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All engines firing

Business Outlook March 2017

18 April 2017: It may have seemed a tad brave when we greeted 2017 with the view that this year would see global growth outperforming – and Australian growth too. But that’s now fast becoming accepted wisdom. The green shoots are everywhere. China has been throwing the kitchen sink at its economy, India is looking as if it will shrug off the cash crunch of recent months, while New Zealand looking pretty comfortable too. And we think that US growth will begin to be supported by growth in business spending, while both Germany and Japan are at full employment. All in all, that’s a pretty good business backdrop for the globe in 2017. And conditions thereafter look solid enough too.

There’s a lot going right in Australia too. China is delivering us a surge in national income the likes of which hasn’t been seen since the height of the resources boom. That has ended the so-called ‘income recession’ that’s been weighing on Australian wallets and purses since late 2011 – and not with a whimper, but with a bang. Even better, China’s largesse arrived at the same time as new mines and gasfields – commissioned during the glory years of the resources boom – hit their straps. That has meant not merely better prices for what we sell to the world, but also increased quantities of those sales as well. And at the same time that the world has gone back to throwing money at Australia, the Reserve Bank did the same with its two interest rate cuts in 2016. Not surprisingly, that pumped up this nation’s already overly botoxed housing prices, with a resultant spectacular lift in wealth. The 9.23 million Australian households had net worth of $9.40 trillion as at end-2016, meaning that Christmas 2016 saw the average Aussie family become millionaires.

Yes, you read that right. Thanks Santa. But wait, there’s more: last winter’s rains were good, and prices aren’t bad either. Even allowing for Cyclone Debbie, that still makes this the best year down on the farm in a number of years. And State Governments are spending on new roads too, while better news on company profits is giving the Federal Budget a bit of breathing room for the first time in ages, while housing prices have added lustre to the budgets of east coast States.

Inflation remains flat as a tack. And why wouldn’t it, with the largest component of prices – wages – travelling at record low rates. But the first breath of a turnaround may be stirring, with hints of price pressures starting to be evident globally, and with the strength of commodity prices around the world suggesting that the lows for wage growth may soon be in sight in Australia. Any pick-up in either inflation or in wage gains is, however, likely to be both modest and slow.

Interest rates have been so low for so long that cheap credit seems normal. But global markets are pricing in more inflation and growth, and coming years will see rising interest rates. We don’t see Australian rates starting to rise until 2018 – but rise they will. Housing prices are dangerously dumb, and the Reserve Bank won’t want to add further fuel to that fire. With a very forgiving global backdrop, the $A may remain near its current levels through 2017.

The next few months will see Australia pass the Netherlands to record the world’s longest ever run of growth without a recession. And they may also see the first current account surplus since Mamma Mia topped the charts in 1975. That’s not a done deal, but it will be a close run thing as the world throws money at us via high prices for the likes of iron ore and coal at the same time as a bunch of gas projects we started building some years ago come onstream. This happiness on the trade front won’t last forever, but it looks to be great news for both this financial year and next.

There’s no direct connection between the world throwing money at Australia and the pace of job growth. But the good news of the moment is so good that some of it is forecast to rub off on the job market for a while – and that’ll be welcome, as it’s been a long time between drinks.

China is doing the Federal Budget favours at the same time as housing prices puff up revenues for some States. These are welcome developments, allowing a loosening of the budgetary noose, with the combined national fiscal position looking better. At first blush that seems to suggest the nation is making healthy and continuing progress from the peak deficits for the national public sector registered at the height of the GFC in late 2009. Erm, no we’re not. Spending continues to climb at a solid clip, and attempts to rein it in remain fruitless vote-losers. Rather, the current improvement in deficit trajectory simply says that the twin engines of chance – a China boom and a house price boom – are both supporting the national tax take at the same time. That’s great, but it probably won’t be a long-lived combination.

Doing the sectoral shuffle

The growth in Oz over the next few years is all about the fossils. Our mining capacity is rising fast as a result of decisions taken amid the heat and hype of the resources boom, and our proportion of older Aussies is on the rise as well, thereby boosting the growth in health care. But while mining’s output gains are set to cool after a few years, the health sector is up and up. Indeed, our population’s rising need for health care is a lot more steadfast than China’s demand for capacity, as China’s debt poses risks for maintaining its growth beyond the next couple of years.

Yet while health care tops the pops among service sectors, a clutch of other services are also flying high. Cheap credit and rising housing prices are a match made in heaven for the financial sector – and will be until the music stops (it will, it will). And business sectors are also having a great time, as the influence of digital transforms the way we collate and process information. The combination of Big Data and Small Interest Rates are a double whammy win for these industries. But digital isn’t deity – it’s hurting some as much as it’s helping others. We’re not printing as much as we used to, sending letters or buying CDs, and we’re more than ever able to buy things directly from overseas online (made especially appealing while fuel and credit are both so cheap).

This globalisation of supply is great for the likes of education (lots of international students) but terrible for manufacturing. Despite a short-term upswing, manufacturing is still down in the dumps (with food the exceptional exception to that rule). Meanwhile, property services and construction are starting to temper as the housing cycle cools, while State Governments are making it rain with transport infrastructure spending off the back of windfall asset sales. And farming is also seeing some great growth.

Once again, a two speed split – but a different one this time

On the State front, China may be rebounding but that isn’t yet true of the nation’s resource-rich ‘sunbelt’ – Western Australia, Queensland and the Northern Territory – with WA being particularly hard hit by current conditions. That combination still leaves the wider growth trends of the moment favouring Australia’s south and east over its north and west. Overall Australian growth therefore remains still very much an ACT / New South Wales / Victoria story, with the rest of the nation pretty much an ‘also ran’. Yet this too shall pass … Queensland should get a real leg up from a surge of gas exports while, looking further ahead, rising export earnings will eventually help tilt the growth pendulum back somewhat, with narrowing State outcomes from 2018 onwards.

NSW has been the nation’s biggest single beneficiary of happy events in Australia’s economy for some years, with the shift to lower interest rates well and truly in this State’s sweet spot. But the better the news now (especially in housing), the greater the troubles being stored up for the future.

Victoria’s economy has been strongly favoured by the megatrends of recent years. Lower exchange rates in particular have loosened the noose on this State’s key manufacturing, education and farm sectors, while spectacular population growth is also driving Victoria’s growth.

The growth in Queensland’s economy is solid, but the growth in its jobs is modest. The big lift in gas exports underway provides a substantial dividend to the State’s economic growth, but does rather less for jobs. That combination of conditions may take a little while longer to repair itself.

South Australia is managing current conditions in rather better shape than is widely recognised. There’s been better news for retailers, farmers and in the State’s job market. Nonetheless, it will be some years before the challenges of the moment can be declared over and done with.

Western Australia is still suffering the slings and arrows of China’s earlier slowdown. Growth is rotten, and even those rotten rates of growth are being propped up by exports as big gas projects wind up construction and head into production. But China is rebounding and the worst is passing.

Tasmania’s economy is chugging away at a relatively healthy rate. The State’s job market has improved, retailers are doing better and the lower Australian dollar is good news for both manufacturers and tourism. But State fundamentals still point to modest longer term growth.

The Northern Territory is grappling with a slowing resources boom as the goliath Ichthys project increasingly moves out of construction and into production. The resultant slowdown is being seen in pretty much every indicator, but the Territory has great underlying strengths for the long haul.

The ACT economy is now among the fastest growing in Australia, as the twin engines of local growth – what the Federal Government is doing with its spending, and what the Reserve Bank is doing with interest rates – have both moved in a growth-friendly direction for Canberra’s economy.

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