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Business Outlook: Australia still in cost cutting mode


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23 April 2013:

  • The rapid pumping of cheap money by central banks has helped sharemarkets more than it has economies.  Yet the latter are looking better too – partly as the crazies have been kept away from the steering wheel in the US, partly as the crazies have grabbed the steering wheel in Japan, and partly as China’s leadership is spending on infrastructure (which we think is also crazy, but is probably the best news of all for Australia’s 2013 outlook).  So although global growth won’t sprint, it should now be a force for good (rather than the malign influence it has been for a while).
  • The fast bits of Australia’s economy are throttling back, with resource-related construction soon set to peak.  And although the Feds have slowed their surge towards surplus, their earlier cuts have combined with those of the States to see the public sector add to short term troubles.  At the same time a range of ‘dollar dependent’ sectors, while less sick than they have been, won’t return to health any time soon.  The upshot is that economic growth in 2013 will be dogged by negatives associated with the $A, while 2014 will be dogged by negatives from the passing of the peak in resource-related construction.  That combination will keep overall growth in Australia’s economy to average rates.  Yet ‘average’ is better than it sounds.  We don’t project a major pothole in growth as the mining boom’s impact on construction spending winds back, in part because that well known elixir of youth – low interest rates – has returned.  And we expect interest rates to stay low for a couple of years – long enough, in fact, to ginger up both retail and housing construction, and keep overall growth in the economy on a relatively even keel.
  • It’s hard to see immediate dangers to the inflation outlook.  Demand growth is only strong outside suburban malls, and so the strength of Australia’s economy masks modest retail price pressures.  And not only is wage growth subdued, a recent lift in productivity also cuts inflation risks.  Finally, the $A is riding high, so import prices aren’t going to upset the applecart either.  Not all these positives will last.  Retail may look healthier in the next year or two amid an extended period of low interest rates, and that could restore some of its lost pricing power.  But only some.  Wage gains may gather speed and productivity growth may lose it, also adding to the risks.  And a flat to falling $A will stop providing extra protection to import prices.  That said, it looks like 2014 at least before inflation risks force their way back to centre stage in Australia’s economic debate.
  • Money is pouring out of global printing presses, juicing up sharemarkets and housing prices.  That raises risks for later, but unemployment is too high and Eurozone risks too worrying to stop, so global interest rates will stay low well into 2014-15.  We project much the same for Australian rates – they’ll stay lower for longer too.  In part that is as (1) the Reserve Bank is becoming less worried by inflation risks, but it is also as (2) the RBA has to keep rates low to help fill the growth pothole left by mega mining projects, and as (3) the $A looks set to strut its strength for longer.
  • 2011 saw trade surpluses, but deficits returned in 2013 – and it looks as if they’re here to stay.  Although there’s heaps of good news locked into rising mining export volumes, the news may be less pretty on commodity prices.  And imports are still higher than a kite, with more growth left in them in this cycle thanks to the $A’s strength and due to a final hurrah in spending on imports to feed into gas projects.  That mix is generating an all-too-familiar lift in the current account deficit.
  • With migration policy taking another populist lurch, the recent (and much needed) momentum in population growth may soon lose legs.  Given the pace of boomer retirement is now faster than a speeding bullet, the supply side of job markets is a bigger negative than most realise.  And demand isn’t surging either, held back in 2013 by $A strength and in 2014 by a downswing in resource-related construction. Yet interest rates are now lower, and they’ll stay low.  That should be enough to keep job gains ticking over, and to limit the size of any upswing in unemployment.
  • Federal and State Governments have both begun much needed repair work to their Budgets.  But some governments (such as the Feds and Queensland) overdid it, leaving their austerity weighing on economic growth.  Even so, there’s still heaps to do.  Yet despite that bleak backdrop, both sides of Federal politics are promising the Budget will do even more – even though it’s still in deficit.  Labor is promising to spend more on education and disability insurance, while the Libs are promising to do away with new taxes and to spend more on Defence.  Yet neither side have said just how they’ll pay.  We should be worried about that.  It’s an election year, so we should focus less on politicians’ promises and instead press them on exactly how they’ll pay for them.

Australia’s industries are changing gears

  • Rising Australian costs and lower commodity prices have undercut prospects for engineering construction.  The latter have also cut tax revenues for the Federal and State Governments, who’ve tightened their collective belts (with knock on implications for health care) in a belated recognition that they spent too much in the glory years of the mid-2000s.  At the same time less rain this year means farm output will shrink, while the mind-bendingly large price increases of recent years, only partly due to the carbon tax, have cut electricity output to 2008 levels.  Hence a bunch of sectors are either already struggling or are about to, with the latter list including industries which have been the mainstays of recent growth.
  • And that’s not all.  Our runaway currency is a key reason why Australia’s wine lake is hard to sell at a profit, why textile output is just a third of what it was a quarter of a century ago, why wood and paper production is back down to 1985 levels, and why local makers of building products are producing 10% less than before the GFC.  Yet there is good currency news out there too.  The key to dollar driven problems rests more on whether the $A is still rising.  And because it has been near parity with the $US for two years now, there are actually signs of growth in numbers of tourists, as well as hints of better news for foreign student numbers.
  • So some sectors are slowing, while others are still stuck in the slow lane.  The best news rests with mining (where output will grow almost a third in the next five years) and with ‘interest rate sensitive sectors’ such as retail (the biggest slab of spending in our economy) and in housing construction (the most volatile bit of the economy).  There are tentative signs of improvement already and, with the RBA set to keep rates low for a while, that news will get even better still.

The resource construction slowdown will mean different things for different States

  • The State league leader board is set to usher in some changes.  WA’s spell at the front of the pack as the fastest growing State has been impressive, but an investment slowdown will soon slow Australia’s investment king.  In fact, with the worst of Queensland’s State Government cutbacks likely to be soon over, that may let the Sunshine State shrug off its cost cutting coal miners to help it grab a stint at the top.  At the bottom end, Tasmania’s vicious cycle (with a lack of job gains leading to a lack of retail spending growth) is hitting that State hard, though a spell of post-election cost cutting could send the ACT’s economy to the back of the pack by 2013-14.
  • Interest rates are low, and they look like staying low.  That mix is music to the ears of NSW’s debt-laden families as well as to its big financial sector - neither of whom will sprint, but both of whom will grow by enough to help underpin better news in the Premier State by late 2013.
  • Its large manufacturing, dairy and foreign student sectors mean Victoria’s economy is ‘dollar dependent’, leaving it at the tender mercies of the rampant $A.  Add in stagnant prospects for housing construction activity and, for the moment at least, Victoria’s growth will be moderate.
  • Queensland’s gas development continues apace, but cutbacks by coal miners and the State Government have come at a short term cost to its growth.  However, the peak impacts from those State cutbacks may soon pass, and there’s still heaps to like in the State’s gas potential.
  • South Australia’s has slowed sharply, with the $A dancing a jig on the prospects of everyone from its car makers to its wine makers.  Add in a phase of rapid baby boomer retirement, and SA’s growth is weak.  Yet the powerful tonic of lower interest rates should help stem the tide.
  • Western Australia’s current growth is beautiful, but that beauty may fade alongside the peak in the State’s project pipeline.  Yet there’s a silver lining, as rising exports and more home building will help shelter the economy as it winds back from its coming resource construction peak.
  • Tasmania’s economy is struggling - population growth has stalled, jobs are being lost, and baby boomers are retiring, with that mix leaving the demand for and supply of workers all too weak.  Lower interest rates will help retail, but it may be a long year for Tasmania’s businesses.
  • It’s lift off in the Northern Territory, whose economic indicators are spinning the dials.  That’s what happens when a $34 billion LNG project starts construction in a $19 billion economy.  Still, the party won’t last too long, as current construction highs may soon begin to ease back.
  • Canberra’s economy has loved lower interest rates, and the political contest in Canberra may mean this year’s Budget holds few fears for the nation’s capital.  Yet that may be a problem delayed rather than a problem solved, with those cuts likely to be on the post-election agenda.

See Deloitte media releases and research at www.deloitte.com.au

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