STATE HANDBOOK: QUEENSLAND OCTOBER 2017

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CONTACTS Amy Li Riki Polygenis Alex Stanley Economist Head of Australian Economics Senior Interest Rate Strategist +61 3 8634 1563 +61 3 8697 9534 +61 2 9237 8154 Amy.li@nab.com.au riki.polygenis@nab.com.au alex.stanley@nab.com.au

CONTENTS 2 | Key points 3 | In Focus: Impacts of Cyclone Debbie 4 | Labour market 6 | Demographics 7 | Consumer and household sector 8 | NAB customer spending behaviours 9 | Business sector 11 | Residential property 12 | Tourism 13 | Trade 14 | Fiscal outlook & semi market 16 | State and territory forecasts

-5

0

5

10

15

1990 1994 1998 2002 2006 2010 2014

Queensland Australia

0

1

2

3

4

5

6

NSW VIC QLD SA WA TAS NT ACT

2014-15 2015-16 2016-17 (f) 2017-18 (f) 2018-19 (f)

CHART 1: STATE GSP GROWTH FORECASTS %, annual growth

CHART 2: STATE FINAL DEMAND GROWTH %

Source: ABS and NAB Group Economics 2

KEY POINTS Transition continues post mining boom

The Queensland economy continues to transition post the resources investment boom towards more broadbased growth. However, the economy remains prone to external shocks such as weather and global demandchanges. For example, coal prices surged following Chinese government policy changes in late 2016, resulting inincreases in export values, profits and government royalties revenue. Earlier this year, Tropical Cyclone Debbie causeddisruptions to coal exports as well as damaging crops and tourism infrastructure. These events are hard to predict orcontrol and therefore building a resilient domestic economy with better policy planning remains crucial in smoothingout the ups and downs and ensuring a stable labour market and balanced local economy. Gross state product isexpected to pick up to 3.2% in 2017-18 and then slow somewhat to 2.5% in 2018-19 as the contribution from LNGexports and dwelling construction flatten off while the domestic economy slowly recovers.

The labour market continues to improve, with the trend unemployment rate now at 6%. Regional divergencesexist and we expect the unemployment rate to remain around 6% in 2017-18 and 2018-19. The South East withits more diverse economy is leading the way in jobs creation. Meanwhile, the coal regions of Fitzroy-Mackay havebenefited from the higher coal prices, while the Outback is suffering from mine closures and a lack of new investment.Employment is also shifting from the higher paying mining and construction industries towards services which tend toprovide more part-time employment and lower pay. As a result, wages growth is expected to remain subdued. Lowincomes growth, weak consumer sentiment and high household indebtedness imply consumption growth willremain subdued until population growth and the labour market improve further.

Investment growth is expected to be negative in the near term before recovering slowly, given that the threelarge LNG projects have finished construction and there is a lack of new resources investment. However, there aresigns pointing to the slow recovery in the non-mining business sector while public investment is also on the rise.Dwelling investment has also been rising, providing some offset to total investment growth. Lower interest rates,combined with increased foreign demand, has seen dwelling approvals rise, especially for units and apartments.However recent data indicates the number and value of dwelling approvals have probably peaked, meaning thesupport from dwelling investment is starting to wane. The concentration of medium-to-high density dwelling in theSouth East has resulted in declines in prices and rents, presenting a risk to the outlook, although the recent pickup inpopulation growth (both from interstate and overseas) should provide some support to housing demand and prices.

Net exports will continue to contribute to economic growth but that contribution will likely decline from 2017-18 as LNG exports flatten off at a high level. Net exports in 2016-17 were negatively affected by Cyclone Debbiethrough lower coal exports, which will be more than offset by the ramping up of LNG exports. Metals exports havedeclined following some major mine and refinery closures, which are being slowly replaced by new capacity. Beefexports also remain subdued as farmers rebuild herd levels following a period of high slaughter rates. Servicesexports including tourism and education will be supported by a lower AUD and rising incomes in Asia, especially inChina. While mining-related travel declines, domestic holiday travel is improving and providing some offset.

Overall, the Queensland economic transition post the mining boom continues to gain traction. The economysuffered temporary setbacks caused by Cyclone Debbie but seems to have bounced back. Elevated coal pricescontinue to deliver export earnings while high levels of LNG exports and dwelling investment will underpinnear term economic growth. Going forward, the domestic economy is expected to continue to improve, withbetter labour market conditions, further pickup in population growth, recovering non-mining investment,steady public demand and an improving household sector. However, the state’s economy is dominated by afew sectors including mining, tourism, construction and agriculture, making it prone to external shocks.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2010 2011 2012 2013 2014 2015 2016 2017

$ billions

IMPACTS OF CYCLONE DEBBIE Disruptions have now largely passed

The impact on the agricultural sector was mixed. While some fruit and vegetables were damaged in this key producing region and prices rose, the increased rainfall was welcomed by others, including beef farmers who had been trying to rebuild herd levels during a period of drought. Sugar and beef exports were affected. The impact on CPI was muted. Rises in fruit and vegetables prices were offset by declines in other vegetable prices. The Cyclone didn’t result in the surge in banana prices like the one following Cyclone Yasi in 2011, as it had avoided the banana producing region in the North. Rebuilding efforts will likely increase construction investment and household goods consumption, proving a temporary boost to the economy.

Overall, the loss to economic output is estimated at around $2 billion or ¾ percentage point of GSP growth by Queensland Treasury, spread between 2016-17 and 2017-18.

Source: BITRE, Macrobond, ABS 3

Severe Tropical Cyclone Debbie hit the Queensland coast near Airlie Beach on 28 March, causing damages to property and increasing rainfall all the way down to the Queensland-NSW border. The biggest economic impact was from reduced coal exports as critical rail infrastructure was damaged. As the nearby Bowen basin is one of the largest coal producing regions in the world, it is estimated that around 10 million tonnes exports were lost, with two thirds coking coal and one third thermal coal. Spot coal prices surged initially. Since there was little damage to mines and coal ports, production and exports were able to resume fairly quickly from late April and prices fell back. The lost coal exports detracted from Q2 growth but little impact is expected in Q3 as production returns to normal.

The tourist sector also suffered losses, especially in the Whitsundays region, with travel to Hamilton Island declining significantly – this slowly returned to normal from May, with the return to full capacity expected in August.

CHART 3: COAL EXPORT TERMINAL LOADINGS

CHART 4: COAL SPOT PRICES

CHART 5: QUEENSLAND COAL EXPORT VALUES

CHART 6: AIRPORT ARRIVALS PER MONTH

0

5,000

10,000

15,000

20,000

25,000

30,000

2010 2011 2012 2013 2014 2015 2016 2017

Sydney to Hamilton Island

Melbourne to Hamilton Island

0

20

40

60

80

100

120

140

0

50

100

150

200

250

300

350

2014 2015 2016 2017

Coking coal (LHS)

Thermal coal (RHS)

US$/t

LABOUR MARKET (1) Overall improving labour market although varying across regions

Looking ahead, the NAB Business Survey points to further improvement in the labour market, although the results will vary across industries and regions. The current high prices for coal and metals are not expected to be maintained, which would result in cost cutting at mines and refineries. The high energy prices have also prompted companies such as Glencore to consider shutting down its Townsville copper refinery. Adani’s coal mine could offset some of the job losses in the region in the future, however the employment outlook for regional Queensland is not looking in as good shape as the south east.

Source: ABS

The labour market continues to improve in tandem with the stronger economic growth in Queensland. However divergence exists across regions, with the coal producing regions benefiting from a temporary surge in prices and activity, the South East continuing its steady recovery, and the outback weakening further.

Overall, it was encouraging to see the participation rate improve strongly, and with even stronger increases in employment, unemployment declined further.

CHART 7: EMPLOYED PERSONS, QUEENSLAND AND AUSTRALIA YoY % growth, seasonally adjusted

CHART 8: PARTICIPATION RATE % CHART 10: NAB SURVEY EMPLOYMENT CONDITIONS

Index

4

-2

-1

0

1

2

3

4

5

6

7

8

2000 2002 2004 2006 2008 2010 2012 2014 2016

Queensland Australia

63

64

65

66

67

68

69

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1

3

5

7

9

11

13

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Queensland Mackay Fitzroy Townsville Cairns Brisbane

CHART 9: UNEMPLOYMENT RATE, SELECTED REGIONS 12-month moving average, %

-40

-30

-20

-10

0

10

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

QLD Australia

This trend has resulted in part time employment rising faster than full time employment. With part time services jobs paying generally less than full time mining jobs, overall wages growth has been subdued.

The low wages growth phenomenon is common across the country and at many other developed economies as well, although the mining cycle has also played a part in Queensland. Average compensation per employee growth was negative in Q2, compared to a zero growth nationally. While average weekly earnings growth for full time employees improved, it remains weak overall.

Source: ABS

The public administration sector added the most jobs in the past 12 months. Heightened residential building activity also saw construction employment rise, although that is not forecast to continue as the peak of the construction boom is expected to be passing.

The overall trend is for job gains in services (with the exception of a deteriorating retail sector) while mining, manufacturing and agriculture jobs are being lost.

CHART 11: CHANGE IN EMPLOYMENT BY INDUSTRY last 12 months to Aug-17, Queensland, '000

CHART 12: CHANGE IN EMPLOYMENT BY INDUSTRY last 3 years to Aug-17, Queensland, '000 CHART 14: AVERAGE WEEKLY EARNINGS

annual % growth

LABOUR MARKET (2) However wages growth remains sluggish

5

CHART 13: FULL TIME VERSUS PART TIME EMPLOYMENT 12-month rolling average, index levels (Jan 2000 = 100)

-20 -15 -10 -5 0 5 10 15 20 25 30

Public adminConstruction

HospitalityArts

CommunicationsManufacturingRental services

MiningBusiness services

Other servicesWholesale trade

TransportFinance

Retail tradeAdmin services

UtilitiesAgriculture

HealthEducation

-25 -20 -15 -10 -5 0 5 10 15 20 25 30 35

HospitalityPublic admin

HealthBusiness services

FinanceEducationTransport

CommunicationsArts

Rental servicesOther services

ConstructionWholesale trade

AgricultureAdmin servicesManufacturing

UtilitiesMining

Retail trade

100

110

120

130

140

150

160

170

180

2000 2002 2004 2006 2008 2010 2012 2014 2016

Full time Part time

Index (Jan 2000 = 100)

-2

0

2

4

6

8

10

12

1995 1997 1999 2000 2002 2003 2005 2007 2008 2010 2011 2013 2014 2016

Full time employees All employees

POPULATION Population growth picks up but remains below national average

Better housing affordability also continues to attract interstate migrants from NSW and VIC, although Victoria still leads in net interstate migration given the better employment prospects there.

A period of weakness in the labour market has seen the loss of young working age population, with the share of 20 to 39 year olds declining, which is expected to be reversed somewhat with the improving jobs market.

Source: ABS

Population growth has continued to recover from the recent lows following the end of the mining investment boom. While the number of temporary overseas workers has declined, overseas student numbers are on the rise and expected to continue to rise.

Interstate migration has also picked up again. Net inflows from Western Australia have increased after the end of the resources investment boom and a period of net outflows.

CHART 15: POPULATION GROWTH, QUEENSLAND AND AUSTRALIA %, year on year

CHART 16: QUEENSLAND POPULATION GROWTH (000s, over the year)

CHART 17: SHARE OF POPULATION AGED 20 TO 39

CHART 18: NET INTERSTATE MIGRATION (000s, over the year)

6

26%

27%

28%

29%

30%

31%

32%

33%

1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

Australia Queensland

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

QLD AUS

0

20

40

60

80

100

120

140

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

'000s

Total population growthNet overseas migrationNatural increaseNet interstate migration

-60

-40

-20

0

20

40

60

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

QLD NSW VIC

The Q2 NAB Consumer Anxiety Survey shows a big increase in household utilities spending, reflecting the higher energy costs. Other than that, household spending centres around essentials including medical expenses and paying off debt, while cutting back on discretionary spending including entertainment, major household items and charitable donations.

Source: ABS, NAB Consumer Anxiety Survey

Increased employment numbers, albeit with sluggish wages growth, has resulted in higher total employee income, supporting household consumption growth. However unless wages growth picks up, consumption is likely to remain subdued, especially at a time of very depressed consumer sentiment.

Retail trade was negatively affected in March by Cyclone Debbie, before bouncing back in April. The Cyclone caused temporary shop closures but the recovery efforts could contribute to increased spending.

CHART 19: TOTAL EMPLOYEE COMPENSATION & HOUSEHOLD CONSUMPTION Growth (YoY %)

CHART 20: RETAIL TURNOVER GROWTH AND CONSUMER SENTIMENT

CHART 21: CHANGES IN SPENDING BEHAVIOUR, NET BALANCE NAB Consumer Anxiety Survey, Q2 2017

HOUSEHOLD CONSUMPTION Household consumption likely to receive boost from higher labour incomes

7

0%

2%

4%

6%

8%

10%

12%

14%

16%

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Total Employee Compensation Nominal household Consumption

80

90

100

110

120

-4

-2

0

2

4

2011 2012 2013 2014 2015 2016 2017

Retail turnover, monthly growth, % - LHS

Consumer sentiment -RHS

-40

-30

-20

-10

0

10

20

30Eating out

Major HH items

Entertainment

Charitable donations

Use of credit

Personal goods

Travel

ChildrenSavings, super,

investments

Home improvements

Groceries

Transport

Paying off debt

Medical expenses

Utilities

Q2'16 Q1'17 Q2'17

NAB CUSTOMER SPENDING BEHAVIOURS Spending growth in regional areas stronger than in Brisbane metro

Source: ABS, NAB Group Economics 8

Customer spending in the greater Brisbane metropolitan area (ABS definition) grew 3.3% y/y in Q2 2017, up from 1.0% y/y in Q1 2017.

Average monthly spending grew $40 to $2,006.

Spending grew fastest for Arts & Recreation (36.5%), Financial & Insurance Services (14.0%), Professional, Scientific & Technical Services (9.7%) and Accommodation & Food Services (8.9%).

CHART 22: GREATER BRISBANE METRO AREA Year-ended growth to Q2 2017, postcode level shown as QLD has large LGAs

CHART 24: REGIONAL QLD(EX METRO) Year-ended growth to Q2 2017

CHART 23: TOP 20 GROWING METRO POSTCODES FOR SPENDING CHART 25: TOP 20 GROWING REGIONAL POSTCODES FOR SPENDING

Overall Growth

3.3%

Average Monthly

Spend (Q2) $2,006

Overall Growth

4.9% Average Monthly

Spend (Q2) $1,925

19.9

%

19.2

%

19.1

%

13.9

%

12.4

%

11.6

%

11.1

%

10.8

%

9.3%

9.3%

9.2%

9.1%

8.8%

8.4%

8.4%

8.3%

7.9%

7.9%

7.8%

7.7%

0%

5%

10%

15%

20%

25%

Coo

per

s Pl

ain

s

Nat

han

Gra

nth

am

Riv

ervi

ew

Dar

ra

Nu

nd

ah

Eato

ns

Hill

Ro

thw

ell

Wat

erfo

rd W

est

Belm

on

t

Hel

ido

n

Laid

ley

Fore

st H

ill

Ro

ched

ale

Sou

th

Fore

st L

ake

Beth

ania

St L

uci

a

Ro

sew

oo

d

Ham

ilto

n

Too

go

ola

wah

4108 4111 4347 4303 4076 4012 4037 4022 4133 4153 4344 4341 4342 4123 4078 4205 4067 4340 4007 4313

52.8

%

52.4

%

45.4

%

37.7

%

35.4

%

33.7

%

30.0

%

29.8

%

29.3

%

27.6

%

27.0

%

26.3

%

25.7

%

25.7

%

25.6

%

25.5

%

25.1

%

24.8

%

24.2

%

23.7

%

0%

10%

20%

30%

40%

50%

60%

Dir

ran

ban

di

Theo

do

re

Thu

limb

ah

Too

wo

om

ba

Ric

hm

on

d

No

osa

Hea

ds

Yan

dara

n

Mid

ge

Poin

t

Yan

gan

Too

bea

h

Barc

ald

ine

Alp

ha

Go

om

bu

ngee

Than

go

ol

Thal

lon

Isis

ford

Dal

veen

Leyb

urn

Gle

n A

plin

Kar

um

ba

4486 4719 4376 4364 4822 4567 4673 4799 4371 4498 4725 4724 4354 4716 4497 4731 4374 4365 4381 4891

While the capacity utilisation rate as measured by the NAB survey was still below the national average, it has surged from the lows in 2016. Mining businesses have increased production as a response to the higher prices while non-mining businesses are also showing improvements in conditions.

By industry, business conditions were positive in all industries except for retail and transport & utilities. Wholesale recorded the strongest condition in Q2, while mining had a surge in confidence on higher commodity prices.

Source: ABS, NAB Business Survey

Private investment declined significantly following the completion of three large scale LNG projects while subdued commodity prices have been limiting new resources investment, acting as a drag on the economy. However, there are signs pointing to the slow recovery in the non-mining business sector while public investment is also on the rise, supporting overall investment growth. The NAB Business Survey shows business conditions in Queensland have picked up significantly this year, to surpass the national average, despite the impacts of Cyclone Debbie. CHART 26: UNDERLYING BUSINESS AND PUBLIC INVESTMENT

CHART 27: BUSINESS CONDITIONS (NET BALANCE) & SPREAD

CHART 28: NAB BUSINESS SURVEY - CAPACITY UTILISATION (%)

CHART 29: NAB BUSINESS SURVEY INDUSTRY RESULTS, Q2 2017

BUSINESS SECTOR Non-mining business sector slowly improving

9

74

76

78

80

82

84

86

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Queensland Total

0

2

4

6

8

10

12

14

16

18

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Underlying private business investment

Underlying public investment

$ bil l ion

-30

0

30

60 Net Balance (%). Latest Quarter

Conditions Confidence

The large increase in the number of dwellings approved has increased the dwelling approvals to changes in population ratio significantly for units and to a lesser extent for houses. Given the over supply of apartments, especially concentrated in particular suburbs in south east Queensland, apartment values have declined and could face further falls.

Overall dwelling prices in Brisbane have been rising gradually, but by less than in Melbourne and Sydney.

Source: ABS, RP Data

Dwelling investment had been rising during a time when resources investment was on the decline, providing some offset to total investment growth. The low interest rate environment, combined with increased foreign demand, has seen dwelling approvals rise, especially for units and apartments.

However recent data indicates the number and value of dwelling approvals have probably peaked, meaning the support from dwelling investment is starting to wane.

CHART 31: RENTAL YIELDS AND PRICE TO INCOME RATIOS

CHART 32: BUILDING APPROVALS RELATIVE TO POPULATION (Long-run average = 100)

CHART 33: CAPITAL CITY DWELLING PRICES RP Data-Rismark hedonic prices

DWELLING INVESTMENT Support from dwelling investment starting to wane

10

0

200

400

600

800

1,000

1,200

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

B

Melbourne Dwelling Prices

$000

Sydney Dwelling Prices

National Dwelling Prices

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$ billions

Houses Units, apartments etc

0

50

100

150

200

250

300

350

400

450

1985 1989 1994 1998 2003 2007 2012 2016 1989 1993 1998 2002 2007 2011 2016

Qld House Approvals to changes in population Qld Unit Approvals to changes in populationAust House Approvals to changes in population Aust Unit Approvals to changes in population

CHART 30: VALUE OF WORK YET TO BE DONE BY DWELLING TYPE

2

2.5

3

3.5

4

4.5

5

5.5

3

4

5

6

7

8

9

10

1996 1999 2002 2005 2008 2011 2014 2017 1998 2001 2004 2007 2010 2013 2016Brisbane house rental yield Aust house rental yield Aust unit rental yieldBrisbane unit rental yield Brisbane price to income Aust price to income

Rental Yield Price-to-income

Yield Ratio

House price growth has been positive across Brisbane regions, while units suffered negative growth in some concentrated areas. For regional Queensland, house price growth was positive in the south east while negative in mining regions.

The NAB residential property survey estimates Queensland house price growth to surpass national average in 2018 and 2019. The two year outlook tends to be more optimistic and needs to be read with caution.

Source: ABS, RP Data, NAB Residential Property Survey

The value of new dwelling approvals has increased in Queensland, however most of that has been concentrated in the south east and in medium to high density dwellings, while in mining regions new dwelling approvals have declined. This has highlighted the divergence across different housing market segments, for houses versus apartments, for the population centres in the south east versus mining regions and the outback.

CHART 34: VALUE OF NEW DWELLING APPROVALS, BY REGION

CHART 35: BRISBANE - MEDIAN PROPERTY PRICE GROWTH (year to Q3 2016)

CHART 36: REGIONAL QUEENSLAND - MEDIAN HOUSE PRICE GROWTH (year to Q3 2016)

CHART 37: NAB RESIDENTIAL PROPERTY SURVEY - HOUSE PRICE EXPECTATIONS

HOUSING MARKET Price divergence across different market segments

11

- 1 2 3 4 5 6 7 89

2013-14

2014-15

2015-16

2013-14

2014-15

2015-16

2013-14

2014-15

2015-16

2013-14

2014-15

2015-16

2013-14

2014-15

2015-16

$ Billions

New other residential building New Houses

Brisbane Gold Coast Sunshine Coast Mining regions Rest of Queensland

-6 -4 -2 0 2 4 6 8 10

Caboolture

Inner Brisbane

Ipswich City

Logan City

Northwest Inner Brisbane

Northwest Outer Brisbane

Pine Rivers

Redcliffe

Redland City

Southeast Inner Brisbane

Southeast Outer Brisbane

House Prices

Unit Prices

-20 -15 -10 -5 0 5 10

Central WestDarling Downs

Far NorthFitzroy

Gold CoastMackay

North WestNorthern

South WestSunshine CoastWest Moreton

Wide Bay-Burnett

-4

-2

0

2

4

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

Q4

'16

Q1

'17

Q2

'17

Q3

'17

Ne

xt 1

2m

Ne

xt 2

y

Australia Qld

ExpectationsEstimated price growth in relevant survey period...

%

For domestic tourism, while mining-related travel has been on the decline, holiday visits to the sunshine state have been on the rise. Domestic airport arrivals into popular destinations such as the Gold and Sunshine Coasts and Cairns have been steadily improving. The Whitsundays region suffered damages from Cyclone Debbie however has quickly re-opened for business. It is unclear how much lost revenue has been incurred while rebuilding efforts continue.

Source: ABS, RBA, BITRE, NAB, Macrobond

The lower Australian dollar in recent years and rising income levels in Asia, especially China, have seen net tourism exports rise significantly. However Queensland hasn’t been able to capture a large share of that growth. Interestingly, Victoria overtook Queensland as the second most popular destination for international short term visitors. While the recent appreciation in the AUD might pull back some of the strength in net tourism exports overall we expect net tourism exports to continue to grow.

CHART 38: NATIONAL TOURISM EXPORTS & THE AUSTRALIAN DOLLAR

CHART 39: SHORT-TERM INTERNATIONAL VISITORS state where spent most time

CHART 40: QUEENSLAND MINING AIR ROUTES

TOURISM Leisure and education tourism to grow while mining travel declines

12

New South Wales

Victoria

Queensland

0

50

100

150

200

250

300

2000 2001 2002 2004 2005 2006 2008 2009 2010 2012 2013 2014 2016 2017

Tho

usa

nd

s

40

50

60

70

80

90

100-400

-200

0

200

400

600

800

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Net tourism exports (LHS)

Exchange rate - TWI (RHS, reversed)

$m Index

Forecast

CHART 41: DOMESTIC ARRIVALS INTO TOURIST AIRPORTS

Coal prices have been a rollercoaster ride. They surged in late 2016 following Chinese government policy changes but have since fallen back, until Cyclone Debbie hit in March, causing disruptions and pushing prices higher again. As production resumed, prices fell back but rose again on stronger sentiment and Chinese steel demand. It is not expected these high price levels will be sustained however they have induced some previously shut capacity to come back online. Looking ahead, coal exports are unlikely to increase substantially given weakening Chinese demand and the rise of renewables energy. Beef exports will remain subdued in the near term as farmers rebuild herd levels. Metals exports have declined following closures including the Century mine and Yabulu nickel refinery, which will be partly offset by increased bauxite production at Weipa and zinc exports from Dugald River from late 2017.

Source: ABS, Bloomberg

Near term exports growth will be underpinned by the three LNG projects, which have all completed construction and have started exporting. However, lower than anticipated contract prices might mean reduced production at below nameplate capacity. From 2018 onwards, contributions from LNG exports will fall as export volumes flatten off. The lower prices also mean reduced company earnings and government revenue receipts. On the other hand, companies have taken large quantities of gas from the domestic market to satisfy contractual obligations, especially as some gas well production was lower than expected. This has resulted in higher domestic gas prices, hurting consumers and manufacturers alike.

CHART 43: IMPLIED EXPORT PRICES, KEY QUEENSLAND COMMODITIES

CHART 44: SPOT COAL PRICES

CHART 45: QUEENSLAND BEEF EXPORTS, VALUE

EXPORTS LNG to drive exports growth while other goods exports subdued

13

0

20

40

60

80

100

120

140

0

50

100

150

200

250

300

350

2014 2015 2016 2017

Coking coal (LHS)

Thermal coal (RHS)

US$/t

CHART 42: FORECAST LNG EXPORTS (revised contract based phasing)

200

300

400

500

600

700

800

900

1,000

0

50

100

150

200

250

300

350

400

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Coking coal

LNG (RHS)

$A/tonne $A/tonne

Thermal coal (LHS)

Forecasts

0

1

2

3

4

5

6

2015 2016 2017 2018 2019

GLNG (QLD) QCLNG (QLD) APLNG (QLD)

Mill

ion

tonn

es p

er q

uart

er

0

100

200

300

400

500

600

2010 2011 2012 2013 2014 2015 2016 2017

$millions

A downward revision to payroll tax receipts and transfer duty by the government saw the taxation revenue for 2017-18 revised downwards by $258 million. Reductions in GST revenue across the period to 2019-20 have also impacted revenue forecasts. In addition, the shift in timing of NDRRA reimbursements relating to prior disaster events has reduced revenue in 2017-18.

Source: Queensland Treasury

A net operating surplus of $2.824 billion is expected for 2016-17, $798 million higher than estimated at the MYFER. The improvement is primarily due to a number of temporary factors, such as the timing of disaster recovery reimbursements for events prior to Tropical Cyclone Debbie and strong royalty revenue as a result of the surge in coal prices. Beyond 2016-17 however, the surplus is forecast to be much smaller as the state faces ongoing weakness in key tax revenues, the return of coal prices to normal levels and spending on recovery work following Cyclone Debbie. The preliminary estimated cost of recovery to the government is $1.1 billion, comprising around $700 million in operating expenses, predominantly grants to local councils, and $400 million in capital expenditure, across the four years to 2019-20. CHART 46: GENERAL GOVERNMENT NET OPERATING BALANCE CHART 47: IMPACT OF NATURAL DISASTER RELIEF AND RECOVERY

ARRANGEMENTS FUNDING ON THE NET OPERATING BALANCE

FISCAL OUTLOOK Modest surplus across the forward estimates

14

0

500

1,000

1,500

2,000

2,500

3,000

2016-17 2017-18 2018-19 2019-20 2020-21

Published net operating balance

Underlying net operating balance excluding disaster impacts

$million

0

500

1,000

1,500

2,000

2015-16 actual 2016-17 2017-18 2018-19 2019-20 2020-21

2016-17 MYFER 2017-18 Budget

$million

SEMI GOVERNMENT AND CREDIT OUTLOOK: QUEENSLAND Lower short term borrowing needs

QTC’s borrowing task comprises of $6.8bn of term debt in 2017-18 – a $2.7bn reduction from mid-year and is entirely refunding maturities. FY YTD, QTC has issued around $3bn, mostly in long end taps and has reduced shorter term and Commonwealth guaranteed lines.

QLD is rated AA+/stable by S&P and Aa1/stable by Moody’s. Debt metric shows improvement near term, but rises in the out years.

Source: QTC

15

The QLD Budget showed significant near term improvement in the operating position, largely reflecting one-offs from higher commodity prices and the profile of natural disaster funding.

Smaller surpluses and growing capital spending point to larger total state fiscal deficits and issuance beyond 2017-18.

CHART 48: QLD NON-FINANCIAL PUBLIC SECTOR NET DEBT CHART 50: S&P CREDIT METRIC: TAX SUPPORTED DEBT/REVENUE

CHART 49: QTC BORROWING PROGRAM CHART 51: QTC TERM BONDS OUTSTANDING

100%

120%

140%

160%

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Tax supported debt as % of consolidated operating revenue

Tax supported debt scoring threshold

Budget 16-17

Budget 17-18

Source: NAB, QLD Budget Papers

MYBR 16-17

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0AUDbn QTC state guaranteed curve

source: QTC, NAB

Issuance as at 30 June 2017

Issuance FYTD

QTC Issuance Outlook ($bn) 2017-18 2018-19 2019-20 2020-21New Money 0.6 0.9 3.0 3.5Maturities 6.2 8.9 9.3 8.4Total 6.8 9.8 12.3 11.9Source: QTC, Budgets, NAB

30.0

35.0

40.0

45.0

50.0

2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

$bn

Source: Qld State Budgets

FY17

FY16 MYBR

FY16

FY17 MYBR

FY18

FORECASTS BY STATE AND TERRITORY Queensland to outperform in 2017-18 thanks to LNG exports

Source: ABS, CoreLogicNAB Economics

NAB’s economic forecasts by state and territory are below. For a summary of the outlook by state, please see the States Handbook – Overview which contains links to the detailed handbook for each state and territory.

REAL GROSS STATE PRODUCT AND UNEMPLOYMENT RATE FORECASTS Annual average

16

HEDONIC HOUSE PRICE FORECASTS* Through the year growth to Q4

HEDONIC UNIT/APARTMENT PRICE FORECASTS * Through the year growth to Q4

2015 2016 2017f 2018f 2019f

Sydney 15.5 10.7 5.1 3.7 3.0

Melbourne 15.8 9.5 8.6 5.5 3.4

Brisbane 6.9 2.7 3.1 1.9 1.2

Adelaide 3.8 3.8 3.4 1.7 1.7

Perth -4.2 -2.9 -3.0 0.7 1.2

Hobart 7.0 9.6 10.0 4.9 1.7

Cap City Avg 11.2 7.3 4.6 3.4 2.5

2015 2016 2017f 2018f 2019f

Sydney 13.1 5.8 5.9 0.5 0.6

Melbourne 7.5 4.7 6.4 1.2 -2.4

Brisbane 1.1 -3.0 -1.1 -1.8 -1.2

Adelaide 2.4 0.6 0.5 0.5 0.5

Perth -2.8 -6.3 -1.9 0.4 0.7

Hobart 1.1 6.4 5.7 2.4 0.6

Cap City Avg 8.2 3.5 4.7 0.5 -0.3

15-16 16-17f 17-18f 18-19f 15-16 16-17 17-18f 18-19fNSW 3.5 2.2 3.1 2.5 5.4 5.0 4.7 4.7VIC 3.3 2.9 3.3 2.7 6.0 5.9 5.8 5.4QLD 2.0 2.2 3.2 2.5 6.2 6.2 6.0 5.9SA 1.9 1.8 2.7 1.7 7.3 6.7 6.5 6.5WA 1.9 0.3 3.2 3.0 6.0 6.2 6.2 5.9TAS 1.3 1.0 2.2 1.8 6.5 6.1 6.0 6.0NT 2.7 1.5 1.5 5.0 4.2 3.5 4.0 4.2ACT 3.4 3.0 3.1 2.6 4.5 3.8 4.8 4.8Australia 2.7 2.0 3.2 2.5 5.9 5.7 5.4 5.3

Gross State Product YoY Unemployment RateNAB growth and unemployment rate forecasts for the states