1

.5

Economic & Financial Outlook 2013 & Beyond

John Peters Senior EconomistCBA Global Markets28 November 2012

Domestic Economy to Grow by 3-4%Lower interest rates; strong AUD

AM Institute

Finance & Risk Forum 2012Barossa Valley, SA

2

.5

Important Information

This advice has been prepared without considering your objectives, financial situation or needs, and before acting on the advice, you should consider its appropriateness to your circumstances.

Commonwealth Bank of Australia (“CBA”) as a provider of investment, borrowing and other financial services undertakes financial transactions with many corporate entities in Australia. This may include any corporate issuer referred to in this report.

For US and US investors: If you would like to speak to someone regarding the subject securities described in this report, please contact Commonwealth Australia Securities LLC (the “US Broker-Dealer”), a broker-dealer registered under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”) at 1 (212) 336-7737. This report was prepared, approved and published by Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945("the Bank") and distributed in the U.S. by the US Broker-Dealer. The Bank is not registered as a broker-dealer under the Exchange Act and is not a member of FINRA or any U.S. self-regulatory organization. Commonwealth Australia Securities LLC (“US Broker-Dealer”) is a wholly owned, but non-guaranteed, subsidiary of the Bank, organized under the laws of the State of Delaware, USA, with limited liability.

Please see further disclaimers at the back of this document. Please also view our website at www.research.commbank.com.au for a more detailed disclaimer.

3

.5

Australian Economic & Financial Market Outlook

Direction of Risks for Australian economy in 2013& 2014

Global Growth Global economic growth to be 3¼-3¾% in 2013 and 2014.

Domestic Growth Domestic economy to grow in 3-3¾% range in 2013 & 2014.

Monetary Policy RBA to cut rates to 3% by QI 2013. Mkt: 2¾% by QIII ‘13

Underlying CPI CPI at 2%(annual) in QIII 2012 but risks picking up in 2013, & 2014 as economy speeds up. Underlying

CPI at 2½% in QIII.

Unemployment Could back at 5½% in HII 2012 and then lower to 5% or less in 2013 & 2014 as economy strengthens.

AUD Outlook To trade mainly in a US$1.00 -1.10 band in 2013 & 2014.

4

.5

3.8

4.4

5.1

5.7

6.4

7.0

J ul-97 J ul-99 J ul-01 J ul-03 J ul-05

-8

-5

-2

2

5

8

Cashrate(lhs)

CBA TEI*(adv 9 mnths ,rhs)

%pa %pa

* Deviation from trend

CBA global growth forecasts envisage below-trend growth in 2012 but a favourable growth skew from an Australian perspective.

A return to trend is likely in 2013 with Asia the stronger region again.

CBA Global Economic Forecasts

CBA Global Growth Forecasts

2011(a)

2012(f)

2013(f)

2014(f)

World 3.8 3.1 3.2 3.8

United States

1.6 1.6 2.1 2.4

Japan 0.2 2.0 1.1 0.6

Eurozone 1.0 -0.4 0.1 1.2

United Kingdom

0.8 0.3 0.9 1.3

Canada 2.3 2.2 2.0 2.0

China 9.3 7.9 8.1 8.2

India 7.8 5.5 6.2 6.8

5

.5

Source: The Conference Board Total Economy Database, Maddison (2010), IMF World Economic Outlook Database and Treasury.

Global reweighting underway

It’s a Brand New Day!

6

.5

The European Threat

IMF defines stabilisation achieved when advanced economy gross debt at 60% of GDP (pre-crisis median).

Adjustment is a lengthy process – IMF scenarios stretch out to 2030.

A requirement is that cyclically-adjusted budget balance improves by 8% of GDP by 2020.

Extended timeframe suggests financial market volatility will be an enduring feature.

Long-term work out

0

40

80

120

0

40

80

120

2007 2012 2017 2022 2027

Title% ofGDP

Source: IMF

GENERAL GOVERNMENT DEBT(advanced economies)

% ofGDP

You are

here

7

.5

US “Cliff” Ahead

Leading indicators of US housing activity turning up.

Drag on US growth from declining housing activity is over.

Housing drag over

0

700

1,400

2,100

2,800

0

25

50

75

100

Jan-95 Jan-00 Jan-05 Jan-10

US HOME STARTS

NAHBfuture sales(6mth lead,

US housing starts (rhs)

Pts '000

-2

-1

0

1

2

-2

-1

0

1

2

Mar-87 Sep-92 Mar-98 Sep-03 Mar-09

US HOUSING & GDP(contribution to annual growth)% %

8

.5

3.8

4.4

5.1

5.7

6.4

7.0

J ul-97 J ul-99 J ul-01 J ul-03 J ul-05

-8

-5

-2

2

5

8

Cashrate(lhs)

CBA TEI*(adv 9 mnths ,rhs)

%pa %pa

* Deviation from trend

Asia has slowed – but outcomes vary across the region.

Asia At Risk?

Divergent trends

9

.5

3.8

4.4

5.1

5.7

6.4

7.0

J ul-97 J ul-99 J ul-01 J ul-03 J ul-05

-8

-5

-2

2

5

8

Cashrate(lhs)

CBA TEI*(adv 9 mnths ,rhs)

%pa %pa

* Deviation from trend

Annual growth has slowed but, on a sequential (quarter-on-quarter) basis, the Chinese economy appears to have bottomed.

China Hard Landing?

Turning?

0

1

2

3

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13

CHINA GDP GROWTH(quarterly % change)%

80

100

120

140

160

80

100

120

140

160

Jan 12 Feb 12 Apr 12 Jun 12 Jul 12 Sep 12 Oct 12

USDUSD IRON ORE PRICES

10

.5Sustained higher terms of trade

(Price exports/price imports) .

Source: ABS Catalogue Number 5206.0, RBA and Treasury

It’s a Brand New Day!

11

.5

Australia & The Global Economy

CBA commodity price forecasts Asian growth skew limits downside to Australian commodity prices.

Bulk commodity prices to lift a little from current spot:

− iron ore (fines) USD125 at end’13;

− hard coking coal USD165 at end’13.

Oil prices to lift a little (USD97 at end’13). Gold holding at elevated levels (USD1725 at end’13).

Food price risks to the upside given poor growing conditions in some regions.

CBA USD Commodity Price Index expected to fall by 15% in 2012/13 and track sideways in 2013/14.

0

100

200

300

400

500

0

100

200

300

400

500

Sep 98 Sep 02 Sep 06 Sep 10

IndexIndex

Allitems

Metals

Source: CBA

CBA COMMODITY PRICE INDEX(USD terms)

Rural

12

.5

Is it over?

Concerns emerging (again) that the commodity “supercycle” is over.

An extension of long-running fears - previous booms followed by busts.

The Supercycle – Is It Over?

20

60

100

140

180

20

60

100

140

180

Sep-99 Sep-02 Sep-05 Sep-08 Sep-11 Sep-14

COMMODITY PRICE FORECASTS(RBA Non-Rural Index, USD)Index Index

Source: RBA, CBA, Consensus Economics

Dec'04

Actual

Aug'12

Consensus forecasts at various

points 100

130

160

190

220

100

130

160

190

220

0 4 8 12 16 20 24 28 32 36 40 44 48 52

Qtrs from trough

TERMS OF TRADE CYCLES (trough=100) IndexIndex

Mar'99

Dec'71

Mar'87

Jun'61

Jun'94

Dec'68

Dec'78

13

.5Real median household wealth

Sources: US Federal Reserve Survey of Consumer Finances, ABS Catalogue Numbers 5206.0, 6554.0, RBA and Treasury.

It’s a Brand New Day!

14

.5

Key points about Australia’s stellar performance since 2008 in wake of GFC

Australia emerged from the GFC (Global Financial Crisis) with:

Low unemployment

Solid economic growth

A stable and profitable financial system; and

Low levels of government debt

Australia’s performance is almost unique among the major advanced economies.

For instance, 35 million jobs were shed globally after the GFC WHILE Australia has created 800,000 new jobs. Australia’s unemployment now stands at 5.2% in June.

Australian Economic & Financial Market Outlook

15

.5

The Resources Boom

China dominates early-mid cycle commodities (iron ore, steel, coal) but consumption mix changes as incomes rise. Advanced economies more important for mid-late cycle commodities (zinc, nickel, copper, LNG). Australia well placed as Chinese incomes rise.

Commodity mix

0

25

50

75

100

Iron ore Steel Aluminium Copper Nickel Zinc Coking Thermal Oil Natural Gas LNG Uranium

%Other India US Eurozone Japan China

GLOBAL COMMODITY CONSUMPTION(% of total)

16

.5Oz Trade: China & Asia overwhelm US & Europe

80% of Australia’s exports go to Asia & emerging economies which are still growing strongly.

17

.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2009 2020 2030

North America Europe Asia Pacific Central and South America Africa and Middle East

Billions (persons) Billions (persons)

Projection of the global middle class by region, persons

Asia Pacific Growth Outlook

18

.5Asia Pacific Growth Outlook

19

.5Asia Pacific Growth Outlook

20

.5

21

.5

Education and Tourism sectors will be big beneficiaries of rapidly expanding Asian middle class

Asia Pacific Growth Outlook

0

100

200

300

400

0

100

200

300

400

Jan 02 Jan 05 Jan 08 Jan 11

IndexIndex

China

India

OVERSEAS ARRIVALS(rolling annual total, Jan'02=100)

NewZealand

Japan

UK

Total

0

100

200

300

'000

China

India

Other East Asia

Other countries

STUDENT VISAS GRANTED(2010/11)

Source: DIMIA

22

.5

Australia well-placed to weather any further global meltdown

Australia dodged recession in 2008/09 courtesy of some good economic management – and some luck.

Good management:

– effective policy stimulus;

– the flexible AUD and labour markets;

– strong financial system and limited housing stress.

Good luck:

– China/Asia economic boom

– favourable demographics;

– the capex pipeline;

– a rural bounce;

– reality failed to validate the extreme pessimism (esp labour market).

What saved us last time?

90

95

100

105

110

90

95

100

105

110

Mar-08 Mar-09 Mar-10 Mar-11 Mar-12

REAL GDP(Sep'08= 100)Index Index

Japan

US

Australia

Europe

UKNZ

Lehman collapse

23

.5

Sovereign risk

Australia’s Stellar Fiscal Position

24

.5

2424

Australia’s Largest Bank and Ranked in the Top 10 Globally

Top 45 banks by market capitalisation and credit rating

Source: Bloomberg. As at 11 Aug 2011. Credit rating: S&P LT FC Iss

ICBCChina Construction Bank

HSBCJP Morgan

Agricultural Bank of ChinaWells Fargo

Bank of ChinaCitigroup

CBABank of America

Royal Bank of CanadaBanco Santander

UniBancoMitsubishi UFJ

TD BankWBC

SberbankBNP Paribas

Goldman SachsBank of Nova Scotia

Bradesco SAANZUBS

Standard CharteredAmexNAB

Allied Irish BankBank of CommunicationsRoyal Bank of Scotland

US Bancorp

Morgan StanleyMizuho Financial

BarclaysBanco Santander Brazil

State Bank of IndiaING Groep

A$0bn A$50bn A$100bn A$150bn A$200bn A$250bn

2.99E+108.47E+10

1.04E+111.16E+11

1.19E+111.28E+11

1.30E+111.66E+11

1.75E+111.79E+11

1.80E+111.82E+11

1.83E+111.84E+11

1.86E+111.89E+111.89E+11

1.90E+111.92E+11

1.94E+111.95E+11

1.98E+111.98E+111.98E+111.99E+11

2.00E+112.04E+11

2.07E+112.08E+112.08E+11

2.18E+112.18E+112.18E+112.19E+112.19E+11

2.20E+11

25

.5

Financial Market Developments

Australia now funds over 60% of capital needs in domestic markets now compared to 40% pre Global Financial Crisis (GFC).

Only 40% of capital needs sourced from offshore vs 60% pre GFC.

26

.5Financial Market Developments

27

.5Financial Market Developments

28

.5Financial Market Developments

29

.5

The real issues facing Australia today

The emergence of Asia as the global centre of economic gravity

Australia’s strong economic links to emerging economies.

The structural shift up in AUD – which is resulting in significant structural change across sectors of Australia’s economy.

Born again savers – consumers are now saving 11.5% of income for first time since early 1980s.

Bad news for retailers & domestic tourism used to consumers spending more than their incomes (as they have in past 20 years or so).

Also State governments suffering due to sharply lower GST revenues.

Labour market structural issues – skill shortages, participation rates, productivity issues, population growth and imminent retirement of boomer generation ( ie 30%of current workforce).

Australian Economic & Financial Market Outlook

30

.5 Australian Economy: Grew at 3¾% in QII 2012. Likely to grow by 3-4% in 2013 & 2014.

STRONGEST GROWTH LNG & iron ore related mining, construction &

exports. Mining construction & equipment, related services Infrastructure – roads, rail, water, power. related construction, engineering & services. Outbound tourism & internet buying. New (imported) car sales.

MODERATE GROWTH Staples – groceries, food, cosmetics, (gambling?). Cafes, restaurants. (Utilities?) Health, defence, education; Government related. New Housing construction, alts & adds. Commercial office refits, rentals.

SECTORS WITH DOWNSIDE RISK New commercial construction Discretionary retail – clothing/shoes, audio-visual Manufacturing – local car industry, textiles Domestic & Inbound tourism

-3

0

3

6

-3

0

3

6

Sep-98 Sep-01 Sep-04 Sep-07 Sep-10

GDP(% change)

% %

Annual

Quarterly

% ch Contrib. (ppts)

GDP 0.6 ~

Of which:

Consumer spending

0.6 0.3

Dwelling investment

-1.7 -0.1

Business investment

1.3 0.3

Public spending 1.9 0.5

Inventories ~ -0.3

Net exports ~ 0.3

31

.5 Australian Economy: Grew 3¾% in QII 2012. WA GSP surged 6.7%, Tasmania +0.5%.

STRONGEST GROWTH average annual growth from

2000-01

WA – 6.7% 4.8% NT – 4.4% 3.6% QLD – 4.0% 4.0%

MODERATE GROWTH

ACT - 3.5% 3.2% NSW – 2.4% 2.2% VIC – 2.3% 2.9% SA – 2.1% 2.5%

MODEST GROWTH

TAS – 0.5% 2.1%

32

.5

Mining sector growth eclipsing non-mining GDP growth.

Mining and Mining related Sectors account for 15- 18% of GDP & 8% of total employment

Mining related activity includes: - construction,- utilities, - project management,- legal services, - surveying, - accounting, - engineering, - manufacturing,- transport wholesale trade, and- human resources etc .

Mining & mining related sectors are expected to grow by 10-12% in 2012/13.

Non – mining economy (>80%of GDP) likely to grow by 1% in 2012/13 vs long term trend of 3%.

100

115

130

145

100

115

130

145

2010/11 2011/12 2012/13

ECONOMIC ACTIVITY(2010/11 = 100) Index

Source: RBA , CBA

MiningGDP

GDP

Non-miningGDP

Index

33

.5

Mining sector growth eclipsing non-mining GDP growth.

Value of advanced mining projects by segment April 2012

Source: Bureau of resources and Energy Economics

34

.5Oz Trade: Strong AUD encouraging Aussie consumers to travel abroad

60

80

100

120

60

80

100

120

Jan-95 Jan-00 Jan-05 Jan-10

COST OF TRAVEL(Index, Mar 09=100)

International

Domestic

IndexIndex

50

100

150

200

50

100

150

200

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

REASON FOR DEPARTURE(short-term, Index, Jan 07=100)

Other

Holiday

IndexIndex

Education

Convention/Conference

EmploymentBusiness

Visit friends/etc

Source: ABS 3401.0

35

.5National credit growth weak – post GFC

Cautious consumers remain in bunker in terms of borrowing & spending

Private sector credit rose by 0.2% in September to be a tepid 4.1% higher than a year ago.

Housing credit lifted by a lacklustre 0.3% in September (up 4.8%pa). This was the weakest annual growth since series began in 1977.

Business credit was the key driver rising 0.1% in (but up by a modest 4.0%pa), and

Other personal lending fell 0.3% to be 1.4% lower than a year ago.

0

6

12

18

0

6

12

18

Jul-97 Jul-00 Jul-03 Jul-06 Jul-09 Jul-12

CREDIT(% change)% %

Annualgrowth(lhs)

Monthlychange

(rhs)

-15

0

15

30

-15

0

15

30

Jul-05 Jul-07 Jul-09 Jul-11

CREDIT(3 month-ended annual rates)% %

Housing

Business

Otherpersonal

36

.5Labour Market: Slows but resilience underestimated

Jobs growth picks up in 2012 In October 2012, jobs rose by 10.7k. Full-time jobs rose 18.7k, part-time jobs fell by 8k.

After no growth in 2011, employment has risen by over 73k jobs across the nation.

Full time jobs lifted by over 53k in September/ October.

Unemployment was 5.4% (cyclical peak 5¾% in HII ‘09).

Unemployment rate has been in tight 4.9-5.4% band since June 2011 (past 16 months).

Low by global standards: US 7.9%; UK 7.9%; Euroland 11.8%; Germany 6.9%; Ireland 15%; Spain & Greece 25%.

Commercial construction, retail & manufacturing weak.

Mining , gov’t & other services rising.

-60

-30

0

30

60

90

3.5

4.0

4.5

5.0

5.5

6.0

Jan-08 Nov-08 Sep-09 Jul-10 May-11 Mar-12

LABOUR MARKET

Employmentgrowth

(3mnth average, rhs)

Unemployment rate(lhs)

% '000

0 5 10 15 20 25

Aust

NZ

Germ…

Canada

UK

Italy

US

France

EU

Spain

Unemployment Rates October %%

37

.5

Excess demand for housing

Demographics suggest underlying housing demand of 180-185kpa – lower than recent years but still well ahead of new construction.

An excess demand and a pent-up demand for new dwellings should limit price downside.

Financial intermediaries willing to finance housing activity.

The Housing Market

100

150

200

100

150

200

Sep-90 Sep-94 Sep-98 Sep-02 Sep-06 Sep-10

HOUSING DEMAND & SUPPLY

Demand

Supply(rolling 4-qtr

sum)

'000'000

38

.5

A regular cycle?

The main drivers of the residential construction cycle are government policy or external shocks.

Excluding these events, the construction cycle had been remarkably muted over the past fifteen years.

CBA forecasts:– 2010:

170k– 2011:

151k– 2012:

138k– 2013:

156k

The Housing Market

20

30

40

50

20

30

40

50

Sep-89 Sep-93 Sep-97 Sep-01 Sep-05 Sep-09

'000

1997-11average

'000

PostGST

slump

GFCslump

FHOBFHOGPre GST

pullforward

DWELLING COMMENCEMENTS

39

.5

Manning The Barricades

Mortgage arrears have increased – bulk reflects localised issues in WA and Qld.

Lending standards are tougher then pre-Lehman’s.

Australian property prices prove resilient on any global comparison.

Property – less stress?

40

.5

Housing Outlook

Issues & Drivers of Domestic Property Markets in 2012-2013

Economic Growth + Positive for Property

Monetary Policy + + Lower rates positive for Property

Underlying CPI + In check for now - bottom line positive.

Unemployment + + To head down to 5% or lower in 2013 – big POSITIVE.

AUD Outlook + - Mixed – given patchy impact on economy.

Population growth + Strong growth via immigration – unequivocal positive

Demand Supply Gap + + Yawning gap unlikely to close – big positive for housing.

Skilled trade shortages may exacerbate demand supply disconnect – driving up rents and house prices in years ahead.

41

.5

Inflation Outlook: Comatose

Inflation: core measures remarkably well behaved

History revised down and QIV core CPI measures on the low side.

But the inflation story is unchanged in some important respects:

– underlying inflation was running at 2%pa in QII 2012 but it has probably bottomed;

– headline inflation (the RBA target) is running at 1.2%pa in QII 2012;

– weak productivity is boosting unit labour costs;

– the fully-employed economy still has to absorb strong income growth and a mining boom;

– structural inflation pressures remain in some areas.

-2

0

2

4

6

-2

0

2

4

6

Mar-06 Sep-07 Mar-09 Sep-10 Mar-12

INFLATION(annual % change) %

AUD influencedinflation

Non-Tradables (Domestic inflationmainly services)

%

CPI

1

2

3

4

5

6

1

2

3

4

5

6

Sep-99 Mar-02 Sep-04 Mar-07 Sep-09 Mar-12

CONSUMER PRICES(annual % change)% %

Headlineinflation

(exc GST)

Underlyinginflation

42

.5

Mining sector growth eclipsing non-mining GDP growth.

Value of advanced mining projects by commodity HI 2012

Value of advanced mining projects by state & territory HI 2012

Source: Bureau of Resources and Energy Economics

43

.5

Sovereign risk

Australia’s Stellar Fiscal Position

44

.5

Testing the fundamentals AUD medium-term fundamentals supportive:

- commodity exposure;

- terms-of-trade at 140-year highs;

- Asian exposure;

- interest rate differential;

- exceptional fiscal position;

- AAA rating and sound financial system.

But the cycle is not dead. AUD will fluctuate around a higher average.

The AUD

0.60

0.70

0.80

0.90

1.00

1.10

0.60

0.70

0.80

0.90

1.00

1.10

Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

AUD TRADING RANGES(versus USD)

Tradingrange

CBA(f)

45

.5

45

AUD

In the AAA-rated space, Australia has had the highest 2-year government bond yields for most of the past decade.

Australia’s yield advantage is currently at high levels because of softness in the ‘advanced economies’.

Australia’s yield advantage should ease as the rest of the world catches up.

High yields

-1 0 1 2 3 4

Australia

Canada

Sweden

Singapore

UK

Hong Kong

Netherlands

Finland

Germany

Denmark

Switzerland

YIELDS ON AAA-RATED GOV. DEBT(two-year bond yields)

%

46

.5

Australia USA France Germany UK Spain Italy China0

10

20

30

40

50

60

Feeling financially insecure or in financial trouble as % surveyed

Source: Boston Consulting

47

.5

Jobs growth by sector : Year to August 2012

Jobs losses are in sectors exposed to:

High AUD

Weak consumer spending

Eg tourism, transport, cafes/restaurants, govt. admin, finance/insurance, retailing & construction

Gains are in

Mining, Agriculture & Utilities

Spending on services: communications, health, education etc

-75 -50 -25 0 25 50

Mining

Health

Prof serv

Education

PBS

Communic

Manufact

Wholesale

Agri

Rental

EGW

Cult

Accomm

Pers

Fin & insur

Admin

Retail

Transp

Gov admin

Construct

JOBS GROWTH BY SECTOR

Year to August 2012

+58.8k

'000s

48

.5

Permanently larger mining sector

Note: Shares are the total gross value added. MMRF estimates after 2010 are spliced onto historical ABS.Source: Strong Growth, low pollution report (2011), ABS and Treasury estimates from MMRF.

It’s a Brand New Day!

49

.5

The November RBA forecasts incorporated a modest downgrade to near-term domestic growth forecasts to 2¾%

But inflation figuring was left largely unchanged.

Forecast bands remain wide - implying a fair degree of uncertainty.

Medium-term projections imply trend growth and core inflation in the 2-3% target band.

Forecasts based on “technical assumption” of no change in cash rate, TWI=79, USD1.04, Brent crude=USD108.

RBA’s Growth & Inflation Forecasts

The policy challenge

0

2

4

6

0

2

4

6

Sep 08 Sep 11 Sep 14 Sep 10 Sep 13

%%

RBA forecast as at:Aug'12Nov'12

KEY RBA FORECASTS(annual % change)

Growth Inflation

50

.5

Manning The Barricades

Monetary and fiscal policy have plenty of room to move.

But appetite and effectiveness likely to vary between monetary and fiscal policy.

Policy ability – but appetite and effectiveness to vary?

-25

0

25

50

75

100

-25

0

25

50

75

100

2006 2008 2010 2012 2014 2016 2018

%%

Australia

Source: IMF Fiscal Monitor

GENERAL GOVERNMENT NET DEBT(% of GDP)

EmergingG-20

AdvancedG-20

0

2

4

6

8

0

2

4

6

8

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

OFFICIAL INTEREST RATES% %

Canada

US

UK

EuroJapan

NZ

Australia

51

.5

CBA view The RBA describes policy settings as being

“modestly accommodative”. RBA’s downgrading of GDP and inflation forecasts points to lower rates ahead.

Global uncertainty and market volatility has RBA noting “scope for monetary policy to provide some support to demand, should that prove necessary, especially in light of Europe’s sovereign debt woes”.

RBA has used rate cuts as short-term confidence booster in past (post Sep’11 attacks, late in Asian financial crisis when CPI running sub 2%).

CBA forecast:

– RBA to cut cash rate to 3% by end QI 2013

The RBA & Monetary Policy

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Jan 11 Apr 11 Aug 11 Nov 11 Mar 12 Jun 12 Oct 12

%

3 months ahead

12 monthsaheadSource: Reuters

RBA CASH RATE PRICING%

Cashrate

52

.5

Income boost

The commodity story is an income story – income injection reversing.

Current commodity price and AUD forecasts consistent with an income extraction of ≈ 1% of GDP.

A Peek at 2013/14

-2

0

2

4

-2

0

2

4

1994/95 1998/99 2002/03 2006/07 2010/11 2014/15

COMMODITY INCOME BOOST*(% of GDP) %%

2011/12to

2013/14

*Source: CBA calculations

53

.5

The Dark Side of the Boom

A very diverse set of forces at work – both stimulatory and contractionary.

Perception is that a significant wedge has been driven between regions, between industries and within sectors.

The reality is that the gap between the mining-related parts of the economy and the rest is not unusually large.

A two-speed economy

-12

0

12

24

36

-25

-15

-5

5

15

1988 1992 1996 2000 2004 2008 2012

%

%

Mining(lhs)

Non-mining

(lhs)

Source: CBA

THE PATCHWORK ECONOMY(annual % change)

Growthrate gap

(rhs)

54

.5

CBA Financial Forecasts

Forecasts –Financial

 

Forecasts – Financial

USD versusEnd Period Cash

Rate90-day Bank Bill

180-day Bank Bill

3-year Bond

10-year Bond

AUD JPY EUR GBP NZD

Dec-09 3.75 4.28 4.47 5.06 5.64 0.90 93.0 1.43 1.62 0.72Mar-10 4.00 4.49 4.76 5.39 5.78 0.92 93.4 1.35 1.52 0.71Jun-10 4.50 4.92 5.00 4.56 5.09 0.84 88.4 1.22 1.49 0.68Sep-10 4.50 5.01 5.20 4.82 4.96 0.97 83.5 1.36 1.57 0.73Dec-10 4.75 5.04 5.23 5.30 5.55 1.02 81.1 1.34 1.56 0.78Mar-11 4.75 4.93 5.01 5.07 5.49 1.03 83.1 1.42 1.60 0.76Jun-11 4.75 5.03 5.07 4.78 5.21 1.07 80.6 1.45 1.61 0.83Sep-11 4.75 4.92 4.68 3.61 4.22 0.97 77.1 1.34 1.56 0.76Dec-11 4.25 4.48 4.43 3.07 3.67 1.02 76.9 1.30 1.55 0.78Mar-12 4.25 4.34 4.33 3.45 3.98 1.03 82.9 1.33 1.60 0.82Jun-12 3.50 3.49 3.44 2.39 3.03 1.02 79.8 1.27 1.57 0.80Sep-12 3.50 3.37 3.32 2.35 2.89 1.03 79.0 1.22 1.56 0.82Dec-12 3.25 3.10 3.00 2.30 2.70 1.05 79.0 1.25 1.58 0.83Mar-13 3.00 2.80 2.70 2.20 2.50 1.04 80.0 1.27 1.60 0.83Jun-13 3.00 2.70 2.50 2.20 2.50 1.04 81.0 1.30 1.62 0.84Sep-13 3.00 2.60 2.50 2.40 2.70 1.04 82.0 1.31 1.64 0.82Dec-13 3.00 2.60 2.50 2.60 2.90 1.04 83.0 1.32 1.64 0.82Mar-14 3.00 2.60 2.60 2.80 3.00 1.04 84.0 1.33 1.64 0.82Jun-14 3.00 2.70 2.70 3.00 3.20 1.02 85.0 1.30 1.60 0.81

Interest Rates Exchange Rates

Fo

recast

55

.5

CBA Financial Forecasts

Swap Rate Forecasts – end period

RBA cash

3 mth bill

3yr swap

5yr swap

10yr swap

26 Nov act 3.25 3.27 3.23 3.47 3.92

End qtr.

Mar 13f 3.00 2.80 2.80 3.10 3.30

J une 13 3.00 2.70 2.90 3.20 3.30

Sep 13 3.00 2.60 3.10 3.35 3.50

Dec 13 3.00 2.60 3.30 3.50 3.65

J un 14 3.00 2.70 2.80 3.10 3.45

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Jan 11 Apr 11 Aug 11 Nov 11 Mar 12 Jun 12 Oct 12

%

3 months ahead

12 monthsaheadSource: Reuters

RBA CASH RATE PRICING%

Cashrate

56

.5

CBA Economic Forecasts

2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2007 2008 2009 2010 2011 2012 2013(a) (a) (a) (a) (f) (f) (a) (a) (a) (a) (a) (f) (f)

Economic Activity

Private final demand 0.1 1.0 3.3 6.8 4.6 4.1 6.9 3.0 -0.4 2.0 5.5 5.7 4.7Of which: Household spending 0.1 2.5 3.1 3.7 3.1 3.3 5.6 1.9 1.0 2.9 3.3 3.8 2.9

Dwelling investment -1.5 1.2 3.0 -3.3 -1.6 5.4 2.0 2.7 -4.4 4.1 1.3 -5.8 4.5Business investment 2.2 -5.2 6.1 22.1 11.2 5.7 14.9 9.4 -4.7 -1.5 17.1 16.0 9.9

Public final demand 3.7 6.6 3.1 0.7 0.1 0.1 3.4 6.8 0.7 8.7 0.1 1.9 -1.4Domestic final demand 0.9 2.3 3.3 5.3 3.6 3.2 6.1 3.9 -0.2 3.5 4.2 4.8 3.3

Inventories (contrib to GDP) -0.7 -0.1 0.5 0.2 0.1 0.0 0.8 -0.3 -0.7 0.4 0.4 0.1 0.1GNE 0.2 2.3 3.8 5.5 3.6 3.2 6.9 3.5 -0.9 3.9 4.6 4.9 3.4

Exports 1.7 5.3 0.4 3.7 4.8 5.8 3.2 3.8 2.1 5.9 -1.3 5.1 6.0Imports -3.3 5.6 10.4 11.8 6.1 6.8 12.6 11.2 -8.6 14.1 11.5 7.6 7.1

Net exports (contrib to GDP) 1.0 -0.1 -2.0 -1.8 -0.5 -0.5 -1.6 -1.4 2.2 -1.5 -2.7 -0.8 -0.5GDP 1.4 2.3 1.9 3.4 3.2 3.0 4.7 2.5 1.4 2.5 2.1 3.7 3.2

Prices & WagesCPI 3.1 2.3 3.1 2.3 2.8 2.8 2.3 4.4 1.8 2.9 3.3 1.9 3.1

Underlying CPI 4.5 3.3 2.5 2.4 2.8 2.9 3.0 4.7 3.8 2.8 2.6 2.4 3.0AWOTE 5.5 5.6 4.2 4.3 2.6 3.4 4.8 4.8 5.7 4.9 4.4 3.3 2.8

WPI 4.1 3.1 3.8 3.6 3.8 3.7 4.0 4.2 3.6 3.4 3.7 3.7 3.8Real h/hold disposable income 7.4 1.0 3.8 3.5 3.0 3.2 7.7 4.2 5.9 1.0 4.4 3.1 2.9

Labour MarketEmployment 1.6 1.4 2.9 0.7 0.7 1.7 3.1 2.8 0.7 2.7 1.7 0.5 1.2

Unemployment rate 4.9 5.5 5.1 5.2 5.5 5.4 4.4 4.3 5.6 5.2 5.1 5.3 5.6

External AccountsCurrent Account: $bn -36.7 -56.1 -33.3 -40.8 -69.4 -79.9 -69.8 -54.2 -52.4 -38.8 -32.5 -57.0 -77.6 % of GDP -2.9 -4.3 -2.4 -2.8 -4.5 -4.9 -6.2 -4.4 -4.2 -2.9 -2.3 -3.8 -4.9

57

.5

All Investors: Unless otherwise noted, all data is sourced from Australian Bureau of Statistics material. (www.abs.gov.au)The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 (the “Bank”, is incorporated in Australia with limited liability. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec"), is a wholly owned, but non-guaranteed, subsidiary of the Bank and is incorporated in Australia with limited liability. Please view our website at www.research.commbank.com.au for more information. The Bank and its subsidiaries, including CommSec, Commonwealth Australia Securities LLC, CBA Europe Ltd and Commonwealth Research, are domestic or foreign entities or business areas of the Commonwealth Bank Group of Companies (CBGOC). CBGOC and their directors, employees and representatives are referred to in this Appendix as “the Group”. This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy any securities or financial instruments. This report has been prepared without taking account of the objectives, financial situation and capacity to bear loss, knowledge, experience or needs of any specific person who may receive this report. No member of the Group does, or is required to, assess the appropriateness or suitability of the report for recipients who therefore do not benefit from any regulatory protections in this regard. All recipients should, before acting on the information in this report, consider the appropriateness and suitability of the information, having regard to their own objectives, financial situation and needs, and, if necessary seek the appropriate professional, foreign exchange or financial advice regarding the content of this report. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its compilation, but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made in this report. Any opinions, conclusions or recommendations set forth in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed elsewhere by the Group. We are under no obligation to, and do not, update or keep current the information contained in this report. The Group does not accept any liability for any loss or damage arising out of the use of all or any part of this report. Any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. Different assumptions and estimates could result in materially different results. The Group does not represent or warrant that any of these valuations, projections or forecasts, or any of the underlying assumptions or estimates, will be met. Past performance is not a reliable indicator of future performance. The Group has provided, provides, or seeks to provide, investment banking, capital markets and/or other services, including financial services, to the companies described in the report and their associates. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject any entity within the Group to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to the Group. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior written permission of the appropriate entity within the Group. In the case of certain products, the Bank or one of its related bodies corporate is or may be the only market maker. The Group, its agents, associates and clients have or have had long or short positions in the securities or other financial instruments referred to herein, and may at any time make purchases and/or sales in such interests or securities as principal or agent, including selling to or buying from clients on a principal basis and may engage in transactions in a manner inconsistent with this report.

All investors – Analyst Certification: Each research analyst, primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the report. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing, and interpreting market information. Directors or employees of the Group may serve or may have served as officers or directors of the subject company of this report. The compensation of analysts who prepared this report is determined exclusively by research management and senior management (not including investment banking). No inducement has been or will be received by the Group from the subject of this report or its associates to undertake the research or make the recommendations. The research staff responsible for this report receive a salary and a bonus that is dependent on a number of factors including their performance and the overall financial performance of the Group, including its profits derived from investment banking, sales and trading revenue.

Important Disclosures and Disclaimer