Boston, MA -- (SBWIRE) -- 08/01/2012 -- Core Views We maintain our bearish view on the Australian economy despite improved economic growth numbers in Q211. Headline real GDP for the quarter increased by a seasonally adjusted 1.2% quarter-onquarter (q-o-q), reversing the 0.9% decline in Q111. With consumer confidence and overseas demand for Australian resources set to weaken owing to slowing global trade conditions, we believe any booster from post-flood reconstruction will only be temporary. With these factors in mind, we project growth to come in at only 1.8% in 2011, before decelerating further to 1.6% in 2012. The ruling Australian Labor Party's grip on power has become increasingly tenuous, and it has been scoring dangerously low in opinion polls. The introduction of the carbon tax in early H211 should provide some brief respite in terms of better support from the Australian Greens, a political ally in parliament. An Australian Labor Party defeat would have implications for a number of national issues, including broadband access, carbon tax and laws on industrial relations. Monetary policy will be kept accommodative in order to drive the post-disaster recovery efforts, with the benchmark official cash rate maintained at 4.75% until the end of 2011, although risks of earlier-than-expected easing are mounting. Indeed, headline inflation moderated to 3.5% year-on-year (y-o-y) in Q311 from 3.6% in the preceding quarter, and should moderate further as consumer spending remains cautious amid weakening property prices. This should compel the Reserve Bank of Australia to progressively ease the benchmark rate in 2012, slashing a total of 100 basis points to just 3.75% by the end of 2012. Major Forecast Changes We upgraded our 2011 average forecast for the Australian dollar to US $1.0500/AUD from US $1.0200/AUD previously on the back of stronger currency performance in recent months. The average figure for 2012 is now US $0.9000/AUD , as a sharp slowdown in financial inflows on account of the weakening property market places downward pressure on the currency. Our monetary policy outlook has become considerably more dovish as we have downgraded the benchmark cash rate projections for 2012, ending the year at 3.75% (from 4.50% previously). Key Risks To Outlook A weaker-than-expected growth outturn in China would weaker the economic performance of Australia given that Chinese demand is the largest driver of Australian exports, including coal and iron ore. Should Chinese policymakers embark on another round of aggressive stimulus measures, then we could see demand for Australian exports rise, supporting real GDP growth and the Australian dollar. Canberra faces the risk of a widening fiscal gap if an Australian property slump turns into a crash. We highlight that a sharp fall in residential home prices would place immense strain on mortgageladen Australian banks. In order to prevent financial panic, government intervention would be needed in this

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