The document discusses the economic impact of recent floods in Australia. It finds that while the global economy is strengthening, Australian growth will be negatively impacted in the short-term by the floods. The floods are expected to significantly damage GDP growth in the current quarter and push up inflation from rising food prices. However, the medium-term economic outlook for Australia remains positive, with strong business investment and rebuilding efforts expected to support domestic demand and growth.

1. Australia after the floods
Spiros Papadopoulos
Senior Economist, Global Markets Research
18 March 2011
1

2. Global economy strengthening, but risks remain
● Middle-East tensions raising oil and gold prices
● Global inflation rising
● ECB and BoE preparing for rate hikes
● China still strong, and still tightening policy
● US economy improving
● Devastating earthquakes in Japan and NZ
● Australian growth affected by floods in short-term, but medium term
outlook remains strong and wage/price pressures trending higher
2

3. Floods to inflict heavy growth damage this quarter in Australia
GDP forecasts q/q%, pre/ post floods
1.4
Risk of a Source: NAB Global Markets Research
1.2 Old Post floods
negative
print
1.0
Actual Q4,
0.8 0.7%
0.6
0.4
0.2
0.0
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12
CPI Headline inflation q/q% forecasts, pre/ post floods
1.6
Source: NAB Global Markets Research
1.4 Old Post floods
1.2 Food prices
1.0 hit
0.8
0.6
0.4
0.2
0.0
-0.2
-0.4
Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12
3

4. QLD growth was already soft - weak property mkt and high AUD
State Final Demand
17.5 17.5
15.0 15.0
12.5 12.5
10.0 10.0
7.5 7.5
Percent
Percent
5.0 5.0
2.5 2.5
0.0 0.0
-2.5 -2.5
-5.0 -5.0
-7.5 -7.5
04 05 06 07 08 09 10
NSW QLD Tasmania
VIC WA SA
Source: Reuters EcoWin
4

5. QLD economy has underperformed since the GFC
NAB Business Conditions, Queensland vs Rest of Australia
20
3 month average
15
Australia, ex Qld
10
5
0
-5
-10
-15
-20 3m
average QLD
-25
Source: NAB Survey, NAB Economics Actual
-30
Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11
5

6. QLD economy has underperformed since the GFC
Domestic Demand: Australia vs Queensland
15.0 15.0
12.5 12.5
10.0 10.0
7.5 7.5
Percent
Percent
5.0 5.0
2.5 2.5
0.0 0.0
-2.5 -2.5
-5.0 -5.0
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Australia (Domestic Final Demand)
Queensland (State Final Demand)
Source: Reuters EcoWin
6

7. Australian economy had been softening before the floods.
Households cautious and retail sector subdued in 2010
Retail sales, QLD & Australia
Annual % change, $ sales
15.0 15.0
12.5 12.5
10.0 10.0
7.5 7.5
Percent
5.0 5.0
2.5 2.5
0.0 0.0
-2.5 -2.5
02 03 04 05 06 07 08 09 10 11
Australia Queensland
Source: Reuters EcoWin
7

8. House price growth has eased after interest rate increases
House Prices - Quarterly Growth
7 7
Dec Qtr Annual
6 6 % Change % YoY
Sydney 1.6 7.4
5 5 Melbourne 1.3 10.8
Brisbane 0.7 0.7
4 4
Adelaide 1.1 3.5
3 3
Perth 3.2 -2.0
Hobart 1.1 1.0
2 2 Darwin 0 1.7
Percent
Percent
Canberra 1.9 6.5
1 1 Australia 0.7 5.8
0 0 Source: ABS 6416.0
-1 -1
Australia
-2 -2
Brisbane
-3 -3
-4 -4
Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
05 06 07 08 09 10
Source: Reuters EcoWin
8

9. Business confidence bounces; Consumer confidence softer
Australian Confidence
130 30
Consumer Confidence (LHS)
125
20
120
115 10
110
0
Net balance
Net balance
105
100
-10
95
Business Confidence (RHS) -20
90
85
-30
80
75 -40
01 02 03 04 05 06 07 08 09 10 11
Source: Reuters EcoWin, NAB Business Survey
9

10. Consumers cautious: Want to pay down debt or put in the bank
Consumer Sentiment: Wisest Place for Savings
50 50
Real estate
40 40
Banks
30 30
Percent
20 20
10 10
Shares
Pay off debt/ home
mortgage
0 0
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: W-MI, NAB Global Markets Research, Reuters EcoWin
10

11. Household savings have risen strongly
Household Saving
% of Household Disposable Income
17.5 17.5
15.0 15.0
12.5 12.5
10.0 10.0
Percent
Percent
7.5 7.5
5.0 5.0
2.5 2.5
0.0 0.0
-2.5 -2.5
84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: NAB Global Markets Research, Reuters EcoWin
11

12. RBA has been on hold since November, but rises ahead
RBA Cash Rate
7.5 7.5
7.0 7.0
6.5 6.5
6.0 6.0
5.5 5.5
(f)
Percent
Percent
5.0 5.0
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
92 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Reuters EcoWin
12

13. Global activity continues to strengthen
Ann Avg GDP 2008 2009 2010 (f) 2011 (f) 2012 (f)
Australia 2.6 1.3 2.7 2.5 3.7
US 0.0 -2.6 2.8 3.2 3.3
Japan -1.2 -6.3 4.0 1.7 2.3
UK 0.0 -5.0 1.4 2.1 2.2
Eurozone 0.3 -4.0 1.7 1.5 1.8
India 7.3 6.8 9.0 8.4 7.4
China 9.6 9.1 10.3 9.1 8.0
World 2.9 -0.7 4.9 4.5 4.2
13

14. Chinese and Indian growth strong despite policy tightenings
14

15. US recovery continuing, labour market improving (slowly)
US GDP
US Payrolls and Unemployment Rate
0.50 11
6
4 10
0.25
2 9
0.00
0
Person (millions)
8
Percent
Percent
-2
-0.25
7
-4
-0.50
6
-6
-0.75
5
-8
-10 -1.00 4
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 05 06 07 08 09 10 11
08 09 10
Q/Q Annualised Rate Annual % Monthly change in Nonfarm payrolls Unemployment Rate
Source: NAB Capital Research, Reuters EcoWin Source: Reuters EcoWin
15

16. Global manufacturing strong
Manufacturing PMIs
Index Index
65 65
60 60
55 55
50 50
45 China 45
US
40 40
Europe
35 35
UK
30 30
Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10
16

17. Japanese earthquake – Key issues for Australia
● Japan accounts for 20% of metallurgical
coal, 18% of thermal coal and 10% of iron Nikkei 225 Index
ore demand 19000 19000
● Areas heavily affected by the earthquake 18000 18000
17000 17000
represent 8% of Japanese GDP
16000 16000
● Japan is 15% of Australia’s trade (China 15000 15000
22.5%), 19% of exports and 9% of 14000 14000
imports. Main exports are coal, iron ore,
Index
13000 13000
beef, aluminium, LNG, nickel, sugar 12000 12000
● In short term, commodity demand will fall 11000 11000
10000 10000
as. large manufacturing plants closed
9000 9000
● Medium term, demand from
8000 8000
reconstruction projects and from coal and 7000 7000
gas fired electricity power stations will 07 08 09 10 11
exert upward pressure on commodities Source: Reuters EcoWin
● BoJ injected ¥15 trn into banking system
to ensure plenty of liquidity
17

18. Commodity prices driving ‘terms of trade’ & real incomes higher
Aus: Terms of Trade and RBA commodity prices
140 1.4
130
1.3
120
1.2
110
RBA commodity price
1.1
100
index (SDR terms, left)
90 1.0
Index
Index
80 0.9
Terms of trade (right)
70
0.8
60
0.7
50
0.6
40
30 0.5
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
Source: NAB Global Markets Research, Reuters EcoWin
18

19. Resource projects ‘committed’ or ‘under construction’:
$A133bn, 10% of GDP
Source: Minerals and Energy, Major development projects – October 2010 listing, Michael Lampard et al, ABARE, November 2010
19

20. Domestic Demand
Longer term activity outlook remains positive, helped by the
rebuilding after the floods and strong business investment
Australian GDP
5 5
4 4
Annual
3 3
Percent
Percent
2 2
(f)
1 1
0 0
Quarterly GDP Growth
-1 -1
00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Reuters EcoWin
20

21. Little spare capacity - unemployment rate is falling
Unemployment Rate
12 12
11 11
10 10
9 9
8 8
Percent
Percent
7 7
6 6
5 5
(f)
4 4
3 3
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Australia Queensland
Source: Reuters EcoWin
21

22. Wage pressures rising, and skilled labour shortages after floods
Wage Price Index
4.50 2.0
1.9
4.25 1.8
Quarterly Growth (RHS)
1.7
Annual Growth (LHS)
4.00 1.6
1.5
3.75 1.4
1.3
3.50 1.2
1.1
Percent
Percent
3.25 1.0
0.9
3.00 0.8
0.7
2.75 0.6
0.5
2.50 0.4
0.3
2.25 0.2
0.1
2.00 0.0
97 98 99 00 01 02 03 04 05 06 07 08 09 10
Source: Reuters EcoWin
22

23. Underlying inflationary pressures rising
Australian Inflation
7 7
6 6
5 5
4 4
%YoY
%YoY
3 3
2 2
(f)
1 1
0 0
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Headline CPI Average Underlying CPI
Source: Reuters EcoWin
23

24. AUD has been solid against the major currencies
AUD/USD AUD Crosses
1.05 1.05 0.80 110
AUD/EUR (LHS)
1.00 1.00 0.75
100
0.95 0.95
0.70
0.90 0.90
0.65 90
0.85 0.85
0.60
AUD/USD
0.80 0.80 80
0.55
0.75 0.75
0.50 AUD/JPY 70
0.70 0.70
(RHS)
AUD/GBP (LHS)
0.65 0.65 0.45
60
0.60 0.60 0.40
0.55 0.55
0.35 50
03 04 05 06 07 08 09 10 11
04 05 06 07 08 09 10 11
Source: Reuters EcoWin
Source: Reuters EcoWin
24

25. A higher average for the AUD over the next decade?
Australian Dollar
1.1 1.1
1.0 1.0
Post commodity-boom average?
0.9 0.9
Average 2004 to 2011: 81c
0.8 0.8
AUD/USD
AUD/USD
0.7 0.7
0.6 Pre commodity-boom 0.6
average: 70c
0.5 0.5
0.4 0.4
86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Reuters EcoWin
25

26. Key financial market forecasts
Interest Rate Forecasts
15-Mar Jun-11 Sep-11 Dec-11 Jun-12 Dec-12
Australia
RBA Cash rate 4.75 4.75 5.00 5.25 5.25 5.25
Offshore Policy Rates
US Fed funds 0.25 0.25 0.25 0.50 1.00 2.00
ECB refi rate 1.00 1.25 1.50 1.50 2.00 2.50
BoE repo rate 0.50 0.75 1.00 1.50 2.00 2.50
Exchange Rate Forecasts
Majors 15-Mar Jun-11 Sep-11 Dec-11 Jun-12 Dec-12
AUD/USD 0.9958 1.05 1.01 0.98 0.96 0.94
NZD/USD 0.7318 0.74 0.72 0.73 0.75 0.77
USD/JPY 81.57 86 87 88 92 92
EUR/USD 1.3919 1.38 1.35 1.36 1.38 1.40
GBP/USD 1.6110 1.59 1.58 1.59 1.61 1.65
USD/CNY 6.5714 6.30 6.20 6.15 5.95 5.75
Australian Cross Rates
AUD/JPY 81.23 90 88 86 88 86
AUD/EUR 0.7154 0.76 0.75 0.72 0.70 0.67
AUD/GBP 0.6181 0.66 0.64 0.62 0.60 0.57
AUD/NZD 1.3608 1.43 1.40 1.34 1.28 1.22
AUD/CNY 6.5438 6.62 6.26 6.03 5.71 5.41
26

27. Oil and Gold prices rise as Middle-East tensions escalate
Oil and Gold Prices
$US
140 1500
130 1400
120 1300
110 1200
100 1100
90 1000
USD/Barrel
80 900
USD/Oz
70 800
60 700
50 600
40 500
30 400
20 300
10 200
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
WTI Crude Oil, Spot Gold, Spot
Source: NAB Global Markets Research, Reuters EcoWin

28. Some upside potential for the ASX 200?
S&P/ASX 200 (RHS)
ASX 200 vs Company Profits
8000
32
S&P/ASX 200 (RHS)
4000
16
Profits, Monthly (billions)
2000
ASX 200
8
1000
Gross Operating Surplus (LHS)
4
500
2 250
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Source: Reuters EcoWin
28

29. But not keeping up with US equity market
ASX 200 vs Dow Jones Industrials
7000
15000 6800
6600
ASX 200 (RHS)
6400
14000
6200
6000
13000
5800
5600
12000 5400
5200
11000 5000
Index
Index
4800
10000 4600
4400
4200
9000
4000
US Dow Jones (LHS)
3800
8000
3600
3400
7000 3200
3000
6000 2800
Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan
06 07 08 09 10 11
Australia ASX 200 US Dow Jones Industrial Index
Source: Reuters EcoWin
29

30. Summary: Risks remain, but interest rates higher in 2011
● Global economy is improving and Chinese growth remains strong
● Commodity demand will see strong resource investment in Australia
● Household caution is keeping RBA on hold, for now
● Labour market is strong, and unemployment falling
● RBA cash rate to rise further to contain wage and price pressures
30

31. Spiros Papadopoulos Senior Economist, Markets +(61 3) 8641 0978
Richard Grace Senior Economist, Markets +(61 2) 9237 1180
Kristina Jawerth Economist, Markets +(61 2) 9237 1180
Stephen Toplis (NZ) Head of BNZ Market Economics +(64 4) 474 6905
Disclaimer
Craig Ebert (NZ) Senior Markets Economist +(64 4) 474 6799
Dean Ford (NZ) Market Economist +(64 4) 474 6923
Tom Vosa (UK) Market Economist +(4420) 7710 1573
Kris Bernie (UK) Dollar Bloc +(44 20) 7710 2910
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