Transcript Tom Taylor`s Economic Update July 2015 P

Border Economy July 2015
Tom Taylor – Head of International Economics (NAB)
What we will cover
1. Show how the lower currency and interest rates that accompany the fading mining
investment boom are shifting growth back toward the big SE States.
2. Lower currency helps manufacturing and tourism compete better after several hard
years and lifts farm incomes – all important in the Border region
3. Lower interest rates is boosting housing markets, construction and consumer
spending on household goods – but so far the big property price and constructions
gains concentrated in metro areas, waiting to see more spill-over into regions of the
State’s economy and focus of growth on metro fringe
4. Increased provision of public services in key regional centres also helps AlburyWodonga – key medical facilities for surrounding regions ageing population,
cultural assets like new Art Gallery for tourists/locals
5. Border NSW region badly needs job growth – area of high unemployment and until
recently employment had been failing to grow.
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Regional pattern of growth shifting in the nation
Growth set to pick up in Australia – 2.4% in 2014/15, 2.6% in 2015/16, 3% in
2016/17
Regional pattern shifting as mining boom fades and low interest rate and
weaker $A boost activity in the big SE States – which had been
underperformers till recently.
WA and Queensland hit by falling commodity prices and downturn in mining
investment – export volume ramp–up under way but not many jobs there
Low interest rates boosting housing market, construction and that is spilling
over into increased demand for household goods.
Weaker $A helping manufacturing and tourism to compete better against
imports and overseas destinations as well as to lift exports
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3 phase mining cycle explains a lot of Australia’s
economic situation
Phase 1 – Price boom
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Phase 2 Investment surge
Phase 3 – exports ramp-up
Growth already rotating away from mining States
to SE Metropolitan States
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Business investment explains the intra-State
difference – mining boom fades and NSW pick up
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Bigger pick up in jobless rate in mining than in SE
States but jobless rates now turning down
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Growth shortfall between SE Metro States and
Australian GDP forecast to narrow or close
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Consumer and housing driving most of the upturn
in NSW economy
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Consumption also a key factor driving growth in
Victoria
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Border region well placed to do better in new
macro-economic environment
Lower $ help lift farm incomes and competitiveness of
manufacturing and services
Lower interest rates give a boost to construction and
consumption
Solid population growth in Sydney and Melbourne boosting size
of consumer and business market in adjacent metro areas
(freight, tourism, consumer demand, building)
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(1) Lower $A helping activity in the region
•Around 75% of the 502 firms who replied to the August 2014 Albury-Wodonga
business survey felt that the $A had no impact on their operations
•But it might be more important than people think! – via indirect channels
•(1) Local incomes that are spent in the community - consequences for
incomes and spending of the big farm export sector on the Border (Murray
region over $1½ Billion, Riverina $2 Billion, NE Victoria $½ Billion)
•(2) Impact on the competitive position of manufacturing sector – hit by low
cost imports and need to be price competitive overseas when the $A was so
high – but offsetting effect via lower costs for imported inputs and machinery.
•(3) Encourage more tourists to travel domestically rather than overseas $A210 million in domestic overnight travel and A$21 Million international
spending in 2013 – already a big industry.
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$A depreciated a lot against $US and RMB but
much less against other big currencies
NAB Currency Forecasts
Dec-15
Jun-16
Dec-16
Jun-16
Dec-16
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US$
0.72
0.71
0.73
0.75
0.76
Euro
0.69
0.69
0.69
0.69
0.68
Yen
90
89.5
92.7
93.8
93.5
NZD
1.16
1.18
1.18
1.17
1.15
RMB
4.5
4.5
4.6
4.7
4.8
(a) Manufacturing - $A depreciation finally delivers
boost to competitiveness of Australian industry
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High $A took Australian industry’s labour costs
above those in US, Japan, much of W Europe
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Profits squeezed in manufacturing, food and oil
dominate earnings, big sectors loss making
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Manufacturing sector shrinks as imports squeeze
out local producers and high $A hits exports
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Official view that mineral prices would stay
historically high – writing off some manufacturing?
Repeated cutbacks in Treasury forecasts
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Look at Border Region Economy - The wedding
cake structure of regional economies
Regional Victorian economies follow a 3 tier wedding cake pattern
Need a sector to inject income from outside the region for sustained
income growth – can’t just deliver pizzas to each other and relying on
inflow of taxes from other regions leaves you vulnerable to spending
cutbacks – local private sector has to generate sustained income
3
Public sector services – based on population and
age structure (health, education, police)
2
Private sector services based on commodity,
tourism, industry income and public funds (retail,
legal, accountancy, transport)
1
Commodity sector, tourism, industry, public sector
spending (eg defence bases)
Competitiveness
of service sector
SMEs
Competitiveness
of commodity
price takers
Tier 1 vital, holds up whole economic structure – look at commodities, industry
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Employment solid in NE Victoria, Border NSW
starting to lift after a long weak patch
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ABS Statistical regions in Victoria Regional areas (SA 4)
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Services dominate Border employment, helps
understand why so many firms downplay $’s role
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And reliance on service jobs has been increasing
as local industrial base has eroded
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Border region manufacturing sector shrinking –
lower $A will help it compete
Still major manufacturing plants in region
• processing local raw materials (Uncle Toby
oats, Kiewa milk, Uncle Bens meat, Myrtleford
plywood mill
•Important presence of big corporations –
Mars, Nestle, Murray Goulburn, Carter Holt
Story of Borg Warner Drivetrain shows what
can go wrong
• 1250 staff at peak in early 1980s
•Bought by Chinese group Geely and shut after
chequered history,
•technology transferred to 3 new plants in
China, its gearboxes were world famous
•Lost valuable source of well paid jobs, training
and skill development in border region – how
many apprentices learned their trade there?
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Albury newsprint mill shows disciplines involved by
globalisation – lower $A help competitive position
Albury newsprint mill among the worlds best
Product demand falling, low Asian prices
Series of mill closures around globe (Walsum)
Weaker $A helps support the plant
Boyer mill partly converted to magazine paper
Helped Oceania financial results
Scope for another conversion from newsprint to
magazine paper – still importing 150 kts pa
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Manufacturing sectors losing ground are often very
high productivity sectors, growing ones not
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Much lower average earnings in the fast growing
service sectors too than in contracting industry
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Impact of shift from high to low productivity jobs
evident in the Victorian growth model
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Lower $A will boost returns for big diverse farm
export sector in Border Region
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Riverina broadacre farm incomes high by historic
standards even before latest price increases
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Surge in grain incomes underpinned rise in
Riverina real broadacre farm cash incomes
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Surge in cattle prices plus high meat and wool
markets lift farm incomes
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(2) Lower interest rates feed into property market,
construction and consumption
•Policy interest rates cut to historic low of 2% in May – as RBA seeks to lift
growth to offset headwind of fading mining boom
•We see rates staying down for a long time as little inflation pressure, first rate
rise probably not until the very end of 2016
• Retail business and mortgage lending rates down too
• Triggers upturn in housing lending, house prices, construction and retail
sales of household goods
•Upturn in dwelling construction concentrated in metro regions – apartments,
especially multi-story complexes located in central cities, role of investors
•Population growth focussed on Albury-Wodonga and different migration
pattern – helps support housing demand
•Still waiting to see big impact outside metro regions on property prices
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RBA cuts cash rate to record low 2%, retail lending
rates fall to 4½%-6½% range
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Lower interest rates starting to work – borrowing
picking up as people start new projects
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Sydney house prices the standout, regions softer.
Albury market picked up, many other towns flat
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Housing investors trading existing stock driving
much of the housing market rather than new builds
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Surge in dwelling approvals in apartments, rivals
house approval numbers in Victoria
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Multi-story apartments account for big share of
dwelling upturn in NSW and Victoria
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Seen upturn in NSW retail sales of discretionary
(non-food) lines since early 2013
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Jump in NSW retail sales of housing-related
products – to put into all those new dwellings
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Three quarters of NSW/Victorian building activity
concentrated in two State capitals
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And the growth is also concentrated in the two
capitals
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Concentration of apartments in central Melbourne,
new house building more regionally dispersed
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Concentration of commercial building in central
Melbourne
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But Albury-Wodonga better position that most
places to generage an upturn in building
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Albury different migration to other Border regions –
retains people to age 25, then loses them
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But there has been growth in Albury-Wodonga
region too for housing approvals
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As well as growth in commercial property sector on
the Border
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(3) Importance of Albury-Wodonga as regional
service centre set to keep growing – 5000+ staff
Albury Wodonga health over 2000 staff,
wage bill of $116 million, staff costs of
$220 million, revenue of $230 million – a
major local business
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Rise in government spending as people age –
especially on health care – demand rises
Incidence of chronic disease by age group in Australia 2011/12
Age
18-44
45-54
55-64
65-74
75+
85+
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Cardio-disease Heart disease Stroke
6.6
0.4
0.2
20.6
1.8
0.9
33.7
4.9
2.2
50.6
9.9
5
11.1
64.2
17.2
15.2
Diabetes Chronic kidney disease
1.4
5.5
5.3
5.6
8.7
7.9
15.6
20.9
12.7
42.1
Health care costs rise
faster than CPI
Health costs rise as
population ages
Ageing profiles already evident in many Border
sub-regions – Alpine and Indigo
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And Towong Shire has same forecast population
ageing pattern but Wodonga Shire differs a bit
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More ageing forecast across region – heading
towards 20% aged 70+, 10% are 80+, 5% are 85+
NE Victoria
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Population ageing forecast to continue in NSW
Border Shires
Southern NSW
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Border region needs the boost from lower $ and
rates plus healthcare jobs – badly needs more jobs
•Policy interest rates cut to historic low of 2% in May – as RBA seeks to lift
growth to offset headwind of fading mining boom
•We see rates staying down for a long time as little inflation pressure, first rate
rise probably not until the very end of 2016
• Retail business and mortgage lending rates down too
• Triggers upturn in housing lending, house prices, construction and retail
sales of household goods
•Upturn in dwelling construction concentrated in metro regions – apartments,
especially multi-story complexes located in central cities, role of investors
•Population growth focussed on Albury-Wodonga and different migration
pattern – helps support housing demand
•Lift in Border NSW employment after flat period, has high jobless rate
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Slowdown in job creation hits Border Region after
mid-2000s, especially full time males
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Employment solid in NE Victoria, Border NSW
starting to lift after a long weak patch
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Lift in jobs in Murray concentrated in full time male
jobs, highest earning group – spending power
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Albury accounts for over half of the Murray region
– so figures should represent region trends
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Very important to see this job growth in Border
NSW as region has high jobless rate
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Albury jobless rate usually region’s highest but has
surged recently to double digit levels
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Conclusion
•
Australian economy re-balancing away from mining States and back to SE metro
States as
1. lower $A boosts farm export incomes and restores some of the competitiveness lost
in manufacturing and tourism during the mining boom
2. lower interest rates boost property values, building and retail sales of household
goods
3. Growth in health care and education continues and most people live in the SE
•
Albury-Wodonga centrally located in SE States and well placed to benefit from this
1. Big diverse regional farm sector gets higher incomes, boost regional sending power
2. Help local industry export and compete vs imports (eg overseas holidays cost more)
3. Regional centre for service provision – hospitals, university, arts
•
Most of boost to property and building focused on metro centres, waiting to see
more spillover into regional property prices and building activity
•
Border needs the lift – high jobless rate and poor record of job creation in Murray
region, finally seeing job recovery
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