Growth OK Cautious consumers

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1 Growth OK Cautious consumers Not For Profit Conference Adelaide October 1 Michael Workman Senior Economist Commonwealth Bank of Australia - (61) michael.workman@cba.com.au 1

2 Important Information This advice has been prepared without considering your objectives, financial situation or needs, and before acting on the advice, you should consider its appropriateness to your circumstances. Commonwealth Bank of Australia ( CBA ) as a provider of investment, borrowing and other financial services undertakes financial transactions with many corporate entities in Australia. This may include any corporate issuer referred to in this report. For US and US investors: If you would like to speak to someone regarding the subject securities described in this report, please contact Commonwealth Australia Securities LLC (the US Broker-Dealer ), a broker-dealer registered under the U.S. Securities Exchange Act of 193 (the Exchange Act ) and a member of the Financial Industry Regulatory Authority ( FINRA ) at 1 (1) This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN AFSL 39("the Bank") and distributed in the U.S. by the US Broker- Dealer. The Bank is not registered as a broker-dealer under the Exchange Act and is not a member of FINRA or any U.S. self-regulatory organization. Commonwealth Australia Securities LLC ( US Broker- Dealer ) is a wholly owned, but non-guaranteed, subsidiary of the Bank, organized under the laws of the State of Delaware, USA, with limited liability. Please see further disclaimers at the back of this document. Please also view our website at for a more detailed disclaimer.

3 Agenda Australian growth outlook: NFP income sources & risks Growth drivers Employment & population Consumer spending & leakages. Interest rates & Housing Prices & lending. Currencies: USD to stay weak, AUD above parity. 3

4 Not For Profits Income Sources % Gov'ts NFP INCOME SOURCES (% of total) 1 3 About 6k NFPs. $1bn turnover? Services sales Donations %pa % economically significant. CBA TEI & THE CASH RATE %pa 8 Cash rate (lhs) Sales are major income source (%). Goods sales Membership Affiliates Investments Other Rents ABS 816 In 6/7 $76bn In 11/1 $1bn?.7.1 Governments are second biggest. - Donations about 1% of income.. - CBA TEI* (adv 9 mnths,rhs) * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 -$ Jul- is average personal donation. Income tax deductions claimed were $1.8bn in 6/7.

5 Not For Profits Shares of Incomes by Sector % Ed'n & Res Cult & Rec Social Serv Environ. et al. Other Health Hospitals Bus. & Unions SHARES OF INCOME BY SECTOR (% of total) 1 1 In 6/7 $76bn %pa In 11/1 $1bn? CBA TEI & THE CASH RATE CBA TEI* (adv 9 mnths,rhs) Cash rate (lhs) Jul-97 Jul-99 Jul-1 Jul-3 Jul- Education and research groups %pa 8 Services receive a rising share of * Deviation from trend receive largest (%) share of income. consumer - incomes Religion ABS 816

6 Not For Profits Jobs Across Sectors % Social Serv Ed'n & Res Environ. et al. Cult & Rec Health Hospitals Religion Bus. & Unions EMPLOYMENT SHARE BY SECTOR (% of total) 1 3 %pa In 6/7 9k CBA TEI & THE CASH RATE Cash rate (lhs). CBA TEI* (adv 9 mnths,rhs) * Deviation from trend 3.8 In 11/1 Jul-97 Jul-99 Jul-1 Jul-3 Jul- 1 million? Employment dominated by social services and education and research %pa 8 groups. Baby boom underway that will place more - pressure on education. - Greying of population means more -8 demand for social and health services. ABS 816 Other 6

7 Australia & The Global Economy Asian protection %pa 1 REAL GDP (annual % chg) %pa China Australia %pa CBA TEI & THE CASH RATE 6 Cash rate (lhs) %pa GFC EU Japan US.7.1 UK CBA TEI* (adv 9 mnths,rhs) -6 * Deviation from trend Jul-97 Jul-99 Jul-1 Jul-3 Jul Jun-8 Jun-9 Jun-1 Jun-11 Jun-1-9 Australia s GDP growth highly correlated to China s growth. 7

8 Australia: 1 GDP: 3.3% 6 %chg AUSTRALIA: GDP %chg CBA forecast 6 STRONGEST GROWTH OUTLOOK Iron ore, coal & LNG mining, construction & exports. Mining construction, equipment & services. Infrastructure roads, rail, water, power, utilities. -related construction, engineering & services. Outbound tourism & internet buying. 3 3 Annual Qtr Sep 1f =.8% Jun-1 Jun-11 Jun-1 Jun-13 MODERATE TO LOW GROWTH OUTLOOK Staples groceries, food, hardware Cafes, restaurants, communications Health, defence & education. Commercial construction, rentals (?) & fit-outs Discretionary retail clothing/shoes, cosmetics, a/visual. Manufacturing metals & wood related. New car sales. Housing construction, alts & adds. SECTORS WITH DOWNSIDE RISK Retail exposed to internet-based alternatives Manufacturing local car industry, textiles Domestic & Inbound tourism. Some education. 8

9 Growth: Mining v Rest The patchwork economy Index ECONOMIC ACTIVITY Source: RBA, CBA (1/11 = 1) Index Mining GDP GDP Non-mining GDP 1/11 11/1 1/ Consensus has trend GDP growth over next few years and resources accounting for ½-⅔ of that growth. Implications: mining-related economy to expand at 16%pa over next two years; non-mining economy to grow at just 1½%pa if overall economy to be kept within the speed limits ; high AUD to keep driving structural change; AUD exposed sectors like tourism, education, manufacturing, and retailing to keep underperforming. 9

10 Inflation at 1.%...below 3% in 1/13. INFLATION % (annual % change) % % 6 INFLATION (annual % change) % 6 Local services Underlying inflation 3 3 RBA target Headline inflation 1 Mar- Mar-6 Mar-8 Mar-1 Mar-1 CPI running at 1.%pa & underlying measures at.%pa. CPI has 8% goods and % services. 1 - Mar-6 Mar-8 Mar-1 Mar-1 AUD effected inflation at -.%pa. Local (mainly services) inflation at 3.%pa. AUD influenced prices - 1

11 Wages: Up 3.7%pa. AUSTRALIAN WAGES % % (annual % change) 3 Private Public Sep-98 Dec-1 Mar- Jun-8 Sep-11 Wages growth near 3.7%pa. Total 3 Mining Mfg Utilities Construct. Wholesale Retail Accom. etc Transp Communic. Fin & insur Rent & Hiring Prof Serv. Admin Serv. Gov't Education Health Cult & rec Pers & other WAGE PRICE INDEX (% annual growth) Total = 3.7% Business surveys suggest slower wages growth coming as unemployment rate rises. 11

12 Jobs: slowing..unemployment rate to rise, except in WA. ' 8 EMPLOYMENT Full-time (lhs) ' % ' 1. LABOUR MARKET Unemployment rate (lhs) Part-time (rhs) 7 Jan-9 Jan-1 Jan-11 Jan-1 Jan Employment growth (rhs) Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Jobs growth expected to slow to 1k/mth, mainly in Victoria & NSW. National unemployment rate likely to rise to 6.6% in late 1. 1

13 Jobs - growth by sector. JOBS GROWTH BY SECTOR 's Mining Health Prof serv Education PBS Communic Manufact Wholesale Agri Rental EGW Cult Accomm Pers Fin & insur Admin Retail Transp Gov admin Construct Year to August k Gains are in Mining, Health & Resources Government Spending on services: health, education, entertainment, property. Losses are in sectors exposed to: High AUD Weak consumer spending Eg tourism, transport, manufacturing, retail & Construction downturn. 13

14 Population: National 1.%...WA 3.%. %pa ABS311 POPULATION GROWTH (annual % change) Qld Vic NSW WA %pa Tas.. Jun- Jun- Jun- Jun-6 Jun-8 Jun-1 Jun-1 SA 's ABS POPULATION GROWTH Moving annual total Net Overseas Nat Increase Dec-97 Dec- Dec-3 Dec-6 Dec-9 National population growth at 331k (1.%pa) gives underlying housing demand of 17k. WA s population growth strong at 3.1%pa. Boosted by interstate & overseas migration. 1

15 Population: Baby Boom & Ageing BABY BOOM ' (Births, annual total) ' 3 3 AGE GROUPS % (% share of total population) % yrs lhs) -1yrs (rhs) 7+ yrs (lhs) POPULATION GROWTH ' ' (rolling annual total) Source: ABS Cat. No Natural increase Net migration ABS Cat. No Jun-9 Jun-9 Jun-98 Jun- Jun-6 Jun-1 Jun-8 Jun-88 Jun-9 Jun- Jun-6 Jun-1 Jun-8 Jun-88 Jun-9 Jun- Jun-6 Jun-1 Baby boom will lift demand for education services over next 1 years. Aged care demand rising as proportion of population over 7 years old rises (6% to 9%?). Higher net migration driving population growth. 1

16 Consumers: Cautious About Spending Ability to spend is OK Household incomes rising by %...with wages up 3.% and jobs up 1.%. BUT..Wealth position: house prices and shares are weak. Strong growth in services, internet-based retail, & overseas travel. Willingness is in doubt Consumer or retail caution prevails. Households still saving more. Bad news more often than goods. Especially on Europe and jobs. Government handed out $.8bn in May & June, plus tax cuts. Spending leakages were also important Power costs, health and rents up. Mortgage rates lower. Petrol flat. Olympics are good. or bad for retail? More overseas travel, less inbound tourism. Both mean less local retail. Higher AUD means falling imported goods prices. 16

17 Confidence: Not Happy, Jan. Are we in Athens yet? Index CONSUMER SENTIMENT Index Index 3 CONFIDENCE & CONDITIONS (smoothed) Index 3 1 Personal Finances 1mo ahead Time to buy a dwelling 1 1 Business conditions Business confidence Consumer sentiment -1-1 Source: Melbourne Institute 6 Jul-6 Jul-7 Jul-8 Jul-9 Jul-1 Jul-11 Jul-1 6 Source: NAB -3 Jan-3 Jan- Jan-7 Jan-9 Jan-11-3 Consumer confidence weak are more rate cuts required? Business confidence also poor. Big business worse than small business. 17

18 Consumers Only Retail Weak H'HOLDS INCOMES & SPENDING (June 8 = 1, current $) Household income after tax incomes Non-retail RETAIL v NON-RETAIL % % (annual % change, curr $) Cash handouts Non-retail Gov't cash handouts Retail Retail Jun-8 Jun-9 Jun-1 Jun-11 Jun-1 Jun-13 ABS Jun-8 Jun-9 Jun-1 Jun-11 Jun-1 Since 8, household incomes up 3%, spending on non-retail %, retail 18%. Consumer spending growth on services strong than on goods. National incomes to have weaker growth as export commodity prices fall. 18

19 New Car Sales - Buoyant 's AUST. NEW CAR SALES (3mth moving average) Commercial lhs SUVs, lhs Cars, rhs 's 6 Jan-9 Jan-1 Jan-11 Jan-1 Jan-13 Total sales headed for 1.7 million in 1. SUVs are the big growth segment, up 3% on a year ago. They need BIGGER, more expensive tyres. Imports taking larger share (8%) of market. Car exports facing higher AUD. Major threats to local industry are higher AUD, rising domestic cost base, lower offshore production costs, imported fuel-efficient & hybrid cars, changing consumer preferences. 19

20 Consumer Caution leakages? More travel, higher bills. 's 7 AUD/USD & TOURISM AUD/USD, rhs 6 6 AUD/USD Departures, lhs.8 Arrivals, lhs.7 UTILITIES SPEND % ($bn & % of after tax income) $bn/qtr 3... Spending as % of after tax income,,lhs Spending,rhs 7... % (annual % change) % RENTS, UTILITIES & RATES Purchase, rates & maintenance Utilities Rents 1 8 Jan-9 Jan-1 Jan-11 Jan Mar-81 Mar-87 Mar-93 Mar-99 Mar- Mar-11. Sep- Sep- Sep-6 Sep-8 Sep-1 Sep-1 Overseas departures were 691k in June, up 8%pa. % above arrivals. Higher charges in some areas are reducing discretionary spending ability. Utility (electricity, gas & water) prices are % higher over the past years.

21 Consumer Caution deposits to $7bn, up 8% pa. 1 CREDIT CARD ACTIVITY (%pa smthd) source RBA 1 $bn HOUSEHOLD ASSETS $bn 8 SAVING RATIO % % 9 Balances 9 Dwellings, lhs Deposits, rhs Total Accounts Avge balance -3 per card Jan-8 Jan-9 Jan-1 Jan-11 Jan RBA Mar-7 Mar-8 Mar-9 Mar-1 Mar-11 Mar-1 Credit card usage rising slowly..debit cards as well. Higher cash deposits shows precautionary savings rising firmly. Saving ratio at 1%, highest since 198s. - Sep-7 Sep-8 Sep-88 Sep-96 Sep- - 1

22 Australian Interest Rates Lower INTEREST RATES 9-1 % % Basic mortgage rate Variable mortgage rate %... RBA CASH RATE PRICING % mth Cash rate 3 months ahead Cash 3 yr swap Jan-9 Jan-1 Jan-11 Jan-1 Jan Source: Reuters 1 months ahead. Feb 1 Jun 1 Nov 1 Apr 11 Aug 11 Jan 1 Jun RBA cut cash to 3.%, more coming. Markets see.% cash in mid 13. Cash rate has averaged.1% since.

23 Interest Rate Forecasts Interest rates Cash Rate 9 Day Bank Bill 3 Year Swap Year Swap 1 Year Swap 1 Year Bond Mar Jun Sep Dec 1(f) Mar 13(f) Jun 13(f) Sep13(f) Dec 13(f)

24 House prices flat. Lending recovering? HOUSE PRICES $s CBA median house price $s 9 9 's AUST. HOUSING LOANS* $bn 16 8 Syd 8 7 Perth 7 Value, rhs Bris Adel 3 Melb Hob 3 3 Number, lhs 8 Mar- Mar-8 Mar-1 Dec-6 Dec-1 * ex refinancing, 3mth avge Jan-8 Jan-9 Jan-1 Jan-11 Jan-1 Median house price for Melbourne, on CBA data, was $61k, in June 1, up 3%pa. Lending growth is relatively weak, but showing a slight lift. Low interest rates will slowly lift borrowing & turnover.

25 USD The AUD cycles December 1983: AUD floats at USD.99 AUD peaks at USD.963 on 16 March 198 AUD floats 1 Dec83 at USD.99 March 1983: Labor Party wins election. 8 March 1983: AUD devalued 1% to USD.89 Strong USD & AUD falls Rising interest rates and higher commodity prices 6-8 February 198: MX Missile Crisis 1 May 1986 Keating Banana Republic comment on radio Commodity prices at record lows 1 February 1989: Keating comments talk down AUD 8 July 1986: Keating changes foreign investment rules and RBA raises rediscount rate to 16%. AUD hits record low of USD.71 during day and closes at USD.61 October 1989 : Second downgrade of Sovereign debt rating Kuwait invaded by Iraq Aug 9 August 1991: Failed Russian coup Oil prices spike in Gulf War I from 18% to.7% Commodity prics 19 December 1991: falling from June 97 Keating becomes Prime Minister October 1987: Stockmarket crash 6 February 199: in Australia One Nation September 1986 : Statement First downgrade of Australian sovereign debt rating Federal election dates: March Dec July 1987 March March March Oct Nov 1 9 Oct World bond Nov 7 markets sell-off on 1 August 1 US inflation fears March 1996 Howard Gov t elected Interest rates cut 1 times from Jan 199 to Dec 1993, October 1993: Metals prices reach record lows. AUD low of USD.61 S&P Sovereign Debt Rating changes AA+ 6 Dec 86 AA Oct 89 AA+ 17 May 99 AAA 17 Feb 3 Average Annual Trading Range AUD/USD, : 13USc June 1997: Asia crisis begins, THB floats RBA lifts rates 3 times from.7% to 7.%, from July to Dec 199. Commodity prices rising July 1998: Metals prices reach record lows. AUD low of USD.81 Japan in recession: JPY & AUD weaken May 1999 S&P Upgrade Interest rates cut times from July 1996 to July 1997, from 7.% to.% Commoditie s recover April 99 YK related selling Oct 99 IMF packages for Asia: Markets rally, Jan 98 Russian debt crisis Ruble devalued Gold falls to USD73/oz AUD low of USD.3 on 8 Aug 99. LTCM on 3 Sept 98 RBA lifts rates: Nov 1999, Feb, April, May & August WTC 11 Sep 1 AUD dip,.8 RBA cash rate changes Mar. 3 May 6.7 Aug 6. 6 Nov 6. 8 Aug Nov 6.7 Feb 8 7. Mar 7. 3 Sep Oct 6. Nov. 3 Dec. Feb Apr 3. 7 Oct 9 3. Nov 3. Dec Mar 1. 7 Apr 1. 3 May 1. 3 Nov Nov Dec 11. May June 1 3. March 3 S&P upgrades Australia to AAA RBA lifts rates in May & June AUD falls to USD.7 as USD rises. US stockmarkets fall. Oil hits $37/bbl AUD low of USD.77 on April 1. Jan-8 Jan-88 Jan-9 Jan-96 Jan- Jan- Jan-8 Jan-1 USD weakens as US shares fall 9 Oct Howard Gov t re-elected RBA lifts rates Nov 3 & 3 Dec. 3 Commodity prices rising Oil prices spike until Gulf War ends 1 April 3 Uridashis lift AUD Oct Moody s upgrades Australia to Aaa Oil prices hit $1/bbl Mineral commodity prices at yr highs Nov 7 Rudd Gov t elected USD weaker Fed cuts rates US sub-prime Problems Aug 7 on AUD collapses as USD rises on Sub-prime crisis Commodity prices slump. Oil prices hit $7/bbl Aug 7 RBA cuts rates 3 Sep 8, to 8 Apr 9 RBA lifts rates Oct 9 to Nov 1 Sep 8 Lehman Bros collapse, US Fed cuts to zero, Dec 8. AUD low of USD.61 on 7 Oct 8 AUD at 3 year high of 1.18, 7 July 11. USD falls as Fed does Quantitative Easing, Mar 9 USD Commodities US & EU growth & shares data weakens, recover USD up. strongly RBA cuts rates on 1 Nov, 6 Dec. 11, then May & Jun

26 AUD Forecasts peak in December? Exchange ratesaud/usd AUD/JPY AUD/EUR AUD/GBP AUD/NZD AUD/CHF Mar Jun Sep Dec 1(f) Mar 13(f) Jun 13(f) Dec 13(f) Dec 13(f)

27 CBA Australian Economic Forecasts - October 1 Fiscal Years Calendar Years 8/9 9/1 1/11 11/1 1/13 13/ (a) (a) (a) (a) (f) (f) (a) (a) (a) (a) (a) (f) (f) Economic Activity Private final demand Of which: Household spending Dwelling investment CBA TEI -.& THE CASH.8 RATE Business investment %pa %pa Public final demand Cash Domestic final demand rate Inventories (contrib to GDP) (lhs) GNE Exports Imports Net exports (contrib to GDP) GDP Prices & Wages. - CBA TEI* CPI (adv 9 mnths.6,rhs) * Deviation from trend AWOTE..6. Jul-97. Jul-99 3.Jul-1 Jul Jul Underlying CPI WPI Real h/hold disposable income Labour Market Employment Unemployment rate External Accounts Current Account: $bn % of GDP

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GDP +3% in 2012 Interest rates lower AUD above parity

GDP +3% in 2012 Interest rates lower AUD above parity GDP +% in 1 Interest rates lower AUD above parity Sydney 1 October 1 Michael Workman Senior Economist Commonwealth Bank of Australia - (1) 9118 119 michael.workman@cba.com.au www.research.commbank.com.au