ANZ RESEARCH

AUSTRALIAN ECONOMICS AUSTRALIAN MONTHLY CHARTBOOK

DECEMBER 2012 CONTACT
research@anz.com

ANZ FORECASTS AN ADDITIONAL 1 PERCENTAGE POINT CUT IN OFFICIAL INTEREST RATES IN 2013 Due to the further sharp weakening in mining business conditions in recent months, the tepid improvement in the non-mining sector, the deterioration in job advertising trends and the strong AUD, we now expect a further 1 percentage point cut in the cash rate over the course of 2013. This will help limit the prospective rise in the unemployment rate that job advertising is signalling. If realised, such rate moves will provide significant further support to the non-mining sectors, including the housing market. The key issue for markets and policy makers is whether the weakest sectors of the economy will strengthen sufficiently to offset the anticipated slowing in mining investment. The RBAs two rate cuts in recent months suggest the central bank wants some further insurance on this front. Overseas, lead indicators have rebounded modestly as inventories continue to be liquidated. However, we are yet to see a solid pick-up in new orders globally. As a result, we see industrial production momentum picking up only modestly through the first half of 2013, led by the US and China. In Europe, recent PMI and German IFO surveys indicate a stabilisation in growth over coming months. We forecast the central banks of the US, Japan and Europe will maintain extremely accommodative policies which will anchor bond yields. Further asset purchases or nontraditional monetary policy actions are expected to continue through 2013 this is likely to continue to put upward pressure on the AUD. Please see page 15 for further discussion on monetary policy.

Australian high frequency data tracker

Activity Retail sales Dwelling approvals (no.) Credit (total) Nab business conditions New motor vehicle sales Trade balance AiG perf. of manufacturing AiG perf. of services Labour market ANZ Job Advertisements SEEK job ads Employment growth ('000) Unemployment rate Prices Nab retail prices (qtrly rate) Nab selling prices (qtrly rate) RBA commodity prices (AUD) House prices (RPData) RBA cash rate % m/m % m/m % m/m % m/m % -0.1 0.2 -1.8 0.2 4.13 0.4 0.1 -0.7 1.8 3.50 -0.1 0.2 -1.6 -0.6 3.25 -0.2 0.1 -0.2 0.4 3.25 Flat Soft Falling Improving Dec: 3.00 % m/m % m/m % m/m % -0.8 -0.8 9.2 5.2 -3.9 -3.0 16.7 5.4 -4.6 -2.7 10.2 5.4 -2.9 -3.6 13.9 5.2 Falling Falling Soft Higher % m/m % m/m % m/m Index % m/m AUD m Index Index Average of 12m to Aug-12 0.3 -0.2 0.3 0.2 0.6 -220 46.6 46.9 Sep-12 0.5 9.5 0.3 -3.4 4.1 -1,420 44.1 41.9 Oct-12 0.0 -7.6 0.1 -4.9 -2.5 -2,088 45.2 42.8 Nov-12 -5.3 0.0 43.6 47.1 General trend Soft Weak Soft Worse Strong Deteriorating Weak Improved

Sources: ABS, ANZ, Bloomberg, NAB, RBA, RPData, SEEK

Australian Monthly Chartbook / December 2012 / 2 of 20

CHARTBOOK
GLOBAL ECONOMY: MOMENTUM SET FOR MODEST REBOUND IN EARLY 2013 Lead indicators have rebounded modestly as inventories continue to be liquidated. However, we are yet to see a solid pick-up in new orders globally. As a result, we see industrial production momentum picking up only modestly through the first half of 2013, led by the US and China. In Europe, recent PMI and German IFO surveys indicate a stabilisation in growth over coming months. We forecast the central banks of the US, Japan and Europe will maintain extremely accommodative policies which will anchor bond yields. Further asset purchases or non-traditional monetary policy actions are expected to continue through 2013. Together with a narrowing of credit spreads, US corporate credit yields are at multi-decade lows. We believe the risk of a sharp fiscal contraction in the US in 2013 is low, though there is a relatively high probability that a deal in Congress will not be reached by year-end. Looking beyond the fiscal situation, the medium term risks may be tilted to the upside. US housing activity is expected to maintain solid growth in 2013 and the US household deleveraging process is becoming mature. A key question for 2013 is how business investment responds to this pick-up in demand?
Global GDP growth
6
2.5

ANZ global lead indicator and risk appetite

Deviation from 12 month trend

1.5

0.5

-0.5

-1.5

-2 00 01 02 03 04 05 06 G7 07 08 09 10 11 12 World 13 Asia ex Japan Other

-2.5 Sep 03

Mar 05

Sep 06

Mar 08

Sep 09

Mar 11

Sep 12

ANZ inventory pulse

ANZ Risk appetite

PMIs by region
65 (Index)
180 160

ANZ global lead indicator

18% 15% Dev from 12 mth trend 12% 9% 6% 120 100 80 2000 3% 0% -3% -6% 2003 2006 2009 2012

55
Index

140

45

35

US Japan Europe C hina

25 05 06 07 08 09 10 11 12

ANZ Global lead Indicator index, lhs ANZ Steel-weighted IP, rhs

US corporate credit yields (since 1919)

20 18 16 14

Non-residential structural investment and architectural billings

60 55 (Index) 50 45 40 35 98 500 450 (US$, chained) 400 350 300 250 00 02 04 06 08 10 12 14 Architecture billing index + 18 months, lhs NR struc tural investment, rhs

12 10 8 6 4 2 0 19 24 29 34 39 44 49 54 59 64 69 74 79 84 89 94 99 04 09 14 aaa baa %

Sources: ANZ, Bank of America Merril Lynch, Bloomberg, IMF, Markit, Thomson Reuters, US Federal Reserve

Australian Monthly Chartbook / December 2012 / 3 of 20

CHARTBOOK
EUROPE: GROWTH IS SHOWING SIGNS OF BASING BUT REBOUND MAY BE MODEST There was evidence from the latest PMI and German IFO data that the cyclical slowdown in Europe may be bottoming. A run down in inventories suggests a bounce in activity into 2013. However, growth is likely to be modest at best next year as structural reform, bank deleveraging and austerity act as headwinds constraining the near-term outlook. Recent trade data suggest that the peripheral European nations are making progress in overcoming their imbalances. Part of this adjustment is cyclical and thus may not last, but there are signs some is structural (i.e. competitiveness and savings are improving). Meanwhile, the unemployment rates in many small European nations have continued to rise, resulting in the euro zone unemployment rate rising to 11.7% in October, a new cycle high albeit with Germany continuing to outperform.
Inventory pulse - Europe
2.0 1.5 1.0 0.5 Index
Index 55 50 -0.5 45 40 35 -1.5 -2.5 65 60

Regional PMIs and euro zone GDP growth

2.5 1.5 0.5 % q/q

0.0 -0.5 -1.0 -1.5 -2.0 -2.5 Jan11 Apr11 Jul11 Oct11 Jan12 Apr12 France Jul12 Oct12

30 -3.5 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 GDP, rhs Italy Germany Franc e

Euro zone

Germany

Italy

Unemployment rates by region

14 26

GDP growth by region

0.6 0.4

12

22

0.2
10 % 18

0 % q/q
%

-0.2 -0.4 -0.6 -0.8

14

10

4 00 01 EZ 02 03 04 05 06 07 France 08 09 10 Italy 11 12 Germany

6 Spain, rhs

-1 Dec 11 Germany Mar 12 France Italy Jun 12 Spain Sep 12 Euro zone

Exports by region
15 3m/3m % change

Unit labour costs - relative to Germany

1.6 Index, 1995 = 1 1.5 1.4 1.3 1.2 1.1 1.0 0.9

10 5 0 -5 -10 -15 -20 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Euro zone Germany France Italy Spain

95

97 99 Ireland Italy

01

03 05 07 Spain Netherlands

09 11 France Portugal

13

Sources: ANZ, Bloomberg, ECB

Australian Monthly Chartbook / December 2012 / 4 of 20

CHARTBOOK
US: BEYOND THE FISCAL CLIFF, BUSINESS INVESTMENT IS THE KEY TO 2013 The FOMC more than met market expectations following its December meeting. First, it plans to buy USD45bn of Treasuries outright per month after the conclusion of Operation Twist. Second, it has adopted quantitative threshold targets a 6!% unemployment rate and 2!% private consumption expenditure (PCE) core deflator, for the Fed funds rate. The latter was somewhat of a surprise. Together with a fall in household liabilities since the GFC, low interest rates have resulted in a sharp correction in the US household debt servicing ratio. We believe the housing recovery will continue through 2013 as households continue to gradually feel more comfortable with their balance sheets. One potential downside risk is from tight bank lending standards, but this could be offset by rising house prices. Under these conditions, the focus is on business investment and hiring in 2013. Corporate spreads have narrowed such that corporate bond yields are at multi-decade lows. While some of the near-term sentiment indices point to downside risks, there are a number of indicators that suggest business investment may pick up. The fiscal outlook will be key for business investment. Indeed, the latest Federal Reserves Beige book report indicated some firms were reluctant to hire full-time staff given the fiscal uncertainty. We believe a fiscal agreement will be resolved in Congress in the new year.
US household debt servicing ratio
15 (% of disposable income)
2400 2000 '000, saar 1600

US corporate bond spreads

90 80

14

70 60 50 40 30 20 10 Index

13

12

1200 800

11
400 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

10 86 88 90 92 94 96 98 00 02 04 06 08 10 12

Housing starts, lhs

NAHB housing index, rhs

Philly Fed capex expectations and business investment

20 15 10 5 % y-y 0 -5 -10 -15 -20 Recession -25 91 93 95 97 99 01 03 05 07 09 11 13 Non-residential investment, lhs -15 Philly expected capex + 12 months, rhs 30 25 20

Non-residential structural investment and architectural billings

60 55 (Index) 50 45 40 35 98 00 02 04 06 08 10 12 14 Architecture billing index + 18 months, lhs NR structural investment, rhs 500 450
(US$, chained)

15 10 5 0 -5 -10 Index

400 350 300 250

M&A activity and non-residential investment

1700 1600 1500 USDbn 1400 1300 1200 1100 1000 600 500 400 300 200 100 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Non-residential capex, lhs M&A activity, rhs

Capacity utilisation and non-residential investment

20 15 y/y % change 10 5 0 -5 -10 -15 -20 -25
USDbn

86 83 % of total capacity 80 77 74 71 68

65 90 92 94 96 98 00 02 04 06 08 10 12 Non-residential capex, lhs Capacity Utilisation, rhs

Sources: Bloomberg, CBO, Thomson Reuters

Australian Monthly Chartbook / December 2012 / 5 of 20

CHARTBOOK

CHINA: CYCLICAL UPTURN UNDER WAY; EXPECT PICK-UP IN ACTIVITY TO CONTINUE Economic growth in China appears to be picking up. In recent months, key activity indicators have largely exceeded market expectations and financial market conditions have stabilised somewhat, aided by a smooth Government leadership transition. Year-ended growth in industrial and electricity production in November was particularly positive. Meanwhile, exports grew by a modest 2.9% y/y, weighed down by weak external demand. While this followed strong year-ended growth in the months prior, it printed well below market expectations of 9% y/y. De-stocking of coal and iron ore inventories has continued. ANZ expects GDP to grow by 8% in Q4 2012, by 8.1% for 2012 and by 8.1% in 2013. We expect Chinas new leadership, and its anticipated, significant reforms, to promote economic growth going forward. Inflationary pressures are expected to remain subdued in the near term. Market liquidity constraints have eased and access to funding has improved, after the Peoples Bank of China injected large volumes of liquidity via reverse repos the amount is estimated to be equivalent to a 60-75bps cut in the reserve requirement ratio. However, due to the market volatility these operations create, we maintain our view that the PBoC will need to cut the reserve requirement ratio (RRR) by 50100bps before year end.
China - Electricity Production and Industrial Production (y/y)
China - Steel Inventories and Rebar Price
23 21 19 17 15 13 11 9 7 5 Nov Feb May Aug Nov Feb May Aug Nov Feb May Aug Nov 09 10 10 10 10 11 11 11 11 12 12 12 12
Electricity Production Industrial Production (RHS)

30 25 20 15 10 5 0 -5

10 9 8 7 6 5 4 3 Jan May Sep Jan May Sep Jan May Sep Jan May Sep 09 09 09 10 10 10 11 11 11 12 12 12 Steel inventories held by traders, mn ton Domestic rebar price, RMB/ton (RHS)

5,500 5,000 4,500 4,000 3,500 3,000 2,500 2,000

forecasts

12 11 10 9 8

6 5 4 3 2 1 0 -1 -2 -3 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Government Target

7 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13

Mar 13

forecasts

13

China-GDP(y/y)
7

China - CPI (y/y)

Sep 13

China - Reverse Repo Operations (RMB bn)

1,000 800 600 400 200 0 -200 -400 -600 -800 30/7/2012
Liquidity Withdrawal Liquidity Injection

China - Reserve Requirement Ratio

24 22 20 18 16 14 12 10 8 6 4 2006 2007 2008 2009 2010 2011 2012

Reverse Repo

25/8/2012

20/9/2012 16/10/2012 11/11/2012

Rev. Repo Matured

C umulative Net Injection

Sources: Bloomberg, CEIC

Australian Monthly Chartbook / December 2012 / 6 of 20

CHARTBOOK

AUSTRALIAN ECONOMY: WILL NON-MINING ACTIVITY STRENGTHEN SUFFICIENTLY TO OFFSET THE SLOWDOWN IN MINING INVESTMENT? Q3 GDP data reveal the Australian economy has grown below trend in each of the past two quarters (Q2 +0.6% q/q and Q3 +0.5% q/q). Furthermore, because of the sharp fall in the terms of trade (-4% q/q in Q3), real net national disposable income (i.e. income adjusted for the terms of trade) fell 0.7% q/q and nominal GDP, which is important for company revenues and profits and for government taxation revenues grew by only 0.2% q/q. (This years mid-year update assumed a 4% rise in nominal GDP over 2012-13). In addition, in earlier capex data, firms revised down their mining capex plans, while non-mining investment plans remained weak. The key issue for markets and policy makers is whether the weakest sectors of the economy (e.g. retail, housing, manufacturing and non-residential investment) strengthen sufficiently to offset the anticipated slowing in mining investment. The RBAs two monetary easings in recent months, suggests the central bank wants some further insurance on this front. The related policy question is what further should (and can) be done if non-mining activity does not strengthen sufficiently. Backing away from the delivery of a budget surplus would be a start, while the RBA could consider moves to offset some of the negative effects of the strong flow of capital into Australia, thereby taking some pressure off the high Australian dollar. The chart on business conditions by industry below succinctly summarises recent trends. The two-speed nature of the economy is evident pre-GFC; with all parts of the economy experiencing strong conditions and mining, very strong conditions. Post GFC, the two-speed nature has been quite different with mining again very strong, but other sectors weaker from early 2010. More recently, however, conditions in the mining sector have deteriorated sharply and turned negative in November and as yet, there has been no significant improvement in the other weaker sectors of the economy. This leaves overall business conditions at the lowest levels in three and a half years. The latest survey also revealed forward orders weakened sharply in November, while capacity utilisation also dropped to the lowest level since June 2009. Each of these trends, if maintained, warns of slower economic growth ahead and of the need for further policy stimulus to avoid a further rise in unemployment. This will likely require a further 50-100bps of rate cuts in 2013, with the latter figure likely if the Australian dollar remains high (or rises further), fiscal tightening is extended or global growth fails to recover as we expect. We forecast real GDP to grow at a below trend rate of around 2.5% in 2013 before returning to trend of 33.25% in 2014. Nominal GDP and GDP adjusted for the terms of trade will remain soft in 2013, before strengthening in 2014 on account of a forecast stabilisation in the terms of trade at still relatively elevated levels.

NAB business conditions

70 60 50
Index, 3-month average
84 85

NAB forward orders versus capacity utilisation

35

25

40 30 20 10 0 -10 -20 -30 -40 98 99 00 01 02 03

Mining Business conditions long run average * Includes manufacturing, retail and construction

83

15

% of total capacity

82

81

-5

80

-15

79

-25

78 99 00 01 02 03 04 05 06 07 08 09 10 11 12

-35

04

05

06

07

08

09

10

11

12

Weak sectors*

All industries

NAB capacity utilisation, 3mma (LHS)

Forward orders (RHS)

Australian Monthly Chartbook / December 2012 / 7 of 20

CHARTBOOK
Terms of trade
110

NAB capacity utilisation vs unemployment rate

8.0 7.5 7.0 77 78 79 80 81 5.5 5.0 4.5 4.0 3.5 82 83 84 85 00 01 02 03 04 05 06 07 08 09 10 11 12 Unemployment rate (lhs) Capacity utilisation (rhs)

100

90

6.5
80

% (inverted)

Index

6.0 %

60

50

40 60 64 68 72 76 80 84 88 92 96 00 04 08 12

Forecasts

70

GDP
6 Forecasts 5

Real national disposable income

10 Forecasts 8 6 4 2 0 -2 -4

% change

-1 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 GDP Q/Q change GDP Y/Y change

% change

00

01

02

03

04 05 06 07 08 09 10 11 GDP adj. for terms of trade, q/q % change GDP adj. for terms of trade, y/y % change

12

13

14

Residential investment
20 Forecasts

ANZ job ads vs unemployment rate

6.5 0.5

15

6.0

0.9

Per cent of labour force, inverted

10 % change

5.5 Per cent

1.3

5.0

1.7

4.5

2.1

-5

4.0

2.5

-10 02 03 04 05 06 07 08 09 10 11 12 13 14 Dwelling investment, q/q Dwelling investment, y/y Dwelling investment, trend y/y

3.5 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Unemployment rate (sa, LHS) ANZ job ads (RHS)

2.9

Sources: ABS, ANZ, NAB, RBA, Westpac Melbourne Institute

Australian Monthly Chartbook / December 2012 / 8 of 20

CHARTBOOK
CONSUMPTION: CONSUMPTION REMAINING SOFT ON WEAKER LABOUR MARKET OUTCOMES
Household consumption was weaker-than-expected in Q3 rising by a modest 0.3% q/q, while the household savings rate remained elevated at a little over 10%. Subdued Q3 consumption growth most likely reflects the waning of a number of factors that temporarily boosted incomes earlier in the year, including redundancy payments in Q1 and the Federal Governments Household Assistance Package in Q2. Retail sales were also weaker than expected in October and point to continuing softness in the largest part of the nonmining economy. Further, growth has an eased in Queensland in recent months, which is symptomatic of the rising unemployment rate and weakening economic conditions in that state, with WA also likely to soften. We are forecasting real consumption growth to moderate to around 2!% over 2013, largely due to a softening in household income growth. Softer income growth is consistent with forward looking indicators of the labour market, such as the ANZ Job Ads series, which suggests that labour market conditions will deteriorate and place upward pressure on the unemployment rate. While slower wages growth will be partially offset by lower interest rates, there is little evidence to suggest that reduced interest rates will significantly boost consumption, given the continued cautious outlook of Australian consumers. Indeed, consumer confidence actually fell in December despite recent interest rates. Furthermore, wealth effects are unlikely to be a catalyst for stronger consumption with house prices expected to drift sideways to marginally higher over the next year. Goods vs. services consumption
8 7 6 5 q/q % change 4 3 2 1 0 -1 -2 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Services, q/q lhs Goods, q/q lhs Services, y/y rhs Goods, y/y rhs 8 6 4 4 2 m/m % change 0 -2 -4 -6 -8 -10 -12 0 -1 -2 02 03 04 05 06 07 08 09 10 11 12 m/m sa, lhs m/m trend, lhs y/y sa, rhs -2 -4 -6 post 1993 average annual % change, rhs 3 2 1 4 2 0 y/y % change y/y% change 6 6 5

Retail sales
10 8

Retail sales by state

170 160

Nominal consumption, income and savings rate

15 Savings rate Average annual % change (nominal) Household consumption 50

Forecasts

Disposable income

45 40 35 30 25 Savings rate (%)

150 140

10

Index, 2005 = 100

130 120 110 100 90

5 20 15 0 10 5 0

Jan-05 NSW

Jan-06 Vic

Jan-07 Qld

Jan-08 SA

Jan-09 WA

Jan-10 Tas

Jan-11 NT

Jan-12 ACT Total

-5 02 03 04 05 06 07 08 09 10 11 12 13

-5

Consumer confidence
2 Standard deviations from average since 1990

Wealth
7,000 Total net household wealth aggregate household wealth, $bn 6,000 5,000 4,000 3,000 2,000 1,000 0 Net housing wealth Net financial wealth

-1

-2

-3

-4 90 92 94 96 98 00 02 04 06 08 10 12 Westpac - Melbourne Institute confidence Roy Morgan confidence

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Sources: ABS, ANZ, RBA, Residex, RP Data

Australian Monthly Chartbook / December 2012 / 9 of 20

CHARTBOOK
LABOUR MARKET AND WAGES: SOFT OUTLOOK DESPITE UPSIDE EMPLOYMENT SURPRISES Upside surprises in recent official data suggests the labour market has been holding up a little better than expected. In November, the unemployment rate dropped to 5.2% from 5.4% in the previous two months. While this was partly driven by a fall in the participation rate to 65.1%, employment also gained 13.9K in November, with average monthly employment growth of +13.6K over the past three months. On a state-by-state basis however, there is little evidence of positive employment momentum outside of WA. Trend employment gains are negative in Victoria and only marginally positive in NSW, Qld, SA and NT. In trend terms, the unemployment rate is now rising in WA and Queensland. SEEK internet job advertisements have turned down sharply in both states in recent months, a trend confirmed by weaker business conditions. . Consistent with these trends, employment by industry data shows declines in mining and professional services over the six months to November. Employment in agriculture, real estate, financial and insurance services also fell over the same period, while it rose in manufacturing, retail trade, hospitality, transport and health. Wages data for Q3 suggests weaker labour market conditions are starting to translate into slower growth in wages and labour costs. The quarterly pace of growth in the wage price index eased to 0.7% q/q, down from outcomes of 0.91.0% q/q in the previous three quarters and the annualised pace over the six months to September eased to below 3!%. Average compensation of employees (a broader measure including overtime, bonuses and non-salary benefits) declined in the quarter, despite an expected boost from redundancy payments. Together with another improvement in nominal non-farm labour productivity (0.4% q/q and 3.0% y/y), this saw unit labour costs decline in the quarter (-0.3% q/q and +0.5% y/y). More recently, survey data suggest labour cost growth stepped down in the three months to November (after a small spike in July/August most likely associated with the increase in the minimum wage). Forward-looking indicators of labour demand have continued to trend down in recent months, including job advertisements and the NAB employment index. We continue to expect the unemployment rate to ratchet higher through 2013 as national income growth remains below average, as firms re-build margins by further improving productivity and as the public sector limits hiring. Wage growth will likely remain moderate. Revisions to official labour force data due to the incorporation of updated population estimates were minor for key ratios such as the unemployment rate and employment-to-population ratio. There were more notable revisions to annual employment growth, however, with annual employment growth now running at 1.1% y/y.
Employment growth & unemployment rate
120 100 80 '000s per month 60 Trend 40 20 0 -20 Employment growth (000s, LHS) -40 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Jan12 Apr12 Jul12 Oct12 4.0 4.8 4.6 4.4 4.2 Unemployment rate (RHS) 5.6 5.4 5.2 5.0
y/y % ch 5.0 4.5 4.0 3.5 3.0

Annual employment growth (inc. revisions)

Annual employment growth

Per cent

2.5 2.0 1.5 1.0 0.5 0.0 Prior month Current month

-0.5 05 06 07 08 09 10 11 12

Monthly employment change by state

17.5 15.0 12.5 Mth change 000s (trend) 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5 09 10 11 12 13 09 10 11 12 13 17.5 15.0 12.5 10.0 7.5 5.0 2.5 0.0 -2.5 -5.0 -7.5

Monthly unemployment rate by state (trend)

10 9 Unemployment rate, % (trend) 8 7 6 5 4 3 2 01 02 03 04 05 06 07 08 09 10 11 12 13 01 02 03 04 05 06 07 08 09 10 11 12 13 NSW VIC QLD AUS WA SA TAS ACT NT 10 9 Unemployment rate, % (trend) 8 7 6 5 4 3 2

Mth change 000s (trend)

NSW

VIC

QLD

SA

WA

TAS

ACT

NT

Australian Monthly Chartbook / December 2012 / 10 of 20

CHARTBOOK
Measures of job advertisements
200
Index (trend), deviation from long-run average 15 10 5 0 -5

NAB survey vs labour demand

5 4 3 2 y/y% ch (trend) 1 0 -1 -2 -3 -4 -5 2001 2003 2005 2007 2009 2011 2013 Employment (RHS) Total hours worked (RHS)

Jan 2006 = 100, seasonally adjusted

180

160

140

120

-10 -15 -20 -25 -30 1999

100

80

60 06 07 08 09 10 11 12 ANZ Job Advertisements Series SEEK New Job Ads DEEWR Internet Vacancies

NAB employment 6m forward (LHS)

SEEK internet job ads by state

Mining States 900 800 Index, average 2002-04 = 100 (s.a.) 700 Non-mining States

Wage price index by industry

7

y/y % change

600 500 400 300 200 100 04 05 NT 06 07 QLD 08 09 10 WA 11 12 AUS 04 05 06 NSW AUS 07 08 VIC ACT 09 10 TAS 11 12 SA

2 01 02 03 04 05 06 07 08 09 10 11 12 Mining Construction All industries Manufacturing Retail trade Professional services

Employment by industry chart

Agriculture, Forestry and Fishing Manufacturing Wholesale Trade Information Media and Telecommunications Financial and Insurance Services Arts and Recreation Services Public Administration and Safety Other Services Retail Trade Construction Electricity, Gas, Water and Waste Services Administrative and Support Services Transport, Postal and Warehousing Accommodation and Food Services Education and Training Professional, Scientific and Technical Services Mining Health Care and Social Assistance
Index, Feb 2005 = 100 240 260

Employment by industry chart

Health Care and Social Assistance Mining Manufacturing Construction Retail Trade Professional, Scientific and Technical Services Education and Training Rental, Hiring and Real Estate Services Administrative and Support Services
260 240 Agriculture, Forestry and Fishing Electricity, Gas, Water and Waste Services Wholesale Trade Accommodation and Food Services Transport, Postal and Warehousing Information Media and Telecommunications Financial and Insurance Services Public Administration and Safety Arts and Recreation Services Other Services

Rental, Hiring and Real Estate Services

220

220

200

200

180

180

160

160

140

140

120

120

100

100

80 05 06 07 08 09 10 11 12

80 05 06 07 08 09 10 11 12

-40 -20

20

40

60

80

100 120 140 160 180

Year to latest

Past 3 years

Productivity and unit labour costs

8
2.5

Surveyed labour costs vs wage price index

1.4

Index, 3-month moving average

2.0

1.2

1.5

1.0 q/q % ch

% y/y

1.0

0.8

0.5

0.6

-2

0.0

0.4

-4 02 03 04 05 06 07 08 09 10 11 12 13
Labour productivity (per hour) Av. compensation per employee (non-farm) Unit labour costs (nominal, non-farm)

-0.5 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 NAB labour costs index, 3m fwd (LHS)

0.2 Wage price index - private sector (RHS)

Sources: ABS, ANZ, NAB, SEEK, Westpac-Melbourne Institute, DEEWR

Australian Monthly Chartbook / December 2012 / 11 of 20

CHARTBOOK

INVESTMENT: MINING DOWNGRADED, NON-MINING REMAINS WEAK The most recent CAPEX release showed that expectations for total nominal CAPEX in 2012-13 were revised 3% lower from the previous estimate. This downgrade was driven entirely by the mining sector, with raw mining CAPEX expectations for 2012-13 revised 8% lower the sharpest downward revision on record albeit from record levels. The downgraded expectations for mining investment are consistent with deteriorating business conditions in this sector reflecting the adverse impacts of lower commodity prices, the still high Australian dollar and ongoing global economic uncertainty. Subjectively adjusting the raw CAPEX intentions for historical spending patterns, mid-point realisation ratio estimates suggest that total nominal CAPEX may rise 10% y/y in 2012-13, below the previous estimate of around 17% y/y. Nominal mining investment may rise around 20% y/y in 2012-13 versus the previous estimate of around 40% y/y growth. Non-mining CAPEX may fall around 7% y/y, broadly in line with the previous estimate. These estimates, however, are highly sensitive to the realisation ratios applied. For example, applying the lowest and highest realisation ratios for mining investment over the past five years to mining firms current CAPEX intentions for 2012-13 yields very different results. If actual mining investment is close to the mid-point estimates this would suggest only modest further growth in mining investment in coming quarters. For the non-mining sector, the quarterly profile would suggest further weakness through 2012-13 The RBA recently downgraded its mining investment forecast for 2012-13 to a little above 8% of GDP from around 9% of GDP. While this downgrade was substantial, the latest capex data suggest this forecast is now a best case scenario with the 'low' CAPEX estimate around ! a percentage point of GDP lower. This creates the risk that mining investment may now peak at an even lower level than previously forecast by the RBA, meaning that non-mining activity needs to pick up more sharply than before to maintain reasonable growth.. Private non-residential building approvals a leading indicator of activity suggest ongoing weakness in activity outside of the health sector. Retail building approvals remain subdued, most likely reflecting the structural changes facing bricks and mortar retailers, while office construction activity also remains weak. As such, there is currently little indication that activity in the non-mining sectors of the economy will pick-up sufficiently to offset the fall in mining investment, suggesting the RBA will maintain an easing bias in 2013.

Unadjusted mining investment intentions

140 Investment intentions downgraded by 8% 120

CAPEX intentions
High Low 80 AUD billions

120 $ millions, current prices

100

100

80

60

60

40 20 20 0 2006-07 Est 1 2007-08 Est 2 2008-09 Est 3 2009-10 Est 4 2010-11 Est 5 2011-12 Est 6 2012-13 Actual

00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 Mining Non-mining
* Uses the highest and lowest realisation ratios from the previous five years

Expectations*

40

Australian Monthly Chartbook / December 2012 / 12 of 20

CHARTBOOK
NAB business conditions
40 70 60 50 100 $billions, current prices 120

Mining CAPEX intentions (nominal)

2012/13 estimate (high realisation ratio)

30

Index, 3-month average

Index, 3-month average

20

40 30 20

80

2012/13 estimate (low realisation ratio)

10

60

10 0

40

-10

-10 -20 -20

20

0 -30 07 08 09 10 11 12 -30 Jun-00 Jun-02 Jun-04 Annual mining investment Jun-06 Jun-08 Jun-10 Jun-12 Quarterly mining investment, annualised

Mining (lhs)

Western Australia (rhs)

*Uses the highest and lowest realisation ratios from the previous five years

Non-mining CAPEX intentions (nominal)

90

CAPEX by state
18 16 14

2012/13 estimate (high realisation ratio)

80 $billions, current prices

$bn per quarter, real

70

12 10 8 6 4 2

60

50

2012/13 estimate (low realisation ratio)

40

30 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12

0 00 01 NSW 02 03 Vic 04 05 Qld 06 07 SA 08 WA 09 10 Tas 11 12 NT

Annual non-mining investment

Quarterly non-mining investment, annualised

*Uses the highest and lowest realisation ratios from the previous five years

Share of nominal mining CAPEX

60

Private non-residential building approvals

3.0

Share of nominal mining investment

50

2.5

30

% of nominal GDP

40

2.0

1.5

20

1.0

10

0.5 Total private non-residential approvals Total private non-residential approvals (excluding health)
09 10 11 12

0.0

Coal

Oil and gas

Metal ores

Other mining

02

03

04

05

06

07

08

09

10

11

12

Private non-residential building approvals by sector

0.9 0.8 0.7 % of nominal GDP 0.6 0.5 0.4 0.3 0.2 0.1 Retail approvals 0.0 02 03 04 05 06 07 08 09 10 11 12 Office approvals Industrial approvals
% of nominal GDP 9 8 7 6 5 4 3 2 1 0 80 82 84 86

Investment share of GDP

88

90

92

94

96

98

00

02

04

06

08

10

12

14

Engineering construction

Dwelling investment

Non-residential building

Sources: ABS, ANZ, NAB,

Forecasts

Australian Monthly Chartbook / December 2012 / 13 of 20

CHARTBOOK
FISCAL POLICY: A RETURN TO SURPLUS ONLY APPROPRIATE WHEN GDP GROWING AT TREND The Government recently restated its intention to deliver an underlying cash surplus in 2012-13 given current conditions of low unemployment, growth around trend (on a year-ended basis) and a strong investment pipeline. However as economic data evolve and Treasurys latest nominal 4% GDP growth forecast looks increasingly doubtful, the 11% revenue growth forecast will also likely prove to be too strong. In these circumstances, the Government will have to either implement a mini-budget to lower expenditure to achieve the forecast surplus or allow the budget to remain in deficit, albeit smaller than in 2011-12, implying still strong fiscal tightening. Slowing employment and wages growth (as below) suggests income tax withheld (which contributes around 40% of revenue) will struggle to record the 6% growth projected for 2012-13 by Treasury. Also, the terms of trade, a crucial determinant of mining company profits and mineral resources rent tax (together contributing about 20% of total revenue), is now expected to fall around 9% in 2012-13 suggesting downside risks to these sources of revenue. We believe the Government should allow some fiscal slippage as the economy slows, especially if monetary policy is required to be eased further as we expect. If GDP growth slips below trend on a year-ended basis when the December quarter National Accounts are released in early March, this would seem an opportune time for the Government to change tack on its surplus commitment. Regardless of the deficit outcome, the Commonwealths debt burden is unlikely to increase significantly from 2011-12 levels. Even if a deficit is recorded in 2012-13 it will be much smaller than in 2011-12 and so the debt outlook will still improve, just not quite to the same degree. If there is no mini-budget earlier, the 2013-14 budget on 14 May will provide the basis for the fiscal policy debate in the lead up to the 2013 Federal election, which is expected in the second half of the year.
Federal underlying cash balance
10
14 14
forecasts

Growth in wages and gross income tax withholding

0 -10 AUDbn -20 -30 -40 -50 2010-11 Budget, May 11 2011-12 2012-13 2013-14 2014-15 2015-16
forecasts

12 10 8 6

12 10 8 6

y/y %

y/y %

4 2 0 -2 -4 -6

4 2 0 -2 -4 -6 03 04 05 06 07 08 09 10 11 12 13 14

MYEFO, Nov 11

Budget, May 12

MYEFO, Oct 12

Gross income tax withheld (3-month average, LHS)

Total Compensation of Employees (RHS)

Growth in terms of trade and company tax

200
100
forecasts

Net debt
50 40 30

18 150 100 AUDbn 50 0 -2 -6 forecasts -50 -100 1971 1976 1981 1986 1991 Net debt AUDbn, lhs 14 10 % of GDP 6 2

80 60 40

20 10 0

y/y %

20 0 -20 -40 -60 03 04 05 06 07 08 09 10 11 12 13 14

Company tax (3-month average, LHS) Terms of Trade, (RHS)

-10 -20 -30

y/y %

-10 1996 2001 2006 2011 2016 Net debt % of GDP, rhs

Sources: ABS, Commonwealth Budget, ANZ

Australian Monthly Chartbook / December 2012 / 14 of 20

CHARTBOOK

HOUSING: SALES, PRICES AND CONSTRUCTION SHOWING TENTATIVE SIGNS OF IMPROVEMENT The housing sales market continues to experience a modest recovery, with sales activity showing tentative signs of improvement. Housing sales have picked up in recent months, with Sydney and Melbourne auction sales and clearance rates increasing to two year highs. House prices, however, have edged moderately lower in Sydney, Melbourne and Brisbane in recent weeks, despite 175 bps of RBA rate cuts in the current easing cycle and mortgage rates only moderately higher than GFC lows. This suggests that buyer demand is not quite keeping pace with the increased number of properties listed for sale with multi-year high sales listings in recent months. Weak home buyer sentiment and soft state economic growth is expected to continue to weigh on house prices, particularly in Melbourne, Adelaide and Hobart. Housing demand/supply fundamentals continue to tighten, with net migration and population growth reaccelerating and a need for additional housing in most capital cities. Pent up home buyer demand combined with falling interest rates and improved market sentiment have set the scene for a cyclical rebound in dwelling investment. But it is proving slow to eventuate, with new dwelling approvals only 10.6% off their recent cyclical lows, and building activity soft. There are structural constraints to new residential construction and developer sentiment remains weak. The recent rebound in medium/high-density dwelling approvals provides some hope of an increase in construction activity.
House prices
Sydney
675 650 625 600

Residential properties advertised for sale

RBA target cash rate (rhs)
5.00 4.75 4.50 4.25 4.00 3.75 3.50 3.25 3.00 2.75 2.50
%

Melbourne

Brisbane

Perth

$000's, original

575 550 525 500 475 450 425 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12

Dec 12

Building approvals
Houses (trend) Houses (sa) 12,000 Dwelling investment, $ billion (real $ 2009-10) Other dwellings* (trend) Other dwellings* (sa) 11 10 9 8 7 6 5 4 3

Private sector dwelling investment

New dwellings (Seas Adj) New dwellings (Trend) Alterations & additions (Seas Adj) Alterations & additions (Trend)

10,000

8,000
Number ('000s)

6,000

4,000

2,000
* Flats, units, apartments, semi-detached/row/terrace houses

98

99

00

01

02

03

04

05

06

07

08

09

10

11

12

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

House deposit* affordability, capital cities

Sydney Melbourne Brisbane Adelaide Perth Hobart Darwin Canberra

Housing finance
First home buyer 120 Upgrader (excl. refin.) Investor (excl. refin.)

150
% of average annual state household disposable income

* Calculated for 20% of capital city house price

130

100

90

$bil, annualised trend

110

80

60

70

40

50

20

30 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Sources: ABS, ANZ, RBA, Residex, RP Data

Australian Monthly Chartbook / December 2012 / 15 of 20

CHARTBOOK
MONETARY POLICY: ANZ FORECASTS AN ADDITIONAL 1 PERCENTAGE POINT OF OFFICIAL INTEREST RATE CUTS IN 2013 The RBA eased monetary policy twice in Q4, concluding that the non-mining sector needed further stimulus to develop stronger growth momentum to compensate for the hole that will be left as mining investment peaks earlier and at a lower level than previously expected and its contribution to growth begins to reduce. A stubbornly high AUD, tighter fiscal policy, continuing consumer preference for debt reduction and weaker labour market lead indicators reinforced the need for this further policy action. A range of macro indicators that historically have provided reliable confirmation of interest rate trends continue to signal further downward pressure on Australian official cash rates (eg job advertising, capacity utilisation and business conditions). Indeed, many of these indicators have deteriorated more sharply in recent months, reflecting worsening conditions in the mining sector, which has also been evident in sharper drops in job advertising and business conditions in Western Australia and Queensland. So far indications of strengthening in the non-mining sector sufficient to offset the current and prospective softening in mining activity have been at best modest. Lead indicators of residential housing construction have improved modestly and there are anecdotal reports of a slight improvement in retail spending, though the official data do not confirm this as yet. Non-residential construction approvals however remain weak (and have in fact declined in recent months), while non-mining investment plans also remain weak. The emerging weakness in indicators of conditions in mining, of themselves, suggest the need for further easing as they reveal the soft underbelly of the non-mining economy that has been emerging since early 2010. The still strong (and now higher AUD since the last rate cut) adds to that need but also strengthens the argument that the time has come to consider addressing the currency issue in other ways including via intervention, given this development increasingly is at odds with domestic Australian fundamentals. Fiscal policy is reinforcing the slowdown at the present time, which does not seem wise, barring an offsetting move to lower rates more aggressively. Thankfully, the Government appears to be preparing the groundwork to step back from its commitment to return the budget to surplus in 2012-13 as nominal GDP growth has slowed. To be sure, making monetary policy (and overall policy) in Australia is becoming increasingly difficult given continued global policy settings of zero interest rates in major regions and additional quantitative easing which is keeping the US$ weak and boosting the AUD, even as Australian interest rates are reduced and Australian fundamentals weaken. Australian rates and yields continue to remain very attractive even at these lower levels viewed from a global perspective and there has been a noticeable pick up in recent interest by foreigners in Australian commercial and office property assets. Together this reinforces our expectation that the AUD broadly is likely to remain well supported in the near term. RBA Deputy Governor Lowe argued in a recent speech that the average level of interest rates would likely be lower than in the recent past due to global monetary policy settings and changed consumer preference for debt. To date, the RBAs decisions have mainly been reflective of global and domestic activity developments. Increasingly, there is the risk, that additional interest rate adjustments may be required on account of the AUD's continuing strength. On the basis of the further sharp weakening in business conditions in mining in recent months, the tepid improvement in the non-mining sector, the deterioration in job advertising trends, and the strong AUD, ANZ now expects a further 1 percentage point cut in cash rates over the course of 2013. This will help limit the prospective rise in the unemployment rate that recent more pronounced weakness in job advertising is signalling. To be sure, if realised, such rate moves will provide significant further support for the housing sector, though a continuing modest increase in the unemployment rate is likely to moderate the strength of the housing recovery.

Australian Monthly Chartbook / December 2012 / 16 of 20

CHARTBOOK
RBA cash rate: market expectations (13 December) Monthly Cumulative change change Expected (bps) (bps) cash rate Feb-13 -0.15 -0.15 2.86 Mar-13 -0.09 -0.24 2.77 Apr-13 -0.09 -0.32 2.71 May-13 -0.05 -0.37 2.64 Jun-13 -0.06 -0.43 2.60 Jul-13 -0.03 -0.46 2.58 Aug-13 -0.03 -0.49 2.55 Sep-13 0.00 -0.49 2.55 Oct-13 0.00 -0.49 2.54 Nov-13 0.01 -0.49 2.55 Dec-13 0.01 -0.48 2.56 ANZ job ads vs cash rate
350 Forecasts 300 250 July 1975 = 100 200 150 100 50 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 ANZ job ads* (trend), LHS * Newspaper job ads until 2004 and total job ads since RBA cash rate, RHS 8
900

RBA cash rate: ANZ forecasts vs. market pricing

4.50

4.00

3.50

3.00

2.50

2.00

1.50 Jan-12 Apr-12 Jul-12 Oct-12 ANZ Forecast Current Cash Rate Futures Cash Rate Futures (1 August 12) Cash Rate Futures (3 December 12) Jan-13 Apr-13 Jul-13 Oct-13 RBA Cash Rate Cash rate futures (1 May 12) Cash Rate Futures (5 November 12)

Seek job ads by state

Mining States Non-mining States

7
800

6 5

Index, average 2002-04 = 100 (s.a.)

700 600 500 400 300 200

4 3 2 1

100 04 05 NT 06 07 QLD 08 09 10 WA 11 12 AUS 04 05 06 NSW AUS 07 08 VIC ACT 09 10 TAS 11 12 SA

NAB business conditions

70 60 50
Index, 3-month average
84 85

NAB capacity utilisation and cash rate

8

40 30 20 10 0 -10 -20 -30 -40 98 99 00 01 02 03

Mining Business conditions long run average * Includes manufacturing, retail and construction % of total capacity

83 6 82

5 81 4 80 3

79

78 00 01 02 03 04 05 06 07 08 09 10 11 12

04

05

06

07

08

09

10

11

12

Weak sectors*

All industries

Capacity utilisation (LHS)

RBA cash rate (RHS)

Sources: ABS, ANZ, Bloomberg, RBA

Australian Monthly Chartbook / December 2012 / 17 of 20

CHARTBOOK
BOND MARKET: SEMIS & SPREAD PRODUCT TAKE CENTRE STAGE The bias to an extension of the gradual easing cycle keeps us positive duration on Australia but we see better value in spread product going into 2013. The latest quarterly data show a small fall in the percentage of foreign ownership of CGS from 76.6% to 72.2% indicating that overseas interest in CGS may be maturing. Foreign (percentage) ownership of semis has been relatively stable for a couple of years and this should increase in the future as it makes sense for investors to switch to higher-yielding semis, especially as they remain cheap relative to bonds. Semi spreads widen rapidly up to the 5-year point and then flatten off, especially for the AAA-rated states. The semis market is still tiered according to credit rating and NSWTC and WATC have moved above TCV after S&P recently changed the outlook on these states to negative from stable. The mid-year reviews should provide better information on states debt levels and spreads should come in if revenues are higherthan-expected. The 3-year swap spread is moving to a lower range and signals a better credit environment, which will also increase the attractiveness of semis.
Nominal growth and AAA-rated countries
5 4 3 2 % 1 0 (1) (2) AUS NETH FIN UK SWED NOR CAN GE DEN SING 250 200 AUD (b) 150 100 50 0 98 00 02 04 06 08 10 12 CGS on issue % CGS held offshore (rhs) Semis on issue % semis held offshore (rhs)

Foreign percentage ownership of CGS has fallen but still remains high
300 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

10-yr bond yields

Nominal growth rate

ACGB coverage ratio still high, keeping yields low

6.00 6.00

Redemptions next year dominated by May-13 ACGB bond

25

5.00 5.00 4.00 Yield %

20

2.00 3.00 1.00 2.00 Jan 10 0.00 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12

$Ab 10 5 0
May- Jun- Aug- Oct- Dec- Apr- Jun13 13 13 13 13 14 14 Jul14 Aug- Oct- Nov- Apr- Oct14 14 14 15 15

4.00

3.00

15

AUS 5-yr generic bond yield

Moving average

NSW

QLD

VIC

WA

SA

NT

TAS

AUS

Spreads widen rapidly to 5-year point

120 120 100 80 60 NSWTC (AAA) 40 20 0 Oct-12 TCV (AAA) SAFA (AA) TAS (AA+) Jul-15 Apr-18 Jan-21 Oct-23 Jun-26 QTC (AA+) WATC (AAA) NTTC (AA-) Basis points 100 80 60 40 20 0 Jan-11

Better environment for credit

1.20 1.00 0.80 0.60 0.40 0.20 0.00 Jul-11 Jan-12 Jul-12 BBSW/OIS 3-month spread (rhs)

Basis points

3-year swap sread (lhs)

Sources: ANZ, Bloomberg

Australian Monthly Chartbook / December 2012 / 18 of 20

CHARTBOOK
AUD: SHORT TERM REALIGNMENT, STUBBORNLY HIGH IN THE LONG TERM Foreign direct investment (FDI) has become a new pillar of support for the Australian dollar, with flows from foreign central banks abating, according to recent data on Australias balance of payments. Net FDI inflows are now the major funding vehicle of the current account. Since these flows are typically the result of longer term business investment decisions, they are therefore less sensitive to short term financial market uncertainty. This can help explain why the Australian dollar has been so stable recently and has traded in a well-behaved fashion within a narrow range. Our current view on the Australian dollar is that it will remain well supported over 2013. With the trend towards slower inflows into CGS expected to continue, and the likelihood that FDI will slow alongside the peak in the mining investment pipeline, we recently revised our forecast peak for AUD/USD to 1.05 from 1.07 previously, but broadly expect a strong and overvalued Australian dollar to permit in 2013.
Australian dollar against major crosses (daily)
100 " cents, pence, yen 90 1.40 US$ NZ$ 1.26
pips 400

AUD/USD average daily trading range

pips 400

300

300

80

1.12 200 200

70

0.98 100 100

60

0.84

50 2010
vs euro (LHS)

0.70 2011
vs GBP (LHS) vs JPY (LHS)

2012
vs USD (RHS) vs NZD (RHS)

0 2005 2006 2007 2008 2009 2010 2011 2012 2013

Balance of payments (share of GDP)

10.0 10.0
2

Basic balance & AUD TWI

105

90

5.0

5.0
-2 75

0.0

0.0

-4

60

-5.0

-5.0

-6

45

-8

30 1987 1995 2003 2011

-10.0 2005 FDI 2007 Portfolio equity 2009 2011 Portfolio debt Banks & money markets

-10.0

1979

Basic balance % of GDP, 4-qtr rolling sum

TWI (May 1970 = 100, RHS)

RBA FX Transactions (AUDb)

6 Purchases of foreign currency One-off purchase of SDRs from Commonwealth received under IMF General & Special Allocations of 2009 1 6 NZ$ 1.4

AUD/NZD and interest rates (daily)

% 3.0 2.0 1.3 1.0 1.2 0.0 -1.0 1.1 -2.0 1.0 2006 2007 2008 2009 2010 2011 2012 2013 -3.0

AUD1.3 bn increase in 4 reserves in 3 months to October 2

-2

Lehmans intervention Sales of foreign currency 2006 2008

-2

-4 2004

-4 2010 2012

RBA FX transactions (excuding swap deliveries)

AUD/NZD (LHS)

2-year swap spread (RHS)

Sources: ABS, ANZ, Bloomberg, JPMorgan, RBA

IMPORTANT NOTICE
The distribution of this document or streaming of this video broadcast (as applicable, publication) may be restricted by law in certain jurisdictions. Persons who receive this publication must inform themselves about and observe all relevant restrictions. 1. COUNTRY/REGION SPECIFIC INFORMATION: AUSTRALIA. This publication is distributed in Australia by Australia and New Zealand Banking Group Limited (ABN 11 005 357 522) (ANZ). ANZ holds an Australian Financial Services licence no. 234527. A copy of ANZ's Financial Services Guide is available at http://www.anz.com/documents/AU/aboutANZ/FinancialServicesGuide.pdf and is available upon request from your ANZ point of contact. If trading strategies or recommendations are included in this publication, they are solely for the information of wholesale clients (as defined in section 761G of the Corporations Act 2001 Cth). Persons who receive this publication must inform themselves about and observe all relevant restrictions. BRAZIL. This publication is distributed in Brazil by ANZ on a cross border basis and only following request by the recipient. No securities are being offered or sold in Brazil under this publication, and no securities have been and will not be registered with the Securities Commission - CVM. BRUNEI. JAPAN. KUWAIT. MALAYSIA. SWITZERLAND. TAIPEI. This publication is distributed in each of Brunei, Japan, Kuwait, Malaysia, Switzerland and Taipei by ANZ on a cross-border basis. EUROPEAN ECONOMIC AREA (EEA): UNITED KINGDOM. ANZ is authorised and regulated in the United Kingdom by the Financial Services Authority (FSA). This publication is distributed in the United Kingdom by ANZ solely for the information of persons who would come within the FSA definition of eligible counterparty or professional client. It is not intended for and must not be distributed to any person who would come within the FSA definition of retail client. Nothing here excludes or restricts any duty or liability to a customer which ANZ may have under the UK Financial Services and Markets Act 2000 or under the regulatory system as defined in the Rules of the FSA. GERMANY. This publication is distributed in Germany by the Frankfurt Branch of ANZ solely for the information of its clients. OTHER EEA COUNTRIES. This publication is distributed in the EEA by ANZ Bank (Europe) Limited (ANZBEL) which is authorised and regulated by the FSA in the United Kingdom, to persons who would come within the FSA definition of eligible counterparty or professional client in other countries in the EEA. This publication is distributed in those countries solely for the information of such persons upon their request. It is not intended for, and must not be distributed to, any person in those countries who would come within the FSA definition of retail client. FIJI. For Fiji regulatory purposes, this publication and any views and recommendations are not to be deemed as investment advice. Fiji investors must seek licensed professional advice should they wish to make any investment in relation to this publication. HONG KONG. This publication is distributed in Hong Kong by the Hong Kong branch of ANZ, which is registered by the Hong Kong Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities. The contents of this publication have not been reviewed by any regulatory authority in Hong Kong. If in doubt about the contents of this publication, you should obtain independent professional advice. INDIA. This publication is distributed in India by ANZ on a cross-border basis. If this publication is received in India, only you (the specified recipient) may print it provided that before doing so, you specify on it your name and place of printing. Further copying or duplication of this publication is strictly prohibited. NEW ZEALAND. This publication is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised adviser service under the Financial Advisers Act 2008. OMAN. This publication has been prepared by ANZ. ANZ neither has a registered business presence nor a representative office in Oman and does not undertake banking business or provide financial services in Oman. Consequently ANZ is not regulated by either the Central Bank of Oman or Omans Capital Market Authority. The information contained in this publication is for discussion purposes only and neither constitutes an offer of securities in Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy nonOmani securities in Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued vide CMA Decision 1/2009). ANZ does not solicit business in Oman and the only circumstances in which ANZ sends information or material describing financial products or financial services to recipients in Oman, is where such information or material has been requested from ANZ and by receiving this publication, the person or entity to whom it has been dispatched by ANZ understands, acknowledges and agrees that this publication has not been approved by the CBO, the CMA or any other regulatory body or authority in Oman. ANZ does not market, offer, sell or distribute any financial or investment products or services in Oman and no subscription to any securities, products or financial services may or will be consummated within Oman. Nothing contained in this publication is intended to constitute Omani investment, legal, tax, accounting or other professional advice. PEOPLES REPUBLIC OF CHINA. If and when the material accompanying this publication does not only relate to the products and/or services of Australia and New Zealand Bank (China) Company Limited (ANZ China), it is noted that: This publication is distributed by ANZ or an affiliate. No action has been taken by ANZ or any affiliate which would permit a public offering of any products or services of such an entity or distribution or re-distribution of this publication in the Peoples Republic of China (PRC). Accordingly, the products and services of such entities are not being offered or sold within the PRC by means of this publication or any other method. This publication may not be distributed, re-distributed or published in the PRC, except under circumstances that will result in compliance with any applicable laws and regulations. If and when the material accompanying this publication relates to the products and/or services of ANZ China only, it is noted that: This publication is distributed by ANZ China in the Mainland of the PRC. QATAR. This publication has not been, and will not be: lodged or registered with, or reviewed or approved by, the Qatar Central Bank ("QCB"), the Qatar Financial Centre ("QFC") Authority, QFC Regulatory Authority or any other authority in the State of Qatar ("Qatar"); or authorised or licensed for distribution in Qatar, and the information contained in this publication does not, and is not intended to, constitute a public offer or other invitation in respect of securities in Qatar or the QFC. The financial products or services described in this publication have not been, and will not be: registered with the QCB, QFC Authority, QFC Regulatory Authority or any other governmental authority in Qatar; or authorised or licensed for offering, marketing, issue or sale, directly or indirectly, in Qatar. Accordingly, the financial products or services described in this publication are not being, and will not be, offered, issued or sold in Qatar, and this publication is not being, and will not be, distributed in Qatar. The offering, marketing, issue and sale of the financial products or services described in this publication and distribution of this publication is being made in, and is subject to the laws, regulations and rules of, jurisdictions outside of Qatar and the QFC. Recipients of this publication must abide by this restriction and not distribute this publication in breach of this restriction. This publication is being sent/issued to a limited number of institutional and/or sophisticated investors (i) upon their request and confirmation that they understand the statements above; and (ii) on the condition that it will not be provided to any person other than the original recipient, and is not for general circulation and may not be reproduced or used for any other purpose. SINGAPORE. This publication is distributed in Singapore by the Singapore branch of ANZ solely for the information of accredited investors, expert investors or (as the case may be) institutional investors (each term as defined in the Securities and Futures Act Cap. 289 of Singapore). ANZ is licensed in Singapore under the Banking Act Cap. 19 of Singapore and is exempted from holding a

IMPORTANT NOTICE

financial advisers licence under Section 23(1)(a) of the Financial Advisers Act Cap. 100 of Singapore. In respect of any matters arising from, or in connection with the distribution of this publication in Singapore, contact your ANZ point of contact. UNITED ARAB EMIRATES. This publication is distributed in the United Arab Emirates (UAE) or the Dubai International Financial Centre (as applicable) by ANZ. This publication: does not, and is not intended to constitute an offer of securities anywhere in the UAE; does not constitute, and is not intended to constitute the carrying on or engagement in banking, financial and/or investment consultation business in the UAE under the rules and regulations made by the Central Bank of the United Arab Emirates, the Emirates Securities and Commodities Authority or the United Arab Emirates Ministry of Economy; does not, and is not intended to constitute an offer of securities within the meaning of the Dubai International Financial Centre Markets Law No. 12 of 2004; and, does not constitute, and is not intended to constitute, a financial promotion, as defined under the Dubai International Financial Centre Regulatory Law No. 1 of 200. ANZ DIFC Branch is regulated by the Dubai Financial Services Authority (DFSA). The financial products or services described in this publication are only available to persons who qualify as Professional Clients or Market Counterparty in accordance with the provisions of the DFSA rules. In addition, ANZ has a representative office (ANZ Representative Office) in Abu Dhabi regulated by the Central Bank of the United Arab Emirates. ANZ Representative Office is not permitted by the Central Bank of the United Arab Emirates to provide any banking services to clients in the UAE. UNITED STATES. If and when this publication is received by any person in the United States or a "U.S. person" (as defined in Regulation S under the US Securities Act of 1933, as amended) (US Person) or any person acting for the account or benefit of a US Person, it is noted that ANZ Securities, Inc. (ANZ S) is a member of FINRA (www.finra.org) and registered with the SEC. ANZ Ss address is 277 Park Avenue, 31st Floor, New York, NY 10172, USA (Tel: +1 212 801 9160 Fax: +1 212 801 9163). Except where this is a FX related publication, this publication is distributed in the United States by ANZ S (a wholly owned subsidiary of ANZ), which accepts responsibility for its content. Information on any securities referred to in this publication may be obtained from ANZ S upon request. Any US Person receiving this publication and wishing to effect transactions in any securities referred to in this publication must contact ANZ S, not its affiliates. Where this is an FX related publication, it is distributed in the United States by ANZ's New York Branch, which is also located at 277 Park Avenue, 31st Floor, New York, NY 10172, USA (Tel: +1 212 801 9160 Fax: +1 212 801 9163). ANZ S is authorised as a broker-dealer only for US Persons who are institutions, not for US Persons who are individuals. If you have registered to use this website or have otherwise received this publication and are a US Person who is an individual: to avoid loss, you should cease to use this website by unsubscribing or should notify the sender and you should not act on the contents of this publication in any way. 2. DISCLAIMER Except if otherwise specified above, this publication is issued and distributed in your country/region by ANZ, on the basis that it is only for the information of the specified recipient or permitted user of the relevant website (collectively, recipient). This publication may not be reproduced, distributed or published by any recipient for any purpose. It is general information and has been prepared without taking into account the objectives, financial situation or needs of any person. Nothing in this publication is intended to be an offer to sell, or a solicitation of an offer to buy, any product, instrument or investment, to effect any transaction or to conclude any legal act of any kind. If, despite the foregoing, any services or products referred to in this publication are deemed to be offered in the jurisdiction in which this publication is received or accessed, no such service or product is intended for nor available to persons resident in that jurisdiction if it would be contradictory to local law or regulation. Such local laws, regulations and other limitations always apply with non-exclusive jurisdiction of local courts. Before making an investment decision, recipients should seek independent financial, legal, tax and other relevant advice having regard to their particular circumstances. The views and recommendations expressed in this publication are the authors. They are based on information known by the author and on sources which the author believes to be reliable, but may involve material elements of subjective judgement and analysis. Unless specifically stated otherwise: they are current on the date of this publication and are subject to change without notice; and, all price information is indicative only. Any of the views and recommendations which comprise estimates, forecasts or other projections, are subject to significant uncertainties and contingencies that cannot reasonably be anticipated. On this basis, such views and recommendations may not always be achieved or prove to be correct. Indications of past performance in this publication will not necessarily be repeated in the future. No representation is being made that any investment will or is likely to achieve profits or losses similar to those achieved in the past, or that significant losses will be avoided. Additionally, this publication may contain forward looking statements. Actual events or results or actual performance may differ materially from those reflected or contemplated in such forward looking statements. All investments entail a risk and may result in both profits and losses. Foreign currency rates of exchange may adversely affect the value, price or income of any products or services described in this publication. The products and services described in this publication are not suitable for all investors, and transacting in these products or services may be considered risky. ANZ and its related bodies corporate and affiliates, and the officers, employees, contractors and agents of each of them (including the author) (Affiliates), do not make any representation as to the accuracy, completeness or currency of the views or recommendations expressed in this publication. Neither ANZ nor its Affiliates accept any responsibility to inform you of any matter that subsequently comes to their notice, which may affect the accuracy, completeness or currency of the information in this publication. Except as required by law, and only to the extent so required: neither ANZ nor its Affiliates warrant or guarantee the performance of any of the products or services described in this publication or any return on any associated investment; and, ANZ and its Affiliates expressly disclaim any responsibility and shall not be liable for any loss, damage, claim, liability, proceedings, cost or expense (Liability) arising directly or indirectly and whether in tort (including negligence), contract, equity or otherwise out of or in connection with this publication. If this publication has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. ANZ and its Affiliates do not accept any Liability as a result of electronic transmission of this publication. ANZ and its Affiliates may have an interest in the products and services described in this publication as follows: They may receive fees from customers for dealing in the products or services described in this publication, and their staff and introducers of business may share in such fees or receive a bonus that may be influenced by total sales. They or their customers may have or have had interests or long or short positions in the products or services described in this publication, and may at any time make purchases and/or sales in them as principal or agent. They may act or have acted as market-maker in products described in this publication. ANZ and its Affiliates may rely on information barriers and other arrangements to control the flow of information contained in one or more business areas within ANZ or within its Affiliates into other business areas of ANZ or of its Affiliates. Please contact your ANZ point of contact with any questions about this publication including for further information on the above disclosures of interest.