Global Economics and Markets November 2012

2 Disclaimer

Neither AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497), nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this presentation.

Past performance is not a reliable indicator of future performance.

While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.

This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

This document is solely for the use of the party to whom it is provided.

3 Economist’s track record in the Global Financial Crisis.

4 Europe’s high Governments Debts & Unemployment rates

are a threat to economic & financial stability

2012 data Gross Government Debt to GDP

Unemployment rate for

September

GREECE 150 – 171 25.1 *

ITALY 126 10.8

Portugal 118 15.7

IRELAND 112 15.1

FRANCE 91 10.8

SPAIN 76 – 90 25.8

GERMANY 83 5.4

* Greece at July 2012 Source : Euro stats , AMP Capital Investors

Select European Sovereign Yields

0

1

2

3

4

5

6

7

8

Jan-08 Jan-09 Jan-10 Jan-11 Jan-120

1

2

3

4

5

6

7

8

Germany

Spain

ITALY

10 year Government Bond Yields

5 European banks have become reluctant to lend

Source : European Central Bank , RBA , AMP Capital Investors

European Bank Lending

-2

0

2

4

6

8

10

12

14

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

Nominal Private sector loans annual % change

(ECB)

6 The US ‘fiscal cliff’ in January 2013

US Federal Budget tightening planned for 2013 is known as the ‘fiscal cliff’. Budget tightening could be circa 4 % of Nominal GDP early next year.

The IMF views that this budget tightening could see America “fall into a full fledged recession”

However the IMF concedes that the

“budget outlook for 2013 is highly uncertain given the large number of expiring tax provisions and the threat of automatic spending cuts and in the context of highly polarized politics ”.

IMF World Economic Outlook , October 2012

US$

Billion

Nominal GDP %

Bush Tax Cut expiry

309 2.0 %

Payroll Tax expiry

125 0.8

Budget Act spending cut

98 0.6

Jobless Benefits cuts

40 0.3

Total 572 3.7

JP Morgan

7 China’s investment + industrial production growth is cooling … so commodity prices under pressure

Source : Datastream , IMF , AMP Capital Investors

China's Fixed Investment vs IP

0

5

10

15

20

25

30

35

40

06 07 08 09 10 11 120

5

10

15

20

25

30

35

40

Industrial Production

% yoy (2mma)

Fixed Asset Investment

Iron Ore vs Coking Coal prices

50

75

100

125

150

175

200

225

250

06 07 08 09 10 11 1270

140

210

280

350

Iron Ore spot price

US$ per ton, (LHS)

Coking Coal US$ per ton,

(RHS)

8 “ THE END IS NIGH ” for the Mining investment boom ?

Federal Budget, Statement 2- 23, May 2012

“Resources sector has committed to or commenced construction of over half of the A$ 456 billion resources investment pipeline…

“Total resources investment … is expected to reach 9 % of GDP in 2013-14.”

Now the Reserve Bank is more cautious

“the profile for mining investment, which is now forecast to peak a little earlier and at a lower level than had earlier been expected …

(around 8 % of GDP rather than around 9 % ).

RBA SMP, November 2012

Australian Business Investment

0

1

2

3

4

5

6

7

00 02 04 06 08 10 120

1

2

3

4

5

6

7

Manufacturing

Nominal Mining Investment

as % Nominal GDP

9

Appendix

10 IMF warns that Europe is vulnerable to “a downward spiral of capital flight , breakup fears and economic decline”

IMF 2012 Banking

estimates

Loan to Deposit

ratio

Non performing

loans %

Equity ratio *

Spain 142 5.6 4.9

Italy 176 10.7 5.2

Germany 98 3.5 2.2

Britain 100 7.5 4.2

US 71 4.8 7.1

Japan 73 2.2 2.8

Australia 113 1.3 4.4

* Equity ratio is tangible common equity to tangible assets

IMF Global Financial Stability , Oct 2012 , Table 2.2

ECB Gross Claims on Spanish & Italian Banks

0

50

100

150

200

250

300

350

400

08 09 10 11 12

Spain

Italy

Euro Billions

11 European banks have become reluctant to lend

Europe is struggling with a fragile banking system.

European bank lending is falling as tight credit conditions prevail in the vulnerable countries such as Portugal, Ireland, Greece, Spain (the “PIIGS”)

European Bank Lending standards are tightening given “risk perceptions” according to the October’s ECB survey

Source : European Central Bank , AMP Capital Investors

European Bank Lending

-2

0

2

4

6

8

10

12

14

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

Nominal Private sector loans annual % change

(ECB)

12 Europe’s banking problems are impacting Australia with diminished credit availability sourced from the continent.

RBA Deputy Governor Phillip Lowe on July 12 highlighted that

“The problems that European Banks are having at home are having an impact here . ”

While there is a pickup in credit sourced from Asian banks, Australian corporates have become more dependent upon Australian banks for financing

13

Appendix

14 Europe is still in a mild recession. Yet the PMI surveys suggest that pace of contraction has stabilised.

Europe still needs to overcome :

Weak business & consumer confidence

Bank lending contraction is consistent with a “Credit crunch”.

Fiscal tightening to narrow budget deficits and lower government debts

Source : Markit Economics , AMP Capital Investors

European Growth and PMI Index

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2006 2007 2008 2009 2010 2011 201230

35

40

45

50

55

60

65

70Manufacturing PMI Index (rhs)

European Real GDP quarterly growth (lhs)

2008/09 recession

15 America’s recovery is showing some improving signs

AMP Capital Investors

US economic growth picked up speed in the September quarter (2% annualised ) versus June quarter ( 1.3 % saar ) ….

Positive Q3 GDP contributors were modest consumer spending (+2%), solid government spending (+3.7) and robust housing construction (+13.7%).

Only major concern is the fall in private business investment (-1.2%).

This subdued capital spending could reflect caution given the fiscal tightening planned for 2013 (the “fiscal cliff”).

US Real GDP growth vs ISM Surveys

-10

-8

-6

-4

-2

0

2

4

6

8

10

05 06 07 08 09 10 11 1230

35

40

45

50

55

60

65

70US Real GDP growth

Quarterly annualisedsaar (LHS)

ISM Services + Manufacturing

(RHS)

16 America’s housing market appears to be finally improving

The US house price collapse was the catalyst for the Global Financial Crisis

This has caused a dramatic loss of household wealth and severely damaged the US housing sector …

The recent surge in US housing starts (+ 35% annual rise) and the slow revival in US house prices (+ 1.3%) signal that a recovery has started.

Source: Standard & Poors , Fed St Louis , AMP Capital Investors

US House Prices vs Starts

140

160

180

200

220

240

04 05 06 07 08 09 10 11 120

500

1000

1500

2000

2500

Case Shiller House Prices(LHS)

Housing starts (thousands RHS)

17 American financial conditions are supportive of mild growth

US financial conditions are stable

and support mild +2 % real growth

> Mortgage rate (30 year) are now 3.4%

> Bank lending standards for mortgages have moderated and are positive for Corporates

> Bank Lending is growing (+4.8% yoy)

> Credit yields are stable . Investment Grade “BBB” yield is 4.6% , High Yield is 6.4%

AMP Capital Investors

US Real GDP vs Financial Conditions

-12.0

-10.5

-9.0

-7.5

-6.0

-4.5

-3.0

-1.5

0.0

1.5

3.0

4.5

6.0

7.5

9.0

06 07 08 09 10 11 12-6

-5

-4

-3

-2

-1

0

1

2

3

US Financial Conditions Index (FCI) (RHS)

US Real GDP Growth % qoq

annualised (LHS)

- is tight financial conditions (LHS)

18 The US ‘fiscal cliff’ is Factor X in January 2013

US Federal Budget tightening planned for 2013 is known as the ‘fiscal cliff’. Budget tightening could be 3.7 % of Nominal GDP next year

The IMF views that this budget tightening could see America “fall into a full fledged recession”

However the IMF concedes that the

“budget outlook for 2013 is highly uncertain given the large number of expiring tax provisions and the threat of automatic spending cuts and in the context of highly polarized politics ”.

IMF World Economic Outlook , October 2012

US$

Billion

Nominal GDP %

Bush Tax Cut expiry

309 2.0 %

Payroll Tax expiry

125 0.8

Budget Act spending cut

98 0.6

Jobless Benefits cuts

40 0.3

Total 572 3.7

JP Morgan

19 Is CHINA running out of puff ???

20 China’s growth slowdown continues

China’s real economic growth has made a gradual slowdown to a 7.4% annual pace in September quarter

Essentially this China slowdown is an orderly move downwards from the robust growth rates of 2010 & 2011.

The market’s concern resides in that China is not accelerating and gives no convincing sign of returning to + 8% economic growth for 2013 & beyond

Source: Datastream, AMP Capital Investors

China's Growth vs Lead Indicator

5

6

7

8

9

10

11

12

13

05 06 07 08 09 10 11 12-3

-2

-1

0

1

2

3Real GDP economic

growth (LHS)

Lead Indicator

(RHS)Electricity production, PMI, Shares,Real Interest rates, Money Supply

21 Given China’s slowdown and with inflation having peaked,

the central bank is gradually easing monetary policy

China’s central bank has scope to relax monetary policy.

With annual inflation now running at 1.9% (peak at 6.5% mid 2011), there is a more relaxed view on price pressures for 2012.

China central bank has cuts the key working capital rate by 0.56% since June. Further interest rate cuts are likely over coming quarters

Source: Datastream, AMP Capital Investors

China's Lending Rate vs Inflation

-2

0

2

4

6

8

10

06 07 08 09 10 11 12-2

0

2

4

6

8

10Working Capital

1 year rate

CPI Inflation

% yoy

22 China’s investment + industrial production growth is cooling … so commodity prices under pressure

Source : Datastream , IMF , AMP Capital Investors

China's Fixed Investment vs IP

0

5

10

15

20

25

30

35

40

06 07 08 09 10 11 120

5

10

15

20

25

30

35

40

Industrial Production

% yoy (2mma)

Fixed Asset Investment

Iron Ore vs Coking Coal prices

50

75

100

125

150

175

200

225

250

06 07 08 09 10 11 1270

140

210

280

350

Iron Ore spot price

US$ per ton, (LHS)

Coking Coal US$ per ton,

(RHS)

23 Are the storm clouds gathering for OZ ?

24 RBA & Treasury view is that the Mining “investment boom” is the key driver of Australia’s economic growth until 2014

Federal Budget, Statement 2- 23, May 2012

“Resources sector has committed to or commenced construction of over half of the

A$ 456 billion resources investment pipeline…

“Total resources investment … is expected to reach 9 % of GDP in 2013-14.”

Now the Reserve Bank is more cautious

“likely that Mining investment would peak a little earlier, and at a somewhat lower level, than had previously been forecast ”

RBA Board minutes, October 2012

Australian Business Investment

0

1

2

3

4

5

6

7

00 02 04 06 08 10 120

1

2

3

4

5

6

7

Manufacturing

Nominal Mining Investment

as % Nominal GDP

25 Australia’s business & consumer confidence has faded but the decline is not as severe as that experienced in 2007-09 “GFC”

Source: Melbourne Institute , NAB Business survey , AMP Capital Investors

26 Australia’s retail sales are very subdued .

Australian consumers have curbed their spending activity….

Nominal Retail sales have averaged 3% per annum for the past 3 years.

This is a only a fraction of 6 % growth in the 5 years prior to the GFC.

For Australian retailers, there has been also significant challenges with the high A$ exchange rate as foreign travel + internet sales has seen reduced spending

Source: ABS , AMP Capital Investors

Australian Nominal Retail Sales

0

1

2

3

4

5

6

7

8

9

10

02 03 04 05 06 07 08 09 10 11 12

Average 6 % annual sales 2002 - 07

27 The RBA has recognised the labour market has “softened” ……

Australia’s jobs growth has slowed to a crawl…

The unemployment rate has risen to 5.4% in September which is the highest since April 2010.

RBA’s October statement recognises that “the labour market has generally softened somewhat in recent months”.

Source: ABS , AMP Capital Investors

Australian Interest Rate vs Employment

3

4

5

6

7

8

06 07 08 09 10 11 12

Cash rate(LHS)

0

1

2

3

4

5

Jobs growth % yoy (RHS)

28 Federal Budget for 2012 -13

Now aims to deliver a budget surplus of

A$ +1.1 billion in 2012-13 .

Given the final 2011/12 deficit was

A$ - 43.7 billion, this is a dramatic and

rapid tightening (circa 3% of GDP).

MYEFO has stated that “a package of savings worth A$16.4 billion in 2012-13 and over the forward estimates”. These “savings” include making large corporate tax receipts to be monthly rather than quarterly (A$ 8.3 billion over 4 years), private health insurance rebate cuts (A$ 0.7 billion billion), reducing the “baby bonus” (A$ 0.5 billion) and apprenticeship incentives (A$0.3 billion).

Australia's Federal Budget position

-60

-50

-40

-30

-20

-10

0

10

20

30

1996 2000 2004 2008 2012

A$b

+ Surplus

- Deficit in Underlying

Cash Balance

A$ billions Fo

rec

as

t

Source: Australian Treasury , AMP Capital Investors

29 There is scope for more interest rate cuts in Australia

considering the high lending rates & deposit rates

Source: RBA , AMP Capital Investors

Australian Interest Rates

2 3 4 5 6 7 8 9

10 11 12 13 14

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

Small Business Overdraft rate

Cash Rate

1 year Term

Deposit

Avg 2002-12 = 9.5 %

30 RBA views that A$ is “higher than might be expected ” given “decline in export prices” and the “weaker global outlook”

Source : Datastream , AMP Capital

Australian $ vs Nominal Interest Differentials

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

00 02 04 06 08 10 12-1

0

1

2

3

4

5

6Australian $ versus US

Dollar (lhs)

Australian Bank Bills -US LIBOR interest rates (RHS)

0.5

0.6

0.7

0.8

0.9

1.0

1.1

00 02 04 06 08 10 12100

200

300

400

500Australian $ vs Metal Prices

A$ vs US Dollar

(LHS)

Metal prices (RHS)

31 Key Points

Slow Global growth for the rest of 2012 and probably 2013: Key concern is Europe with the current recession + fragile financial system.

However America is more resilient with 2% economic growth & China at 7.5%

Global interest rates to remain low to offset tighter fiscal policy.

Reserve Bank should cut interest rates again given slow growth,

mild inflation , the high A$ + tighter Fiscal policy .

32 Australia : Keep Calm and Carry On ?

32 “The Age", Fairfax Newspapers, 26 January, 2012

33

Appendix

34 Global shares have been volatile on growth worries.

Australia should benefit from lower interest rates

Source: AMP Capital Investors

40

60

80

100

120

140

160

180

200

220

240

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

Australia - ASX 200

Global Shares MSCI World - Local

35

// 35

Both individual & institutional investors are cautious

Wisest place for savings

Source: Melbourne Institute, ABS 5655

0

10

20

30

40

50

60

92 94 96 98 00 02 04 06 08 10

Shares

Real estate

Superannuation

Deposits or pay debt

% response

Superannuation Funds cash weightings

4

6

8

10

12

14

16

92 94 96 98 00 02 04 06 08 10 12

Cash weighting

36 Global Shares are attractively priced

Australian and US Equity Market Valuations

8

10

12

14

16

18

20

Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

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

Australia

United States

Average for US

Average for Australia

1-Year Forward Price Earnings Ratio

37 Global Profits have stalled with Europe’s woes + subdued Q3 US earnings reports

38 Despite the US profit slowdown , the credit market and equity volatility measures are not ringing alarm bells

US Credit Spread vs Corporate Profits

0

1

2

3

4

5

6

90 94 98 2002 2006 2010

-40

-30

-20

-10

0

10

20

30

40

Moody BAA credit spread

(LHS)

Falling - Corporate

Profits growth(RHS)

+ Rising corporate profits % yoy (LHS)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

08 09 10 11 122

3

4

5

6

7

VIX Equity Option

Volatility(LHS)

US BAA Credit Spread (RHS)

39 Spain remains in a precarious position with falling economic activity, fiscal tightening and a struggling financial system.

Spain’s economy contracted by -0.3% in the September quarter and by – 1.6 % for the past year.

Spain’s Federal Government has set further budget tightening measures.

The Rajoy Government’s austerity measures include a wage freeze, a 9% cut to public spending and a VAT tax increase. These fiscal austerity measures aim to move the budget deficit from 6% GDP in 2012 towards 4.5% in 2013 .

Spain’s banking system “stress tests” identified that € 59.3 billion is needed to cope with an adverse scenario involving a 50% decline in land prices -5 % fall in GDP

Source : AMP Capital Investors

European Real GDP

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2009 2010 2011 2012-6

-5

-4

-3

-2

-1

0

1

2

3

4

Spain Real GDP annnual % change

European Real GDP

annual change

↓ Contraction

↑ Growth

40 IMF warns that Europe is vulnerable to “a downward spiral of capital flight , breakup fears and economic decline”

IMF 2012 Banking

estimates

Loan to Deposit

ratio

Non performing

loans %

Equity ratio *

Spain 142 5.6 4.9

Italy 176 10.7 5.2

Germany 98 3.5 2.2

Britain 100 7.5 4.2

US 71 4.8 7.1

Japan 73 2.2 2.8

Australia 113 1.3 4.4

* Equity ratio is tangible common equity to tangible assets

IMF Global Financial Stability , Oct 2012 , Table 2.2

41 US Fiscal Cliff scenarios

1) Status Quo

Obama as President

Senate control with Democrats

House of Reps is Republican

Fiscal tightening ≈ 0.6%- 1.3%

Nominal GDP

US Real GDP growth 2% to 2.5%

Limited impact on US Shares

& US Treasury Bond Yields

3) “Air Force 1” change

Romney as President

Senate control by Democrats

House of Reps is Republican

Fiscal tightening ≈ 3.7 % GDP

Recession (Real GDP falls 1%)

US Shares slump (≈ - 20%)

Treasuries rally strongly

FED expands QE3 program

2) Republican “clean sweep” of

Presidency & Congress

Fiscal tightening ≈ 1.7 % GDP assuming Bush tax rollover

US Real GDP growth ≈ 1.0 % US Shares slide , Treasuries volatile as China declared currency manipulator

42 India’s recent growth and inflation trends…

The IMF has sharply downgraded growth forecasts for 2012 and 2013. India’s Real GDP in 2012 has been downgraded to 4.9%. 2013 is now revised to 6.0%. India’s inflation remains stubbornly high and above the central bank’s 6% target.

India's Real GDP Growth

0

2

4

6

8

10

12

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

IMF Forecast

Source: IMF September 2012

India's CPI Inflation

0

2

4

6

8

10

12

14

16

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

IMF Forecast

Source: IMF September 2012

43 Global interest rates are likely to remain low

Source: Datastream, AMP Capital

0

1

2

3

4

5

6

7

8

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

Australia

Europe

Japan

US

%

44 Low Bond yields imply sedate medium term returns

10 Year Government Bond Yields by Rating

Source: Thomson Reuters, AMP Capital. Data at 30 September, 2012

3.2

1.8 1.4

1.8 1.6 1.8 1.3 1.6

0.5

1.9 2.0 2.2 1.8

2.4

3.6

0.8

5.3 5.5

4.6 4.8

Aus

tral

ia

Cana

da

Den

mar

k

Finl

and

Ger

man

y

Net

herl

ands

Sing

apor

e

Swed

en

Switz

erla

nd

Uni

ted

King

dom

Aus

tria

Fran

ce

Uni

ted

Stat

es

Belg

ium

N

ew

Zeal

and

Japa

n

Mex

ico

Spai

n

Irel

and

Ital

y

AAA AA+ AA AA- A- BBB+

45 Very low bond yields will mean low returns from bonds over the next 5-10 years

US 10 year bond yields at their lowest level ever

0

2

4

6

8

10

12

14

16

1860 1880 1900 1920 1940 1960 1980 2000

10 year bond yield, percent

0

2

4

6

8

10

12

14

16

18

20

1901 1921 1941 1961 1981 2001

10 year bond yield,

percent

Australian 10 year bond yields at their lowest since 1901

Source: AMP Capital Investors

46 Both America and the Netherlands 10-Year Government bond

yield has made record lows in 2012 (source : Deutsche Bank)

Deutsche Bank

47 US central bank is starting a new round of “quantitative easing” (QE3) which should be positive for asset prices

Source: US Federal Reserve , AMP Capital Investors

600

800

1000

1200

1400

1600

1800

2000

2200

2400

2600

08 09 10 11 12-3000

-2000

-1000

0

1000

2000

3000

S&P500 (LHS)

US Treasuries & mortgage backed securities held by the Fed, $USbn (RHS)

QE1

QE2

US quantitative easing and US shares

+56%

+30%

48

48

Source: Thomson Financial, AMP Capital

The mining boom is losing momentum

Retail sales are weak

Building approvals are soft

4

5

6

7

8

02 03 04 05 06 07 08 09 10 11 12

Unemployment Rate %

8

10

12

14

16

18

20

90 92 94 96 98 00 02 04 06 08 10 12

(dwelling, monthly '000s)

-5%

0%

5%

10%

15%

90 92 94 96 98 00 02 04 06 08 10 12

Retail Sales % yoy

-20%

-10%

0%

10%

20%

30%

40%

90 92 94 96 98 00 02 04 06 08 10 12 14

Estimates Fin year, % change

// 48

Australia’s economy is “multi speed”

And the labour market is soft

Mining investment is booming but other industry sectors are struggling

49 Australian Residential Mortgage Interest Rates

Source: RBA, AMP Capital Investors

Banks have raised their interest rates margins over the past 5 years

0

1 2

3 4

5 6

7

8

9 10

11

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

Standard variable mortgage rate

RBA official cash rate

Average since 2000 = 7.25%

Percent

Gap between mortgage rate and cash rate

50 Recent Australian house prices falls and high debt burdens have also weighed on consumer spending.

Source: Australian Bureau of Statistics, RBA,

Australian House Prices Percentage change to September 2012

ABS Quarterly AnnualSydney 0.3 1.3Melbourne 0.2 -2.3Brisbane 0.4 0.3Adelaide -0.6 -1.1Perth 1.8 4.4Hobart 0.2 -2.2Darwin -0.5 8.2Canberra -1.1 0.4 AUSTRALIA 0.3 0.3 ABS 6416

Australian House Prices vs Household Debt

50

75

100

125

150

175

93 95 97 99 01 03 05 07 09 11100

150

200

250

300

350

Household Debt to Disposable Income

(LHS)

Australian Nominal

House Prices (rebased to 1993

= 100 RHS)

51 RBA Governor Stevens views that house prices “do not constitute definitive evidence of an imminent slump”

“ historical or international comparisons, to the extent they can be made, do not constitute definitive evidence of an imminent slump. ”

“ …. the housing market bubble, if that's what it is, seems to be taking quite a long time to pop – if that's what it is going to do. The ingredients we would look for as signalling an imminent crash seem, if anything, less in evidence now than five years ago.”

RBA Governor Glenn Stevens, July 24 , 2012

52 RBA views Household sector is “coping well with its debt levels”

RBA FSR: Australian Household Balance Sheets > Australia’s household sector “has continued to consolidate its

financial position in 2012”.This is evident in a higher savings rate, “actively shifting their portfolios towards more conservative assets such as deposits” and “household borrowing has also slowed in recent years”.

> The RBA FSR notes that “many households are choosing to repay their existing debt more quickly than required”. Around 50% of “borrowers are repaying their mortgages ahead of schedule and are thereby building up buffers”. These “buffers” are “estimated to be equivalent to around 1½ years of scheduled repayments (principal plus interest)”.

> Accordingly the RBA views that “the household sector has been coping well with its debt levels”. Australian housing loans which are ‘non-performing’ with payments more than 90 days overdue “have eased somewhat since its peak in mid 2011, to be a little over 0.6%”.

53 Commodity price forecasts being cut as demand softens and supply rises

BREE forecasts for the September quarter > The Federal Government’s Bureau of Resource and Energy

Economics (BREE) have released their commodity forecasts. BREE is expecting weaker export revenues next year for Australia’s two largest commodity exports.

> For Iron Ore which is Australia’s largest commodity export by value, BREE expects that prices will average US$101 per ton in 2013 compared to US$126 in 2012. Export volumes should rise by 8%. Given the larger price declines, the total value of iron ore exports is expected to fall by -12% to A$ 53 billion in 2013.

> Coking coal (or Metallurgical coal) is also expected to see lower prices (-14%) but rising production (+6%) for 2013. Accordingly, Australian coking coal export values are forecast to fall by -8% to A$ 29 billion in 2013.

BREE forecasts

2012 2013 % annual change

Iron Ore prices

US$ 126 US$ 101 - 20%

Iron Ore Export volume

483 million tonnes

528 million tonnes

+ 9.3 %

Coking

Coal price

US$ 211 US$ 183 -14%

Coal exports

volumes

151 million tonnes

160 million

tonnes

+6 %

54 Treasurer Swan still committed to delivering a 2012/13 budget surplus

Mid Year Economic and Fiscal Outlook (MYEFO). • This update of the Federal Government’s Budget indicates a

A$20 billion fall in tax estimates given lower commodity prices. This tax decline threatened the 2012-13 A$ 1.5 surplus forecast.

• Treasurer Wayne Swan announced “a package of savings worth A$16.4 billion in 2012-13 and over the forward estimates”. These “savings” include making large corporate tax receipts to be monthly rather than quarterly (A$ 8.3 billion over 4 years), private health insurance rebate cuts (A$ 0.7 billion), reducing the “baby bonus” (A$ 0.46 b) and apprenticeship incentives (A$0.27 b).

• There have been mild Australian economic growth downgrades for 2012-13 (MYEFO at 3% compared to May’s Budget 3.25%). Business investment is forecast to be robust (+11% growth) while the unemployment rate is stable at 5.5% for 2012-13.

> Even allowing for these “savings”, a budget deficit of A$ 15 billion is more likely in 2012-13 than this new Government target of a marginal A$ 1.1 billion surplus. Slow global growth, lower commodity prices and a softer labour market will all weigh against a budget surplus being achieved this financial year.

Federal Budget

2011- 2012

outcomes

2012-2013

estimates

2013-2014

estimates

Budget balance

A$ - 43.7 billion deficit

A$+ 1.1

Billion

A$ 2.2

Billion

Real GDP growth

3.4 % 3.0 3.0

Business Investment

21.3 % 11.0 6.5

CPI Inflation

1.2 % 3.0 2.25

Jobless Rate

5.1 % 5.5 5.5

55 Australian headline inflation pressures revive with carbon tax but the statistical inflation measures are at midpoint of RBA’s 2% - 3% range

Consumer Price Index (CPI) for the September quarter > Australia's headline inflation result shows some significant price

pressures. However this appears mainly due to the carbon tax. Given annual inflation remains at the lower end of the RBA’s 2% - 3% inflation target range, there is a solid case for another RBA interest rate cut of 0.25% before the end of 2012.

> Australia's Headline CPI recorded a large quarterly increase of +1.4 %. The "most significant price" rise was the +15.3 % surge in electricity prices which can be largely accounted for by the carbon tax. However annual Headline CPI inflation is only 2.0% and is still at the lower end of the RBA's 2 % - 3 % target range.

> The statistical underlying inflation measures also indicate that Australia's price pressures are contained. The Trimmed Mean rose by + 0.7% qoq and the Weighted Median by + 0.8 % qoq. Combining these statistical measures shows annual core inflation running at around 2.5%.

Australian Consumer Price Index

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

06 07 08 09 10 11 12 13

Annual % Change

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Headline CPI

Average statistical measures

Trimmed Mean + Weighted Median

RBATarget band