STATE UPDATE: TASMANIA JULY 216 CONTENTS 2 Key points 3 In Focus: electricity in Tasmania 4 Tourism 5 Consumer & household sector 6 Business sector 7 Residential property 8 Labour market 9 Demographics 1 Economic structure and trade 11 Fiscal outlook & semi market CONTACTS Phin Ziebell Riki Polygenis Skye Masters Economist Head of Australian Head of Interest Rate Strategy +61 () 475 94 662 Economics +61 2 9295 1196 phin.ziebell@nab.com.au +61 3 8697 9534 skye.masters@nab.com.au riki.polygenis@nab.com.au Important Notice This document has been prepared by National Australia Bank Limited ABN 12 4 44 937 AFSL 23686 ("NAB"). Any advice contained in this document has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice in this document, NAB recommends that you consider whether the advice is appropriate for your circumstances. NAB recommends that you obtain and consider the relevant Product Disclosure Statement or other disclosure document, before making any decision about a product including whether to acquire or to continue to hold it. Please click here to view our disclaimer and terms of use. Photo Mai Thai
KEY POINTS 12 1 CHART 1: STATE GSP GROWTH FORECASTS Annual growth, per cent 8 6 4 2 CHART 2: STATE FINAL DEMAND GROWTH Per cent 2 15 1 5-5 NSW VIC QLD SA WA TAS NT ACT 213-14 214-15 215-16 (f) 216-17 (f) 217-18 (f) -1 1989 1993 1997 21 25 29 213 TAS Australia The outlook for the Tasmanian economy has improved over the past year, although there is some divergence in key indicators: while unemployment has fallen, particularly in Hobart, housing approvals and commencements have taken a hit. Likewise, there will be divergence across major industries: tourism continues to perform well while farmgate price cuts will continue to put pressure on the state s hitherto burgeoning dairy industry. Agriculture, forestry and fishing accounts for almost 1% of Tasmania s GSP (compared to around 2% nationally) and is the state s largest sector. While forestry continues its structural decline, agriculture has become more important thanks to a cool climate and expanding irrigation schemes (particularly for dairy). Tasmania s strong reputation for quality and food safety is a key export advantage for food products. Likewise, Tourism Tasmania reports that Tasmania is more dependent on tourism than any other state in Australia. The lower AUD, combined with a diversity of high quality holiday attractions (such as MONA), has made Tasmania a more attractive destination for Australian and international tourists. While Victoria remains the biggest single source of domestic tourists (owing to proximity), tourism from other states are growing strongly. Tourists spent $2.1b in Tasmania in the year ended March 216, up 7%. This will be a positive for investment and retail, although commercial building approvals present a mixed picture. Tasmania s annual GSP growth has mostly been below the national average since the early 199s, with the gap widening substantially in the post-gfc era (chart 2). Unemployment has fallen recently but the outlook for construction is mixed. Population growth has also been slow, but looks to be picking up. Nevertheless, growth remains below the national average. We forecast that GSP will grow 2.2% in 216-17 and 2.1 % in 217-18. 2
IN FOCUS Electricity in Tasmania Tasmania s electricity sector dominated by hydro-electric generation has come under intense scrutiny this year, driven by extreme drought over the summer and early autumn combined with the failure of the Basslink interconnector with Victoria in December 215. Basslink, opened in 26, connects Tasmania to eastern Australia s National Electricity Market, an interconnected grid covering all states except Western Australia and the Northern Territory. This allows Tasmania to export hydro power to the mainland when prices are high and import brown coal fired power from Victoria when prices are low. CHART 3: HYDRO TASMANIA SYSTEM STORAGE LEVEL % of system capacity 7% The late 215 failure came after Tasmania sold higher priced hydro power into Victoria in the run-up to summer, which alongside drought, left storage levels around 25-3%. Without Victorian-sourced electricity, Tasmania was forced to set up expensive diesel generators and run the hydro to precipitous levels, with storage levels falling to just over 13% in April. EnergyQuest estimates that the cable failure has cost as least $56m. While recent rains have replenished storages, the experience will likely limit Hydro Tasmania s ability to sell electricity to the mainland over future summer peak periods. CHART 4: TASMANIAN WHOLESALE ELECTRICITY SPOT PRICE Weekly volume weighted, $/MWh 3 2 6% 5% 4% 3% 2% 1% Basslink failure % 21 211 212 213 214 215 216 1 21 211 212 213 214 215 216 CHART 5: ANNUAL BASSLINK NET INTERCONNECTOR FLOW GWh/annum, negative number = net import from mainland 4 3 2 1-1 -2 21-11 211-12 212-13 213-14 214-15 Source: Hydro Tasmania, AEMO, AER, EnergyQuest and NAB Group Economics 3
TOURISM Continues to grow strongly Tasmania ranks as one of Australia s most appealing tourist destinations, ranking second in appeal after Queensland according to the most recent data from Tourism Tasmania. The state is highly dependent on tourism, with tourism accounting (directly and indirectly) for over 9% of Tasmanian GSP, the highest in Australia. Tasmania is enjoying a domestic tourism revival thanks to new and popular attractions such as MONA. Total domestic visitor numbers were up 6% in the year ended March 216, surpassing the 1,, mark for the year. Meanwhile, international visitor numbers were up 9.1% to 216,. CHART 6: INTERSTATE VISITORS TO TASMANIA Number, annual to March, by state of origin A key driver of Tasmania s tourism renaissance (beyond the appeal of attractions) is the fall in the value of the Australian dollar over the past few years. This has made domestic holidays relatively cheaper, reflected in the greater diversity of state of origin for domestic visitors. Victoria continues to the biggest single source of domestic tourism, reflecting the state s close proximity to Tasmania. However, Victoria s share has fallen from 46% of visitors four years ago to 43% today. Tourists spent $2.1b in Tasmania in the year ended March 216, up 7%. CHART 8: TOURISM SPENDING BY TYPE $ million, annual to March 1,2, 1,, 8, 6, 4, 2, NT ACT WA SA QLD NSW VIC Apr 212 - Mar 213 Apr 213 - Mar 214 Apr 214 - Mar 215 CHART 7: INTERNATIONAL VISITORS TO AUSTRALIA BY STATE y/y % 12 months to March 216 15% Apr 215 - Mar 216 25 2 15 1 Other items Accommodation Transport 1% 5% 5 % -5% Apr 212 - Mar 213 Apr 213 - Mar 214 Apr 214 - Mar 215 Apr 215 - Mar 216 Source: Tourism Tasmania, Austrade and NAB Group Economics 4
CONSUMER SPENDING Tasmanians remain cautious, but conditions are improving Wage growth and household consumption remain positive, although national conditions. The recent fall in unemployment in Hobart may present some upside, although the volatility of labour force data gives some pause in reaching this conclusion. Retail sales remain robust, perhaps due to tourism expenditure. Consumer behaviour in Tasmania remains reasonably cautious although the NAB Consumer Survey showed a pick-up in Q2 216 in an number of areas. Survey respondents continue to spend on essential goods and services such as groceries, transport and utilities, while demonstrating more prudent intentions in longer-term financial management strategies to focus on savings, super and investment, as well as paying down debt. CHART 9: COMPENSATION OF EMPLOYEES AND H-HOLD CONSUMPTION Growth, y/y %, nominal Total compensation per employee as proxy for household income Household Consumption 15% 1% 5% % -5% -1% 1997 2 23 26 29 212 215 CHART 1: RETAIL TURNOVER AND HOUSE PRICE GROWTH y/y % Savings, super, -5 28.% 2.% investments 22.% 16.% 1.% 4.% -2.% Hobart House Price Growth (y/y%) - RHS Retail Turnover Growth (y/y%) - LHS -8.% 25 27 29 211 213 215 15% 1% 5% % -5% -1% 16.% 12.% 8.% 4.%.% -4.% -8.% CHART 11: NAB CONSUMER ANXIETY SURVEY - CONSUMER SPENDING PREFERENCES Points Groceries Medical expenses Paying off debt Transport Children Q1'16 Utilities Entertainment 2 1-1 -2-3 -4 Charitable donations Travel Eating out Personal goods Q2'16 Major HH items Home improvements Use of credit 5
BUSINESS CONDITIONS Divergence between manufacturing and tourism, agriculture In previous years, investment has been undermined by a strong AUD, which weighed on tourism and primary exports. A structural decline in the manufacturing sector has further weighed on sentiment. However, while a lower AUD since 214 may not reverse the structural decline in manufacturing, it should improve the tourism sector. Non-residential building approvals, while volatile, continue to show a slowdown in all categories except other. CHART 12: NON-RESIDENTIAL BUILDING APPROVALS $ million Agriculture, forestry and fishing accounts for almost 1% of Tasmania s GSP (compared to around 2% nationally) and is the state s largest sector. The dairy sector has seen considerable growth and the state s share of national milk production has been steadily increasing over the last decade. Farm gate milk prices have come under considerable pressure this year, reflecting a steep decline in international dairy prices since 214. Murray Goulburn, the nation s largest dairy producer, recently released its opening price for 216-17. It forecasts a farm gate price of $4.8/kg milk solids, which could be as low as $4.31 for some producers. CHART 13: TASMANIA S SHARE OF AUSTRALIAN WHOLEMILK PRODUCTION % $m 3 Retail/wholesale Offices Factories Warehouses Other 1% 9% 25 8% 2 7% 6% 15 5% 4% 1 3% 5 2% 1% 2 22 24 26 28 21 212 214 % 197 71 198 81 199 91 2 1 21 11 Source: ABS, ABARES and NAB Group Economics 6
RESIDENTIAL SECTOR Approvals and commencements are falling Tasmania s housing market is very different from the mainland, with relatively few units and generally much lower prices the median hedonic price in Hobart is now around half of the weighted average of all capital city prices. House prices have been kept low by low population growth combined with continuous growth in housing supply over most of the 2s, driving the dwelling to population ratio higher over time. The pick-up in housing approvals since 213, associated with looser supply fundamentals, kept a lid on house price growth but looks to have come to an end. Recent data show a downturn in approvals as well as commencements. Tasmania s unit approvals remain well below the national average, although house approvals remain much closer to the national average data. CHART 14: RESIDENTIAL APPROVALS AND COMMENCEMENTS Tasmania CHART 16: BUILDING APPROVALS RELATIVE TO POPULATION Long run average = 1 12 1 8 Approvals Commencements 3 TAS House App to pop TAS Unit App to pop 6 4 25 Aust House App to pop Aust Unit App to pop 2 1985 199 1995 2 25 21 215 CHART 15: PRICE GROWTH BY REGION % change from previous quarter 2 15 Southern 1 Northern Mersey-Lyell Units Houses 5 Greater Hobart 1985 1988 1992 1996 2 23 27 211 215 218 1988 1992 1996 1999 23 27 211 214 218-8 -6-4 -2 2 4 6 8 7
LABOUR MARKET Unemployment is falling, especially in Hobart Slower economic growth saw the Tasmanian unemployment rate rise steadily in the aftermath of the GFC from 28 to 213 despite weak population growth over the period. It started trending downwards from its peak of 8.7% in June 213 to a low of 5.8% in September 215. While we note volatility in the data (including a slight increase in the latest reading), an upward trend since September last year has now been reversed, particularly in Hobart. Over the 12 months to the June quarter 216, health, education, transport and finance saw the biggest employment gains. Hospitality, followed by closely by construction and mining, suffered the largest number of job losses. The recent fall in residential building approvals bodes somewhat ill for the construction industry. Looking over the last three years, the biggest job losses have been in hospitality and construction despite these sectors contributing considerably to GSP growth. CHART 17: UNEMPLOYMENT RATE BY REGION % 12 11 1 9 8 7 6 5 4 3 Tasmania Greater Hobart Rest of TAS 2 2 25 21 215 CHART 18: CHANGE IN EMPLOYMENT BY INDUSTRY 12 months to June 216, Tasmania, Hospitality Construction Mining Business services Public admin Wholesale trade Utilities Other services Arts Rental services Communications Manufacturing Retail trade Admin services Agriculture Finance Transport Education Health -3-2.5-2 -1.5-1 -.5.5 1 1.5 2 2.5 3 3.5 4 8
DEMOGRAPHIC TRENDS Population growth remains below the national average Weak GSP growth in the wake of the global financial crisis (except for 213-14) saw a reversal in the tide of interstate migration from net positive to negative, with the net outflow of Tasmanian residents to other states peaking in September 212 at around 2,8 people in the quarter. This has since moved closer to neutral and with natural increases and net overseas migration, Tasmania s population growth is in positive territory. Tasmania s population is older than the national average, with a notably smaller proportion of the population aged 2 to 4. This has clear implications for government revenue and health spending. Tasmania s share of the Australian population is also falling over time. Not only is the Tasmanian resident population ageing, the population is growing at a significantly slower rate than the national average. CHART 19: POPULATION GROWTH DRIVERS over the year 8 's 6 Natural increase Net overseas migration 4 2-2 -4-6 1985 199 1995 2 25 21 215 CHART 2: TASMANIA POPULATION GROWTH Year ended growth 2.5 CHART 21: POPULATION SHARE BY AGE Share of Tasmania s estimated resident population 1% 9% 8% 7% 6% 5% 8 plus 71 to 8 61 to 7 51 to 6 41 to 5 2. TAS AUS 4% 31 to 4 1.5 1..5. -.5 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 212 214 216 3% 2% 1% % 1975 198 1985 199 1995 2 25 21 215 21 to 3 11 to 2 to 1 9
ECONOMIC STRUCTURE AND TRADE Tasmania is an island located south of the Australian mainland. It is Australia s least populous state, having a population of just over 5,. This combination of remoteness and low population presents a number of economic challenges. Health is the biggest employer, and retail, education, hospitality, manufacturing and public administration are also major employers. This reflects Tasmania s reliance on government services delivery employment and tourism. Tasmania s external trade is focussed on East Asia. China is the biggest export destination presently, although other nations in the East and South East Asian region feature prominently. The United States and New Zealand also feature in the state s major trading partners. CHART 22: COMPOSITION OF EMPLOYMENT & GVA 214-15 Other services Arts Health Education Public admin Admin services Business services Rental services Finance Communications Transport Hospitality Retail trade Wholesale trade Construction Utilities Manufacturing Mining Agriculture Employment GVA CHART 23: TOP TASMANIA EXPORT DESTINATIONS AND IMPORT SOURCE COUNTRIES 12 month average Value of exports ($m) 1 China 867 2 ASEAN 688 3 Taiwan 274 4 US 21 5 Japan 28 6 Korea 125 7 HK 11 8 New Zealand 17 9 India 84 1 EU 62 11 Singapore 58 12 UK 9 13 Germany 5 Value of imports ($m) 1 Korea 154 2 China 131 3 EU 12 4 ASEAN 11 5 US 52 6 Singapore 46 7 UK 29 8 Germany 23 9 New Zealand 19 1 Japan 16 11 Taiwan 5 12 HK % 2% 4% 6% 8% 1% 12% 14% 16% 1
FISCAL OUTLOOK The 216-17 Budget forecasts a net operating balance of $77.3 million for 216-17, a return to surplus three years earlier than expected. A small surplus is forecast in 217-18 and a deficit in 218-19 before another return to surplus in 219-2. Tascorp has said that its borrowing program for 216-17 will total $9m which is slightly higher than the 215-16 program. Tascorp will issue a new Feb 228 fixed rate line with the remainder of the programme likely to be raised via existing Hotstock lines. CHART 24: NET OPERATING BALANCE General government sector, $ million 1 5 S&P is yet to confirm Tasmania s credit rating post the budget but we do not see the budget causing any changes to the rating. Non-financial public sector net debt is expected to remain steady through the forward estimates. The Governments focus is to work on improving the financial position of the state and managing the risks such as superannuation liabilities. As to the later the Government continues to meet the cash cost of defined benefit scheme but liabilities remain sensitive to discount rate movements. CHART 26: TASCORP BONDS OUTSTANDING AS AT END JUNE 216 $ million 12 AUDmn -5-1 2 CHART 25: TASMANIA NON-FINANCIAL PUBLIC SECTOR DEBT $ billion 3. 2.5 215-16 216-17 217-18 218-19 219-2 AUDbn FY 16 FY 16 MYBR FY 17 1 8 6 4 Nov-16 Sep-17 Jun-2 Mar-22 Jun-24 Feb-26 2. 1.5 1..5. 214-15 215-16 216-17 217-18 218-19 Source: Tasmanian budget papers, Tascorp, Bloomberg, NAB 11