Even the boneheads in Congress can’t stop a recovery in the United States, with housing now set to boost US growth – and perhaps by more than many realise. And China may not have embraced reforms to accelerate its switch from construction- to consumer-led growth, but it has rebounded, and remains a huge force for good in terms of global and Australian growth. On the other hand, Europe may not be out of the woods, while Japan also remains weak. Yet for the first time in a while the news on global growth is getting better rather than worse. We don’t project huge gains, but we see global growth moving closer to trend through 2013 and 2014.
The mega-mining construction projects which accounted for much of Australia’s production growth in recent years are hurtling towards a peak. We time the latter as coming in late 2013 – though the Reserve Bank sees it coming even earlier. That means Australia’s main growth driver will no longer play that role beyond 2013. (Resource related construction will remain huge relative to times past, but smaller than its 2013 peak.) And there’s the rub. The strongest contributor to Australian growth will peak, so the rest of the economy needs to fill a potential pothole. But Federal and State Government cuts have deepened that pothole. And although interest rate cuts will help retail spending and housing construction more than is yet realised, that won’t be enough of itself. Australia also needs the $A to start to slide back from its recent highs to take pressure off the likes of manufacturing, tourism and international education. Yet so far that’s not happening, with a sharp divide between commodity prices (which have fallen) and the $A (which hasn’t). These forecasts therefore project growth will continue to labour in the short term amid damage from the $A. At least global risks now look less dangerous, with China rebounding, US growth having the potential to surprise, and Europe’s central bank doing the best that it can.
The carbon tax and lower health insurance subsidies have boosted inflation. Yet the carbon effect on consumer prices has been smaller than expected and, outside those impacts, inflation is still easing. That is because (1) most businesses don’t have much pricing power, (2) productivity growth has lifted as spooked managers target efficiency, and (3) the $A is cutting import prices. Although we don’t think inflation will drop back too much further, we see it as less-than-scary for the moment.
Official interest rates in much of the world will remain flat as a pancake for a couple more years – unemployment in many nations is simply too high. Yet they’ll begin to lift in 2014 or 2015 (perhaps starting in the US first), while government bond yields will be more sensitive to signs of economic recovery than official rates, and will lift earlier still. The Reserve Bank may not cut again, but either way low rates will linger, while a strong $A may well do the same. Yet neither the weakness in interest rates nor the strength in exchange rates will form a ‘new normal’ – neither is permanent.
It turns out that Australia’s trade deficit wasn’t dead – it was only sleeping. A moderate slowdown in China was all it took to generate one of the biggest and fastest deteriorations on the trade account that Australia has ever seen. And there’s more pressure on the trade accounts still to come, with some costly imports tied to gas projects to arrive in the next little while. Yet much of the bad news – out of the black and into the red – has already happened.
Migrant numbers are up, boosting population potential. That’s a much needed development, though it is happening despite policy rather than because of it. That should be good news for job gains too, and it would be if it weren’t for the Godzilla-like strength of the $A, which remains a problem for job prospects in a range of sectors. Indeed, weak job growth would already have hurt unemployment (which we see peaking at 5¾% in a year) if it weren’t for the current accelerated pace of boomer retirement.
Commodity prices surged through to 2008, revving up tax revenue. The policy response was to spend the lot, meaning that Budgets boosted an already strong economy. Then the GFC hit, and the policy response supported the economy – meaning our fiscal policy was to spend in the good times, and then to spend in the bad times. Since then gathering headwinds (a disappointing rich world recovery and an emerging economy slowdown that cut commodity prices) has made the task of returning to surplus ever harder. The response was restraint, making fiscal policy pro-cyclical again, meaning cutbacks amid a slowdown. That approach was starting to hurt Australia’s economy, so the decision to abandon the surge for a 2012-13 surplus was a sensible one. It’s true that Federal and State Budgets still need repair work – a lot of it – to get back to genuinely healthy surpluses. However, that should be done with more smarts and less speed.
‘Interest sensitive’ sectors will lift, but it’s not clear the ‘dollar dependent’ sectors will...
A massive surge in engineering construction work to develop new mines and infrastructure has been the prime driver of Australia’s growth. But that surge will soon peak and pass. The good news is mining will grow fast on the fruits of that work, grabbing the number one growth ranking of all the sectors we forecast for each of the next three years, and a 30% gain in output in total over the next five years. Yet that’s small bikkies in a big economy, and smaller still in terms of jobs. Besides, even though the Feds are now resting on their oars, State Government cutbacks mean public sector budgets are still tightening, while farm output is unlikely to repeat last year’s record. So although some service sectors should make good gains – health care and education chief among them – Australia’s economy needs a new growth engine.
That’s what lower interest rates will help to achieve, with cheap credit projected to sprinkle some fairy dust over the Australian industrial landscape. Housing construction, a long dormant ‘pocket rocket’, should start to strut its stuff in 2013. And retail’s recovery (yes, it’s been having one, albeit from a pretty poor base) might get a second wind from the second half of 2013 onwards.
Yet although ‘interest rate sensitive’ sectors such as retail and home building may lift, they won’t set any land speed records, and it is less clear that ‘dollar dependent’ sectors will do the same. The $A is still giving manufacturing a Chinese burn, and the news also remains modest in both tourism and international education. And although we do see the $A eventually ceding some recently gained ground, that mostly occurs after mid-2014 – meaning that the ‘interest rate sensitive’ sectors won’t get much by way of support from the ‘dollar dependent’ ones until then?
The State leader board won’t change – or not yet...
Turning to the State-by-State outlook, Queensland and Western Australia may have to battle a ‘construction cliff’ as resource-related building work peaks and passes. But that support for their economies hasn’t peaked yet and, despite cost cutting from miners (which has already had a notable impact on growth in the Sunshine State), both these States and the Northern Territory still look set for a solid short term growth outlook. Yet the seeds of slowdown in the sunbelt States have been sown. The ‘two speed split’ among States will remain notable through to 2013-14, but may then narrow somewhat thereafter, especially if the $A eventually eases back.
Its indebted families mean NSW is more sensitive to interest rates than is any other State, so the interest rate cuts of the past year are good news for its housing construction sector and retailers. Although that won’t be too evident until later in 2013, it should stand this State in good stead.
NSW may be ‘interest rate sensitive’, but Victoria’s economy is ‘dollar dependent’, meaning that better news on the growth front may require the $A to fall off its perch. As we don’t see the latter happening for a while yet, Victoria’s growth may lose a little momentum through 2013.
Queensland’s coal miners are cutting costs, laying off workers and contractors, and scaling back expansion plans. And while State Government cutbacks are needed to return the Budget to health, they come at a short term cost to growth. Luckily gas development is still running hot.
South Australia’s growth has been brought to heel by the $A’s rampaging strength and by a slowdown in homebuilding. The ‘interest rate sensitive sectors’ should start to generate better news through 2013 and 2014 but, for this State, much depends on where the $A heads next.
Western Australia’s investment pipeline remains humongous, and population growth is double the national average. Yet output and demand growth may have already peaked for this cycle. Indeed, although it remains very low, WA’s unemployment shifted up notably in recent months.
Tasmania’s economic indicators are awash in a sea of red ink. To be clear, this State’s economy isn’t in crisis. But it isn’t OK either. Unemployment is well above that in other States, and short term prospects remain relatively modest (as well as hostage to the $A’s fortune).
It’s all go in the Northern Territory, where commercial construction activity quadrupled in the past year alone. Yet the current surge in spending is exactly that. And there are challenges too. For example, it isn’t clear the next round of gas projects will necessarily get the go ahead.
The ACT has been dodging bullets left, right and centre – with Australia’s ‘fiscal cliff’ less of a short term challenge now the Feds have decided to hasten slowly on their way back to surplus, while the Reserve Bank’s rate cuts have flooded Canberra’s consumers with cash.
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