1. ABC Global Research Asian Economics Paul Bloxham Chief Economist (Australia and New Zealand) HSBC Bank Australia Limited +61 (2) 435 966 522paulbloxham@hsbc.com.au Australia in 2012/13: Will the luck continue? July 2012 View HSBC Global Research at: http://www.research.hsbc.comhttp://www.research.hsbc.com 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 in the Disclaimer, which forms part of it

2. Company Logo Delete grid from slide master 2 Lucky country: Australia’s last recession ended 20 years ago Source: ABS; HSBC estimates

3. Company Logo Delete grid from slide master 3 Six macro themes for Australia in 2012/13 1) ‘Elephant in the room’ – Global risks continue to dominate the landscape 2) ‘Mining boom rolls on’ – Two-thirds of GDP growth is mining investment 3) ‘AUD and Dutch disease’ – Has held down inflation, but effects to wear off 4) ‘Deleveraging continues’ – Happening at the best time: when the economy is growing 5) ‘Productivity challenge’ – The issue should become more prominent in 2012/13 6) ‘Conventional policy works’ – Monetary policy works and there is fiscal room to move

4. Company Logo Delete grid from slide master 4 1.1) ‘Elephant in the room’ – Europe is straining under the weight of debt Source: IMF

5. Company Logo Delete grid from slide master 5 1.2) Part of the challenge is the major economic divergences Source: Thomson Reuters Datastream

6. Company Logo Delete grid from slide master 6 1.3) Unemployment rates are moving in the wrong directions Source: Thomson Reuters Datastream

7. Company Logo Delete grid from slide master 7 1.4) Eurozone is showing inflation divergences *Ireland, Greece, Spain and Portugal (GDP weighted average) Source: Thomson Reuters Datastream

8. Company Logo Delete grid from slide master 8 1.5) Timely indicators for Europe have stabilised, but are still weak Source: Eurostat and HSBC

9. Company Logo Delete grid from slide master 9 1.6) US also faces big challenges Source: Thomson Reuters Datastream

10. Company Logo Delete grid from slide master 10 1.7) US fiscal austerity is a heavy drag on economic growth Source: Bureau of Economic Analysis

11. Company Logo Delete grid from slide master 11 1.8) But recent global growth has been due to emerging economies Source: IMF, HSBC estimates

12. Company Logo Delete grid from slide master 12 1.9) Asia output growth has become less about exports in recent years Source: CEIC

13. Company Logo Delete grid from slide master 13 1.10) China’s PMI has spent seven months below its breakeven level Source: HSBC

14. Company Logo Delete grid from slide master 14 1.11) Chinese fixed asset investment slowed, but are expected to hold up Source: CEIC, HSBC

15. Company Logo Delete grid from slide master 15 1.12) China’s public housing should buffer the construction slowdown Source: CEIC, HSBC Completed floor space of residential housing

16. Company Logo Delete grid from slide master 16 1.13) Still expect strong medium-term demand for commodities Source: IMF, HSBC

17. Company Logo Delete grid from slide master 17 1.14) Demand for energy expected to continue to be solid Source: IMF, HSBC

18. Company Logo Delete grid from slide master 18 1.15) Australia’s trading partner growth is solid, but risks are to the downside Source: ABS, CEIC, RBA, HSBC

19. Company Logo Delete grid from slide master 19 1.16) Credit to GDP ratio now higher than at the 1997 peak Source: CEIC, HSBC

20. Company Logo Delete grid from slide master 20 2.1) ‘Mining boom rolls on’ – investment is rising very strongly Source: ABS, RBA, HSBC

21. Company Logo Delete grid from slide master 21 2.2) Value of pipeline of advanced projects is substantial Source: BREE, HSBC

22. Company Logo Delete grid from slide master 22 2.3) Commodity prices have peaked, but are still around historical highs Source: RBA, HSBC

23. Company Logo Delete grid from slide master 23 2.4) Australian business conditions are a bit below average Source: Thomson Reuters Datastream, NAB

24. Company Logo Delete grid from slide master 24 3.1) ‘AUD and Dutch disease’ – AUD rose sharply in 2009 and 2010 Source: RBA

25. Company Logo Delete grid from slide master 25 3.2) Appreciation has held down inflation, but the effect should wear off Source: ABS, RBA

26. Company Logo Delete grid from slide master 26 3.3) High AUD has seen big net outflows of tourists Source: ABS

27. Company Logo Delete grid from slide master 27 3.4) Tourist outflow and online sales have been holding back retail sales Source: ABS

28. Company Logo Delete grid from slide master 28 3.5) Employment is weakest in exchange rate-sensitive industries Source: ABS, HSBC

29. Company Logo Delete grid from slide master 29 4.1) ‘Household deleveraging continues’ – saving is high Source: ABS, RBA

30. Company Logo Delete grid from slide master 30 4.2) Household credit growth has slowed in recent years Source: ABS

31. Company Logo Delete grid from slide master 31 4.3) Households are paying down debt

32. Company Logo Delete grid from slide master 32 4.4) Household caution has put downward pressure on house prices Source: RP Data

33. Company Logo Delete grid from slide master 33 4.5) But we remain unconcerned about a large house price decline Source: HILDA, RBA

34. Company Logo Delete grid from slide master 34 4.6) Housing loan arrears are low

35. Company Logo Delete grid from slide master 35 4.7) The unemployment rate is still historically low, despite rising recently Source: ABS

36. Company Logo Delete grid from slide master 36 4.8) Signs of labour market improvement Source: ABS

37. Company Logo Delete grid from slide master 37 4.9) Housing prices have grown in line with income for almost a decade Source: RP Data / Rismark

38. Company Logo Delete grid from slide master 38 5.1) ‘The productivity challenge’ – can’t keep growing without productivity Source: ABS

39. Company Logo Delete grid from slide master 39 5.2) Commodity prices have peaked, which means income boost easing Source: ABS

40. Company Logo Delete grid from slide master 40 5.3) Actual productivity growth has been very weak Source: ABS, HSBC

41. Company Logo Delete grid from slide master 41 5.4) Growth has been driven by working harder, not necessarily smarter Source: ABS, HSBC

42. Company Logo Delete grid from slide master 42 5.5) Underinvestment in infrastructure is pushing up the cost base Source: ABS

43. Company Logo Delete grid from slide master 43 5.6) The sustainable rate of GDP growth has come down Source: ABS, HSBC

44. Company Logo Delete grid from slide master 44 5.7) Unit labour cost growth has been high, but is easing Source: ABS

45. Company Logo Delete grid from slide master 45 5.8) RBA’s inflation forecasts assume a pick-up in productivity Source: ABS, RBA

46. Company Logo Delete grid from slide master 46 6.1) ‘Conventional policy works’ – Interest-rate sensitive sectors will get a boost Source: RBA

47. Company Logo Delete grid from slide master 47 6.2) Despite a higher margin between RBA and effective rates Source: RBA

48. Company Logo Delete grid from slide master 48 6.3) Government faces big task to meet budget plans Source: Federal Treasury

49. Company Logo Delete grid from slide master 49 6.4) Biggest fiscal contraction since the 1950s Source: Federal Treasury

50. Company Logo Delete grid from slide master 50 6.5) Net debt position still looks healthy Source: Federal Treasury

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