FY16: What will be shaping the economy?

Transcription

1 December 215 View from the top The Australian economy grew by an above-trend rate of.9% in the September quarter to be 2.5% higher through the year. Growth was driven by a solid rebound in exports of gold and, to a lesser extent, iron ore and coal and a moderate pickup in private consumption. While the result saw Australia s trade position improve, domestic spending remains lacklustre, with private investment contracting for its third consecutive quarter. Per capita incomes, in real terms, also continue to slide. However, improving profitability and business conditions, reflected to date in increased hiring, should also see investment by the non-mining sector pick up in the coming year. Conditions in the international economy continue to remain mixed. An improved growth outlook in the US has raised expectations that the US Federal Reserve will increase interest rates for the first time in almost a decade. Closer to home, global commodity markets remain weak, with prices for Australia s major commodity exports at near decade lows. Indicator Sep quarter FY-15 FY-16 f FY-17 f FY-18 f Real GDP growth 2.5% 2.2% 2.3% 2.4% 2.9% Inflation 1.5% 1.5% 2.% 2.25% 2.5% Unemployment rate 6.2% 6.1% 6.5% 6.25% 6% RBA cash rate 2.% 2.% 2.% General outlook - - Negative Stable Stable Source: ABS; RBA; PwC forecast (f), GDP growth expressed as a year average rate, inflation is through-the-year to June and the unemployment rate and interest rates are end of year. PwC Economics and Policy

2 Potential forces shaping FY16 Productivity Household sector Commodity markets Labour productivity increased by a subdued.6% in This is well below the long term IGR assumption of 1.5%. Below trend growth and declining commodity prices are placing pressure on other factors, such as productivity growth, to support higher wages and incomes. This quarter, the Federal Government released their response to the Competition Policy Review and an Innovation Statement. These initiatives are targeted at revitalising productivity over the longer term. Prospects for households will be shaped by opposing factors more people are employed, for now, but average incomes are struggling to match inflation. There remain a number of headwinds, with further job losses to come in the mining and automotive sectors, and house prices and construction in the major capital cities continuing to moderate. This suggests that households will continue to gradually run down savings. Employment has picked up, but not everywhere in the country Better than average operating conditions have seen employment growth steadily improve in the second half of the year, with around 14, jobs (full- and part-time) added over the past 6 months. Annualised employment growth is now the fastest it has been since 211, driven by hiring in the services sector. While market conditions are a catalyst, a key factor supporting this transition has also been record low wage increases, which has supported the demand for workers, but comes at the expense of purchasing power (i.e. real income growth) for those already working. Figure 1: Private and public sector wage growth 6. %, tty The price of Australia s key commodity exports has continued to decline with the terms of trade at mid-26 levels. Since the end of September, iron ore prices have fallen a further 25% to be at near decade lows. In addition, oil prices have continued to fall with prices down more than 15%. This will have significant impacts on the Federal Government s fiscal position in next week s Mid-year Economic and Fiscal Outlook (MYEFO) update. The September quarter saw annual wages growth in the private sector fall to 2.1% (.6% above inflation), although still the weakest growth since records began in 1997 (see Figure 1). While this trend is supporting aggregate employment growth, hiring prospects are unequal across the country, as activity becomes increasingly concentrated away from mining centres. Figure 2: Unemployment rate by capital city % Sydney Melbourne Brisbane Perth Public Private. Sep-2 Mar-28 Sep-215 Note: Wage price index, totally hourly rates of pay excluding bonuses, seasonally adjusted Source: ABS catalogue Oct-2 Jul-24 Apr-28 Jan-212 Oct-215 Note: Seasonally adjusted using state-specific seasonal factors, 6 month moving average Source: ABS catalogue number This transition has hit hardest in greater Perth, where the unemployment rate has hit a 1 year high PwC 2

3 (6%), while Greater Sydney, Melbourne and Brisbane have seen their unemployment rates trend toward multi-year lows (see Figure 2). Significant challenges also remain for regional areas, where the unemployment rate, at 12%, is double that of the capital cities. Figure 4: Dwelling construction and building approvals 1, Number 7,5 2, 15,... but the housing market is showing signs of abating This regional divergence has also been apparent in the property market. Since the end of last year, property prices in Sydney and Melbourne have recorded rapid growth in the order of 1%. While Brisbane and Adelaide have recorded steady price increases, this has been offset by declining prices in the Perth market (see Figure 3). Figure 3: Major 5 capital city house prices* Index (Dec 2 = 1) Sydney Melbourne Rest of Australia (BNE, PER, ADE) 95 2-Dec-14 2-Jun-15 2-Dec-15 Source: CoreLogic RP Data Daily Index and PwC *Note: ABS Residential Property Index weights have been used to re-weight the series. The rest of Australia excludes Canberra, Hobart and Darwin. The upswing in housing prices reflects several market fundamentals including supply shortages, the record low level of interest rates and above average growth in Australia s population. It has also driven significant real economic activity, with dwelling investment increasing by over 1% compared to the end of 214, notwithstanding a slowing in recent quarters. However, slowing population growth and the major banks decisions to increase standard variable mortgage rates by percentage points are flowing through to leading indicators of housing activity. Since the beginning of the year dwelling approvals have softened and there are early signs that the construction of new dwellings has peaked (see Figure 4). Dwelling commencements have also fallen from their September 214 peak, and are expected to gradually decline and settle at levels seen during late 212 (around 4, per quarter). Source: ABS catalogue number 569. and While the dwelling sector is a relatively small contributor to economic growth (around 5% of national output), it is a significant contributor to household net worth. With a large proportion of Australian household income devoted to interest repayments, developments in the sector can have wider impacts on the rest of the economy (including consumption and investment decisions). and MYEFO to lower long term growth projections The slowdown in population growth, largely arising from weaker-than-expected outcomes in net overseas migration (mainly from New Zealand), has also had implications for the long-term economic outlook. At the time of publication, the Treasurer s release of MYEFO is less than a week away. However, early indications from Treasury officials 1 suggest that the report will downgrade long term growth prospects from those reported in the Budget a reflection of both lower than expected migration and average hours worked. The impact of these assumptions is to change Treasury s estimate of Australia s potential (also known as trend) output what could be sustainably produced based on the economy s supply of labour and capital. While this was previously 3% beyond the forward estimates, it has been downgraded to around 2.75%. These downgrades will have significant impacts on projected tax collections beyond the 1 5, 2,5 Construction of dwellings (3mma, LHS) 5, Dwelling approvals (3mma, RHS) - Oct-5 Oct-1 Oct-15 For example, in a recent speech to the Australian Business Economists Conference, Deputy Secretary, Nigel Ray discussed the upcoming changes to Treasury s projections for December s MYEFO release. 1, PwC 3

4 forward estimates, as Treasury s budget projections assume the economy returns to (a now lower estimate of) trend GDP. As a guide, a downgrade of.25% is estimated to lower nominal GDP by around $4 billion per year (approximately $1 billion in lost tax receipts per annum). Adding further woes, sustained weakness in global commodity prices will put pressure on income tax receipts and the Federal Government s fiscal position over the shorter term. While the revised outlook has stoked significant concerns around Australia s economic future, it is worth putting recent economic performance in context. Over a period of significant global volatility, the Australian economy is 18 months away from breaking an economic growth record (see Figure 5). Since the collapse of Lehman Brothers in 28, Australian economic output has increased by over 18%. This compares favourably to countries such as the US, UK and Euro area which have grown by 13%, 9% and 8% respectively over the same period. Figure 5: Period of economic growth without a recession (selected G1 economies + Australia) Number of quarters Source: Business Insider, Longview Economics, PwC. It is also worth noting that while population growth affects the level of Australia s aggregate GDP and potentially provides additional labour to support an ageing population, it is not, in itself, the key determinate of living standards per person. Recent history illustrates this since the peak in the Australia s terms of trade four years ago, GDP has risen by almost 11%, but GDP per capita has risen by only 4%, and real income per capita has fallen by nearly 6%. 2 Closing this gap will ultimately depend on Australia s ability to boost its productivity. 2 Real income accounts for all income earned by Australians, deflated in terms of prices of national expenditure. 6 placing further pressure on the Government to boost productivity Productivity growth has been subdued in recent years driven by declines in the, construction and transport sectors. However, as major resource projects have transitioned from construction to production, mining productivity has started to show signs of improvement over the past two years (see Figure 6). Figure 6: Mining labour productivity index Index Beginning of the mining boom Source: ABS catalogue number With mining employing 2% of the national workforce, and mining employment in decline, Australia will need to look to productivity improvements in other sectors of the economy to bolster employment and output growth. The Federal Government has announced a number of policy initiatives over the past year (including competition policy reforms and an innovation statement). Both of these policy agendas have the potential to increase Australia s long-term productivity growth. The Federal Government s response to the Competition Policy Review contains a number of reforms to boost productivity. These include the deregulation of the taxi industry, lessening of restrictions on retail hours and pharmacy ownership, changes to utilities pricing and competition within the education and health services sectors. Productivity increases in labour intensive industries, such as retail, are an important driver of wage growth. In addition, the Government recently announced a four-year $1.1 billion innovation strategy focused on tax incentives to support start-ups, science and technology research. In the short term, these measures will boost business confidence which should flow through to an increase in intellectual property product capital expenditure. PwC 4

5 Best and worst industry performers September quarter 215 To understand industry performance in the September quarter, it is worth looking at how growth has compared with historical averages. The chart below illustrates the performance of the top five and bottom five industries in the September quarter against performance over the past 1 years. Industries above the diagonal line have exceeded historical averages and those below have recorded below average growth in the quarter %, Sep Qtr annual growth Non-metallic mineral product Rental, hiring and real estate services Information media and telecommunications Iron ore mining 5-5 Wood and paper product Printing and recorded media Food, beverage and tobacco products Metal product %, 1 year annual average Note: Displays the five industries that grew slowest/fastest in the September quarter 215 relative to a 1 year history; above the line indicates above trend growth while below the line indicates below rend growth. Source: ABS catalogue number GEM spotlight: El Nino and the local economic and social impact Australia looks on track to enter another period of El Nino, potentially one of the worst on record. Based on past El Nino and severe drought experience we know the impact is felt in different ways across the country. To help business and government prepare, we have used PwC s Geospatial Economic Model (GEM) to look at the nature and severity of granular impacts. Using the model, we first analysed 1 years of Bureau of Meteorology data to identify the granular locations within Australia that are most severely impact by the associated drought conditions. We have then overlaid the last 14 years of economic, industry and social data to understand how these drought conditions affected the populations, businesses and governments in these locations. This information has allowed us to identify the communities most at risk, the industries that are most likely to be affected and the knock on implications of this to the wider economy. Coal mining Professional, scientific and technical services financial). It will also arm businesses with the information they require to understand how to navigate this period. Figure 7: Winter-Spring mean rainfall deciles across 14 El Nino events If Australia does enter a severe El Nino condition, this information will be critical to Governments looking to tailor response packages (both social and Source: PwC GEM, Definitions Base interest rate forecasts increase; decrease; no change General outlook In the Key Metrics table on page 1, the economic environment is assessed as being Positive, Stable or Negative. PwC 5

6 PwC economic and policy consulting The Economic Views reports are produced by PwC s Economic and Policy Consulting team. Working at the nexus of economics, policy, strategy and finance, we provide practical and empirically-supported solutions using the latest economic tools and industry leading expertise. Our macroeconomic efforts have recently been focused on helping businesses to assess the most pressing risks and opportunities in their markets, understand the effectiveness of their forecasts and test their businesses sensitivity to a range of economic scenarios. All these factors are essential to establishing the best strategy for business during times of economic turmoil. We also provide microeconomic advice to a range of industry sectors, with a particular focus on transport, Government, health and social services, energy, water, and natural resources. For more information about any of our services please contact one of the members of the team to the right. How our macroeconomic team can support you: Prepare economic outlook reports on the country or industry you are interested in Prepare short term and long term forecasts of macroeconomic variables such as GDP, inflation, average earnings, consumer demand and interest rates Review and advise and develop short and long term forecasting methods for businesses based on key macroeconomic and industry sensitivities Advise on the impact of key events, such as the global financial crisis, emissions trading schemes or major changes in regulation, on your markets Assess the contribution your company or industry makes to the local economy in terms of economic variables such as employment, tax revenue and output Construct models to forecast prices and key market trends. Contact details For more information about our services please contact one of the members of the macroeconomic consulting team below: Craig Fenton Partner +61 () craig.fenton@au.pwc.com Jeremy Thorpe Partner +61 () jeremy.thorpe@au.pwc.com Rob Tyson Director +61 () rob.tyson@au.pwc.com Ben Greig Manager +61 () ben.greig@au.pwc.com Rhett Wilcox Senior Associate +61 () rhett.wilcox@au.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. This publication (and any extract from it) must not be copied, redistributed or placed on any website, without PricewaterhouseCoopers' prior written consent. 215 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. WL PwC 6