Economic Update and Outlook Sze-Young Lim Senior Economist Australian Industry Group

Key points State of the global economy Economic conditions in Australia Patchy economic growth in Australia: further evidence from Ai Group’s industry performance indexes Performance of Manufacturing Index Performance of Services Index Performance of Construction Index Concluding comments

State of the global economy Global economic recovery underpinned by robust growth in emerging economies

State of the global economy Significant increases in public debt raise doubts of fiscal sustainability

State of the global economy Increased risk of sovereign debt default in Europe 200 400 600 800 1000 1200 1400 1600 1800 Jan - 10 Apr Jul Oct 11 Greece Ireland Portugal Latvia Romania 50 100 150 250 300 350 450 Spain Belgium Italy Finland Netherlands Sovereign bond yield spreads over German Bunds (basis points)

State of the global economy Contagion likely to arise from a European sovereign debt default Adverse impact on financial stability

State of the global economy European economy set to slow

State of the global economy Debt overhang in the US extends to households Fiscal austerity measures and household deleveraging weigh on economy

State of the global economy Subdued housing market and stock market volatility to curtail private consumption in the US

State of the global economy Consumer confidence in the US at crisis lows

State of the global economy Employment growth stalling in the US and Euro area Unemployment rate remains high

IMF Economic Growth Forecasts (September 2011) 2009 2010 2011 2012 World output -0.7 5.1 4.0 (-0.3) (-0.5) US -3.5 3.0 1.5 (-1.0) 1.8 (-0.9) Euro area -4.3 1.6 (-0.4) 1.1 (-0.6) Germany -5.1 3.6 2.7 1.3 (-0.7) France -2.6 1.4 1.7 Italy -5.2 0.6 0.3 Spain -3.7 -0.1 0.8 (0.0) UK -4.9 Developing Asia 7.2 9.5 8.2 (-0.2) 8.0 China 9.2 10.3 (-0.1) 9.0 India 6.8 10.1 7.8 7.5

Economic conditions in Australia Australia’s economy rebounded in the June quarter Overall domestic demand remains soft Dwelling and non-dwelling construction weakened due to weakness in housing and construction markets Recent pick-up in household spending may not be sustainable Labour market has softened Challenging business conditions in non-mining sectors of economy Heightened global economic uncertainty Strong Australian dollar Persistent wage pressures Increased import competition Uncertainty over carbon tax Domestic demand could remain soft in the near term while exporters continue to be inhibited by the strong Australian dollar

Economic conditions in Australia Private consumption remains sluggish

Economic conditions in Australia Employment growth in Australia slowing

Economic conditions in Australia Strong Australian dollar

Economic conditions in Australia Strong Australian dollar weakens manufacturing exports

Economic conditions in Australia Increased import competition from emerging economies Note: ASEAN comprises Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

Economic conditions in Australia Further evidence of patchy economic growth Challenging business conditions in manufacturing, services and construction sectors Manufacturing sector: Ai Group’s Australian PMI

Economic conditions in Australia Further evidence of patchy economic growth Services sector: Ai Group’s Australian PSI

Economic conditions in Australia Further evidence of patchy economic growth Construction sector: Ai Group’s Australian PCI

Concluding comments Heightened uncertainty in the global economic outlook following sovereign debt problems in Europe and the US Increased downside risks to the global economic outlook Domestic demand could weaken following increased global economic uncertainty and heightened risk aversion in financial markets Labour market has softened and private consumption remain sluggish Patchy economic growth: non-mining sectors risk being hollowed out amid the resources boom Failure to build a balanced and diversified economy could cause the economy to be vulnerable to swings in commodity prices Governments, businesses, labour unions and industry groups need to cooperate and work closely