Christopher Nielson Besa Deda Corporate Treasury Specialist Chief Economist 14 August, 2009 An Economic Outlook: Glass Half Full?

Road Map World economic outlook Domestic economic conditions Interest rate outlook Credit market developments Aussie dollar outlook

Australian Economy Avoids the ‘R’ Word Australia is sharing in some of the pain of the world economic downturn. But growth prospects remain more favourable in Australia than in other major economies around the world.

Australia – Ahead of the Pack Australia will remain ahead of the pack, although next year the US is expected to pip Australia at the post.

Why? A healthy banking system, strong regulatory system, still high terms of trade, aggressive stimulus from the RBA & Federal Government and strong population growth.

Consumer Spending – Shifting to a Higher Gear Some negatives on the consumer are receding - including lower petrol prices, improved share markets & lower mortgage rates. But the prospect of higher unemployment remains.

Consumer Sentiment Does a U Turn Consumers are more optimistic about the future.

Clear & Present Danger The peak in the unemployment rate will occur mid next year. We expect the peak to be % (from 5.8% now). Rising unemployment could instil caution among consumers.

Housing Lending Revs Up The boost to the First Home Owners grant and rate cuts are spurring the recovery.

House Price Trends Trends in housing lending will flow through to house prices. The lower end of the market is picking up, reflecting the strong demand from first-home buyers.

Unsung Hero – Population Growth Population growth nationally is at 40-year highs. It is not purely an immigration story.

Frost Bite in Commercial Property A more pronounced downturn in the non-residential building sector is being witnessed. Falls sharper for large-scale projects. Partly reflects restricted access to external financing. Commercial sector closely tied to state of the labour market.

Business Investment Outlook – Slow Sign Ahead Work in the pipeline means business investment has not collapsed. Government injections will assist private business investment. But business investment for this financial year and next is still set to be scaled back further.

Interest Rates – The Race to Zero Is Over? We think the RBA is done cutting rates. We think the next move in the cash rate will be up early next year.

How Soon Will the RBA Start Tapping on the Brakes? Financial markets are starting to entertain rate hikes within six months.

US – A Dim Light at the End of the Tunnel? We believe the US economy is bottoming and may already be recovering. But the recovery will be U in shape not a V-shaped one.

Investors appetite towards risk is a dominant driver of the AUD. Interest-rate differentials are also in the AUD’s favour. The AUD’s Dashboard

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