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Business Outlook: NSW getting its act together…


21 July 2014: There’s a tug-of-war underway on global growth prospects.  China is juggling worries around property prices, dodgy finance companies and a delayed switch away from its growth being too reliant on infrastructure.  Yet progress to date is solid.  And while we remain nervous about China, we are matchingly hopeful about the US, especially if capex can fire up.  The upshot is that the global balance is changing, with the news on growth generally modest in the East and on the up in the West.  So far that looks like playing out as a nil all draw, leaving growth among Australia’s major trading partners sitting relatively close to trend in both 2014 and 2015.

Australian economic growth is looking good thanks to the third phase of the resources boom (a surge in export volumes) kicking off strongly, and the second phase of the resources boom (mining construction) lingering longer than expected.  With that baton pass going well, economic growth has also been topped up by the impact of low interest rates.  Low rates are generating more home building (which is now starting to gallop) and a lift in retail turnover growth too.  But we’re not out of the woods yet.  Export gains may now take a breather until gas kicks in some time in 2016 and beyond, whereas the degree of decline in mining construction is set to accelerate.  And although the Federal Budget did little to punters’ pockets in the next couple of years, people think it did cut savagely, and so consumer confidence has dropped.  Those factors may take some steam out of economic growth, which may ease back under trend until late 2015.

Petrol prices are rising, gas prices are headed up as Australian miners connect up to world markets, and cigarette prices are soaring amid tax hikes.  Yet that’s about it.  Try as we might, we can’t get an inflation scare out of that bunch.  And on the other side of the ledger, domestic demand growth has been crawling, while if wage gains were any weaker they would be refused life insurance.  Given that these are pretty important drivers of price pressures, we’re not surprised that the lift in inflation in the second half of 2013 moderated more recently.  And ‘moderate’ looks like being the name of the inflationary game for a while further yet.

There are some reasons to expect a late 2014 in the Australian cash rate from its record lows:  growth is back above trend, housing prices have surged, and big banks have taken advantage of super cheap borrowing costs globally to edge up their mortgage rate discounts.  Yet we’ve never subscribed to the ‘rate rise in 2014’ camp, and see no reason to change our views:  the latest growth figures were artificially strong, consumer sentiment is soggy, 2013’s surge in inflation has since moderated, and while the iron ore price is down, the $A is up.  That mix leaves us still seeing the Reserve Bank on hold until well into 2015.  But the $A’s resilience amid commodity price falls through 2014 to date suggests that the dollar may only lose altitude slowly.

The current account deficit just hit its lowest share of national income in a third of a century thanks to a trillion dollars of investment in resources rapidly coming onstream.  And at the same time that we’re all in a tizz over evil foreigners buying up Australian housing and other assets, the official figures show that – for the first time ever – Australians actually own more of the world’s assets than they do of ours.  Funnily enough, talkback radio didn’t even notice.

The job market is better than you think it is, with low interest rates generating employment in sectors as diverse as housing construction and retail, and with real estate agents benefiting from associated effects.  At the same time the $A is off its peaks, which has staunched the worst of the bleeding in manufacturing, and has created jobs in accommodation amid a lift in tourist arrivals.  But don’t break out the champagne.  Job growth is still only half its longer term trend, and rapid retirement among baby boomers will limit good news on jobs in the next few years.

The last decade saw Federal spending lift 3.0% a year more than inflation. Unless policy changed, the next decade was headed for annual real growth of 3.5% – and deficits as far as the eye can see.  The Budget proposed cuts to bring that spending trajectory in the next decade to 2.7% real growth (still well shy of Labor’s target of 2% real growth in spending, but tough enough to start a storm).  Forget the politics:  the problem is last decade saw a temporary tax boom but permanent policy promises.  Yet Australia’s inability to admit we have a problem may mean that the most courageous attempt at Budget repair for years will founder amid opposition that includes the Senate, the States, families, motorists, pensioners, the young, unemployed, Indigenous Australia, uni students, ABC / SBS supporters, and a bloke named Barry who’s not sure why he’s annoyed.

The sectoral growth shuffle is underway…

The top of the sectoral growth leaderboard isn’t in dispute.  In fact so good has its production performance been of late that the mining sector can expect a visit from ASADA sometime soon.  And, aside from further commodity price troubles, the sprint in mining sector output should continue for some years to come.  The next step down the league ladder is crowded with sectors that have been lapping up low interest rates – as is true, for example, of finance, and also of real estate.  Next on the ladder includes the construction sector (as the gas projects of the moment power on), health care and, believe it or not, the public sector (cuts have been talked about rather than achieved, and the Clive and Bill Show may yet hold austerity at bay).

At the sharp end of the sectoral leaderboard come the likes of manufacturing (which is still struggling with the never-say-die strength of the $A) and the utilities sector (where electricity production continues to sag).

Looking ahead, the sectoral shuffle will keep mining and health near the top of the pops, and the ranking of both manufacturing and the utilities will remain relatively modest (though at least these laggards are projected to pick up somewhat).  Rather, the big movers in sectoral ranking will be construction (headed down, despite the benefit of a lift in homebuilding) and the public sector (the cuts haven’t been huge, but they will still take a toll despite the cushioning impact of the extra Federal spending promised for parental leave, schools and disability insurance).  And the likes of retail and wholesale are also projected to lift their relative standing on the sectoral leaderboard, aided by low interest rates and healthy gains in household wealth.

NSW is getting its act together, although resource States will still top 2014-15 growth leaderboard

Australia’s strength by State is on the move, building in the south east of the continent, and flagging in the west and the north.  Yet that baton pass is slow, because so is the matching shift from the construction to the export phase of the resources boom.  That’s why the ‘sun belt’ of Western Australia, Queensland and the Northern Territory still has growth bragging rights ahead for 2014-15.

Yet there is already a move on, evident everywhere from slowing population gains in Western Australia and Queensland, to the rising pace of the population gains seen in both NSW (the fastest growth since 2009) and in Tasmania (the fastest in two years – a vital turnaround.

NSW is getting its act together, with low interest rates generating better news in both retail and housing construction, as well as better times in the State’s finance sector.  Add in an accelerator effect for advisory operations from a rising transactions cycle, and NSW is doing just fine.

Victoria has been struggling with the rampant $A, which has hurt its manufacturers and its international education sector.  Yet the future isn’t as bleak as the known negatives in car manufacturing and aluminium smelting might suggest, with homebuilding remaining strong.

Queensland’s economy is performing better than its residents realise.  The State’s project pipeline is pretty well-spaced.  That leaves it less at risk of a pothole in activity between most resource-related construction projects finishing and most resource export volumes picking up.

South Australia needs to cut the gloom.  Yes, Olympic Dam didn’t get an early green light, Holden is moving on and baby boomers are opting for earlier retirement rather than struggling to get the next job.  Yet interest and exchange rate trends mean prospects remain reasonable.

Western Australia has so far seen a smooth baton pass from construction to exports, though a drop in the iron ore price is a reminder that juggle gets harder from here.  Yet the hit to growth should be relatively temporary, with the State having growth options available in several sectors.

Tasmania is marching to the beat of a different drum, scoring growth in areas such as business investment spending and population gains where the national trends are in the other direction.  Yet although much news is good, the State’s growth prospects won’t outpace those nationally.

The Northern Territory’s economy is travelling at great speed.  Yet such is the size of its success that the next round of project approvals simply won’t be able to keep construction – currently at record levels, boosted in part by the huge Ichthys project – as strong as it is today.

The good news is the Federal Budget didn’t add many more cuts to affect Canberra’s public service numbers or its economy.  In fact real spending growth in the next decade looks likely to match last decade’s.  But the bad news is that public service numbers will fall from here.

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Chris Richardson
Deloitte Access Economics
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Tel: 02 6175 2000, Mobile: +61 414 466 156
Kellie Chalker-Hall
Deloitte Access Economics
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Manager, Marketing & Subscriptions
Tel: +61 2 6175 2000

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