ABC Global Research Asian Economics Paul Bloxham Chief Economist (Australia and New Zealand) HSBC Bank Australia Limited +61 (2) Australia in 2012/13: Will the luck continue? July 2012 View HSBC Global Research at: Issuer of report: HSBC Bank Australia Limited Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and in the Disclaimer, which forms part of it

Company Logo Delete grid from slide master 2 Lucky country: Australia’s last recession ended 20 years ago Source: ABS; HSBC estimates

Company Logo Delete grid from slide master 3 Six macro themes for Australia in 2012/13 1) ‘Elephant in the room’ – Global risks continue to dominate the landscape 2) ‘Mining boom rolls on’ – Two-thirds of GDP growth is mining investment 3) ‘AUD and Dutch disease’ – Has held down inflation, but effects to wear off 4) ‘Deleveraging continues’ – Happening at the best time: when the economy is growing 5) ‘Productivity challenge’ – The issue should become more prominent in 2012/13 6) ‘Conventional policy works’ – Monetary policy works and there is fiscal room to move

Company Logo Delete grid from slide master 4 1.1) ‘Elephant in the room’ – Europe is straining under the weight of debt Source: IMF

Company Logo Delete grid from slide master 5 1.2) Part of the challenge is the major economic divergences Source: Thomson Reuters Datastream

Company Logo Delete grid from slide master 6 1.3) Unemployment rates are moving in the wrong directions Source: Thomson Reuters Datastream

Company Logo Delete grid from slide master 7 1.4) Eurozone is showing inflation divergences *Ireland, Greece, Spain and Portugal (GDP weighted average) Source: Thomson Reuters Datastream

Company Logo Delete grid from slide master 8 1.5) Timely indicators for Europe have stabilised, but are still weak Source: Eurostat and HSBC

Company Logo Delete grid from slide master 9 1.6) US also faces big challenges Source: Thomson Reuters Datastream

Company Logo Delete grid from slide master ) US fiscal austerity is a heavy drag on economic growth Source: Bureau of Economic Analysis

Company Logo Delete grid from slide master ) But recent global growth has been due to emerging economies Source: IMF, HSBC estimates

Company Logo Delete grid from slide master ) Asia output growth has become less about exports in recent years Source: CEIC

Company Logo Delete grid from slide master ) China’s PMI has spent seven months below its breakeven level Source: HSBC

Company Logo Delete grid from slide master ) Chinese fixed asset investment slowed, but are expected to hold up Source: CEIC, HSBC

Company Logo Delete grid from slide master ) China’s public housing should buffer the construction slowdown Source: CEIC, HSBC Completed floor space of residential housing

Company Logo Delete grid from slide master ) Still expect strong medium-term demand for commodities Source: IMF, HSBC

Company Logo Delete grid from slide master ) Demand for energy expected to continue to be solid Source: IMF, HSBC

Company Logo Delete grid from slide master ) Australia’s trading partner growth is solid, but risks are to the downside Source: ABS, CEIC, RBA, HSBC

Company Logo Delete grid from slide master ) Credit to GDP ratio now higher than at the 1997 peak Source: CEIC, HSBC

Company Logo Delete grid from slide master ) ‘Mining boom rolls on’ – investment is rising very strongly Source: ABS, RBA, HSBC

Company Logo Delete grid from slide master ) Value of pipeline of advanced projects is substantial Source: BREE, HSBC

Company Logo Delete grid from slide master ) Commodity prices have peaked, but are still around historical highs Source: RBA, HSBC

Company Logo Delete grid from slide master ) Australian business conditions are a bit below average Source: Thomson Reuters Datastream, NAB

Company Logo Delete grid from slide master ) ‘AUD and Dutch disease’ – AUD rose sharply in 2009 and 2010 Source: RBA

Company Logo Delete grid from slide master ) Appreciation has held down inflation, but the effect should wear off Source: ABS, RBA

Company Logo Delete grid from slide master ) High AUD has seen big net outflows of tourists Source: ABS

Company Logo Delete grid from slide master ) Tourist outflow and online sales have been holding back retail sales Source: ABS

Company Logo Delete grid from slide master ) Employment is weakest in exchange rate-sensitive industries Source: ABS, HSBC

Company Logo Delete grid from slide master ) ‘Household deleveraging continues’ – saving is high Source: ABS, RBA

Company Logo Delete grid from slide master ) Household credit growth has slowed in recent years Source: ABS

Company Logo Delete grid from slide master ) Households are paying down debt

Company Logo Delete grid from slide master ) Household caution has put downward pressure on house prices Source: RP Data

Company Logo Delete grid from slide master ) But we remain unconcerned about a large house price decline Source: HILDA, RBA

Company Logo Delete grid from slide master ) Housing loan arrears are low

Company Logo Delete grid from slide master ) The unemployment rate is still historically low, despite rising recently Source: ABS

Company Logo Delete grid from slide master ) Signs of labour market improvement Source: ABS

Company Logo Delete grid from slide master ) Housing prices have grown in line with income for almost a decade Source: RP Data / Rismark

Company Logo Delete grid from slide master ) ‘The productivity challenge’ – can’t keep growing without productivity Source: ABS

Company Logo Delete grid from slide master ) Commodity prices have peaked, which means income boost easing Source: ABS

Company Logo Delete grid from slide master ) Actual productivity growth has been very weak Source: ABS, HSBC

Company Logo Delete grid from slide master ) Growth has been driven by working harder, not necessarily smarter Source: ABS, HSBC

Company Logo Delete grid from slide master ) Underinvestment in infrastructure is pushing up the cost base Source: ABS

Company Logo Delete grid from slide master ) The sustainable rate of GDP growth has come down Source: ABS, HSBC

Company Logo Delete grid from slide master ) Unit labour cost growth has been high, but is easing Source: ABS

Company Logo Delete grid from slide master ) RBA’s inflation forecasts assume a pick-up in productivity Source: ABS, RBA

Company Logo Delete grid from slide master ) ‘Conventional policy works’ – Interest-rate sensitive sectors will get a boost Source: RBA

Company Logo Delete grid from slide master ) Despite a higher margin between RBA and effective rates Source: RBA

Company Logo Delete grid from slide master ) Government faces big task to meet budget plans Source: Federal Treasury

Company Logo Delete grid from slide master ) Biggest fiscal contraction since the 1950s Source: Federal Treasury

Company Logo Delete grid from slide master ) Net debt position still looks healthy Source: Federal Treasury

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