1. 1 Alan Oster - Group Chief Economist Australian Outlook – where to now post the floods

2. 2 Key issues International Some encouraging news re the USA and large Europeans But Japan still struggling and UK hit by new weakness (weather / policy) And sovereign risk still a concern in Europe China India and Non Japan Asia still powering growth New focus on rising inflation – especially food Australia What damage has floods etc done What is the growth path from here – timing and speed of recovery process Implications for dual speed economy, capacity shortages Inflation and rates

3. 3 But even the disruption effects can be very large NAB has run a special floods survey Suggests across Australia in January revenue and output loses were around 5% and 6% respectively. In excess of 10% in Qld On duration around 80% expected to be back to pre - flood activity within 4 weeks Together means output loss of 2.7% in Q1 in the market economy (78% of the total economy). Or around 2% in the total economy Then need to add back govt assistance and other private sector responses. Overall indicates a deduction from recorded GDP of around 1½% relative to pre flood expectations.

4. 4 And are some issues that complicate assessments. Which will affect peoples balance sheets and attitudes to spending etc There are tails to the length of disruption And insurance cover not 22% beyond 4 weeks great

5. 5 That said we expect around + ¾% points additional growth in GDP coming into the rest of 2011 Reconstruction: -About $3¼ bn reconstruction spend -And private sector rebuild and restocking Recovery in mine production (rebuilding stocks) Agriculture gains (water allocations & subsoil moisture) Growth to accelerate to around 4% per annum from mid 2011 So story really about timing of growth – albeit during calendar year 2011 down ½ % on pre-flood expectations.

6. 6 Business Confidence eroded in mid 2010 but fell significantly in Dec– especially in Qld. January rebound saying things are past their worse and will improve after a temporary hit to activity. Business confidence (s.a. net balance

7. 7 And the expected hit to activity arrived. Not just Qld – but clearly worse there. Business conditions (s.a. net balance) Capacity utilisation (n.s.a. per cent)

8. 8 Overall Survey indicative of demand slowing to around 1½% at an annualised rate in 6 months to March. And GDP a touch less (probably a flat Q1 outcome).

9. 9 Need to remember that the multi speed economy still there. With retail / wholesale the worse. Mining (coal) heavily impacted. Services much less so.

10. 10 Consumers are more cautious in recent past. Will be impacted by floods. Don’t expect caution to ease much ■ Consumers are still wary and de-leveraging. Saving ratio has moved up significantly ■ We don’t see this caution as changing significantly over the next year or so. ■ But recovery and increased income and lower unemployment should help.

11. 11 On retail. Clothing footwear and household goods very very poor. Supermarkets, car repairs & food better. Mixed on pharmacies. Patterns broadly similar to late 2010 – except clothing / household

12. 12 Consumer caution also evident in housing markets There has been a significant drop back in house price expectations Qld was already a problem prior to floods – because of over supply Melbourne a hot market cooling But not expecting a crunch in housing prices

13. 13 On house prices we see a flat period ahead – up 1½% but growth only to start again in H2 2011. Consumption to be moderate in 2011 – dipping on flood but back to moderate growth by late 2011.

14. 14 Going forward, as well as the rebuild process, Australian economy will still be boosted by strong terms of trade and hence incomes. Also strong trading partner growth and no large output gaps. 1985-2000 average

15. 15 AUD often thought of as proxy for global (and especially Chinese) growth. Our model says AUD good value around USD 95c (+/- 5c). We see AUD rising to 1.05 by mid 2011 then back to 90c by late 2012. Model driven by: n Commodities; n USD / EURO – as a measure of USD weakness n Long & short run rates; n Relative unemployment; nRelative Equity Mkts

16. 16 Mining project pipeline now exceeds all other engineering Almost 2½ years mining construction at current rates

17. 17 For 2011 we see growth of around 2½% - was 3.2% pre flood Story very much around accelerating growth in H2 as recovery kicks in and income and mining accelerates. GDP at 4% in 2012.

18. 18 Prices still low with discounting continuing. That together with high currency has been important in explaining lower core inflation. Floods will see headline pick up. But RBA will look through initially

19. 19 Australian Forecasts in summary