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PhilipWebbEconomic Forecast

Guest Speakers : Rob Brooker & Enzo Raidmondo

Philip Webb

Economic Update Forum

Rob BrookerHead of Australian Economics & Commodities, NAB12 November 2013

33

Important information

DISCLAIMER: “[While care has been taken in preparing this material,] NationalAustralia Bank Limited (ABN 12 004 044 937) does not warrant or represent that the information, recommendations, opinions or conclusions contained in this document (“Information”) are accurate, reliable, complete or current. The Information has been prepared for dissemination to professional investors for information purposes only and any statements as to past performance do not represent future performance. The Information does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. In all cases, anyone proposing to rely on or use the Information should independently verify and check the accuracy, completeness, reliability and suitability of the Information and should obtain independent and specific advice from appropriate professionals or experts.To the extent permissible by law, the National shall not be liable for any errors, omissions, defects or misrepresentations in the Information or for any loss or damage suffered by persons who use or rely on such Information (including by reasons of negligence, negligent misstatement or otherwise). If any law prohibits the exclusion of such liability, the National limits its liability to the re-supply of the Information, provided that such limitation is permitted by law and is fair and reasonable. The National, its affiliates and employees may hold a position or act as a price maker in the financial instruments of any issuer discussed within this document or act as an underwriter, placement agent, adviser or lender to such issuer.”

4

GDP growth still below trend but improving in 2014 (mainly via advanced economies)

Still very depressed but recession may be bottoming out

Better fundamentals with moderate growth & potential withdrawal of stimulus causing volatility in financial markets

New stimulus packages implemented, QE has weakened Ұ and driven up equities. The bright spot!!

Focus on quality of growth rather than quantum, but mini stimulus to support H2 growth. Growth still robust but less rapid

Global economic story

5

The money is easyUS Fed still buying securities from private sector

Starts to end in March?

-2500

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Govt securities Mortgage-backed securitiesLending to banks Crisis-related facilitiesBank deposits Banknotes

US Fed balance sheet

($US billion)

Source: IMF

QE1 QE2QE3

66

Global economic forecastsHalf of current global growth from China, India & Brazil

Bigger contribution in 2014 from advanced economies

4.14.24.04.2Trading partners

4.4

3.5

7.5

1.9

-0.3

1.7

2.9

2013IMF

weight2012 2014 2015

World GDP growth 3.2 3.5 3.6

United States 19 2.8 2.6 2.9

Euro zone 14 -0.6 1.1 1.4

Japan 6 2.0 2.1 1.5

China 15 7.8 7.2 7.0

Emerging Asia(a) 8 3.8 3.8 4.2

India 6 5.1 4.9 5.3

(a) South Korea, Taiwan, ASEAN

7

Australian economic storyAdjusting to end of mining investment boom

Confidence better but headwinds remain

MINING

CASH RATE

AUD

FISCAL

Transition from labour-intensive investment to capital-intensive export: unemployment to rise, consumers to remain cautious

One more cut (maybe May) as unemployment continues to edge up

Downside from commodities prices, further cash rate cut & upside on USD as QE3 ends

Fiscal story no different under new government: preservation of AAA requires eventual return to cash surplus and fiscal restraint

88

Australian economic forecastsWeaker AUD & lower interest rates won’t be enough

Mining transition & fiscal austerity see labour market slower

* at end of period; ** through-year growth

n.a.0.860.95n.a.0.900.93$US/$A*

3.002.252.502.502.252.75RBA cash rate*

2.12.42.32.02.62.4CPI underlying**

6.36.65.96.66.35.7Unemployment rate*

0.90.31.10.70.41.3Employment

2.92.42.32.82.22.9GDP

2015201420132014-152013-142012-13

9

Confidence better but for how long? Business & consumer sentiment have improved

But business conditions remain below trend

-40

-30

-20

-10

0

10

20

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-1360

70

80

90

100

110

120

Business (s.a. LHS) Consumer (n.s.a. RHS)

Business & consumer confidence

Sources: NAB; Melbourne Institute-Westpac

Net.

bal.Index

-40

-30

-20

-10

0

10

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13-40

-30

-20

-10

0

10

Confidence Conditions

Business confidence & conditions

Source: NAB

Net.

bal.

Net.

bal.

10

Broad-based improvementSuggests influence of change of government

Interest rates & AUD also matter; mining also reflects China

-40

-30

-20

-10

0

10

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-40

-30

-20

-10

0

10

Manufacturing Mining Construction Retail

Monthly confidence indexes(seasonally adjusted)

Source: NAB business survey

Net.

bal.

Net.

bal.

-40

-30

-20

-10

0

10

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-40

-30

-20

-10

0

10

Transport Wholesale Services Finance

Monthly confidence indexes(seasonally adjusted)

Source: NAB business survey

Net.

bal.Net.

bal.

11

Signs of life in forward indicators?Sales, profitability & employment better than mid-2013

Orders & stocks improved but capacity utilisation weak

-40

-30

-20

-10

0

10

20

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13-40

-30

-20

-10

0

10

20

Profitabiity Trading Employment

Business conditions: components

Source: NAB

Net.

bal.

Net.

bal.

77

79

81

83

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13-30

-20

-10

0

Capacity use (LHS) Orders (RHS) Stocks (RHS)

Forward indicators

Source: NAB

%Net.

bal.

12

Conditions still multi-speedMining, manufacturing, construction, retail weak

Wholesale, transport better; services best

-40

-30

-20

-10

0

10

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-30

-20

-10

0

10

Manufacturing Mining Construction Retail

Monthly conditions indexes(seasonally adjusted)

Source: NAB business survey

Net.

bal.

Net.

bal.

-40

-30

-20

-10

0

10

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-30

-20

-10

0

10

Transport Wholesale Services Finance

Monthly conditions indexes(seasonally adjusted)

Source: NAB business survey

Net.

bal.Net.

bal.

13

Interstate variations widening againConfidence converging across states

But conditions showing wide variation

-30

-20

-10

0

10

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-30

-20

-10

0

10

VIC NSW QLD SA WA TAS (trend)

Monthly confidence indexes(seasonally adjusted)

Source: NAB

Net.

bal.Net.

bal.

-30

-20

-10

0

10

Oct-12 Jan-13 Apr-13 Jul-13 Oct-13-30

-20

-10

0

10

VIC NSW QLD SA WA TAS (trend)

Monthly conditions indexes(seasonally adjusted)

Source: NAB

Net.

bal.

Net.

bal.

14

Conditions worsen in ASX300Confidence improved from SMEs to ASX300 firms

But conditions deteriorating across all firm sizes

-30

-20

-10

0

10

Sep-10 Jun-11 Mar-12 Dec-12 Sep-13-30

-20

-10

0

10

ASX300 (n.s.a.) Large (quarterly) SME

Quarterly confidence indexes(seasonally adjusted)

Source: NAB

Net.

bal.Net.

bal.

-30

-20

-10

0

10

Sep-10 Jun-11 Mar-12 Dec-12 Sep-13-30

-20

-10

0

10

ASX300 (n.s.a.) Large (quarterly) SME

Quarterly conditions indexes(seasonally adjusted)

Source: NAB

Net.

bal.Net.

bal.

1515

Retail sector weakConsumers still saving to repair balance sheets

Lower interest rates will help but higher unemployment won’t

Jun2005

Jun2007

Jun2009

Jun2011 2013

Jun

14

12

10

8

6

4

2

0

-2

Household saving ratePer cent of net household disposable income

Source: ABS & NAB calculations

Seasonally adjusted Trend

16

Mining cliff approaching?After 2013 mining investment could take 2% pts p.a. off GDP

And release 75000 jobs from mining construction

0

5

10

15

Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-150

50

100

150

Commencements Work done Work yet to be done

Source: ABS, NAB estimates

Engineering construction: mining($ billion, CVM)

0

50

100

150

200

250

Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-15

Mining employment in construction Mining employment in operations

Mining employment

Source: NAB estimates

'000

persons Projection

17

Structural adjustment to continueMining employment starting to decline

Adjustment process to go into reverse

Australian employmentChange since March 2008

-200

-100

0

100

200

2008 2009 2010 2011 2012 2013

'000

-200

-100

0

100

200

'000

Mining

Manufacturing

Education &

training

Health care &

social assistance

Sources: ABS; NAB

Retail

18

Employment indicators still softLabour market looks softer than 2012

Labour market conditions% change on same month of previous year

-40

-20

0

20

40

Oct-10 Oct-11 Oct-12 Oct-13

0

1

2

3

4

Job vacancies (LHS) ANZ job ads (LHS)

DEEWR internet vacancies (LHS) Employment (RHS)

% %

Series break

19

Forecasts of cash ratesCash rate expectations December 2013

0

5

10

15

20

25

30

2 2.25 2.5 2.75 3 3.25 3.5

31/12/2013

No. of

forecasters

Cash rate forecast

Source: Bloomberg

20

Forecasts of cash rateCash rate expectations February 2014

0

5

10

15

20

25

30

2 2.25 2.5 2.75 3 3.25 3.5

28/02/2014

No. of

forecasters

Cash rate forecast

Source: Bloomberg

21

Forecasts of cash rateCash rate expectations March 2014

0

5

10

15

20

25

30

2 2.25 2.5 2.75 3 3.25 3.5

31/03/2014

No. of

forecasters

Cash rate forecast

Source: Bloomberg

22

Forecasts of cash rateCash rate expectations June 2014

0

5

10

15

20

25

30

2 2.25 2.5 2.75 3 3.25 3.5

30/06/2014

No. of

forecasters

Cash rate forecast

Source: Bloomberg

23

Forecasts of cash rateCash rate expectations September 2014

0

5

10

15

20

25

30

2 2.25 2.5 2.75 3 3.25 3.5

30/09/2014

No. of

forecasters

Cash rate forecast

Source: Bloomberg

24

Forecasts of cash rateCash rate expectations December 2014

0

5

10

15

20

25

30

2 2.25 2.5 2.75 3 3.25 3.5

31/12/2014

No. of

forecasters

Cash rate forecast

Source: Bloomberg

25

House prices strength patchyStrong rises in Sydney & Melbourne

But still recovering from GFC elsewhere

Monthly dwelling pricesRP Data-Rismark hedonic prices

350

400

450

500

550

600

650

700

Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

350

400

450

500

550

600

650

700

$'000 $'000

Sydney

Melbourne

Perth

Brisbane

Adelaide

Source: RP Data-Rismark

26

Price bubble unlikelyPrices broadly in line with household borrowing capacity

House prices constrained by job insecurity

100

200

300

400

500

600

700

Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-1550

100

150

200

250

300

350

Average dwelling price (LHS)

Implied borrowing capacity (RHS)

House prices & borrowing capacity

Source: NAB estimates

$'000

Forecast

$'000

27

First home buyer blues?But state govt schemes now focus on construction

Changes caused pull forward of applications

0

5

10

15

20

25

30

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

NSW VIC QLD SA WA

Housing finance for owner occupationAll lenders, total dwellings, % first home buyers

%

Source: ABS & NAB calculations

28

Supply shortage to continueRising unemployment & interest rates weighing on construction

But enough activity to prevent under-supply worsening

25000

30000

35000

40000

45000

50000

Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 Dec-152.40

2.45

2.50

2.55

2.60

2.65

2.70

Completions (LHS) Population per dwelling (RHS)

Dwelling constructionCompletions & dwelling supply

Source: NAB estimates

Number

per qtr

$m per qtr

Forecast

29

Employment security a key constraintAccess to credit & rising interest rates becoming less of an issue

Major Constraints on Existing Property

0.50 1.50 2.50 3.50 4.50 5.50

Rising Interest Rates

Relative Returns on Other

Investments

Lack of Stock

Level of Prices

Access to Credit

Employment Security Q3'13

Q2'13

Q3'12

Not At All

Significant

Not Very

Significant

Somewhat

SignificantSignificant

Very

Significant

Source: NAB Residential Property Survey

30

Overseas interest in new constructionHigh levels of interest from Asian investors

Source: NAB Residential Property Survey

Percentage Share of Buyers (Current)

Existing Properties vs New Developments

0

5

10

15

20

25

30

35

40

45

50

Australian Resident

First Home Buyers

Australian Resident

Owner Occupiers

Australian Resident

Investors

Overseas Buyers Other

Existing Properties New Developments

%

31

Prices likely to moderateSydney, Melbourne & Brisbane stronger than others

NAB Capital City House Price Forecasts (%)*

3.04.57.6-0.1-3.49.9Capital City Average

2.52.58.63.2-4.76.2Perth

1.52.01.0-1.0-3.96.9Adelaide

4.05.04.10.7-5.63.6Brisbane

2.54.56.8-3.1-3.013.3Melbourne

4.06.011.50.8-2.211.6Sydney

201520142013201220112010

*percentage changes represent through the year growth rates to Q3

32

State of the Residential MarketPhillip Webb, 12 November 2013

33

Market overview

Market outlook

Outer eastern hot spots

34

Market Overview

35

Victoria’s economic growth still slow

36

Unemployment still stabilising

37

Interest rates still at record low

38

Confidence has improved

39

Households are still saving more

Source: Reserve Bank of Australia

40

Million dollar sales increasing

41

First home buyers lowest on record

42

Population growth again on the rise

43

Victorian residential market over 30 years

44

Melbourne residential prices over 10 years

45

Auctions and clearance rates

46

Vacancy rates relatively stable

47

Rental Growth, Melbourne

48

Market Outlook

49

50

Consumer Sentiment v Clearance Rates

51

Clearance Rates v House Price Growth

52

Sentiment v Clearance Rates v House Price Growth

53

Outer Eastern Hot Spots

54

Outer Eastern Overview

55

Top 10 House Price Growth (Quarter)

56

Top 10 Unit Price Growth (Quarter)

57

Top 10 Rental Yield Suburbs

58

Top Rental Options

59

Top Investment Options

60

REIV Research

61

62

Following the market

63

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QUESTIONS

64

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