1

Spiros Papadopoulos

Senior Economist, Global Markets Research

October 2012

Global concerns continue.

RBA to cut again

Global economy: US, China, India slowing; Europe in recession

2

US GDP

Source: NAB Global Markets Research, Reuters EcoWin

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

09 10 11 12

Perc

ent

-5

-4

-3

-2

-1

0

1

2

3

Annual % change

Annual % change

Quarterly % change

Euro-zone GDP

Quarterly % Annual %Source: NAB Capital Research, Reuters EcoWin

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

09 10 11 12

Perc

ent

-5

-4

-3

-2

-1

0

1

2

3

Eurozone GDP indexed to Dec 2006=100

Source: NAB Global Markets Research, Reuters EcoWin

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

06 07 08 09 10 11 12

84

86

88

90

92

94

96

98

100

102

104

106

108

110

Netherlands

Spain

Greece

Ireland

Germany

France

Italy

Portugal

UK

Real GDP, annual % change

Source: NAB Global Markets Research, Reuters EcoWin

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

Perc

ent

0

5

10

15

Perc

ent

0

5

10

15

China

India

Fiscal austerity weighing on growth

3

171

126121 119

9793

90

111

1924

0

20

40

60

80

100

120

140

160

180

Greece Italy Ireland Portugal Spain UK Germany US China Australia

% of GDP

General Government Gross Debt - 2013 Estimates

Source: IMF Fiscal Monitor Update, July 2012

% of GDP

Australian Government still aiming for Surplus in 2012-13

4

-60

-50

-40

-30

-20

-10

0

10

20

30

1991/92 1995/96 1999/00 2003/04 2007/08 2011/12 2015/16

$Bn $Bn

Australian Federal Budget Balance

Source: 2012-13 MYEFO

(f)

Central banks have taken further action to ease policy

5

● US Fed has launched QE3, $40bn per month

● ECB has cut interest rates and unveiled bond buying plan

● UK BoE has expanded its QE purchases by £50bn to £375bn

● China has cut interest rates, cut RRR, fiscal boost

● Korea and Brazil have cut interest rates

● RBA has cut in May, June and October

Only some central banks can ease policy significantly

6

Central bank policy interest rates

Australian rates attuned to Asia's prospects

Source: NAB Global Markets Research, Reuters EcoWin

02 03 04 05 06 07 08 09 10 11 12

Perc

ent

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

ECB refi

India repo rate

RBA cash

BoE repo

Fed funds target

China one year lending rate

Korea base rate

7

Fiscal tightenings (US, Europe) mean lower global growth.

Emerging markets remain solid, but slowing

Ann Avg

GDP2009 2010 2011 2012 (f) 2013 (f)

Australia 1.4 2.5 2.1 3.3 2.5

US -3.1 2.4 1.8 2.1 2.4

Japan -5.5 4.5 -0.7 2.2 1.5

UK -4.0 1.8 0.8 -0.4 1.0

Eurozone -4.3 1.9 1.5 -0.7 0.1

India 7.6 8.2 7.5 5.2 5.8

China 9.2 10.4 9.2 7.5 7.9

World -0.3 5.2 3.9 3.0 3.3

Australian GDP to average 2.5% in 2013

8

Australian GDP

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Perc

ent

-1

0

1

2

3

4

5

6

Perc

ent

-1

0

1

2

3

4

5

6

Annual GDP

Quarterly GDP Growth

Domestic Demand

(f)

Mining investment driving strong growth in WA and QLD

9

State Final Demand

NSW VIC QLD WA Tasmania SASource: Reuters EcoWin

04 05 06 07 08 09 10 11 12

Annual P

erc

ent

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

Annual P

erc

ent

-10.0

-7.5

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

Resource investment to peak in 2013

10

$0bn

$10bn

$20bn

$30bn

$40bn

$50bn

$60bn

$70bn

$80bn

$90bn

$100bn

2012 2013 2014 2015 2016 2017 2018 2019 na

Source: Bureau of Resource & Energy Economics, NAB Credit Research

Estimated Annual Capital Expenditure

Feasibility/Pre Feas

FID/FEED/Reg Approval

Underway

The multi-speed economy

11

-40

-30

-20

-10

0

10

20

30

40

50

60

70

Sep-08 Sep-09 Sep-10 Sep-11 Sep-12

Source: NAB Business Survey

NAB Business Conditions indexes

Manufacturing

Source: NAB Business Survey

NAB Business Conditions indexes

Source: NAB Business Survey

(sa, 3-mth moving averages)

NAB Business Conditions indexes

Business Services

Source: NAB Business Survey

NAB Business Conditions indexes

Retail

Source: NAB Business Survey

NAB Business Conditions indexes

Source: NAB Business Survey

(sa, 3-mth moving averages)

NAB Business Conditions indexes

Mining

Household Services

Construction

Transport

Confidence levels in the economy still soft

12

Australian Confidence

Source: Reuters EcoWin, NAB Business Survey

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

Net bala

nce

-40

-30

-20

-10

0

10

20

30

Net bala

nce

75

80

85

90

95

100

105

110

115

120

125

130

Business Confidence

Business Conditions

Business ConfidenceBusiness ConfidenceBusiness Confidence

Business Confidence (RHS)

Consumer Confidence (LHS)

Consumers still saving and reducing debt.

Retail sales growth weaker after May/June Gov’t handouts

13

% of Household Disposable Income

Household Saving

Source: NAB Global Markets Research, Reuters EcoWin

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Perc

ent

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

Perc

ent

-2.5

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

Annual % change, $ sales

Retail sales

Australia VictoriaSource: Reuters EcoWin

03 04 05 06 07 08 09 10 11 12

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

Perc

ent

-2

-1

0

1

2

3

4

5

6

7

8

9

10

11

12

14

One positive sign is higher house prices in recent months

300

350

400

450

500

550

600

650

700

750

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

$'000Capital City - Median House Prices

Sydney Houses

Melbourne Houses

Perth Houses

Australia

Brisbane Houses

Adelaide Houses

Source: RP Data Rismark

15

Inflation contained, trending back to the middle of RBA’s target

RBA's Inflation Forecasts

Headline CPI Average Underlying CPISource: Reuters EcoWin

04 05 06 07 08 09 10 11 12 13 14

%Y

oY

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

%Y

oY

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

(f)

16

RBA to cut the cash rate again in November

RBA Cash Rate

Source: Reuters EcoWin

92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Perc

ent

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Perc

ent

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

(f)

17

Markets pricing in another 75bps in cuts by the RBA

Market now pricing risk for abnormal disturbance/ global recession

RBA cash target and "what's priced in"

Source: NAB Global Markets Research, Reuters EcoWin

03 04 05 06 07 08 09 10 11 12

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

3 year swap yield, wholesale market

RBA cash rate

RBA cash rate "priced in", four quarters ahead

Actual RBA cash rate target3yr benchmark

swap rate

AUD still high despite interest rate cuts and global events

18

AUD to trend lower:

1. Global growth outlook weak. China slowing and commodity prices declining

2. Australia’s yield differential narrowing with RBA cutting rates

AUD Crosses

Source: Reuters EcoWin

07 08 09 10 11 12

0.30

0.40

0.50

0.60

0.70

0.80

0.90

0.30

0.40

0.50

0.60

0.70

0.80

0.90

AUD/EUR

AUD/GBP

AUD/USD

Source: Reuters EcoWin

07 08 09 10 11 12

0.6

0.7

0.8

0.9

1.0

1.1

1.2

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Commodity prices are falling...but wheat prices soaring

19

RBA commodity price measures

Source: NAB Global Markets Research, Reuters EcoWin

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Index (

SD

R term

s)

25

50

75

100

125

150

175

Index (

SD

R term

s)

25

50

75

100

125

150

175

Non-Rural

Rural Commodities

RBA commodity price index

‘Fair value’ model – AUD overvalued vs historical fundamentals

20

Central banks diversifying into AUD.

Australian CGBs also in high demand. 80%+ of CGBs foreign owned

0.55

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

AUD/USD Spot

+1 Std Dev Present Value Model

-1 Std Dev Present Value Model

Source: Bloomberg, National Australia Bank. Note Based on weekly 2-yr swap yield spread, JoC industrial metals prices, risk-appetite index and gold price.

AUD/USD

Summary: Further easing to come from the RBA

● Global growth continues to slow, constrained by fiscal tightening

● Chinese economy has slowed

● Australian mining investment to peak in 2013

● Retail and construction sectors still weak

● Confidence levels remain subdued, AUD still high

● RBA to cut again

21

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Important Notices