QUARTERLY ECONOMIC OUTLOOK - BankSA · Quarterly Economic Outlook 3 The Export boom Asia s increased demand for Australian commodities has gained momentum in recent years, and is

Quarterly Economic Outlook 1

QUARTERLY ECONOMIC OUTLOOK April 2012 Friday 13th April 2012

• A new year has brought some optimism to financial markets in 2012. Measures by the European Central Bank (ECB) to provide liquidity to the banking sector has alleviated the risk of an adverse financial outcome. There has also been further evidence of activity picking up in the US economy.

• Greece remained in the spotlight in the March quarter. After months of negotiations and uncertainty for financial markets, Greece secured a second bailout package and a restructure to avoid a �disorderly� default. A recession and demands for further austerity suggest that Greece is not out of the woods. Further, there are still issues for other European economies with worries about Spain resurfacing this week.

• An improvement in the US labour market and a pickup in economic activity were encouraging signs for the world�s largest economy. Concerns however remain � there is a risk of a large drag from fiscal policy, the unemployment rate is still high and the housing market remains an area of weakness.

• There was evidence of growth in China moderating amid a slowing property market and weaker export growth. Authorities added to concerns when its growth target was lowered from 8% to 7.5%. It suggests that authorities will tolerate lower growth to address reform and to keep price pressures in check. That being said, we expect the Chinese economy to grow at a robust pace, albeit softer than in previous years.

• Better sentiment has led to a reversal of safe haven flows and into risky assets. Share markets rallied, while Australian and US bonds fell. Yields however remain close to historically low levels. Investors also regained some confidence in European government debt - Spanish and Italian bond yields fell to more sustainable levels, but are still sensitive to bad news.

• Economic growth in Australia disappointed in the December quarter with annual growth remaining below trend. Business investment is still the bright spot in the economy, but it may not be growing sufficiently to compensate for the weaker sectors. Partial indicators continue to suggest that parts of the economy are struggling under the weight of the high Australian dollar and caution by consumers and businesses.

• The Reserve Bank (RBA) has left the cash rate unchanged at 4.25% amid greater stability in financial markets and a more positive international backdrop. The run of weaker domestic data however, suggests that another rate cut remains on the cards. We expect another 25bp cut when the RBA meets in May.

• AUD was supported by a better risk appetite and an improved global outlook, but gains were capped by some US dollar strength and worries of softer growth in China. The AUD/USD still gained in the quarter, rising 1.3%. Relatively high interest rates and high commodity prices also continue to support the AUD.

• This quarter�s feature article takes a look at Structural Change and is entitled �Surviving the Boom�.

Table of Contents

Special Feature Article Australian Economic Data

- GDP - CPI - Labour Force - Building Approvals - Retail Sales - Trade Balance - Consumer Sentiment - Private Sector Credit - Housing Finance - Capital Expenditure - Current Account - Company Profits - Wage Price Index - House Price Index - Producer Prices - New Motor Vehicle Sales

Page 2-4 Page 5-8

Interest Rate Markets - Central Bank Outlook - Bond Yields

Currency Markets - Australian Dollar - Global Currencies

Commodity & Share Markets - Oil - Gold & Base Metals - Domestic Equities - International Equities

Recent & Upcoming Data Forecasts St.George Contacts Listing

Page 9 Page 10

Page 11

Page 12 Page 13 Page 14


Feature Article: Structural Change � Surviving the Boom

Structural change is the new buzzword. But what exactly does it mean? More importantly, what does it mean for Australians?

Structural change describes the process of change in the make-up of an economy. It could be a move from a manufacturing based economy to a services or mining based economy. The idea of Australia �riding on the sheep�s back� for a century is part of our national psyche. The image of blue collar workers in manufacturing as the epitome of middle Australia is also hard to shake. While this may be our history, the Australian economy has constantly evolved. Change is constant - an irony with implications for business strategy, education policy and career aspirations.

What Factors Are Driving the Structural Change?

Demand for Services

The shift from manufacturing to services is not confined to Australia. All modern economies are seeing a similar pattern. As incomes rise, consumers are buying more �services� rather than �things�. These services range from traditional services such as holidays and accounting services to flight simulator experiences and personal trainers. Behind each of these activities are jobs and business opportunities, as well as job losses.

Apart from the limit of how many things we can fit into our homes, there are other forces at work changing the economy that we live and work in. The internet, the digital revolution and globalisation are all playing a role in creating change.

Technological Change

While the internet has been around for well over a decade, its increase in speed has meant that many more online applications, such as online shopping and movie downloads, have become increasingly viable. Other technological changes, including software developments, have improved productivity across the professions, but this has also resulted in job losses for others. For example, many people in highly skilled jobs do more of their own administration such as typing and emails, making some administrative roles redundant. Globalisation is another factor prompting structural change. The world is becoming a �smaller� place and some employment markets have become global, resulting in the outsourcing of some local jobs to lower cost centres overseas.

0

10

20

30

40

50

60

70

80

90

Agriculture Mining Manufacturing Other

Industry Sector Shares

1960s 1970s 1980s 1990s

%


The Export boom

Asia�s increased demand for Australian commodities has gained momentum in recent years, and is an important driver of structural change. In 1998 exports to China represented 3% of Australia�s total exports. This shot up to 27% in 2011. The impact of the current export boom is different to that of previous episodes since the Australian dollar is now free to move up and down. Movements in the Australian dollar automatically lead to adjustments in the economy. The high Australian dollar has created casualties among both exporters and among import competing industries, including in the manufacturing, retail, tourism and education sectors. At the same time, the ability to purchase imported goods more cheaply has lifted living standards or created income that can be saved or spent.

For price sensitive exports, the high Australian dollar is a killer.

As the Australian dollar has appreciated, exchange rate sensitive sectors have suffered. For example, some manufacturing or tourism business practices which worked well when the Aussie dollar was around 70 or 80 US cents, may no longer be profitable with an Aussie dollar above parity against the US dollar.

Over time businesses will have to innovate and move up the value chain, producing items which utilise the training and skills which are Australia�s strength. Listed companies such as Resmed and Cochlear, which produce specialised medical equipment, have thrived despite the high Aussie dollar.

Consumers Are Saving Their Money

Householders have become more prudent, which has seen the household saving ratio rise to around 9.5% of disposable income in the past few years. Part of this reflects a loss-of-wealth effect, given that share prices and house prices have fallen. Consumer sentiment has deteriorated leading to changed behaviour and further changes in the shape of our economy. Reluctance amongst householders to take on extra debt, coupled with tighter, post-GFC, lending standards amongst financial institutions, has led to slower credit growth. While this trend has negatively impacted the finance industry, the same sector has benefited in recent years from growing inflows into superannuation funds. The net result is that some areas of the finance industry are shedding staff, while opportunities have been created elsewhere.

Increased consumer cautiousness has also impacted the retail industry; an industry which has seen job losses over the past year. The retail industry is facing challenges from online shopping, which, while making up a very small proportion of consumer spending, is growing rapidly. This presents an opportunity for some and a challenge for others to do things differently.

-5

0

5

10

15

Mar-90 Mar-94 Mar-98 Mar-02 Mar-06 Mar-10

Household Savings Ratio(quarterly data, per cent)

80

100

120

140

0

4

8

12

Jan-01 Jan-04 Jan-07 Jan-10

IndexY/Y%

Retail Sales & Sentiment(3-Month Moving Average)

Nominal Retail Sales (lhs)

MI-WBC Consumer Sentiment Index (rhs)


Workplace Changes

The participation rate for women is still below that for men, although it has increased in recent years. The workforce participation rate for women is currently 59.1%, compared to 43.5% in February 1978. Over that time frame, the number of part-time positions has increased and more women are now working part-time hours. This is structural change.

Life expectancy has increased greatly over the past 100 years and this has impacted the workplace and the shape of the economy. The trend for a longer period of retirement impacts the choice of housing and the products and services demanded. In the years ahead, unless migration or natural birth rates increase, the ratio of workers to those in retirement will decrease. This has serious implications for personal taxation as well as spending on health care. It may also require businesses to consider ways of capturing or retaining the skills of those who might otherwise be thinking of retirement.

How Does this Impact Us?

Numbers can paint a picture showing some of the impacts of structural change. In 1984, roughly in 1 in 6 workers were employed in manufacturing. Today it is closer to 1 in 12. On the flip side, in 1984 only 1 in 11 people worked in healthcare and social assistance. Today it is 1 in 8. More people are working in service or �white collar� industries. Similarly, there has been a massive change in the role of women in the workforce. In 1984 only 45% of working age women participated in the paid workforce. Today it is edging towards 60%.

As a nation we are changing what we do and who does it. Consider the number and nature of jobs associated with the internet and communications. Jobs that did not exist thirty years ago now populate the job ads pages of newspapers and, of course, online employment sites. We see ads for social media analysts, webpage designers, e-commerce specialists and mobile eftpos terminal technicians. Internet cafes and mobile phone shops are now commonplace. This is structural change.

Survival Skills

Technological advances and cheaper labour in developing countries can represent a threat to the jobs of Australian workers. However, if we lift our level of education and improve our skills, especially in the jobs based on relationships, we reduce the probability of jobs being replaced by machines or offshored. Education and training of staff is also essential for businesses in order that they can move up the value chain. This may be easier said than done but the world will not stand still. As Reserve Bank of Australia Deputy Governor Lowe said in a recent speech on Structural Change, �Australia cannot hope to be a large-scale producer of relatively standardised, plain-vanilla, manufactured goods�. Australian businesses can move up the value chain, innovate with products and services and specialise in areas in which Australia has an advantage. Overall it means businesses must rethink their business model and adapt to change in order to survive in the new environment. We are in a time of challenge and hardship for some businesses, but also a time of opportunity.

Jo Heffernan, Senior Economist Ph: (02) 9320-5751


Australian Economic Data Gross Domestic Product

-4

-2

0

2

4

6

8

-4

-2

0

2

4

6

8

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

%%Gross Domestic Product

Q/Q

Y/Y

The Australian economy showed modest growth of 0.4% in the December quarter last year, following far more robust expansion in the previous two quarters. This saw the annual growth rate slow to 2.3% in the year to December, from 2.6% previously. A soft housing sector combined with a pullback in business investment. Growth in household consumption was subdued, reflecting householder caution. A rebuilding in non-farm inventories boosted economic growth in the December quarter. Net exports contributed to growth in the December quarter, for the first time in a year. By state, WA showed a contraction in growth, but this followed very strong growth in Q3.

Consumer Price Index

Underlying inflation rose by 0.6% in the December quarter. The annual rate of underlying inflation lifted only slightly to 2.6%, remaining relatively well contained and within the Reserve Bank�s target band. Headline inflation was flat in the December quarter, the weakest result in three years, taking the annual rate down to 3.1%. Tradables inflation fell sharply while non-tradables inflation rose. Services inflation climbed and goods inflation decelerated. With underlying inflation within the Reserve Bank�s target band, it gives the RBA room to cut interest rates further if demand conditions deteriorate �materially�.

Labour Force

-1

0

1

2

3

4

5

Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Employment Growth (annual % change)

There was a strong gain of 44k jobs in March taking markets by surprise. Despite strong growth in job creation, the unemployment rate remained at 5.2% courtesy of a rise in the participation rate. The bulk of the jobs created were part-time (28.2k) but a solid 15.8k full-time jobs were also created. Although the large gain in March is welcome we are reminded that in the 12 months to March only 37,600 jobs were created. This is not exactly indicative of trend growth in the economy.

Building Approvals

-70

-35

0

35

70

-20

-10

0

10

20

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

Building Approvals

annual % change (rhs)

monthly% change (lhs)

y/y%m/m%

Building approvals slumped 7.8% in February, The decline was driven by the volatile �dwellings excluding houses� component, which includes apartments which plummeted 16.6% in February, its largest fall since September last year. House approvals were also weak , falling 3.1% in February, indicating the decline was broad-based. The ongoing weakness suggests that residential construction will remain subdued over the near-term.


Retail Sales

0

3

6

9

12

0

3

6

9

12

Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

Retail Sales(annual % change)

SeasonallyAdjusted

Trend

Retail spending growth continues to be unspectacular as consumers seem uncertain about their job prospects and the economic outlook. In February, retail trade rose by a subdued 0.2%, which saw the annual rate step down from 2.8% to 2.0%, the weakest annual pace in six months. There continues to be significant divergence across the States. Western Australia and Queensland have recorded strong back-to-back gains over January and February while spending in NSW and Victoria have declined. The breakdown by sector suggests that discretionary areas of spending are quite weak, reflecting the precautionary behaviour by households.

Trade Balance

-4

-3

-2

-1

0

1

2

3

4


Trade Balance$bn

The trade balance unexpectedly posted a $480mn deficit in February, the second consecutive monthly deficit. Exports failed to recover, and fell 2.1% in February after slumping 9.0% in January. Meanwhile, imports fell 3.9% in February with broad-based declines across categories. The recent slump in exports is concerning given that parts of Asia including China are experiencing a slowdown in growth. On balance, we continue to expect that China will grow at a solid, albeit slower pace which will be supportive of demand for Australia�s exports. Further weakness in export growth however, might suggest that Australia is not benefiting as much from the resource boom as previously expected.

Consumer Sentiment

80

100

120

140

0

4

8

12


IndexY/Y%

Retail Sales & Sentiment(3-Month Moving Average)

Nominal Retail Sales (lhs)

MI-WBC Consumer Sentiment Index (rhs)

The Westpac-Melbourne Institute Consumer Sentiment Index slipped 1.6% from 96.1 in March to 94.5 in April. The index sits further below the 100 mark indicating pessimists outweigh optimists. The decline is despite conditions in the global economy improving and growing speculation that the RBA may cut rates next month. The drop in the index largely reflected concerns about current and expected family finances.

Private Sector Credit

-10

0

10

20

30

-10

0

10

20

30


Private Sector Credit(By Component, %y/y)

BusinessHousing

Total

Other Personal

Private Sector Credit rose a modest 0.4% in February, which took the annual pace to 3.5%. An anaemic trend witnessed over the past two years has continued. Housing credit grew by 0.4% having been stuck in the 0.3% to 0.5% range since the beginning of 2011. Business credit lifted 0.4% in February and is also growing at a subdued pace. The business community remains cautious ahead of the Federal Budget and in the face of a modest economic outlook. Other personal credit growth remains weak as consumers worried about potential job losses and strengthened their personal balance sheets.


Housing Finance

10

15

20

25

30

35

Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

First Home Buyers(% of all dwellings financed)

The number of home loans fell 2.5% in February, although they are still up 9.8% in the year. The drop was led by first home buyers which made up 17.2% of the total number of new home loans in February. Stamp duty exemptions for first home buyers in NSW for established dwellings were abolished, which dampened the national numbers in February and also in January. In NSW, first home buyers as a percentage of dwellings financed dropped sharply to the lowest since 2005. It will likely take some time before first home buyer demand in NSW recovers as prospective first home owners would need to save for additional stamp duty expenses. However, there are other encouraging signs that the housing market is stabilising.

Capital Expenditure

0

40

80

120

160

200

240

98/99 01/02 04/05 07/08 10/11

$bn

Capital Expenditure(actual and planned)

Actual

Estimated capex for 2011-12 & 2012-13

Business investment remains the bright spot in the domestic economy, with spending plans still looking very solid. Actual capex spending, however, slipped 0.3% in the December quarter, although the annual rate at 30.0% for the year to December is very robust, led by mining capex. Investment intentions for capex in 2012-13 suggest an increase of close to 30%. The attractive return on capital, particularly for resource companies, is driving the growth in business investment, assisted by the high Australian dollar which makes capital goods imports less expensive. Capital expenditure is expected to contribute strongly to economic growth this year.

Current Account Balance

0

10

20

30

40

0

10

20

30

40

00 02 04 06 08 10 12

$bn$bnExports Volumes

Resources (rhs)

Mfg & Other (lhs)

Rural(lhs)

Services (lhs)

The current account deficit widened by $2.6bn to $8.4bn in the December quarter, with the narrowing on the trade surplus causing the deterioration. The trade surplus fell by $2.6bn to 3.6bn in the December quarter, due almost entirely to the goods component. The trade component has now been in surplus for seven consecutive quarters, the longest run since 1973. The other component of the current account, the primary income balance (the net balance on dividends and interest payments) was marginally smaller than the previous quarter, coming in at a deficit of $11.8bn and has narrowed for the fourth consecutive quarter.

Company Profits

-20

0

20

40

-20

0

20

40

Mar-98 Mar-01 Mar-04 Mar-07 Mar-10

%%Company Profits

quarterly % change

annual % change

Company gross operating profits were weaker than expected, falling 6.5% in the December quarter, the steepest decline since June 2009. This followed two consecutive quarters of strong growth in company profits and leaves the annual rate of growth in company profits at 2.2% in the year to December. The sharpest decline in profits for the quarter was in the financial and insurance services industry. Mining profits also declined, reflecting a fall in commodity prices in the quarter. Manufacturing profits have fallen in six out of the past seven quarters, reflecting the impact of the high Aussie dollar.


Wage Price Index

1

2

3

4

5

0.0

0.4

0.8

1.2

1.6

2000 2003 2006 2009 2012

Wage Price Indexq/q % y/y %

Q/Q %Change (lhs)

Annual % Change (rhs)

The wage cost index rose by 1.0% in the December quarter, after rising 0.7% in the previous quarter. The annual rate held steady at 3.6% in the year to the December quarter, which is well below the RBA�s unofficial �line in the sand� of 4.5%. By industry, strong wage growth above 4.5% was only seen in one industry in the year to December; professional, scientific and technical services, further indicating that wage pressures are broadly contained. By State, the strongest wage growth was seen in NT at 4.3% in the year to December. Soft growth in employment over the past year suggests that the risk of upward pressure on wages has eased.

House Price Index

-10

-5

0

5

10

15

20

Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

ABS House Price Index

annual % change

quarterly % change

%

The housing market remains one of the weak areas of the economy. House prices have continued to moderate, falling by 1.0% in the December quarter, following a downwardly revised decrease of 1.9% in the September quarter. On an annual basis house prices fell by 4.8% in the year to December, down from the 3.4% decline in the year to September and the third consecutive quarterly decline in year-on-year house prices and the sharpest decline since March 2009. The Reserve Bank of Australia�s interest rate cuts in November and December last year are an encouraging development for the housing market and should provide some support for house prices.

Producer Prices

-12

-6

0

6

12

18

-12

-6

0

6

12

18

Mar-00 Mar-04 Mar-08 Mar-12

Producer Price Inflation(annual % change)

Final Goods

Preliminary Goods

Intermediate

Prices paid by producers at the final stage of production rose by just 0.3% in the December quarter, indicating that upstream price pressures remain modest. Growth in producer prices was driven by higher import prices, indicating the disinflationary effect of the earlier appreciation of the Australian dollar is waning. At the final stage of production, the imported prices component recorded its strongest quarterly growth in nearly 3 years, while the domestic component posted the weakest quarterly growth rate in 2½ years. For the year to December producer prices at the final stage rose 2.9%, up from 2.7% in the year to September.

New Motor Vehicle Sales

-30

-20

-10

0

10

20

30

-30

-20

-10

0

10

20

30


New Motor Vehicle Sales

Monthly % Change (lhs)

Annual % Change (rhs)

New motor vehicle sales have stabilised after Japanese supply disruptions had led to volatility in the data earlier in 2011. New car sales were unchanged in February, after rising 1.2% in January. For the year to February, new motor vehicle sales are up 1.7%. By state, car sales growth over the past year has been strongest in NT (+11.0%), WA (+6.5%) and Queensland (+5.2%). Consumer sentiment surveys suggest that householders could remain cautious in their spending, however, the index that measures a good time to buy a car is up 1.3% on the year to March.


Interest Rate Markets

Central Bank Outlook

0

2

4

6

8

0

2

4

6

8

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

%%

Australia (4.25%)

Europe (1.00%)

United States (0.25%)

Japan (0.10%)

China (6.56%)

The Reserve Bank of Australia (RBA) has held rates steady at 4.25%, following rate cuts of 50 basis points at the end of last year. The reduced risk of an adverse financial event from Europe has been a key reason for the RBA to keep rates on hold, but the weak areas of Australia�s economy suggest that another rate cut is still on the cards. We expect that the RBA will cut rates once more at the RBA�s next meeting in May. The European Central Bank (ECB) has left interest rates unchanged, but has pumped in over �1 trillion of liquidity into the banking system through its Long-Term Refinancing Operation (LTRO) since the end of December, which has alleviated funding pressures and a credit freeze. Central banks from other advanced economies have taken a pause after easing monetary policy late last year. Both the Bank of England (BoE) and the Federal Reserve (Fed) kept monetary policy unchanged. Comments by the Fed however, suggests that the Fed remains cautious about the outlook, but in light of improved US economic activity in recent months, another round of quantitative easing is appearing less likely. An exception was the Bank of Japan (BoJ) which surprised markets on February 14 by pledging to purchase ¥10 trillion in government debt (quantitative easing) and set an inflation target of 1%. The inflation target signals that the BoJ may take a tougher stance on deflation and suggests that further quantitative easing remains likely. The People�s Bank of China (PBOC) lowered its reserve requirement ratio (required cash held by banks) a further 50 basis points on February 24 following a 50 basis points cut on December 5. The PBOC has yet to lower interest rates in this cycle, but moderating growth and inflation suggests that more monetary easing is likely later this year.

Global 2-Year Bond Yields

1.0

2.0

3.0

4.0

5.0

6.0

0.0

0.5

1.0

1.5

2.0

2.5

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr -11 Jul-11 Oct-11 Jan-12 Apr-12

Australia -rhs

% %

US - lhs

UK -lhs

Euro -lhs

US 2-year bond yields rose in the March quarter, as demand for safe-haven assets eased. Optimism on a recovery in the US economy and an improvement in conditions in Europe led to a sell-off in government bonds. However, US yields remain close to historical lows given there remain some concerns for the US economy and expectations that monetary policy will remain accommodative. Bond yields also ended higher in Australia, the UK and Germany tracking their US counterparts. Meanwhile, Italian and Spanish bond yields were lower in the March quarter after the ECB provided liquidity to banks and alleviated concerns about contagion and Greece avoided a �disorderly� default.


Currency Markets

Australian Dollar

60

65

70

75

80

85

0.70

0.80

0.90

1.00

1.10

1.20

Jul-09 Oct-09 Jan-10 Apr -10 Jul-10 Oct-10 Jan-11 Apr -11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

AUD/USD (lhs)

TWI (rhs)

Index$US

An improvement in risk appetite was supportive of the Australian dollar over the March quarter as the risk of an adverse financial outcome from Europe subsided. Further signs of a recovery in the US also underpinned the improvement in investor sentiment. The AUD rose as high as 1.0856 on February 29, a near six-month high. But the AUD came under pressure throughout March, partly reflecting US dollar strength, rising concerns of weaker growth in China and a run of soft domestic economic data. With the peak in Australia�s terms of trade behind us and the prospect of another RBA rate cut still on the cards, the AUD is unlikely to scale to the peaks seen this quarter in the near-term. We however continue to expect the AUD to be well-supported by relatively high interest rates and still high commodity prices. More recently, the AUD has recovered on a surprisingly strong employment report. The Australian dollar ended the March quarter 1.3% higher against the US dollar, 1.6% lower against the euro, 9.3% higher against the Japanese yen and 1.9% higher in trade-weighted terms.

Global Currencies

75

82

89

96

103

1.00

1.20

1.40

1.60

1.80

Jul-09 Oct-09 Jan-10 Apr -10 Jul-10 Oct-10 Jan-11 Apr -11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12

EUR/USD (lhs)

GBP/USD (lhs)

Yen

USD/JPY (rhs)

$US

Currency markets remained volatile in the March quarter, reflecting the changing fortunes of Europe. However, risk appetite generally improved. The US dollar ended the quarter slightly lower against most currencies, as stronger risk appetite led to some unwinding of safe-haven inflows. The USD staged a temporary recovery following a run of more positive US economic data. However, it retreated on comments from Fed Chairman Bernanke which dampened expectations that the Fed would start moving away from its accommodative stance. Better investor sentiment also saw the Japanese yen underperform other currencies. The yen also came under pressure following the Bank of Japan�s decision to ease monetary policy and to adopt an inflation target, although the yen recovered some lost ground over the past few weeks. The euro recovered from a 16-month low against the US dollar as conditions in the region improved. Worries about the stability of the euro zone subsided after Greece avoided a disorderly default � it received a second bailout package and completed a debt swap deal with private debt holders. GBP largely tracked the EUR reflecting Britain�s close ties with the euro zone.


Commodity Markets

Oil

60

80

100

120

Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

West Texas Intermediate

$US per barrel

Oil prices were 4.2% higher over the March quarter, supported by an easing of global growth concerns � the risk of an adverse event from Europe subsided and economic data from the US continued to improve. Geo-political tensions between Iran and the West were also supportive of oil prices, heightening concerns about supply disruptions. More recently, gains have been capped on rumours that the US and other European nations were planning to release some of their strategic reserves.

Gold & Base Metals

1000

2000

3000

4000

5000

700

1050

1400

1750

2100

Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12

Price of Gold (lhs)

$US per ounce Index

LME Index - basket of base metal prices (rhs)

7

Commodity prices rose in the March quarter, boosted by improved financial conditions in Europe and better than expected US economic data. Gold prices rose 6.7% in the March quarter, while the London Metals (LMEX) Index was also higher, up 8.3%. However, the pickup in US economic activity lessened the chance of another round of quantitative easing from the Fed and weighed on gold prices towards March. Concerns of a slowdown in economic activity in China also placed downward pressure on commodities later in the quarter, particularly base metals.

Share Markets

Australia

3500

4000

4500

5000

5500

Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12

S&P/ASX 200

Australian shares tracked global markets, but underperformed their US counterpart. Signs of weakening domestic growth and concerns of slower growth in China likely weighed on the Australian market. However, the ASX200 still gained 6.9% in the March quarter, the best quarterly gain since 2009.

International Markets

3000

4000

5000

6000

7000

6000

8000

10000

12000

14000

Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12

FTSE 100 (rhs)

Nikkei (lhs)

Dow Jones (lhs)

Stock markets globally rallied as the risk of an adverse financial event from Europe subsided and US economic data improved. The S&P500 gained 12% for the March quarter to its highest level in almost four years. Other markets also had strong gains including the DAX (17.8%) and the Nikkei (19.3%) A correction over early April however triggered by worries about Spain suggested that the rally had been overdone.


Recent Australian Economic Data Red � Indicates the result was weaker than consensus expectations Blue � Indicates the result was stronger than consensus expectations Black � Indicates the result was in line with consensus expectations All data is for month-on-month unless otherwise specified. The source for consensus forecasts is Bloomberg.

April WBC-MI Cons Confidence Apr -1.6% Previous -5.0% 11/4

March Employment Mar 44.0k Consensus 6.5k 12/4

Unemployment Rate Mar 5.2% Consensus 5.3% 12/4 ANZ Job Ads Mar 1.0% Previous 3.3% 10/4

NAB Business Conditions Mar 4 Previous 3 10/4 NAB Business Confidence Mar 3 Previous 1 10/4

AiG Perf of Construction Mar 36.2 Previous 35.6 10/4 AiG Performance of Services Mar 47.0 Previous 46.7 4/4 TD-MI Inflation Gauge Mar 0.5% Previous 0.1% 2/4

AiG Perf of Manufacturing Mar 49.5 Previous 51.3 2/4 WBC-MI Cons Confidence Mar -5.0% Previous 4.2% 14/3

February Housing Finance Feb -2.5% Consensus -4.0% 11/4 Trade Balance -$480mn Consensus $1100mn 4/4

Retail Sales Feb 0.2% Consensus 0.2% 3/4 Building Approvals Feb -7.8% Consensus 0.5% 2/4

RPData-Rismark House Prices Feb 0.2% Previous 0.8%2/4 Private Sector Credit Feb 0.4% Consensus 0.3% 30/3

New Motor Vehicle Sales Feb unch Previous 1.2% 15/3 NAB Business Conditions Feb 3 Previous 2 13/3

NAB Business Confidence Feb 1 Previous 4 13/3

Employment Feb -15.4k Consensus 5k 8/3 Unemployment Rate Feb 5.2% Consensus 5.2% 8/3 AiG Perf of Construction Feb 35.6 Previous 39.8 7/3 ANZ Job Ads Feb 3.3% Previous 7.5% 5/3

TD-MI Inflation Gauge Feb 0.1% Previous 0.2% 5/3 AiG Perf of Services Feb 46.7 Previous 51.9 5/3

AiG Perf of Manufacturing Feb 51.3 Previous 51.6 1/3

WBC-MI Cons Confidence Feb 4.2% Previous 2.4% 15/2

January Housing Finance Jan -1.2% Consensus -0.6% 13/3

Trade Balance Jan -$673m Consensus $1500m 9/3 Building Approvals Jan 0.9% Consensus 2.0% 1/3

RPData-Rismark House Prices Jan 0.8% Previous -1.0%1/3 Private Sector Credit Jan 0.2% Consensus 0.3% 29/2

Retail Sales Jan 0.3% Consensus 0.3% 29/2 Employment Change Jan 46.3k Consensus 10k 16/2

Unemployment Rate Jan 5.1% Consensus 5.3% 16/2 New Motor Vehicle Sales Jan 1.3% Previous -2.7% 15/2

NAB Business Conditions Jan 2 Previous 1 14/2 NAB Business Confidence Jan 4 Previous 3 14/2

AiG Perf of Construction Jan 39.8 Previous 41.0 7/2 ANZ Job Ads Jan 6.0% Previous -1.6% 6/2 TD-MI Inflation Gauge Jan 0.2% Previous 0.5% 6/2

AiG Perf of Services Jan 51.9 Previous 49.0 3/2 AiG Perf of Manufacturing Jan 51.6 Previous 50.2 1/2

Westpac-MI Consumer Conf Jan 2.4% Previous -8.3% 18/1

December Dwelling Starts Q4 -6.9% Consensus -3.0% 14/3

GDP Q4 0.4% Consensus 0.8% 7/3 Current Account Bal Q4 -$8374m Consensus -$8050m 6/3

Inventories Q4 1.4% Consensus 0.3% 5/3 Company Profits Q4 -6.5% Consensus unch 5/3

Capital Expenditure Q4 -0.3% Consensus 3.8% 1/3 Construction Work Done Q4 -4.6% Consensus -0.8% 29/2

Wage Cost Index Q4 1.0% Consensus 0.8% 22/2 Housing Finance Dec 2.3% Consensus 1.8% 13/2

NAB Business Confidence Q4 1 Previous -3 9/2

Upcoming Data and Events � Australia, China & US

Australian Data / Events Underlined

April 13 CH Industrial Production, Mar CH Retail Sales, Mar

CH GDP, Q1 US Consumer Prices, Mar

US UoM Consumer Confidence, Apr p April 16

US NY Empire Manufacturing, Apr US Retail Sales, Mar

US Total Net TIC Flows, Feb

US NAHB Housing Market Index, Apr April 17 AU RBA Board Meeting Minutes, Apr

AU New Motor Vehicle Sales, Mar US Housing Starts, Mar

US Building Permits, Mar US Industrial Production, Mar

April 18 AU WBC-MI Leading Index, Feb

CH Property Prices, Mar

April 19 AU NAB Consumer Confidence, Q1 US Philadelphia Fed Index, Apr

US Existing Home Sales, Mar US Leading Indicators, Mar

April 20 AU Trade Price Indices, Q1

CH MNI Flash Business Survey, Apr April 23

AU Producer Prices, Q1


Forecasts

2011 2012 2013

End Period: Q3 Q4 Q1 Q2 (f) Q3 (f) Q4 (f) Q1 (f) Q2 (f)

RBA Cash Rate, % 4.75 4.25 4.25 4.00 4.00 4.00 4.00 4.25

90 Day BBSW, % 4.77 4.47 4.30 4.20 4.15 4.10 4.20 4.40

3 Year Bond, % 3.62 3.13 3.48 3.60 3.70 4.00 4.20 4.40

10 Year Bond, % 4.22 3.67 3.98 4.20 4.30 4.40 4.45 4.50

AUD/USD 0.9662 1.0209 1.0346 1.0200 1.0200 1.0100 1.0300 1.0400

USD/JPY 77.06 76.91 82.87 84.00 85.00 85.00 84.00 84.00

EUR/USD 1.3387 1.2961 1.3343 1.2900 1.2700 1.2600 1.2800 1.3100

GBP/USD 1.5584 1.5543 1.6008 1.5900 1.5800 1.5700 1.5900 1.6000

USD/CHF 0.9082 0.9381 0.9025 0.9200 0.9300 0.9400 0.9400 0.9500

USD/CAD 1.0503 1.0213 0.9987 0.9800 0.9700 0.9600 0.9500 0.9500

NZD/USD 0.7614 0.7772 0.8187 0.8200 0.8300 0.8400 0.8450 0.8500

USD/CNY 6.3812 6.2949 6.2985 6.2500 6.2000 6.1500 6.1000 6.0500

USD/SGD 1.3073 1.2966 1.2577 1.2600 1.2500 1.2300 1.2400 1.2500

AUD/EUR 0.722 0.7877 0.7754 0.7907 0.8031 0.8016 0.8047 0.7939

AUD/JPY 74.5 78.52 85.74 85.68 86.70 85.85 86.52 87.36

AUD/GBP 0.62 0.6568 0.6463 0.6415 0.6456 0.6433 0.6478 0.6500

AUD/CHF 0.878 0.9577 0.9337 0.9384 0.9486 0.9494 0.9682 0.9880

AUD/CAD 1.015 1.0426 1.0333 0.9996 0.9894 0.9696 0.9785 0.9880

AUD/NZD 1.269 1.3136 1.2637 1.2439 1.2289 1.2024 1.2189 1.2235

AUD/CNY 6.166 6.4265 6.5164 6.3750 6.3240 6.2115 6.2830 6.2920

AUD/SGD 1.263 1.3237 1.3012 1.2852 1.2750 1.2423 1.2772 1.3000

Source:

Bloomberg for historical data

Notes:

AUD cross exchange rates forecasts have been rounded


Contact Listing

Chief Economist Hans Kunnen [email protected] (02) 9320 5854 Senior Economist Josephine Heffernan [email protected] (02) 9320 5751 Economist Janu Chan [email protected] (02) 9320 5892 State Manager SA Mark Goldsmith [email protected] (08) 8424 5597

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