1

Alan Oster - Group Chief Economist

Australian Outlook

– where to now post the floods

2

Key issues

International Some encouraging news re the USA and large Europeans But Japan still struggling and UK hit by new weakness (weather / policy) And sovereign risk still a concern in Europe China India and Non Japan Asia still powering growth New focus on rising inflation – especially food

Australia What damage has floods etc done What is the growth path from here – timing and speed of recovery process Implications for dual speed economy , capacity shortages Inflation and rates

3

But even the disruption effects can be very large

NAB has run a special floods survey

Suggests across Australia in January revenue and output loses were around 5% and 6% respectively. In excess of 10% in Qld

On duration around 80% expected to be back to pre - flood activity within 4 weeks

Together means output loss of 2.7% in Q1 in the market economy (78% of the total economy). Or around 2% in the total economy

Then need to add back govt assistance and other private sector responses. Overall indicates a deduction from recorded GDP of around 1½% relative to pre flood expectations.

4

And are some issues that complicate assessments. Which will affect peoples balance sheets and attitudes to spending etc

There are tails to the length of disruption And insurance cover not 22% beyond 4 weeks great

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Already at preflood activity

Less than 1week

1-2 Weeks 2-4 weeks 1-3 months 3-6 months More than 6months

Never

How long before back to pre flood activity levels

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

None at all 1-25% 26-50% 51-75% 76-100 Don’t know

Extent that your losses will be covered by Insurance

5

That said we expect around + ¾% points additional growth in GDP coming into the rest of 2011

Reconstruction:- About $3¼ bn reconstruction spend- And private sector rebuild and restocking

Recovery in mine production (rebuilding stocks)

Agriculture gains (water allocations & subsoil moisture)

Growth to accelerate to around 4% per annum from mid 2011

So story really about timing of growth – albeit during calendar year 2011 down ½ % on pre-flood expectations.

6

Business Confidence eroded in mid 2010 but fell significantly in Dec– especially in Qld. January rebound saying things are past their worse and will improve after a temporary hit to activity.

-40

-20

0

20

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Australia Queensland

Business confidence(s.a. net balance

7

And the expected hit to activity arrived. Not just Qld – but clearly worse there.

Business conditions(s.a. net balance)

-40

-20

0

20

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Australia Queensland

74

76

78

80

82

84

Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Australia Queensland

Capacity utilisation(n.s.a. per cent)

8

Overall Survey indicative of demand slowing to around 1½% at an annualised rate in 6 months to March. And GDP a touch less (probably a flat Q1 outcome).

Business Conditions (Change & Level) as an Indicator of Domestic Demand - 6 Mthly Annualised % in Demand

-4

-2

0

2

4

6

8

10

Ma

r-0

7

Jun

-07

Se

p-0

7

De

c-0

7

Ma

r-0

8

Jun

-08

Se

p-0

8

De

c-0

8

Ma

r-0

9

Jun

-09

Se

p-0

9

De

c-0

9

Ma

r-1

0

Jun

-10

Se

p-1

0

De

c-1

0

Ma

r-1

1

DOMESTIC DEMAND

Based on NAB Conditions

9

Need to remember that the multi speed economy still there. With retail / wholesale the worse. Mining (coal) heavily impacted. Services much less so.

-10

0

10

20

30

40Dec-10 Jan-11

Business conditions (trend)(net balance)

-10

0

10

20

30

40Dec-10 Jan-11

Business conditions (trend) (net balance)

Source: NAB business survey

10

Consumers are more cautious in recent past. Will be impacted by floods.Don’t expect caution to ease much

■ Consumers are still wary and de-leveraging. Saving ratio has moved up significantly

■ We don’t see this caution as changing significantly over the next year or so.

■ But recovery and increased income and lower unemployment should help. -4

-2

0

2

4

6

8

10

12

14

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

Trend Seasonally adjusted

Household saving ratio(% of household income)

Source: ABS

11

On retail. Clothing footwear and household goods very very poor. Supermarkets, car repairs & food better. Mixed on pharmacies.Patterns broadly similar to late 2010 – except clothing / household

-70-60-50-40-30-20-10

01020

Su

perm

ark

ets

/gro

ceri

es

Sp

ecia

lised

fo

od

Takeaw

ay f

oo

d

Co

nven

ien

ce s

tore

s

Dep

art

men

t sto

res

Clo

thin

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oo

twear

Ho

useh

old

go

od

s

To

ys a

nd

sp

ort

ing

Vid

eo

/mu

sic

sto

res

New

sag

en

ts

Ph

arm

acie

s

Petr

ol

Sta

tio

ns

Car

reta

ilin

g

Car

rep

air

NSW VIC QLD SA

WA Other AUS Nov 2010 Aust

12

Consumer caution also evident in housing marketsThere has been a significant drop back in house price expectations

Qld was already a problem prior to floods – because of over supply

Melbourne a hot market cooling

But not expecting a crunch in housing prices

13

On house prices we see a flat period ahead – up 1½% but growth only to start again in H2 2011. Consumption to be moderate in 2011 – dipping on flood but back to moderate growth by late 2011.

Australian House Prices - 12 Mth %

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

Sep-8

7Se

p-88

Sep-8

9Se

p-90

Sep-9

1Se

p-92

Sep-9

3Se

p-94

Sep-9

5Se

p-96

Sep-9

7Se

p-98

Sep-9

9Se

p-00

Sep-0

1Se

p-02

Sep-0

3Se

p-04

Sep-0

5Se

p-06

Sep-0

7Se

p-08

Sep-0

9Se

p-10

Sep-1

1Se

p-12

% oy

a

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Actual

Model

Real Consumption - Annual Growth

-4.0

-2.0

0.0

2.0

4.0

6.0

Dec-8

8

Jun-9

0

Dec-9

1

Jun-9

3

Dec-9

4

Jun-9

6

Dec-9

7

Jun-9

9

Dec-0

0

Jun-0

2

Dec-0

3

Jun-0

5

Dec-0

6

Jun-0

8

Dec-0

9

Jun-1

1

Dec-1

2

-4%

-2%

0%

2%

4%

6%

Model Actual plus f

Forecasts

Model

14

Going forward, as well as the rebuild process, Australian economy will still be boosted by strong terms of trade and hence incomes. Also strong trading partner growth and no large output gaps.

0

100

200

300

Dec-03 Dec-06 Dec-09

Oil Thermal coal

Iron ore Metal coal

Energy & iron ore prices $USIndex Sep qtr 2007 = 100.0

Sources: Datastream, NAB forecasts

0.6

0.8

1.0

1.2

Dec-03 Dec-06 Dec-09 Dec-12

Terms of trade

Source: ABS, NAB forecasts

1985-2000 average

15

AUD often thought of as proxy for global (and especially Chinese) growth. Our model says AUD good value around USD 95c (+/- 5c). We see AUD rising to 1.05 by mid 2011 then back to 90c by late 2012.

Model driven by: Commodities;

USD / EURO – as a measure of USD weakness

Long & short run rates;

Relative unemployment;

Relative Equity Mkts

Model AUD and Forecasts v Actuals

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

Feb-

85

Feb-

86

Feb-

87

Feb-

88

Feb-

89

Feb-

90

Feb-

91

Feb-

92

Feb-

93

Feb-

94

Feb-

95

Feb-

96

Feb-

97

Feb-

98

Feb-

99

Feb-

00

Feb-

01

Feb-

02

Feb-

03

Feb-

04

Feb-

05

Feb-

06

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

Feb-

12

ACTUAL

Plus 1 std error

Less 1 std error

NASDAQ BUBBLE

16

Mining project pipeline now exceeds all other engineering Almost 2½ years mining construction at current rates

0

10

20

30

Mar-04 Mar-07 Mar-10

Minerals Transport

Utilities Other

Engineering construction work yet to be done (months)

0

20

40

60

80

Sep-04 Sep-07 Sep-10

Minerals Transport Utilities Other

Engineering construction work yet to be done ($ billion)

Source: ABS

17

For 2011 we see growth of around 2½% - was 3.2% pre floodStory very much around accelerating growth in H2 as recovery kicks in and income and mining accelerates. GDP at 4% in 2012.

Real Output/Expenditure (GDP) - Quarterly

-1.0%

0.0%

1.0%

2.0%

Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11

Quarterly GDP 4 per. Mov. Avg.

18

Prices still low with discounting continuing. That together with high currency has been important in explaining lower core inflation. Floods will see headline pick up. But RBA will look through initially

-1

0

1

2

3

4

5

6

Dec-07 Aug-08 Apr-09 Dec-09 Aug-10

NAB retail prices

NAB retail price inflation (s.a.a.r.)

Source: NAB Business Survey

1

2

3

4

5

Dec-04 Dec-06 Dec-08 Dec-10 Dec-12

Headline CPI Underlying CPI

CPI inflation (% p.a.)

Source: ABS, RBA

19

Australian Forecasts in summary

* At end of period

** Increase in year to Dec

2010-11 2011-12 2010 2011 2012

GDP 2.1 3.6 2.6 2.4 3.9

Employment 2.7 1.7 2.5 2.0 2.1

Unemployment rate* 5.0 4.7 5.1 4.9 4.6

Average earnings** 3.6 4.3 4.9 4.6 4.1

CPI underlying ** 2.5 2.6 2.2 2.9 2.6

RBA cash rate* 5.0 5.25 4.75 5.25 5.25

$US/$A* 1.05 0.96 1.02 0.98 0.94

2010-11 2011-12 2010 2011 2012

GDP 2.1 3.6 2.6 2.4 3.9

Employment 2.7 1.7 2.5 2.0 2.1

Unemployment rate* 5.0 4.7 5.1 4.9 4.6

Average earnings** 3.6 4.3 4.9 4.6 4.1

CPI underlying ** 2.5 2.6 2.2 2.9 2.6

RBA cash rate* 5.0 5.25 4.75 5.25 5.25

$US/$A* 1.05 0.96 1.02 0.98 0.94