A global economic and market outlook Dr Chris Caton March 2015

Growth Forecasts (%) Month of Forecast A-14M-14J-14 A-14S-14O-14N-14D-14J-15F-15M-15 Australia New Zealand US Japan China Germany UK “World” Source: Consensus Economics

Oil prices generally bounce hard 2 Source : ISI Evercore

7.5 is the new 10. China’s growth contribution is still increasing. 3

Resources investment (% of GDP) 4

The terms of trade have come down a long way (index, 2012/13=100) 5

6 Real GDP growth in Australia and the US Source: Datastream Year to % change

Mining exports have been growing rapidly 7

Non-mining activity has picked up slightly 8

9 Financial Market Forecasts Now (19 March) End-Jun 2015 End-Dec 2015 AUD/USD Official cash rate (%) Year Bond yield (%) ASX

10 The Australian Dollar and US Trade Weighted Index Source: Datastream IndexAUD/USD US TWI inverted (LHS) AUD/USD (RHS)

11 Australian Share market Performance – ASX200 Source: Bloomberg

The Australian market is a little above fair value (forward p/e ratio) 12

But the P/E tends to be higher when the cash rate is lower 13

The resources sector has been a massive drag on the market 14

Australia has kept pace with the developed world ex US 15

We have been in almost perfect sync with the United States market, but may now be looking relatively a little cheap. 16 Source :Minack Advisors

17 The labour market data are still soft and unemployment is still rising Source: ABS 000’s% Employment (LHS) Unemployment Rate (RHS)

It’s clear where most of the new jobs come from 18

Contribution to employment growth over

Employment growth has been very uneven 20

21 Australian inflation is not an issue Source: ABS % BT Forecasts GST Effect

Wage growth has moderated across the board 22

Household financial ratios 23

House Prices - Australia v Brisbane Source: ABS Index (1987 = 100)

Australian houses are the biggest in the world (sq m per capita) 25

House prices have risen everywhere, particularly in Sydney ($’000s) 26

House price rises have been a capital-city story 27 Source: Minack Advisors

Prices have been rising rapidly in just two cities in the past year (% increase year to February 2015) 28 Source : Core Logic RPData

Where’s the bubble? Average house price increase in the past ten years 29

Credit growth is picking up, driven by investors 30

The investors are now in charge 31 source :Goldman Sachs

Investors have been piling in in New South Wales 32

Not much of the borrowing by investors finances new dwellings! 33

34 Gross Domestic Product Source: ABS % BT Forecasts

35 Source Consensus Economics Ss: Consensus Economics GDPInflation Australia United States New Zealand Norway United Kingdom Canada Sweden Spain Switzerland Germany Netherlands Eurozone France Japan Italy Global Medium-Term Economic Growth and Inflation Prospects ( )

36 Asia-Pacific Medium-Term Economic Growth and Inflation Prospects ( ) GDPConsumer Prices China India Philippines Indonesia Malaysia Thailand Singapore South Korea Taiwan Hong Kong3.0 Australia New Zealand Japan Source: Consensus Economics

37 Summary  The big question in the US is when will rates begin to rise and how quickly?  The Eurozone is battling deflation.  We will always worry about China.  The Australian economy should continue to experience only moderate growth. The mining investment boom has ended with no significant pickup to date in non-mining capex.  The cash rate is likely to fall again.  The exchange rate may fall further.  The Australian share market is a little above fair value.

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