ABC Global Research Asian Economics Paul Bloxham Chief Economist (Australia and New Zealand) HSBC Bank Australia Limited +61 (2) Australia in the Asian century: Looking beyond the mining boom November 2012 View HSBC Global Research at: Issuer of report: HSBC Bank Australia Limited Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

Company Logo Delete grid from slide master 2 Australia’s is now in its 21 st year of continuous growth Source: ABS; HSBC estimates

Company Logo Delete grid from slide master 3 Some signs of growth moderating into the second half of 2012 Source: ABS

Company Logo Delete grid from slide master 4 Timely measures of sentiment are around their average levels Source: Westpac-Melbourne Institute, NAB, Datastream

Company Logo Delete grid from slide master 5 Australia in the Asian century 1) Asia is driving global growth, which is benefiting Australia 2) Mining boom not over yet: more investment and export ramp-up yet to come 3) Local economy will rebalance, with lower rates supporting housing and retail sales 4) Asia presents medium-term opportunities beyond just mining for Australia 5) Lifting productivity is the main challenge and important for inflation and rates outlook

Company Logo Delete grid from slide master 6 1.1) Asia is driving global growth: economic centre of gravity moving east Source: Quah (2010)

Company Logo Delete grid from slide master 7 1.2) China and India expected to overtake the US and Europe as the largest in the world

Company Logo Delete grid from slide master 8 1.3) Emerging economies already contributing more to global growth Source: HSBC estimates

Company Logo Delete grid from slide master 9 1.4) China is delivering 50yrs of US advance every decade (India 30 yrs)

Company Logo Delete grid from slide master ) Europe is straining under the weight of debt Source: IMF

Company Logo Delete grid from slide master ) Europe faces enormous challenges that will be with us for some time Source: Datastream

Company Logo Delete grid from slide master ) Timely indicators suggest Europe is in recession Source: Eurostat and HSBC

Company Logo Delete grid from slide master ) US is operating at well below its capacity Source: Thomson Reuters Datastream

Company Logo Delete grid from slide master ) China’s PMI suggests around trend growth Source: HSBC; Bloomberg

Company Logo Delete grid from slide master ) High commodity prices may be the new (old) normal? Source: Erten and O’Campo (2012); HSBC estimates

Company Logo Delete grid from slide master ) But commodity demand still to be supported by emerging economies Source: GGDC, Brook Hunt, HSBC estimates, IMF

Company Logo Delete grid from slide master ) Bulk of global population at commodity intensive stage of development Source: Total Economy Database; IMF; HSBC estimates

Company Logo Delete grid from slide master ) Commodity intensive economies driving the bulk of global growth Source: Total Economy Database; IMF; HSBC estimates

Company Logo Delete grid from slide master ) High AUD has been a key catalyst for slowdown in some sectors Source: RBA; HSBC

Company Logo Delete grid from slide master ) Mining boom not over: just part way through second of three stages Source: HSBC

Company Logo Delete grid from slide master ) Commodity prices have peaked, but remain historically high Source: RBA, HSBC

Company Logo Delete grid from slide master ) Free kick to income growth from rising commodity price has now passed Source: ABS; RBA

Company Logo Delete grid from slide master ) But terms of trade still at a very high level, making investment worthwhile Source: ABS, HSBC

Company Logo Delete grid from slide master ) Mining investment should make large contribution to growth this year and next Source: ABS; HSBC estimates

Company Logo Delete grid from slide master ) Much of the investment pipeline is for energy (LNG in particular) Source: BREE, HSBC

Company Logo Delete grid from slide master ) Export ramp-up has yet to come Source: BREE

Company Logo Delete grid from slide master ) Some rebalancing expected: after some sectors slowed to make way for mining Source: ABS; HSBC estimates

Company Logo Delete grid from slide master ) Keep in mind that Australia’s economy is mostly services Source: ABS; RBA

Company Logo Delete grid from slide master ) Growth needs to switch from being commodity-driven to credit-driven

Company Logo Delete grid from slide master ) Credit growth has been weak, but domestic demand has been strong Source: ABS; RBA

Company Logo Delete grid from slide master ) Financial system still works in Australia, so credit growth is lifting

Company Logo Delete grid from slide master ) Lower rates mean that housing prices are picking up Source: Rismark

Company Logo Delete grid from slide master ) Housing building cycle likely to have troughed Source: ABS; RBA; HSBC

Company Logo Delete grid from slide master ) Households have already lifted their savings to elevated levels Source: ABS, RBA

Company Logo Delete grid from slide master ) Household caution is reflected in easing housing prices Source: RP Data / Rismark

Company Logo Delete grid from slide master ) Record number of outbound Australian tourists weakening domestic spending Source: ABS

Company Logo Delete grid from slide master ) Exchange rate effect is starting to wear off Source: ABS

Company Logo Delete grid from slide master ) Growing Asian middle class will bring opportunities beyond mining - Increased demand for housing and consumer durables; - Increased demand for more and better quality food; - Increased demand for education services; - Increased demand for holidays; - Increased demand for financial services

Company Logo Delete grid from slide master ) Chinese motor vehicle sales still have a lot of catching up to do

Company Logo Delete grid from slide master ) China should account for over a quarter of global car sales by 2018

Company Logo Delete grid from slide master ) Food intake rising in developed countries

Company Logo Delete grid from slide master ) Higher incomes lead to higher meat consumption and less grain

Company Logo Delete grid from slide master ) China is driving Australia’s tourist arrivals numbers Source: ABS

Company Logo Delete grid from slide master ) Weak productivity growth remains Australia’s main challenge Source: ABS

Company Logo Delete grid from slide master ) Growth has been driven by working harder, not necessarily smarter Source: ABS; HSBC

Company Logo Delete grid from slide master ) Weak productivity partly reflects the mining boom

Company Logo Delete grid from slide master ) Weak productivity boosted local inflation, but import prices have fallen Source: ABS, RBA

Company Logo Delete grid from slide master ) Inflation low, largely due to AUD appreciation in 2009 and 2010 Source: ABS; RBA

Company Logo Delete grid from slide master ) Wages growth remains solid Source: ABS; RBA

Company Logo Delete grid from slide master ) RBA rates are well below neutral Source: RBA; HSBC

Company Logo Delete grid from slide master 51

Company Logo Delete grid from slide master 52

Company Logo Delete grid from slide master 53