During ICCI's May Business Lunch, keynote speaker Antony Kelly shared with our business community key insights on end of the financial year main figures.

1. GLOBAL OVERVIEW
AND AUSTRALIA
Date May 2018 | Author Tony Kelly, Group Economics

2. GLOBAL TRENDS

3. GROWTH HAS PROBABLY PEAKED BUT LIKELY TO REMAIN ABOVE
TREND…AS ALWAYS THERE ARE RISKS (GEO-POLITICAL, TRADE)
Source: ThomsonReuters, NAB
2013 2014 2015 2016 2017 2018 2019 2020
US 1.7 2.6 2.9 1.5 2.3 2.7 2.3 1.7
Euro-zone -0.2 1.3 2.1 1.8 2.3 2.3 2.1 1.9
Japan 2.0 0.4 1.4 0.9 1.7 1.3 0.9 0.7
UK 2.1 3.1 2.3 1.9 1.8 1.5 1.7 1.5
Canada 2.5 2.9 1.0 1.4 3.0 2.0 1.8 1.5
China 7.8 7.3 6.9 6.7 6.9 6.5 6.3 6.0
India 6.4 7.4 8.2 7.1 6.7 6.8 7.2 6.9
Latin America 2.9 1.3 0.3 -0.6 1.3 2.6 2.8 2.7
Other East Asia 4.2 4.1 3.6 3.8 4.4 4.2 3.9 3.7
NZ 2.2 3.2 4.2 4.2 3.0 3.0 3.0 2.4
Total 3.5 3.6 3.5 3.2 3.8 3.8 3.7 3.5
Annual GDP growth (%) – NAB forecasts

4. ITALY GROWING AGAIN – BUT A LOT OF GROUND TO MAKE UP… A SOURCE
OF POLITICAL RISK FOR EURO-ZONE
Source: ThomsonReuters, NAB
Italian GDP: A lost decade
-8
-6
-4
-2
0
2
4
360
370
380
390
400
410
420
430
2004 2006 2008 2010 2012 2014 2016 2018
%Billion euros, 2010 prices
Change on year earlier (RHS)
level (LHS)
4
5
6
7
8
9
10
11
12
13
14
2004 2006 2008 2010 2012 2014 2016 2018
%
Italian unemployment rate – still high

5. GROWTH IS ABOVE ‘POTENTIAL’ IN MOST MAJOR ADVANCED ECONOMIES
Source: ThomsonReuters, NAB
0 0.5 1 1.5 2 2.5 3
Japan
Eurozone
UK
Canada
USA
Advanced economies - Recent potential and actual growth
Recent Potential

6. MARKET LOOKING FOR INFLATION SIGNS & CENTRAL BANK RESPONSE –
CHANGING VIEW ON FED…YIELDS UP…SHARES DOWN?
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
May-17 Jul-17 Sep-17 Dec-17 Feb-18 Apr-18
U.S.
Euro-z.
U.K.
Canada
Australia
Japan
90
100
110
120
130
140
150
Jan-14 May-15 Sep-16 Jan-18
Advanced economy
markets
Australia
10 year government bond yields (%) Share market indices

7. CHINA’S ECONOMY UP SLIGHTLY IN 2017…BUT TREND SLOWDOWN TO
CONTINUE AS DRIVERS OF GROWTH SHIFT
Pause in downward trend in 2017 Economic Growth by Industry
Sources: CEIC, Datastream, NAB Economics
0
4
8
12
16
Q1 2005Q1 2007Q1 2009Q1 2011Q1 2013Q1 2015Q1 2017Q1 2019
%
Source: CEIC, NAB Economics
GDP growth (yoy)
GDP growth (qoq, sa)
Estimated by NAB prior to Dec 2010
0
4
8
12
16
20
Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015 Q1 2017
Chinese economic growth by sector (% yoy)
Source: CEIC, NAB Economics
Secondary industries
(Manufacturing and construction)
Tertiary (services) industries

8. AUSTRALIA

9. FEDERAL BUDGET : - INFRASTRUCTURE, TAX & BABY BOOMER PACKAGE
 Emphasis on infrastructure spending (significantly back ended), tax cuts and baby boomer
retirement plans
 Budget on track for surplus by 2019/20. Receipts still doing the heavy hitting initially while
medium term the surpluses rely on much better expenditure control than we have seen recently
 Don’t expect a major impact on the economy – modest budget repair to continue & corporate tax
cuts (if get through Parliament) unlikely to have major impact
 Budget repair still hard. Worried that both sides of politics will spend more in the election cycle.
Little insurance if anything goes wrong in the economic outlook.

10. FEDERAL BUDGET - SOME KEY MEASURES
 Infrastructure: a projected increase of $24.5bn over the next 10 year period – but significantly back ended.
In Victoria includes airport rail link & extra $1.8b for finishing Melbourne Ring road and Monash rail link…but
state government has other priorities
 Personal tax
 Medicare levy up-kick to fund NDIS from mid 2019 abolished
 Seven year personal income tax plan
 Initially aimed at lower income brackets via a new the low income tax rebate of around worth around
$10 per week for those below $87k – so not huge initially (and increase in 87k bracket to 90k)
 Phase 2 in 2022/23 increasing tax brackets to & higher low income tax offset and Phase 3 in 2024/25
top rate to 200k and abolish 37% bracket
 Business Tax
 Corporate tax cuts for firms with over $50m in turnover
 Extend the instant write off provisions for small business investments under $20k
 A multi-billion aged care package set to ease the backlog of retirees wishing to age in their own homes –
with a scheme providing extra funding to provide in home care (up to 14,000 retirees could be covered).

11. COMPANY TAX CUTS – Results from Nab Survey special research
• Quarterly business survey – over 50% said tax cut
would improve outlook
• Most significant impact - increased business
investment
 But overall affect on economy likely to be small
 Under imputation system tax cuts to the corporate
sector – without changes to the top marginal
income tax rate – largely involve a switch between
corporate tax and personal tax
What would business do (significantly)
differently with tax cuts
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Investment
Employment
Wages
Debt Reduction

12. BUDGET MEASURES – UNDERLYING CASH BALANCE BACK IN SURPLUS A
YEAR EARLIER BUT DIRECTION THE SAME
-5
-4
-3
-2
-1
0
1
2
3
1996-97 2000-01 2004-05 2008-09 2012-13 2016-17 2020-21
Source: Commonwealth Treasury
Underlying Cash Balance & Fiscal Balance
% of GDP
%
Fiscal Balance
Underlying Cash
Balance
* Solid lines are 2018-19 Budget,
dotted lines are 2017-18 MYEFO

13. ON UNDERLYING CASH BALANCE – HEAVY RELIANCE ON REVENUES,
EXPENDITURE RESTRAINT IN THE FUTURE
21
22
23
24
25
26
27
2000-01 2004-05 2008-09 2012-13 2016-17 2020-21
Commonwealth revenue & expenses*
% of GDP
Revenue
Expenses
Sources: Commonwealth Treasury
%
* Solid lines are 2018-19 Budget,
dotted lines are 2017-18 MYEFO

14. GROWTH EXPECTATIONS – TAX CUTS TOO SMALL TO CHANGE 2018/19
OUTLOOK BUT STILL EXPECT GROWTH TO STRENGTHEN – ABOVE TREND
0
1
2
3
4
0
1
2
3
4
2004 2006 2008 2010 2012 2014 2016 2018 2020
Gross Domestic Product
% %
Treasury
(Budget)
Sources: ABS; NAB, RBA, Commonwealth Treasury
Actual (plus NAB forecasts)
RBA
Forecasts

15. HOW IS THE ECONOMY TRAVELLING – SHORT ANSWER FROM NAB SURVEY
IS ‘WELL’
NAB MONTHLY BUSINESS SURVEY:
Conditions (trend) Confidence (trend)
Source: NAB
-25
-20
-15
-10
-5
0
5
10
15
20
25
1997 2000 2003 2006 2009 2012 2015 2018
Australia Victoria
-40
-30
-20
-10
0
10
20
30
1997 2000 2003 2006 2009 2012 2015 2018
Australia Victoria

16. BUSINESS CONDITIONS – BROAD BASED STRENGTH BUT RETAIL STILL
LAGGING, BUDGET A POSITIVE FOR CONSTRUCTION
NAB MONTHLY BUSINESS SURVEY – Conditions by Industry (trend)
Source: NAB
-5
0
5
10
15
20
25
30
35
Business Conditions Business Confidence

17. PUBLIC INFRASTRUCTURE SUPPORTING GROWTH
PUBLIC INFRASTURE UNDERWAY BY STATE ($ billion)
Source: ABS – The value of work yet to be done on commenced public infrastructure projects (transport, water, energy & telecom.)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
1986 1990 1994 1998 2002 2006 2010 2014
NSW VIC Qld SA WA

18. RESIDENTIAL BUILDING CONSTRUCTION HAS PEAKED…BUT STILL AT A HIGH
LEVEL
Dwellings under construction vs annual population
change (Long-run average = 100)
Residential building approvals (number)
0
2000
4000
6000
8000
10000
12000
Jan-06 Jan-09 Jan-12 Jan-15 Jan-18
* Light line is s.a. data, darker line is six month moving
Houses
apartments
Semi-detached
0
50
100
150
200
250
300
350
400
NSW Vic Queensland SA WA
Houses Apartments
(Ratio)

19. HOUSE PRICES HAVE LOST MOMENTUM…DON’T SEE THIS CHANGING
2015 2016 2017f 2018f 2019f
Sydney 15.5 10.7 2.1 -3.4 -1.2
Melbourne 15.8 9.5 9.1 0.1 2.2
Brisbane 6.9 2.7 3.1 1.7 2.0
Adelaide 3.8 3.8 3.3 0.0 1.7
Perth -4.2 -2.9 -2.6 1.0 1.2
Hobart 7.0 9.6 12.9 6.5 1.7
Cap City Avg 11.2 7.3 4.0 -0.8 0.8
2015 2016 2017f 2018f 2019f
Sydney 13.1 5.8 5.4 -1.6 -2.4
Melbourne 7.5 4.7 8.4 1.2 -1.8
Brisbane 1.1 -3.0 -1.2 -2.0 -1.2
Adelaide 2.4 0.6 0.5 1.2 0.5
Perth -2.8 -6.3 -0.9 -1.2 0.7
Hobart 1.1 6.4 9.1 6.6 1.2
Cap City Avg 8.2 3.5 5.1 -0.8 -1.8
NAB Hedonic house price forecasts (%)
NAB Hedonic unit price forecasts (%)

20. AUSTRALIAN WAGES GROWTH STUCK BELOW PRE-GFC LEVELS – A
CRITICAL PROBLEM & WHY BOTH SIDES OF POLITICS HAVE TAX CUTS..
Traditional relationships say wages
should be going up but….
Source: NAB, ABS, Econdata DX, Treasury
Even as difficulty of getting labour
increases
10
20
30
40
50
60
70
809
10
11
12
13
14
15
16
17
18
19
1989 1993 1997 2001 2005 2009 2013 2017
Labour underutilisation & labour constraints (%)
Difficulty of finding suitable labour,
(inverted, adv 2 qtr), RHS
Underutilisation rate , LHS
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Dec-97 Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15
Private sector wage price index (y/y%)
actual - Australia
model estimate - Australia
actual - Victoria

21. Consumers are under the pump: They are still very cautious - and budgets
have been crunched by utility prices
-30
-20
-10
0
10
20
30
Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q4'15 Q1'16 Q2'16 Q3'16 Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18
Transport/ Food/ Medical/Children
Household /Personal Goods/ Home Improvements
Utilities
Paying off Debt
Total
Consumer Spending Patterns - Net balances from NAB Consumer Behaviour Survey
21

22. RBA RATE VIEW
•Our forecasts suggest that by late 2018 the
economy likely to be sufficiently strong to see RBA
beginning to remove emergency low rates
•Timing very data dependent and RBA in no hurry;
• We have our first rate rise in late 2018
(tentatively November). But unless wages
pick up, rate rises delayed into 2019
(markets aren’t expecting any moves)
• And two more in 2019 – but no hurry (May
and November);
• Lots of uncertainties including, wages, the
AUD and the consumer.
0
2
4
6
8
10
2005 2007 2009 2011 2013 2015 2017 2019
RBA Cash Rate (%)
Source: Bloomberg, NAB

23. NOT EXPECTING MAJOR CHANGES IN AUD/USD
AUSSIE DOLLAR FORECASTS AND MODEL
Source: Econdata DX, NAB
* * Model driven by: commodity prices; US TWI – as measure of USD strength; long and short run rates; relative unemployment; relative
equity markets and VIX.
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
Feb-85 Feb-88 Feb-91 Feb-94 Feb-97 Feb-00 Feb-03 Feb-06 Feb-09 Feb-12 Feb-15 Feb-18
AUD ACTUAL & FORECASTS
Plus X2 Std Dev
Minus X2 Std Dev
AUD/ USD
Forecasts:
End 2018 = 75c AUD/USD
End 2019= 74c AUD/USD
End 2020= 73c AUD/USD

24. KEY TAKEAWAYS
 Global economy strongest it has been for a while – but growth has probably peaked
 Markets now attuned to inflation risk and the possibility that Central banks will move
faster - bond yields rising suddenly can spill over into equity markets
 Budget does not change the outlook but expect Australian growth to strengthen -
business conditions in Australia are strong and broad based…except retail
 Expect RBA to hike late this year or next year, but dependent on wages/inflation moving
higher

25. IMPORTANT INFORMATION