1. Economic Update and Outlook
Sze-Young Lim
Senior Economist
Australian Industry Group

2. Key points State of the global economy
Economic conditions in Australia
Patchy economic growth in Australia: further evidence from Ai Group’s industry performance indexes
Performance of Manufacturing Index
Performance of Services Index
Performance of Construction Index
Concluding comments

3. State of the global economy
Global economic recovery underpinned by robust growth in emerging economies

4. State of the global economy
Significant increases in public debt raise doubts of fiscal sustainability

5. State of the global economy
Increased risk of sovereign debt default in Europe
200
400
600
800
1000
1200
1400
1600
1800
Jan - 10
Apr
Jul
Oct 11
Greece
Ireland
Portugal
Latvia
Romania 50
100
150
250
300
350
450
Spain
Belgium
Italy
Finland
Netherlands
Sovereign bond yield spreads over German Bunds
(basis points)

6. State of the global economy
Contagion likely to arise from a European sovereign debt default
Adverse impact on financial stability

7. State of the global economy
European economy set to slow

8. State of the global economy
Debt overhang in the US extends to households
Fiscal austerity measures and household deleveraging weigh on economy

9. State of the global economy
Subdued housing market and stock market volatility to curtail private consumption in the US

10. State of the global economy
Consumer confidence in the US at crisis lows

11. State of the global economy
Employment growth stalling in the US and Euro area
Unemployment rate remains high

12. IMF Economic Growth Forecasts (September 2011)
2009
2010
2011
2012
World output
-0.7
5.1
4.0
(-0.3)
(-0.5) US
-3.5
3.0
1.5
(-1.0)
1.8
(-0.9)
Euro area
-4.3
1.6
(-0.4)
1.1
(-0.6)
Germany
-5.1
3.6
2.7
1.3
(-0.7)
France
-2.6
1.4
1.7
Italy
-5.2
0.6
0.3
Spain
-3.7
-0.1
0.8
(0.0) UK
-4.9
Developing Asia
7.2
9.5
8.2
(-0.2)
8.0
China
9.2
10.3
(-0.1)
9.0
India
6.8
10.1
7.8
7.5

13. Economic conditions in Australia
Australia’s economy rebounded in the June quarter
Overall domestic demand remains soft
Dwelling and non-dwelling construction weakened due to weakness in housing and construction markets
Recent pick-up in household spending may not be sustainable
Labour market has softened
Challenging business conditions in non-mining sectors of economy
Heightened global economic uncertainty
Strong Australian dollar
Persistent wage pressures
Increased import competition
Uncertainty over carbon tax
Domestic demand could remain soft in the near term while exporters continue to be inhibited by the strong Australian dollar

14. Economic conditions in Australia
Private consumption remains sluggish

15. Economic conditions in Australia
Employment growth in Australia slowing

16. Economic conditions in Australia
Strong Australian dollar

17. Economic conditions in Australia
Strong Australian dollar weakens manufacturing exports

18. Economic conditions in Australia
Increased import competition from emerging economies
Note: ASEAN comprises Brunei, Cambodia, Indonesia, Lao, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.

19. Economic conditions in Australia
Further evidence of patchy economic growth
Challenging business conditions in manufacturing, services and construction sectors
Manufacturing sector: Ai Group’s Australian PMI

20. Economic conditions in Australia
Further evidence of patchy economic growth
Services sector: Ai Group’s Australian PSI

21. Economic conditions in Australia
Further evidence of patchy economic growth
Construction sector: Ai Group’s Australian PCI

22. Concluding comments
Heightened uncertainty in the global economic outlook following sovereign debt problems in Europe and the US
Increased downside risks to the global economic outlook
Domestic demand could weaken following increased global economic uncertainty and heightened risk aversion in financial markets
Labour market has softened and private consumption remain sluggish
Patchy economic growth: non-mining sectors risk being hollowed out amid the resources boom
Failure to build a balanced and diversified economy could cause the economy to be vulnerable to swings in commodity prices
Governments, businesses, labour unions and industry groups need to cooperate and work closely