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Embargoed until:

11.30am Tuesday 11 October 2011

Monthly Business Survey September 2011

Conditions recover and businesses take comfort from better sales, a

lower AUD and talk of interest rate cuts. Global uncertainty stillweighing on near-term activity indicators.

! Business conditions improved in September, after edging down over the previous two months, withthe outcome suggesting that the Australian economy may be stabilising. However, there are stillsigns that a swift recovery may not ensue, with forward orders remaining weak and stockscontracting a little in the month. Nonetheless, capacity utilisation bounced back, to be above long-runaverage levels. Overall, the Surveys activity readings, if maintained at current levels, are broadlyconsistent with underlying demand growth of around 3% in the December quarter (at an annualisedrate) and GDP growth (ex coal) of 3%.

! Business confidence rebounded sharply in September, in line with better conditions and helped bythe sharp depreciation of the AUD coupled with speculation that domestic interest rates will be

reduced. Confidence rose across a majority of industries in the month, with a particularly strong risein manufacturing implying that the lower AUD provided some relief.

! Conditions improved in all industries other than personal & recreational services which wasunchanged at strong levels. During September there were large gains in manufacturing and miningconditions. Despite this, conditions remain at depressed levels in manufacturing, construction, retailand wholesale.

! Labour costs growth eased a little in the month, after solid outcomes in the previous two months.Final product prices softened in September, and retail price growth was also weaker.

Implications for NAB forecasts (See Global & Australian Forecasts report also released today):

! The survey results signal caution about the likelihood of monetary policy being loosened in the nearterm, although the odds of a rate cut are clearly higher following the slowing in global growth andfinancial market volatility. Our domestic forecasts are broadly unchanged.

! While near term activity remains soft, we see a medium-term rebound in the Australian economy,aided by mining exports and investment in resources and infrastructure. We expect GDP growth of1.9% in 2011, rising to 4.1% in 2012. Core inflation (ex carbon pricing) is expected to remain around2% over the next year but drift above 3% by mid-2013. As such, we expect the RBA will need to liftrates by late 2012. However, in the near term, the RBA is more dovish and there is now a 50/50chance of a reduction in the cash rate in coming months if inflation remains subdued and domesticdemand and the labour market weakens further.

Key monthly business statistics*

Jul Aug Sep Jul Aug Sep

2011 2011 2011 2011 2011 2011

Net balance Net balance

Business confidence 1 -9 -2 Employment -2 0 3Business conditions -1 -3 2 Forward orders -6 -5 -4

Trading 1 -3 5 Stocks 3 2 -1

Profitability -3 -6 -2 Exports 1 -3 -2

% change at quarterly rate % change at quarterly rate

Labour costs 2.1 1.3 1.0 Retail prices -0.7 0.2 0.1

Purchase costs 0.8 0.8 0.6 Per cent

Final products prices 0.5 0.4 0.2 Capacity utilisation rate 80.4 80.4 81.3

* All data seasonally adjusted and subject to revision. Cost and prices data are monthly percentage changes expressed at a quarterly rate. All otherdata are net balance indexes, except capacity utilisation, which is an average rate, expressed as a percentage. Fieldwork for this Survey wasconducted from 26 to 30 September, covering over 400 firms across the non-farm business sector.

For more information contact:

Alan Oster, Chief Economist(03) 8634 2927 Mobile 0414 444 652

Next release: 20 October 2011 (September Quarterly)

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Embargoed until 11.30am Tuesday, 11 October 2011

Analysis

Conditions strengthen

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-10

0

10

20

III IV I II III IV I II III IV I II III

2008 2009 2010 2011

Seasonally adjusted TrendConds 1990s recn

Business conditions (net balance)

Average of the indexes of trading conditions, profitabili ty andemployment.

The business conditions index recoveredby a solid 5 points in September, lifting outof negative territory to +2 index points andunwinding consecutive declines recorded in

the previous two months. While overallconditions remained fairly soft inSeptember, the pick up in activity implies ashift in momentum towards a moreexpansionary economy, compared to aneconomy that had previously appeared tobe losing traction. The improvement inconditions in the month reflected broad-based increases in trading conditions (up8 to +5 points), profitability (up 4 to-2 points) and employment (up 3 to+3 points).

The conditions index, at +2 points, is now

4 points below its long-term average of+6 points (since 1997 for the MonthlySurvey). However, if the Survey comparisonis extended back to the timeframe of the fullQuarterly Survey (1989), conditions are infact a touch above the long-run average of+1 point.

Business confidence recovered sharply inSeptember (up 7 points to -2 index points),although the outcome still implies negativeconfidence readings in both seasonallyadjusted and trend terms. Nonetheless, the

pick up in business confidence is a muchbetter outcome than what could have beenenvisaged given the heightened uncertaintyand volatility enveloping the global economyat present. As such, the turnaround inconfidence relative to a month ago suggestsless concern about the impact of globalinfluences on activity within business.Furthermore, the depreciation of theAustralian dollar during the month is likely tohave helped to alleviate some stress onbusinesses competing on the global market,

Confidence bounces back

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0

10

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2008 2009 2010 2011

Seasonally adjusted TrendConf 1990s recn

Business confidence (net bal., s.a.)

Excluding normal seasonal changes, how do you expect thebusiness conditions facing your industry in the next month tochange?

while the heightened expectation that domestic interest rates will be lowered by the RBA may

have also provided some relief. The current level of business confidence remains below theaverage of the series (of +6 for both the Monthly and Quarterly timeframe).

Business conditions by industry. Business conditions improved across all industries, withthe exception of recreation & personal services, where they were unchanged. Conditionsimproved very strongly in manufacturing although they remained weak while conditionsalso improved notably in mining. Overall, business conditions were strongest (by far) in mining(+28), recreation & personal services and transport & utilities, while conditions were againweakest in manufacturing, construction, wholesale and retail.

Business conditions by state. Conditions improved across all states in September, withconditions rising very sharply in Tasmania (on a small sample) and also improving solidly inNSW. In level terms WA, Tasmania and NSW all reported positive readings for businessconditions in the month, while conditions continued to contract in Queensland, Victoria and SA.In trend terms, WA remained the strongest state followed by NSW and SA. In contrast, trend

conditions were weakest in Tasmania followed by Victoria and Queensland.

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Analysis (cont.)

Business confidence by industry. Business confidence improved across all industries inSeptember, with the exception of construction, mining and wholesale. The largest pick up inconfidence was in manufacturing, followed by finance/ property/ business, transport & utilitiesand retail. In level terms, confidence remains positive in mining and retail (with confidencelevels of +16 and +3 respectively), is neutral in recreation & personal services, and falling in allother industries. The weakest confidence was in wholesale (-13), followed by construction (-9).

Business confidence by state. Business confidence picked up across all states in Septemberwith the exception of WA where it was marginally lower. Trend confidence levels were againstrongest in WA and Queensland (the largest mining states), and were weakest in Tasmania(despite confidence picking up very sharply in the month; on a small sample) and SA.

The variation in business conditions acrosssectors has become increasingly pronouncedsince late 2009. Disparity between sectorperformance can be observed by comparingbusiness conditions of the (currently)strongest performing sectors (mining,transport & utilities, recreation & personal

services and finance/business/property) withconditions of the weakest performing sectors(retail, manufacturing, construction andwholesale). The persistent divergence inindustry conditions indicates that theAustralian economy is undergoing a structuraltransformation towards mining and service-based industries, and away from traditionalmanufacturing and discretionary retailing.

Economy remaking itself

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0

10

20

2000 2003 2006 2009 2000 2003 2006 2009

Net

bal.

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0

10

20

Net

bal.

Weak**

Strong*

Business conditions3-month moving average

* Strong industries include mining, transport & utilities, recreation & personal

services and finance/business/property

** Weak industries include retail, manufacturing, construction and wholesale

Gap between weak &

strong industry conditions

The forward orders index rose marginally in September, although remained fairly subdued(-4 points) and below its long-term average level (of +1 over the Monthly Survey period and-1 over the Quarterly Survey period). Changes in forward orders indices in September were

mixed across industries. In levels terms, orders were strongest (and positive) in finance/business/ property (+8), and weakest in mining (-11), wholesale and manufacturing. Capacityutilisation picked up in September, rising to 81.3% from 80.4% in the previous month, to beabove its long-term average (of 81.2% over the Monthly Survey period or 80.4% over thetimeframe of the full Quarterly Survey). Notably, capacity jumped sharply in finance/ business/property and manufacturing more than unwinding last months sharp declines and in miningand personal & recreational services. Despite stronger readings elsewhere in the survey,capacity utilisation fell in retail and construction. Capacity utilisation remained highest in miningand lowest in manufacturing. Capital expenditure was lower in September (+1 point),reflecting weaker investment in transport & utilities and construction.

Forward orders implied softer 6-monthlyannualised demand growth for the June

quarter 2011 than the 4.3% outcome in theJune quarter National Accounts. Based onforward orders for the September quarter, thesurvey implies 6-monthly annualised demandgrowth was around 2% in the Septemberquarter. If we assume the September forwardorders outcome is continued into theDecember quarter, the Survey implies6-monthly annualised demand growth will riseto around 3%.

Demand growth to stabilise

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2

4

6

8

10

02 03 04 05 06 07 08 09 10 11

Domestic demand Prediction from orders

Forward orders (change & level) as an indicator of

domestic demand (6-monthly annualised)

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Analysis (cont.)

Similarly, business conditions imply that 6-monthlyannualised GDP growth was (significantly) higherthan the 0.6% recorded in the June quarter. Thislargely reflects the survey not capturing the fullimpact of the flood-induced decline in coal mineproduction in H1 2011 (which has taken the bestpart of 1% off H1 GDP). Based on businessconditions for the September quarter, the implied6-monthly annualised GDP growth (ex coal mines)would be around 2-2% (annualised) in theSeptember quarter. But if September monthlybusiness conditions were maintained over theDecember quarter, the implied growth rate wouldrise to around 3%.

Elsewhere in the survey, cash flow was strongestin mining and weakest in construction and retail.

GDP (ex coal mines) growth topick up

-2

0

2

4

6

8

02 03 04 05 06 07 08 09 10 11

GDP Prediction from bus conds

Business c onditions (change & level) as an indicator of

GDP (6-monthly annualised)

Labour costs (a wages bill measure) softened to 1.0% in September (at a quarterly rate),following increases of 1.3% in the previous month. It appears that the boost provided to growthby Fair Work Australias minimum wage increase in July has begun to dissipate. Labour costincreases in the month (at a quarterly rate) were highest in transport & utilities (1.9%) andmining (1.2%), while growth was softest in wholesale (0.3%), construction and retail (both 0.8).

Price inflation softened in September, increasingby 0.2% (at a quarterly rate), compared to growthof 0.4% in August. Retail prices were even moresubdued, increasing by a quarterly rate of just0.1% in the month, from a soft 0.2% in the

previous month. The softer increase in retail pricegrowth reflected a 0.1 percentage point decline inretail purchase cost inflation, suggesting thatretailers continued to keep their margins relativelystable.

Overall purchase cost pressures appear to haveeased in September, despite the depreciation ofthe AUD over the month (these cost increasesmay be expected to flow through in comingmonths). Purchase costs increased by 0.6% in themonth (at a quarterly rate), following growth of0.8% in August. By industry, the only industry toexperience an increase in purchase cost

pressures in the month was wholesale, whilepurchase costs softened in construction andrecreation & personal services.

Retail prices soften

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5


2008 2009 2010 2011

Labour Product price Retai l p rice

Costs & prices (% change at a quarterl rate)

Based on respondent estimates of changes in labourcosts and product. Retail prices are based on retailsector product price estimates.

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Current business conditions

Business conditions Conditions recover

The business conditions index picked up solidly inSeptember, rising by 5 points to +2 index points,although remained a little below its long-term average

of +6 points for the Monthly Survey (but in line with+1 points for the Quarterly). In trend terms, theconditions index was unchanged at -1 index points.

Trading, profitability and employment

The rise in the business conditions index inSeptember reflected improvements in tradingconditions, profitability and employment. Comparedwith their long-run averages over the Quarterly Surveyperiod (from 1989), trading conditions were marginallysofter than average, profitability was the same andemployment conditions were stronger than average.

Trading conditions improved very strongly inmanufacturing (up 29 to -5 points), more thanunwinding a sharp deterioration in the previous month,while conditions also improved solidly in transport &utilities, wholesale and construction. In contrast,recreation & personal services recorded a decline intrading conditions, albeit conditions remained strong

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2008 2009 2010 2011

Trading Profitability E mploymentConds 1990s recn

All components of business conditions (net bal., s.a.)

Net balance of respondents who regard last monthstrading / profitability / employment performance asgood.

(down 3 to +16). In trend terms, trading conditions remained strongest in mining (+27) andrecreation & personal (+17), while conditions were weakest in manufacturing (-17) and retail (-10).

Profitability improved strongly in mining (up 13 to +21 points) and transport & utilities (up 13 to+18 points), while it fell notably in wholesale. In trend terms, profitability was strongest in mining(+18) and recreation & personal services (+12), and weakest in manufacturing (-18), retail (-12),

construction (-11) and wholesale (-9).Employment conditions picked up to +3 index points in September, which was the secondconsecutive monthly increase. The improvement in employment in the month was most significantin manufacturing (up 18 to -6 points) followed by wholesale (up 7) and mining (up 6). In contrast,employment conditions declined very sharply in transport & utilities (down 28 to +1 index points),while conditions also weakened in construction (down 6) and recreation & personal services(down 1). Trend employment conditions were strongest in mining (+33), and weakest (negative) inmanufacturing (-18) and wholesale (-5).

Business conditions components (net balance)

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III IV I II III IV I II III

2009 2010 2011

Seasonally adjusted Trend

Trading performance

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0

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2009 2010 2011


Profitability

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2009 2010 2011


Employment

Net balance of respondents reporting trading performance / profitability / employment as good or very good (rather thanpoor or very poor).

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Current business conditions (cont.)

Forward orders Orders remain weak

The forward orders index continued to nudgehigher in September, though remained fairly

subdued (up 1 to -4 points), and was unchangedat -5 points in trend terms.

Changes in forward orders were mixed acrossindustries. New orders deteriorated sharply inmining (down 28 to -11 points), followed bytransport & utilities and recreation & personalservices. In contrast, orders improved across allother industries, with the most notable increasesin manufacturing (up 13) and finance/ business/property (up 12). In seasonally adjusted terms,orders were strongest (and positive) in recreation& personal services (+8), and weakest in mining(-11) and wholesale (-8).

Net balance of respondents with more orders from customerslast month.

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2008 2009 2010 2011

Seasonally adjusted TrendOrders 1990s recn

Forward orders (net balance)

Capacity utilisation Capacity utilisation rebounds

Capacity utilisation rebounded in September,increasing by 0.9 percentage points to be aboveaverage, at 81.3%. The rise in utilised capacitylargely reflected increases in finance/ business/property and manufacturing, while retail andconstruction experienced a reduction in capacityutilisation.

Despite a pick up in capacity utilisation in the

month, trend capacity was marginally lower, fallingby 0.1 percentage points to 80.7%. In levelsterms, trend capacity utilisation was highest inmining (84.5%) and recreation & personalservices (83.2%), and lowest in manufacturing(74.6%).

Full capacity is the maximum desirable level of output usingexisting capital equipment.

76

78

80

82

84

86


2008 2009 2010 2011


CapU 1990s recn

Capacity utilisation (per cent)

Stocks Stocks contract

The stocks index continued its decline inSeptember, falling by 3 points to -1 index point.

The stocks index, which is now in negativeterritory, implies some expectation of adeterioration in future demand (albeit soft), whichis consistent with a contraction in forward orders.

Changes in stocks in the month were mixedacross industries. The stocks index fell sharply inmining (down 14 to -11 points) and manufacturing(down 8). On the other hand, stocks rose notablyin retail (up 8 to +13 points) and construction (up5). In trend terms, the stocks index was highest inretail (+6) and transport & utilities (+4) and lowestin construction (-7) and manufacturing (0).

Net balance of respondents with an increase in stocks lastmonth.

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-5

0

5

10


2008 2009 2010 2011


Stocks (net balance)

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Current business conditions (cont.)

Capital expenditure Capital spending weakens

Capital expenditure fell in September (down 4 to+1 point), after edging higher in the previousmonth, and it also eased in trend terms. Capital

spending was higher in mining and manufacturing,but lower in all other industries. The largestdeclines in capex were in transport & utilities,construction, finance/ business/ property andwholesale. In level terms, apital expenditure waslowest in construction (-7) and wholesale (-6) andhighest in mining (+25).

Net balance of respondents with an increase in capitalexpenditure last month.

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2009 2010 2011


Capital expenditure (net balance)

Exports Exports up, but still weak

The exports index, which represents exportconditions for the economy as a whole, rosemarginally in September to -2 index points, afterfalling heavily in August.

By industry, the exports index rose most inmanufacturing and wholesale, while it fell heavilyin transport & utilities and finance/ business/property.

Similarly, the exporters sales index, whichrepresents export conditions for exporting

industries, also rose in the month, but by a largeramount (up 5 to -9 points).

Net balance of respondents with an increase in export saleslast month.

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-8

-6

-4

-2

0

2


2008 2009 2010 2011


Exports (net balance)

Credit availability Credit conditions unchanged

Firms reported no change indifficulty obtaining finance inSeptember, with the net index(easier minus harder)remaining at -6 index points.This outcome reflected a fallin the proportion ofrespondents finding it moredifficult to obtain finance,which was entirely offset by afall in the proportion of firmsfinding it easier to obtainfinance. The proportion ofbusinesses reporting thatthey did not require creditrose from 42% to 44%,

suggesting slightly less creditdemand.

0

20

40

60

80

100

II III IV I II III

2010 2011

More difficult Unchanged Easier No borrowing required

Borrowing conditions (% of firms)

In terms of the borrowings required for your business in the last month, hasit been

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Industry sectors

Business confidence Mining strongest; wholesale and constructionweakest

Most industries reported an improvement in business confidence (seasonally adjusted) in

September. The exceptions to this were construction, where confidence fell sharply (down12 to -9 points), and mining and wholesale, where confidence levels were marginally lower.Confidence improved most significantly in manufacturing (up 15 to -2 points), followed byfinance/ business/ property, transport & utilities and retail. In level terms, seasonally adjustedconfidence was strongest in mining (+16) and weakest in wholesale (-13) and construction(-9). Trend confidence levels were strongest in mining (+19) and weakest in manufacturingand wholesale (both -9).

Business confidence by industry (net balance)

3-month moving average

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2009 2010 2011

Mining Manuf Constn

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2009 2010 2011

Retail Wsale Transp

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2009 2010 2011

Fin, bus, prop Rec, pers

Business conditions Mining strongest; manufacturing weakestBusiness conditions (seasonally adjusted) improved across all industries in September, withthe exception of recreation & personal services where conditions were unchanged. The mostsignificant increases in conditions were in manufacturing (up 19 to -8 points) and mining (up11 to +28 points), more than unwinding falls in the previous month. In seasonally adjustedterms, the strongest conditions were in mining (+28), recreation & personal services (+13)and transport & utilities (+12), while conditions were weakest in manufacturing (-8),construction, wholesale and retail (all -5). Trend conditions were strongest in mining (+24)and weakest in manufacturing (-17).

Business conditions by industry (net balance)


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2009 2010 2011

Mining Manuf Constn

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2009 2010 2011

Retail Wsale Transp

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2009 2010 2011

Fin, bus, prop Rec, pers

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States

Business confidence Confidence rebounds in Tas and Vic:

Weakest in SA

Business confidence (seasonally adjusted) improved across all states in September, with the

exception of WA, where confidence levels were marginally lower. The most significantincreases in confidence were in Tasmania (up 46 to +9 points; on a small sample) andVictoria (up 10 to -2 points). Trend confidence remained highest in WA (+5; despiteconfidence edging lower in the month), followed by Queensland (+3), while levels werelowest in Tasmania (-14) and SA (-10).

Business confidence by state (net balance)


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2009 2010 2011

Australia NSW VIC

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2009 2010 2011

Australia QLD WA

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2009 2010 2011

Australia SA TAS

Business conditions WA strongest; Vic and Qld weakest

Business conditions (seasonally adjusted) improved across all states in September, with the

largest increases recorded in Tasmania (up 33 to +15 points; on a small sample) and NSW(up 10 to +7points). Trend conditions were highest in WA (+13) followed by NSW and SA(both +1), and were lowest in Tasmania reflecting a lengthy prior period of weak conditions(-9), Victoria and Queensland (both -4).

Business conditions by state (net balance)


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2009 2010 2011

Australia NSW VIC

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2009 2010 2011

Australia QLD WA

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2009 2010 2011

Australia SA TAS

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Macroeconomic, Industry & Markets ResearchAustralia

Alan Oster Group Chief Economist +(61 3) 8634 2927

Jacqui Brand Personal Assistant +(61 3) 8634 2181

Rob Brooker Head of Australian Economics & Commodities +(61 3) 8634 1663

Alexandra Knight Economist Australia +(61 3) 9208 8035Vacant Economist Australia & Commodities +(61 3) 8634 8602

Michael Creed Economist Agribusiness +(61 3) 8634 3470

Dean Pearson Head of Industry Analysis +(61 3) 8634 2331

Gerard Burg Economist Industry Analysis +(61 3) 8634 2788

Robert De Iure Economist Property +(61 3) 8634 4611

Brien McDonald Economist Industry Analysis & Risk Metrics +(61 3) 8634 3837

Tom Taylor Head of International Economics +(61 3) 8634 1883

John Sharma Economist Sovereign Risk +(61 3) 8634 4514

Tony Kelly Economist International +(61 3) 9208 5049

James Glenn Economist Asia +(61 3) 9208 8129

Global Markets Research - Wholesale Banking

Peter Jolly Head of Markets Research +(61 2) 9237 1406

Robert Henderson Chief Economist Markets - Australia +(61 2) 9237 1836

Spiros Papadopoulos Senior Economist Markets +(61 3) 8641 0978

David de Garis Senior Economist Markets +(61 3) 8641 3045

New ZealandTony Alexander Chief Economist BNZ +(64 4)474 6744Stephen Toplis Head of Research, NZ +(64 4) 474 6905Craig Ebert Senior Economist, NZ +(64 4) 474 6799Doug Steel Markets Economist, NZ +(64 4) 474 6923

London

Tom Vosa Head of Market Economics - Europe +(44 20) 7710 1573Vacant Market Economist Europe +(44 20) 7710 2910

Foreign Exchange Fixed Interest/Derivatives

Sydney +800 9295 1100 +(61 2) 9295 1166

Melbourne +800 842 3301 +(61 3) 9277 3321

Wellington +800 64 642 222 +800 64 644 464

London +800 747 4615 +(44 20) 7796 4761

New York +1 800 125 602 +1877 377 5480

Singapore +(65) 338 0019 +(65) 338 1789

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2011m09 press release (1)

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