Grant Turley CFO Network presentation

Australia’s Challenges in a Commodity Boom

Grant TurleySenior FX Strategist15 September 2010

2

Australia has outperformed most advanced economies during the global financial crisis

Sources: Bloomberg and ANZ

Unemployment rates

3

4

5

6

7

8

9

10

11

12

13

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

UK US AUS Eurozone

%

3

Australia was assisted by a sharp rebound in trading growth compared to the OECD

4

Australia and the worldFor Australia, the G7 outlook is less and less meaningful - China is now our number 1 trade partner

Source: ANZ, RBA ASEAN 6: Singapore, Indonesia, Malaysia, Thailand, Philippines, Vietnam Other Asia: HK & Taiwan

Australian two-way trade weights

World Asia

0

10

20

30

40

50

60

70

70 75 80 85 90 95 00 05 10

US Europe

UK Asia

% pts

0

5

10

15

20

25

30

35

70 75 80 85 90 95 00 05 10

Japan

China

Korea

ASEAN 6

Other Asia

% pts

5

Industrial commodity prices move in long wave (25-40 year) cyclesReal copper price

Sources: Bloomberg; ANZ.

0

100

200

300

400

500

600

700

1897 1907 1917 1927 1937 1947 1957 1967 1977 1987 1997 2007 2017

Real Price (US CPI adjusted)

6

Australia is now poised for an investment boomThe proposed Resource Super Profits tax is impacting investment planned for 2012-19

ABARE Advanced Mining and Energy Projects

Source: ABARE

7

Infrastructure requirements and mining drive an investment boom Investment is expected to surge in late 2010

Sources: ABS and ANZ

Engineering construction

0

5000

10000

15000

20000

25000

30000

87 89 91 93 95 97 99 01 03 05 07 09 11

New engineering construction

Engineering commencements 6mforward 4qma

Vol $mn

0

20

40

60

80

100

120

140

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

$A

(e)

(e)+20% (mining +40%)

Capital expenditure expectations

8

Inflation has not been to the bottom of the target band in 10 yearsThe current forecast leaves little room for upside surprises

Sources: RBA and ANZ

RBA’s Core Inflation Forecasts

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

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

annual

% c

han

ge

RBA May & Aug 10 Forecast

RBA Feb 10 Forecast

RBA Nov 09 Forecast

RBA Aug 09 Forecast

RBA May 09 Forecast

RBA core inflation

Forecast

9

Australia has been supported by the GFC fiscal responseNow we are looking for a transition to the private sector

Sources: ANZ, ABS

Australian GDP

-2

-1

0

1

2

3

4

5

6

87 89 91 93 95 97 99 01 03 05 07 09 11

-2

-1

0

1

2

3

4

5

6

7

Private final demand

Public final demand

GDP rhs

Ppt

contr

ibuti

on t

o y

earl

y G

DP g

row

th

Forecasts

% y

early

change

10

The household sector is likely to be the casualty of this mining boom because the capacity-constrained Australian economy can’t accommodate all sectors firing

-60

-40

-20

0

20

40

60

80

00 01 02 03 04 05 06 07 08 09 10

Building approvals

Housing finance approvals

'000 a

nnualis

ed (

12m

ma)

0

2

4

6

8

10

02 03 04 05 06 07 08 09 10

Total retail sales

annual %

change

Retail sales Building approvals

11

In August the RBA expected the savings rate to riseThe Q2 GDP figures revealed a further decline in the saving rate

Household savings ratio

Sources: ABS

-4

-2

0

2

4

6

8

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

Household savings

% of household disposible income

12

100

150

200

250

300

350

400

450

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

100

125

150

175

200

225

Population growth vs. dwelling completions

Annual dwelling completions (rhs)

Annual population gain (lhs)

Strong population gains drive an undersupply of housingThis will put a floor under house prices and construction but upward pressure on rents and inflation

‘000 ‘000

Sources: ABS, ANZ Economics and Markets Research

13

Market expectations do not reflect policy risksEven modest further tightening is not priced-in

Source: ANZ & Bloomberg

RBA cash rate and market expectations

2.0

3.0

4.0

5.0

6.0

7.0

8.0

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

per

cen

t

RBA Cash Rate

ANZ Forecast

Current Cash Rate Futures

14

Australia - “Making room for the mining boom MkII”

• The Australian economic outlook is strong We forecast growth to accelerate to 3¾ - 4% next year The new peak in the terms of trade is set to drive an investment and export boom. In the short-term, it could be a bumpy ride as the economy transitions from public to

private demand drivers A disruption to global credit markets and a hard landing in Chinese property are the

main external risks

• Inflation has more than likely bottomed in 2Q10 We are on cusp of investment boom and capacity is already stretched in product and

labour markets Strong demand and limited supply flexibility points to a pick up in inflation

• Households must accommodate the investment boom With a boom in mining investment ‘locked in’ a subdued household is required This prospect seems unlikely with falling unemployment and rising wealth The RBA will need to step in to restrain the household

• The return of the two-speed economy Divergent prospects for different sectors suggest the split between the resource

and non-resource States may sharply widen

15

Australian dollar outlookIf commodity prices remain elevated so too will the Australian dollar

Source: Bloomberg, ABS and ANZ

Terms of trade and A$TWI

50

60

70

80

90

100

110

120

130

140

86 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

45

50

55

60

65

70

75

80

Terms of trade RHS

A$TWI RHS

A$ TWIIndex

Forecasts

16

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