58 n.a. n.a.

Current Account Deficit ( $b) 36 21 32 11

( %) of GDP 3 1 2 1

Employment 1 -1 - -1

Terms of Trade 6 -12 -12

End of Period

Average Earnings 3 2 1 2

Total CPI 2 2 2 1

Underlying CPI 4 2 3 1

Unemployment Rate 5 7 7 8

RBA Cash Rate 3 3 3 3

10 Year Govt. Bonds 5 5 5 5

$A/US cents 79 84 83 84

$A - Trade Weighted Index 62 64 63.5 64

(a) Contribution to GDP growth(b) Interest rates and exchange rates for the 2008/09 period are the most current at the time of writing

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Macroeconomic, Industry & Markets Research AustraliaAlan Oster Group Chief Economist +(61 3) 8634 2927Jacqui Brand Personal Assistant +(61 3) 8634 2181

Vacant Head of Australian Economics & Commodities +(61 3) 8634 2832John Sharma Economist Australia +(61 3) 8634 4514Ben Westmore Economist Australia & Commodities +(61 3) 8634 8602

Dean Pearson Head of Industry Analysis +(61 3) 8634 2331Gerard Burg Economist Industry Analysis +(61 3) 8634 2788Daniel Farley Economist Property +(61 3) 8634 2168Brien McDonald Economist Industry Analysis +(61 3) 8634 3837Frank Drum Economist Agribusiness +(61 3) 8634 2041

Michael Lee Senior Economist Modelling and Econometric Support +(61 3) 8634 8562

Tom Taylor Head of International Economics +(61 3) 8634 1883Robert De Iure Economist Country Risk +(61 3) 8634 4611Vacant Economist International +(61 3) 8634 3050Mark Rodrigues Economist International +(61 3) 8634 1823

Global Markets Research - Wholesale BankingPeter Jolly Head of Markets Research +(61 2) 9237 1855Robert Henderson Chief Economist Markets - Australia +(61 2) 9237 1836Spiros Papadopoulos Senior Economist Markets +(61 3) 8641 0978David de Garis Senior Economist Markets +(61 2) 9237 1180

New ZealandTony Alexander Chief Economist BNZ +(64 4)474 6744Stephen Toplis Head of Market Economics - BNZ +(64 4) 474 6905Craig Ebert Market Economist - BNZ +(64 4) 474 6799Mark Walton Market Economist BNZ +(64 4) 474 6799

LondonTom Vosa Head of Market Economics - Europe +(44 20) 7710 1573David Tinsley Market Economist Europe +(44 20) 7710 2910

Foreign Exchange Fixed Interest/DerivativesSydney +800 9295 1100 +(61 2) 9295 1166Melbourne +800 842 3301 +(61 3) 9277 3321Wellington +800 64 642 222 +800 64 644 464London +800 747 4615 +(44 20) 7796 4761New York +1 800 125 602 +1877 377 5480Singapore +(65) 338 0019 +(65) 338 1789

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NAB June 09

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