A Global Economic and Market Outlook November 2012 Presented by Dr Chris Caton.

A Global Economic and Market Outlook

November 2012

Presented by Dr Chris Caton

Euro-area government bond spreads (to German bonds)

2

The two that matter have clearly improved (long-term bond yields (%))

3

4

2012 Growth Forecasts (%)

Month of Forecast

J-12 F-12 M-12 A-12 M-12 J-12 J-12 A-12 S-12 O-12

Australia 3.4 3.3 3.1 3.1 3.0 3.2 3.3 3.4 3.5 3.4

New Zealand

2.6 2.4 2.4 2.3 2.2 2.0 2.4 2.4 2.4 2.4

US 2.2 2.2 2.3 2.3 2.3 2.2 2.1 2.2 2.2 2.1

Japan 1.9 1.8 1.9 2.0 2.0 2.5 2.5 2.5 2.4 2.3

China 8.4 8.4 8.4 8.4 8.3 8.1 8.1 7.9 7.7 7.7

Germany 0.5 0.6 0.6 0.7 0.8 0.9 0.9 0.9 0.8 0.8

UK 0.5 0.5 0.6 0.7 0.4 0.3 0.1 -0.2 -0.3 -0.2

“World” 2.6 2.6 2.6 2.6 2.6 2.6 2.5 2.6 2.6 2.5

Source: Consensus Economics

5

2013 Growth Forecasts (%)

Month of Forecast

J-12 F-12 M-12 A-12 M-12 J-12 J-12 A-12 S-12 O-12

Australia 3.2 3.3 3.1 3.1 3.4 3.2 3.1 3.1 2.9 2.9

New Zealand

3.2 3.3 3.2 3.1 3.0 3.0 2.9 2.8 2.8 2.7

US 2.5 2.5 2.6 2.5 2.5 2.4 2.3 2.1 2.1 2.0

Japan 1.4 1.4 1.5 1.5 1.5 1.3 1.4 1.4 1.3 1.3

China 8.6 8.6 8.6 8.5 8.5 8.4 8.4 8.3 8.1 8.1

Germany 1.5 1.5 1.5 1.6 1.6 1.4 1.3 1.2 1.0 0.9

UK 1.8 1.8 1.8 1.8 1.8 1.8 1.6 1.4 1.3 1.2

“World” 3.2 3.2 3.2 3.1 3.1 3.0 2.9 2.9 2.8 2.8

Source: Consensus Economics

6

Financial Market Forecasts

Now (14 Nov)

End-Dec2012

End-June2013

AUD/USD 1.042 1.00 0.93

Official cash rate (%) 3.25 3.00 3.00

10 Year Bond yield (%) 3.06 3.30 3.70

ASX 200 4385 4550 4850

7

The Australian Dollar and US Trade Weighted Index

Source: Datastream

64

84

103

122

142

161

180

99 00 01 02 03 04 05 06 07 08 09 10 11 12

0.40

0.52

0.64

0.76

0.88

1.00

1.12Index AUD/USD

US TWI inverted (LHS)

AUD/USD (RHS)

8

Australian dollar against Asian share markets

Source: Datastream

0.6

0.7

0.8

0.9

1

1.1

1.2

08 09 10 11 12

175

245

315

385

455

525

595$A Asian Emerging Markets Index

Asian Emerging Markets Index (RHS)

$A (LHS)

9

Australian Sharemarket Performance – ASX200

Source: Bloomberg

1000

1500

2000

2500

3000

3500

4000

4500

5000

5500

6000

6500

7000

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The Australian market is still a little cheap (p/e ratio)

10

P/Es by sector

11

World share markets are cheap (P/E ratio)

12

13

Real GDP growth in Australia and the US

Source: Datastream

Year to % change

-5.0

-2.5

0.0

2.5

5.0

7.5

10.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

US Australia

It’s the developing world, stupid

14

Australia’s Terms of trade(Index 1900-01 to 1999-00 = 100)

Source: ABS Catalogue Number 5206.0, RBA and Treasury.

60

80

100

120

140

160

180

200

60

80

100

120

140

160

180

200

1869-70 1894-95 1919-20 1944-45 1969-70 1994-95 2019-20

IndexIndex

Budget forecasts/projections

5-year centred moving average

Chinese steel and iron ore spot prices

16

17

Employment growth has been slow

Source: ABS

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8800

9200

9600

10000

10400

10800

11200

11600

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

000’s %

Employment (LHS)

Unemployment Rate (RHS)

Contributions to jobs growth (year to August 2012, thousands)

18

19

Australian Inflation

Source: ABS

0

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Headline CPI Underlying inflation

%

BT Forecasts

GST Effect

Interest rate changes do make a difference!

20

House Prices - Australia v Sydney

Source: ABS

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12100

150

200

250

300

350

400

450

500

550

600Index (1987 = 100)

We are very expensive compared with the United States

22

But not otherwise!

23

Prices have fallen everywhere but they may be turning

24

25

Gross Domestic Product

Source: ABS

-2

-1

0

1

2

3

4

5

6

7

8

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Qtly growth Year-to growth Non-farm year-to growth

%

BT Forecasts

GST Effect

26

Mining investment will peak soon

27 Source: Consensus Economics

GDP Inflation

Australia 3.0 2.6

Norway 2.7 1.9

New Zealand 2.6 2.3

United States 2.5 2.3

Sweden 2.2 1.7

Canada 2.1 2.0

United Kingdom 1.8 2.8

Netherlands 1.6 2.2

Switzerland 1.6 1.1

Spain 1.6 2.1

France 1.4 1.9

Germany 1.4 2.1

Eurozone 1.1 2.0

Japan 1.1 0.7

Italy 0.5 2.1

Global Medium-Term Economic Growth and Inflation Prospects (2012-2022)

28

Asia-Pacific Medium-Term Economic Growth and Inflation Prospects (2012-2022)

GDP Consumer Prices

India 7.2 5.9

China 7.1 3.0

Indonesia 6.1 5.7

Philippines 5.2 4.4

Malaysia 4.8 2.3

Thailand 4.4 3.0

Singapore 4.0 2.7

Taiwan 3.4 2.1

South Korea 3.4 2.7

Hong Kong 3.3 3.1

Australia 3.0 2.6

New Zealand 2.6 2.3

Japan 1.1 0.9

Source: Consensus Economics

29

Morgan Stanley Capital Indexes

Source: Datastream

600

900

1200

1500

1800

2100

2400

2700

3000

3300

3600

03 04 05 06 07 08 09 10 11 12

100

150

200

250

300

350

400

450

500

550

600Developed Index Asian Emerging Markets Index

Asian Emerging Markets Index (RHS)

World Developed Index (LHS)

30

Summary

Eurozone debt is a serious issue; it will drag on for a long time but is unlikely to end in catastrophe. We will always worry about China.

The Australian economy should continue to experience moderate but unbalanced growth, led by mining investment. The mining boom will, of course, end eventually.

The cash rate is likely to fall again.

The exchange rate is above fair value. The rest of the world is still on sale for Australians.

Share markets are cheap.

31

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