Global Overview&

Australia– where to now for the multi speed

economy

Alan Oster – Group Chief Economist

2

Recently financial markets have turned surprisingly optimistic. Equity markets up fear index down.

Really reflects lowering of fear of global problems

Important factors are:Fiscal cliff delayedLess talk of EuropeChina clearly bottomedAnd new Govt in

Japan pushing expansionary policy

But economies not much better Indeed in Q4 2012 worsened. So what about the globe going forward

0

10

20

30

40

50

60

06/06/2011 29/08/2011 21/11/2011 13/02/2012 07/05/2012 30/07/2012 22/10/2012 14/01/2013 08/04/201360

70

80

90

100

110

120

Australian share market

Share markets in major developed economies

VIX index ofmarket volatility LHS)

FINANCIAL MARKET INDICATORS

3

Global outlook:Cautious optimism but mixed… recent data concerning

Global growth of around 3% in 2013 and still sub trend (3.7%) in 2014 Developed world a struggle– US sluggish but sustainable growth – fiscal cliff delayed and debt debate

still coming. Sequester now kicking in. But housing recovery helping – Europe back into recession – with sovereign risk still an issue. Five quarters

in a row of flat to negative growth. 6th coming– Japan with new Govt pushing increased spending and loosening monetary

policy (and the Yen) GDP turns up but moderately. Emerging economies softened in response to trade downturn from developed economies and previous policy tightening (now reversing).– China slowed a lot but appears to be stabilising - we expect growth around

8%. Q1 2013 on downside but still expect reasonable growth..– India in need of stimulus. Central bank cut despite inflation concerns– Non China Asia slowed as world trade softening Growth around 3.6% but

weaker if you are more trade exposed (HK, Singapore, Korea)Fed and ECB have however removed tail risk of global meltdown

4

European sentiment may be bottoming but not their economy• European confidence still at historic lows• But looks to have bottomed – re ECB• Cyprus not yet big issue

• But can’t say the same about their economy

• 5 quarters of flat or negative GDP –about to report a 6th.

European Economic (Consumer and Business) Sentiment- Measured as Deviation in European Sentiment From Long Run Average

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

May

-07

Sep

-07

Jan-

08

May

-08

Sep

-08

Jan-

09

May

-09

Sep

-09

Jan-

10

May

-10

Sep

-10

Jan-

11

May

-11

Sep

-11

Jan-

12

May

-12

Sep

-12

Jan-

13

-5

-4

-3

-2

-1

0

1

2

Feb-

06

Feb-

07

Feb-

08

Feb-

09

Feb-

10

Feb-

11

Feb-

12

Feb-

13

-5

-4

-3

-2

-1

0

1

2

GDP QTR %BUSINESS CLIMATE INDICATOR

EUROPEAN GDP AND BUSINESS CLIMATE INDICATOR

5

And as a result unemployment across the region continues to deteriorate. Especially in the periphery

Albeit the crunch is different across regions

0

5

10

15

20

25

Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

Netherlands Germany FranceItaly Spain Greece

Unemployment rates (%)

Source: OECD

EUROPEAN WIDE UNEMPLOYMENT %

6.5

7.5

8.5

9.5

10.5

11.5

12.5

Jul-0

7

Mar

-08

Nov

-08

Jul-0

9

Mar

-10

Nov

-10

Jul-1

1

Mar

-12

Nov

-12

6

Overall we see continuing recession in Euro-land in 2013. No positive quarterly growth till late 2013.

-3.00

-2.50

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

Mar

-05

Jun-

05

Sep-

05

Dec

-05

Mar

-06

Jun-

06

Sep-

06

Dec

-06

Mar

-07

Jun-

07

Sep-

07

Dec

-07

Mar

-08

Jun-

08

Sep-

08

Dec

-08

Mar

-09

Jun-

09

Sep-

09

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

-3.00%

-2.50%

-2.00%

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

1.50%

Net Exports & Stocks ContrDEMANDGDP

EUROPEAN GDP Demand and Net Exports Qtrly % and Qtrly Contribution

We don’t expect positive overall growth till Q3 2013Domestic demand is even more depressedEurope has benefited from better exports – mainly Germany

7

US economy numbers bouncyBut fundamentals seem reasonable – but modest

US GDP increased by 2.5% annualised in Q1 after a flat (defence cutback) Q4 2012

Growth mainly reflecting consumption and investment (dwellings)

Key survey of manufacturing and services also around 3% (annualised) in Q1 2013

Data a bit weaker in March month and if continues implies growth around 2 to 2 ½ % in Q2 2013

-9

-6

-3

0

3

6

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

ANNUALISED GDPMAN ISMTOTAL ISM

US Quarterly Growth Annualised and Manufacturing / Total ISM

8

On the positive side…… HousingOn the negative……… Fiscal restraint

50

75

100

125

150

175

40179 40544 40909 41275 40422 40787 41153 40330 40695 4106150

75

100

125

150

175

Construction activity Home sales

Existing

new homes

Residential property market indicatorsJan 2010 = 100

Private new construction

Starts

Permits

Jan 2010 = 100

Stock available for sale

existing (1 family & condos)

new 1 family homes

Housing construction (and prices up)

And overbuild over

But fiscal policy likely to take out around 1% in 2013 and 2014 (similar to 2012)

And debt ceiling still there….. politics

Change in cyclically adjusted budget balance (ex TARP)

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

% potential GDP

9

Our forecast suggests moderate on-going US growth

Model based on : Real interest rates, House prices, Equity prices, Oil prices, TWI (currency), Commodity prices, Credit rationing and lags.

Overall we expect growth of only around 2.1% this year and near 3% in 2014

That means hard to lower unemployment in the near term

Fed wont raise rates till unemployment is below 6 ½% (say late 2015)

But QE will probably stop late 2013 or early 2014.

US Quarterly GDP v Nab Mini Model

-3

-2.5

-2

-1.5

-1

-0.5

0

0.5

1

1.5

2

Sep

-01

Sep

- 02

Sep

- 03

Se p

-04

Sep

-05

Sep

-06

Sep

-07

Sep-

08

Se p

-09

Sep

-10

Sep-

11

Sep

-12

Sep

-13

Se p

-14

10

Japanese outlook: Policy change has had a large financial impact …

New Government has announced stimulus package and Bank of Japan has activated QEQE in Japan broadly similar in size to what the Fed is doingHas weakened the Yen and driven up equities USA Japan and Aust Equity Prices

From Sept 2012 (Sept =100)

95

105

115

125

135

145

155

165

Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13

USAJapanAust

Yen v AUD & USD From Sept 2012 to Mid May 2013

75

80

85

90

95

100

105

Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13

AUD/ YEN (26%)

USD/YEN(29%)

11

Japanese outlook: Better but still not great …Overall around 1.7% in 2013 and 2.2% in 2014

Expect ramp up in public spending

And better net exportsAlso increased wealth helps

consumer

Tankan Survey pointing to better growth

And it has showed up in GDP

QTR Tankan Model Of GDP

-5-4-3-2-101234

Q2

05

Q2

06

Q2

07

Q2

08

Q2

2009

Q2

2010

Q2

2011

Q2

2012

Qtrly GDP %EQ Based on Tanken

Quarterly Growth (%) & Contribution for Net Exports

-1.00%

-0.80%

-0.60%

-0.40%

-0.20%

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

NET EXPORTS (LHS)Domestic Demand (RHS)GDP (RHS)Public Demand (RHS)

12

China: National accounts disappointed in Q1 2013, but robust growth expected to continue in 2013GDP disappointed in Q1 2013, but

growth to remain robust

But, rapid pace of previous years is behind us

Authorities see growth as “stable”, while composition is improving

Business sentiment indicators point to a (tentative) bottom in late 2012

Albeit different across industries

0

4

8

12

2000 2002 2004 2006 2008 2010 20120

4

8

12

% %

China - Real GDPPercentage change

Year-ended

Quarterly*

* Data prior to DQ2010 are estimated by NAB.Source: CEIC Database, NAB

China Business ClimateIndex

80

90

100

110

120

130

140

150

1999 2001 2003 2005 2007 2009 2011 201380

90

100

110

120

130

140

150

Index Index

Sources: CEIC

Retail/Wholesale

Manufacturing

Real EstateAggregate

13

Of course government policy important, but export slowdown may bottom as global growth improves

Central government spending has supporting investment growth, but impact fading

Real estate investment recovery on shaky ground following property controls

China’s exports generally outperformed expectations this year (15% yoy in April)

Exports to HK have risen sharply, but inconsistencies suggest that actual export demand may be overstated.

Government stimulus investmentFixed asset investment; year-ended percentage change (3mma)

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010 2011 2012 2013-30

-20

-10

0

10

20

30

40

Sources: Thomson Reuters

% %Local Governments

Central Governments

China's Inflated Export NumbersYear-ended percentage change

-60

-40

-20

0

20

40

60

2005 2007 2009 2011 2013 2006 2008 2010 2012-60

-40

-20

0

20

40

60

% %

Sources: CEIC; NAB

Exports to Hong Kong Exports to Taiwan

Chinese Export Data

Partner Imports data

14

As a result industrial production has turned. Retails strengthening from good levels.

Industrial production is steady, but with more subdued growth (up around 9¼% yoy in April)

Industrial sector battling with over capacity in certain segments

Retail sales up 12.8% in year to April. Implying real growth around 11.8%Consumer confidence has

weakened, reflecting slower income growth.

Deflation of the Industrial SectorIndex; Year-ended percentage change

25

30

35

40

45

1996 1998 2000 2002 2004 2006 2008 2010 2012-10

-5

0

5

10

Source: CEIC

Index %

Capacity utilisation

Producer prices

-4

1

6

11

16

21

2004 2005 2006 2007 2008 2009 2010 2011 2012 201380

100

120

140

160

180

China - Retail SalesYear-ended percentage change; index

%

Index

Real Retail Sales

Nominal Retail Sales

* No observation is shown for January due to the effect of Chinese New Year; Feburary shows the average of January and February compared to December.

Consumer Confidence

15

Growth outlook: We expect growth to hold up at around 7.8% in 2013 – with policy remaining accommodative

China - Monetary Policy ResponsePercentage points of GDP growth

0.0

0.1

0.2

0.3

0 1 2 3 4 50.0

0.1

0.2

0.3

Ppts Ppts

Source: NAB Research

50bp cut to interest rate

50bp cut to reserve requirement ratio

Quarters

Economic Forecasts

2012 2013 2014 2012 2013 2014 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Real GDP 7.8 7.8 7.6 7.9 7.7 7.8 7.9 7.9 7.9 7.8 7.4 7.3Exchange Rate (USD/CNY) 6.3 6.1 6.1 6.4 6.2 6.1 6.1 6.1 6.1 6.1 6.1 6.1Monetary Policy (end of period)Benchmark Lending Rate 6.00 6.0 7.0 6.00 6.00 6.00 6.00 6.00 6.25 6.50 6.75 7.00Reserve Ratio Requirement* 20.0 21.0 21.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 Sources: CEIC; NAB Group Economics

Year Average Chng % Year-ended Chng %

* For large depository institutions

China Real GDP GrowthYear-ended percentage change

0

2

4

6

8

10

12

14

2000 2002 2004 2006 2008 2010 2012 20140

2

4

6

8

10

12

14

% %

NAB Fcst

NAB Forecasting

Model

Source: CEIC, NAB

16

In Non Japan Asia data has been a bit soft –hopefully a temporary issue

But are seeing a similar trends in Latin America – so likely to reflect softness in global demand

17

Overall we see modest growth going forward in Asian tigers

Average annual growth in GDP (%)

2011 2012 2013 2014

Hong Kong 4.9 1.4 2.7 3.6

Indonesia 6.5 6.2 6.2 5.9

Singapore 5.2 1.3 2.3 3.6

Taiwan 4.1 1.2 3.3 4

Thailand 0 6.8 4.6 5

Malaysia 5.1 5.6 5.4 5.6

S Korea 3.7 2.0 1.8 2.8

Philippines 3.9 6.6 4.4 4.8

Tigers 4.2 3.8 3.7 4.3

• But growth stronger in near term where there is less reliance on global growth e.g. Indonesia• But worse where open to trade (HK & Singapore)• Or to competitiveness via currency (e.g. South Korea)

Asian Tigers Demand Components y/y %

18

Global economic forecasts: Key themeTrend growth returns in 2014 but recent weakness...

IMF

weight2012 2013 2014

World 3.1 3.1 3.7

United States 20 2.2 2.1 2.9

Euro zone 15 -0.5 -0.6 1.1

Japan 6 2.1 1.6 2.2

China 14 7.5 7.8 7.6

Asian Tigers 8 3.7 3.6 4.3

India 6 5.1 5.7 6.4

19

AUD a proxy for global risk appetite and commodities.And of course China

Our model says AUD good value USD 98c (+/- 5c). So not radically over valued

That probably reflects foreign demand for AUD in foreign central bank reserves –diversification a key driver. Hedge funds less involved

Not a lot RBA can do – rates matter but not a lot

We see AUD around parity (a touch below) for rest of 2013 then easing to mid to lower 90c by late 2014. Model driven by: commodity prices; US TWI – as measure of USD weakness;

long and short run rates; relative unemployment; relative equity markets and VIX.

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

Feb-85Feb-86Feb-87Feb-88Feb-89Feb-90Feb-91Feb-92Feb-93Feb-94Feb-95Feb-96Feb

-97Feb-98Feb-99Feb-00Feb

-01Feb-02Feb-03Feb-04Feb-05Feb-06Feb-07Feb-08Feb-09Feb-10Feb-11Feb-12Feb-13Feb-14

Series1

Plus X2 Std Dev

Minus X2 Std Dev

Model AUD and Forecasts v Actuals

20

Australian industry shifted up the global cost curve – especially against other advanced economies

21

Iron ore cost curves important – Aust low cost And a longer term perspective interesting.

Current price

Price in Oct / Nov 2012

0

40

80

120

160

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

40

80

120

160

Contract Price 62%Fe** (w/ forecast)

Spot Price 62%Fe*

Iron Ore PricesFOB Basis

* Spot price is calculated on an FOB basis by subtracting Port Dampier to Qingdao shipping rates from the cost and freight price. 62% Fe spot price is an estimate from published 63.5% price.** Up to Q3 2011, based on formulation that quarterly contract price equals previous quarters average spot price, lagged one month (eg. DQ = Average(Jun-Aug spot price)). Estimated using spot from Q4 2011.Source: ABARE, Bloomberg, Thomson Datastream, NAB

US$/T US$/TNAB Forecast

Australia a low cost provider Recent price spike not likely to be maintained But still very profitable

22

Thermal coal story not so good

23

Some key themes on Australia

• Domestic economy very mixed and in our view has hit a softer patch that has continued into the first part of 2013.

• House prices and equity markets helping wealth and consumer. But big offsets in lack of non mining investment as mining turns down, weaker commodity prices and high currency.

– Multi-speed nature continuing – with the weak getting worse. Mining investment continuing but will slow and go backwards as export boom replaces it as a key driver of growth. But employment demand will weaken (less miners to run v build a mine)

– Currency stays high and may be having larger expectation impacts on activity.

• With economy still struggling in H1 2013, growth in 2013 will be a around 2.3 % So unemployment to rise by late year (around 5¾ - 6%)

• Structural adjustment challenge massive. Another cut (s) required (25 points)

24

Our survey suggests domestic economy quite weak.Survey has tracked local economy well for 20 years

-10

-5

0

5

10

15

Mar

-90

Mar

-91

Mar

-92

Mar

-93

Mar

-94

Mar

-95

Mar

-96

Mar

-97

Mar

-98

Mar

-99

Mar

-00

Mar

-01

Mar

-02

Mar

-03

Mar

-04

Mar

-05

Mar

-06

Mar

-07

Mar

-08

Mar

-09

Mar

-10

Mar

-11

Mar

-12

Mar

-13

G NE Q trly An nua lisedN AB FO R W ARD OR DER S

Q uarterly Chang e in G NE v NAB Indicator Based on Forward O rd ers

25

A concern is that appears stronger industries are now weakening as well – especially, but not just, mining…

-50

-25

0

25

50

2000 2003 2006 2009 2012-50

-25

0

25

50

ppt ppt

Source: NAB

Range of industry conditions

Average

Monthly Business Conditions by IndustryNet balance, deviation from industry average since 1989

26

Still big divergence of conditions and confidence across industries. But mining scared and weakening

Business Conditions and ConfidenceThree Months to April; sa

Source: NAB

-25

-20

-15

-10

-5

0

5

10

15

Min

ing

Tran

spor

t&

Util

ities

Rec

& p

ers

Fina

nce

Who

lesa

le

Ret

ail

Man

uf

Con

stn All

Conditions

Confidence

Mining conditions deteriorating rapidly. Manufacturing very poor. Retail not goodPersonal services and transport & utilities reasonable. Finance confidence global.

27

Forward indicators a real concernAs is low level of capacity utilisation

We have a new forward indicator based on wholesale conditions leading general conditions by 3 to 4 monthsImplies still weak Q2 2013 – i.e. if

anything a weakening in growth momentum

And capacity utilisationrates getting very low

Not a great incentive to invest – especially in non mining

Business Conditions v Wholesale As a Leading Indicator

-20

-15

-10

-5

0

5

10

15

20

25

1997

M07

1998

M07

1999

M07

2000

M07

2001

M07

2002

M07

2003

M07

2004

M07

2005

M07

2006

M07

2007

M07

2008

M07

2009

M07

2010

M07

2011

M07

2012

M07

BUSINESS CONDITIONSWHOLESALE LEADING INDICATOR

78

79

80

81

82

83

84

85

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

CAPUM_SA

28

Confidence improved on global sentiment in early 2013 But below long run average and a touch weaker in April.

Long run average

Confidence better in early 2013 (fiscal cliff avoided, better China data & rates)But still a touch below long run average. April weaker on mining gloom

-40

-30

-20

-10

0

10

20

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

2010 2011 2012 2013

Seasonally adjusted TrendConf 1990s recn Conf GFC

Business confidence (net balance)

29

Re-inventing the Australian economy.The challenge

Health care and social security the biggest employer and where the growth is largest (280k)

Miners and Education are both employing around 125k nearly as many as manufacturing fired (140k)

These trends not recognised in the debate or at least in the press

But still real and represent a big policy challenge. Its not going away

Employment - Changes since March 2008

-210

-160

-110

-60

-10

40

90

140

190

240

290

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Health and Social Assistance

Mining

Accom and Food

Manufacturing

Media and Telcos Retail

Education &Training

30

Better equity markets and turning house prices have helped perceptions of wealth. But we remain cautious

House price expectations turning increasingly positive – Nab Property Survey

Over the medium term our Australian model wants moderate growth.

Accelerating in near term but then flattens out by end 2013 as unemployment rises

Property Survey - House Price Expectations

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

Q1'11 Q3'11 Q1'12 Q3'12 Q1'13 Q3'13 Q1'14 Q3'14 Q1'15

Australia Victoria NSW Qld SA/NT WA

%

Expectations

And reflected in our state forecastsNAB Modelling - House Price Forecasts

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2011 2012 2013 2014

Australia Victoria NSW Qld SA/NT WA

NAB Forecasts

%

Australian House Prices - 12 Mth %

-15

-10

-5

0

5

10

15

20

25

30

35

40

45

50

Sep-

87

Dec

-89

Mar

-92

Jun-

94

Sep-

96

Dec

-98

Mar

-01

Jun-

03

Sep-

05

Dec

-07

Mar

-10

Jun-

12

Sep-

14

% o

ya

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Actual / ForecastsModel

31

Recent ABS data suggest a surge in retail sales. More strength but are technical issues here.

ABS Nominal retail trade strong but bouncy

Our credit card data ($3bn per month) suggests recent moves overstated and hence March negative

April up around ½%Grouped RWH v ABS

-30

-20

-10

0

10

20

30

Jul-1

1

Aug

-11

Sep

-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

Sep

-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr

-13

Chn ABS

Chn RWH Grouped Cards

32

Investment – a tale of mining v the rest

Mining investment now exceeds investment in the rest of economy combined

0

20

40

60

80

100

120

140

2010-11 2011-12 2012-13 2013-14Ave 5-yr RR Min 5-yr RR Max 5-yr RR

Source: ABS & NAB calculations

$ bn Mining capex Other selected industries capex

0

20

40

60

80

100

120

140

2010-11 2011-12 2012-13 2013-14

Source: ABS & NAB calculations

$ billion

33

Its not that mining investment wont be really strong for ages. Rather its moving out of the growth phase

0

2

4

6

8

10

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Mining investment (LHS) RBA forecast (LHS)

Mining investment* (quarterly, CVM)

Source: NAB* NAB estimate

% GDPAlso a critical point is that mining is

moving from investment to exports

Good for productivity and hopefully neutral for growth

But will lower demand for employment

8 people to build an LNG platform 1 to run it

4 to build a mine 1 to run it

Hence critical for non mining investment to help offset the slack

34

Critical issue is will non mining investment offset slowing mining. Nothing in credit data and investment intentions

Personal (credit card) and business credit currently around flat to negative

Home loans at 5% a 30 year low

Key System Credit Aggregrates3 mths at annual rate - saar

-15

-10

-5

0

5

10

15

20

25

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

Jun-

11

Dec

-11

Jun-

12

Dec

-12

BUSINESS

%

HOUSING

OTHER

Non-mining investmentActual and NAB expectations net balance

-30

-20

-10

0

10

20

30

40

1990 1993 1996 1999 2002 2005 2008 2011-30

-20

-10

0

10

20

30

40

Non-mining GFCF NAB capex 12-mth expectations

% change on prev. year

Net balance

Quarterly non-mining GFCF estimated by NABSources: ABS, NAB

35

GDP loses momentum– we expect 2.3 % in 2013.Slightly better in 2014 on rate cuts but mining boom has big impacts on demand v GDP (esp in 2015)

Australian GDP and Domestic Demand: At a 6monthly Annualised Rate

-2.5%

-0.5%

1.5%

3.5%

5.5%

Dec

-09

Mar

-10

Jun-

10

Sep-

10

Dec

-10

Mar

-11

Jun-

11

Sep-

11

Dec

-11

Mar

-12

Jun-

12

Sep-

12

Dec

-12

Mar

-13

Jun-

13

Sep-

13

Dec

-13

Mar

-14

Jun-

14

Sep-

14

Dec

-14

Mar

-15

Jun-

15

Sep-

15

Dec

-15

% c

hang

e - 1

2 m

onth

s to

GDP Domestic Demand

36

For labour market lower growth raises unemployment And phasing of mining boom keeps it there

Australian Labour Market

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

Jun-

09

Sep

-09

Dec

-09

Mar

-10

Jun-

10

Sep

-10

Dec

-10

Mar

-11

Jun-

11

Sep

-11

Dec

-11

Mar

-12

Jun-

12

Sep

-12

Dec

-12

Mar

-13

Jun-

13

Sep

-13

Dec

-13

Mar

-14

Jun-

14

Sep

-14

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

% c

hang

e - 1

2 m

onth

s to

4.5

5.0

5.5

6.0

6.5

% -

rate

EMPLOYMENT - LHS

UNEMPLOYMENT RATE - RHS

37

RBA to cut by another 25 points in 2013 – to 2½ %

Economy hitting a soft patch

Inflation not an issue

RBA took the opportunity to go early – in May we expected JuneIts about helping competitiveness of struggling parts of the economyWe still are very worried re non mining investmentAt the margin we have lower growth expectations for 2013But very similar inflation outlook

We expect RBA to have to respond again as unemployment rises to 5¾-6% by mid late 2013. Accelerating house prices on the other hand could complicate the timing process

We have a final cut in late 2013 as mining phasing heralds further labour market weakness (say November).

38

Overall reaction to the Budget.What a difference a year makes!!!

• This is a very political document - with last years rhetoric about the need to get back to surplus for global credibility ditched

• But path of progress back to surplus is much slower than expected – involving less pain to the economy than we expected. Indeed the impact is practically nothing in 2014/15 building through time to around ½% in the out years

• The budget is helping to repair some structural problems via scrapping last years welfare increases (spreading the benefits of the boom) and the baby bonus, increasing the medicare levy to help fund national disability reform, tightening offshore tax arrangements and acknowledging lower carbon price

• Overall a budget more in keeping with a weaker economy

• Forecasts at 2.7% for 2013/14 and 3% reasonable (we are a touch lower). But we have lower start in 2012/13 More importantly we have a much weaker nominal economy –important re budget outcomes re profit and taxes.

• We still see need for another 25 point cut in rates to get 2013/14 forecasts. And we still see November as the most likely timing,

39

In corporate speak, Budget has “negative jaws”Mainly fixed on revenue side – and after a few years

Fixing “jaws” is the key to fiscal sustainability

Clearly main driver is the fall in revenues

But expenses (after shooting up during GFC ) have remained at higher levels

22

23

24

25

26

2000-01 2004-05 2008-09 2012-13 2016-1722

23

24

25

26

Commonwealth revenue & expenses*% of GDP

RevenueExpense

%

Sources: ABS; Commonwealth Treasury; NAB calculations; RBA* GST classified as Commonwealth tax & expense

%

40

Fiscal impact – Nothing like last yearNothing much to out years and then only around ½%

Analysis based on OECD methodology;

-4-3.5

-3-2.5

-2-1.5

-1-0.5

00.5

11.5

22.5

3

1990

/91

1991

/92

1992

/93

1993

/94

1994

/95

1995

/96

1996

/97

1997

/98

1998

/99

1999

/00

2000

/01

2001

/02

2002

/03

2003

/4

2004

/5

2005

/6

2006

/7

2007

/8

2008

/9

2009

/10

2010

/11

2011

/12

2012

/13

2013

/14

2014

/15

2015

/16

Cha

nge

(% o

f GD

P)

Structural Impulse - Annual Movement % of GDP

Loosening Policy

Tightening Policy

41

The uncertainties

• How much of the package will get ever see the light of day post the election.

• Lots of the action re expenses kicks in late in the period – especially Gonski and National Disabilities. That of course is where the forecasting uncertainties are greatest.

• Need to be careful re future election commitments – not a lot of scope for “election goodies” if fiscal outcomes are to be achieved.

• Even in the near term revenue forecasts have been terrible. At present we are more bearish than Government re the current nominal outcomes.

• The world. We are weaker and nervous.

42

Australian economic forecasts2012-13 2012-13 2013-14 2013-14 2014-15 2014-15

NAB Treasury NAB Treasury NAB Treasury

Real GDP 2.7 3 2.6 2 ¾ 3.1 3

Employment 1.0 1 ¼ 0.9 1 ¼ 0.9 1 ½

Unemployment rate* 5.7 5 ½ 5.9 5 ¾ 6.1 5 ¾

CPI underlying** 2.3 (1)2 ½ 2.7 (1)2 ¼ 2.6 (1)2 ¼

RBA cash rate* 2.75 NA 2.50 NA 3.25 NA

$US/$A* 1.03 (2)1.03 0.96 (2)1.03 0.91 (2)1.03

Nominal GDP 2.1 3 ¼ 4.2 5 4.9 5

*at end of period; ** through-year growth; (1) headline rate; (2) technical assumption

43

Currency forecasts in more detail