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Business Outlook March quarter 2012: Mining investment in overdrive reinforces two speed split for Australian economy


24 April 2012:  Deloitte Access Economics said today that as Europe’s central bank has pushed a trillion euros into financial markets - despite the current worrying news from Spain, European risks have receded slightly – from ‘terrifying’ to ‘quite worrying’.  

Chris Richardson, Deloitte Access Economics Partner said: “That doesn’t mean the outlook for the global economy is better – it was always the more likely outcome that Europe wouldn’t blow.  But it means the central forecast (Europe has a small recession and emerging Asia is slower, but the US recovery becomes more evident) is now more likely.  That’s welcome news.

“But the less welcome news is that the two speed split in Australia’s economy is widening.”  

According to Deloitte Access Economics’ Business Outlook for the March 2012 quarter, all of Australia’s economic growth in this financial year will be due to a surge in business investment as firms – especially those in the resource sector – try to increase their production capacity.  

Mr Richardson said while the negatives for the Australian economy were worse than before – weaker retail, weaker housing construction, and weaker government spending – the positives from the surge in resource investment continued to outweigh the negatives.  

“Although it’s true that families are saving rather than spending, that housing construction is weak and getting weaker, that Federal stimulus is almost a thing of the past, and that the deadly duo of strength in our interest and exchange rates is playing merry hell with many businesses and business models, those negatives aren’t enough to put paid to Australia’s expansion,” Mr Richardson said.  

“It may be a lopsided period in Australian growth, but growth it will be.

“We have yet again revised up the outlook for capital spending by businesses – meaning Australia’s key strength is still getting stronger.  That says the two speed split in Australia’s economy, which was already large, is getting larger still. Yet that doesn’t stop the overall outlook for growth still looking rather better than most people realise.”

Mr Richardson said inflation was looking less dangerous in the short term, with the continuing strength of the $A cutting import prices, demand weak outside the resources sector, and wage inflation remaining moderate.  

“This is more a pause, however, than a sea change,” he said. “The $A won’t keep rising, demand will remain strong (including a modest lift in retail sales), and wage gains may resume their rise as jobs recover and  baby boomers retire.

“As far as interest rates are concerned, the better Europe looks, the more likely the Reserve Bank is to disappoint businesses and families, but even so, chances are it will nudge rates down a notch, given that the big banks have done some nudging of their own in the other direction, and as the inflation outlook looks less of a worry in the short term.”

Mr Richardson said that as European risks receded, from ‘terrifying’ to ‘quite worrying’, a Federal surplus in 2012-13 was both more likely and less dangerous.  

“It’s more likely as, the less Europe hogs the headlines, the less that the hit to confidence will linger. And the better Europe looks, the healthier commodity prices look and the less the risk of a credit crunch,” he said.

“At the same time a surplus is ‘less dangerous’ so too is the economy better equipped to handle the tightening now underway, so May’s Budget will forecast a surplus, and now looks more likely to achieve it.”

Mr Richardson said that although a number of factors were in play in the two speed split, the stand out Australian economic driver remained the $A.  

“Surveys show that businesses are increasingly seeing a $A at or above parity with the $US as the ‘new normal’,” he said. “Not surprisingly, that has many businesses running scared:  their operations weren’t built to withstand the gale blowing. Any change in conditions – and sectoral sentiment – therefore depends a lot on where the $A heads from here.” 

States and Territories

The national two speed economic split also continued between the States and was widening, Mr Richardson said.

“Two speed troubles were already dogging Tasmania, Victoria and South Australia, but the longer the $A lingers above parity with the $US, the more they’re hurting,” he said.

“On the other hand, and despite the finance sector cutbacks of the moment, it looks as if NSW is holding up, with its growth running in the middle of the pack. Western Australia remains strong, and Queensland’s recovery proceeds apace.”

NSW’s relative economic performance is lifting despite the growing challenge it faces from finance sector cutbacks.  The State’s improved relative performance also owes something to the woes of others, with its outlook best seen as ‘solid’ rather than ‘inspiring’.

Two speed troubles are dragging on Victoria.  Not all the macro indicators are negative.  But some are red, and others are flashing amber. Manufacturers are bemoaning the stunning strength of the $A, and so too are farmers and the State’s large international education sector.

Although the patchiness in Queensland’s economy is still very evident, the State as a whole has its mojo back.  Economic growth has roared back into life amid a rebound in coal and farm output, although the biggest growth engine is the stunning resource development boom.

South Australia’s industrial structure leaves it particularly vulnerable to two speed troubles – all sorts of businesses in the State are feeling the blowtorch to the belly of current conditions.  That will keep growth on a tight leash until Olympic Dam-related positives start to flow.

Western Australia’s growth remains dominated by a project investment pipeline of simply awe inspiring dimensions.  Although export volumes are set to grow too, for now the pace of growth will be dictated by the success (or otherwise) in the pace of project delivery.

The States on the wrong side of Australia’s two speed divide are in deepening trouble, and that’s particularly true of Tasmania.  Growth is stagnant, population growth is the lowest in a decade, and an acceleration in retirements is compounding the weakness of the moment.

It has been increasingly clear that a turnaround was in the offing for the Northern Territory.  This won’t turn out to be a barn burning boost of speed in output growth, but the go ahead for the huge Inpex project provides greater certainty and underpinning to the Territory’s economy.

Growth in the ACT slowed through 2011, and the outlook remains modest.  

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Simon Rushton
Job Title:
National Manager Corporate Affairs and Communications
Tel: +61 2 9322 5562; M: +61 450 530 748
Kellie Chalker-Hall
Deloitte Access Economics
Job Title:
Manager, Marketing & Subscriptions
Tel: +61 2 6175 2000




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