Cautious Economic Optimism for 2017/18
This morning CCIQ participated in the annual BDO Economic and Political Update which featured an economic update from the Department of Treasury and a panel discussion including CCIQ GM of Advocacy Kate Whittle.
As the major political parties gear up for an impending state election campaign, CCIQ has produced an economic review of the 2016/17 financial year. When the final data is released, we are expecting to see Queensland GSP growth of around 2.5 per cent for 2016/17, which would fall short of the treasury forecasts published in the latest state budget (2.75 per cent).
Latest National Accounts Data
The Australian economy grew 0.8 per cent during the June quarter to take total growth for 2016/17 to 2.0 per cent. This result is on par with the expectations of the RBA in its latest Statement on Monetary Policy which was released in August. With the national economy still performing below potential, the RBA should be in no rush to start hiking interest rates soon.
The export sector continues to be a strength for the Australian economy with net exports contributing roughly half of the growth in the latest quarter (0.4 percentage points). Similarly, household consumption was also strong, rising 0.7 per cent during the quarter to make the same contribution to growth as net exports. The figures for the public sector contribution to growth (+0.8 percentage points) are inflated by the transfer of ownership of the new Royal Adelaide Hospital to the public sector.
Queensland state final demand (SFD) rebounded in the June quarter by 1.1 per cent with activity in the private sector entirely responsible for the growth in this period. This was a strong response following the weak March quarter where private sector activity was hampered by Cyclone Debbie.
During the past quarter, spending by households rose strongly with expenditure on services continuing to record steady growth while retail goods rebounded following a poor cyclone impacted quarter in March.
After years of cost cutting, the business environment appears to be turning with businesses beginning to invest again. In recent periods, residential construction was the lone area of strength in business investment. However the data is now indicating broader improvements in business investment across engineering construction and machinery & equipment investment, with the uptick in investment taking place outside the mining sector.
This is a welcome improvement as the reliance on growth needs to shift away from public sector spending. In recent quarters, both federal and state spending has propped up domestic activity, mostly in the form of recurrent expenditure. However, the public sector contribution to expenditure was flat this past quarter.
Review of 2016/17
With the strong finish to the end of the 2016/17 financial year, SFD overall rose by 2.0 per cent - a welcome reversal of the trend decline of recent years. Queensland is now starting to emerge from the difficult transition period post-mining boom, which had left unemployment at elevated levels, particularly in regional Queensland.
Entering the 2016/17 year, the unemployment rate stood at 6.2 per cent in July 2016, and over the past year it has proven to be particularly stubborn, rising a tick above these levels to 6.3 per cent at June 2017. Throw in weak wages growth – which has barely exceeded inflation – and it is no surprise household consumption expenditure growth slowed, rising by only 2.2 per cent during 2016/17.
In the past year, household spending patterns continued to shift towards the consumption of services. As was the case in 2015/16, expenditure on communications, utilities, insurance & finance and health were amongst the biggest growth categories along with clothing and footwear from the retail category. Furnishings and household equipment also saw a lift in the latest year as homeowners replaced household goods damaged from the cyclone. The data also showed households were tightening their belts with discretionary spending categories such as motor vehicle purchases, recreation & culture and hotels, cafes and restaurants at the slower end of the growth spectrum.
In contrast to the cautious consumers, general government expenditure accelerated through 2014/15 and 2015/16 and this momentum was carried forward into the latest year. The increased spending is assumed to come from a mixture of federal funding for the defence force and programs such as the NDIS, while the state government has significantly lifted the provision of services in the health and education space.
A more positive sign was the belated upturn in public gross fixed capital formation, having declined for six consecutive years after 2009/10. Publicly funded investment had peaked in 2009/10 as governments spent heavily on expanding network capacity in the utilities and transport segments, just as the Building the Education Revolution was gearing up. Reconstruction efforts following Cyclone Yasi helped support elevated construction levels early this decade before the slump in public finances led to further cuts to government infrastructure spending.
The latest turnaround in publicly funded infrastructure spending is tied to the accelerated NBN rollout schedule as well as the delivery of Commonwealth Games infrastructure, education buildings and a strong pipeline of road projects covering the Bruce Highway, Toowoomba Range Second Crossing, the Gateway Upgrade North and Kingsford Smith Drive Upgrade.
Amongst the latest data, the most promising aspect was the stabilisation in private capital expenditure which has ceased to be a drag on SFD growth. At the tail end of the mining investment boom, private investment declined 15.0 and 14.2 per cent during 2014/15 and 2015/16 years respectively, subtracting 4.0 and 3.3 percentage points from SFD growth in those years.
The turnaround in private capital expenditure in 2016/17 was due to rising investment in new machinery and equipment as well as intangibles (including minerals investment, research and development). In contrast, the construction components have continued to exhibit weakness during the past year but have managed to stem the large collapse in activity.
Non-residential building activity dropped 3.0 per cent during the past year as the completion of the Sunshine Coast University Hospital and an oversupplied office market weighed down on activity. However, there are positive signs for local activity with the construction of new warehouse, aged care, short-term accommodation and education facilities all exhibiting stronger levels of investment. Meanwhile, private sector funded infrastructure construction picked up through the first half of calendar 2017 with construction work in the roads, electricity and utilities segments starting to improve. A large element of this infrastructure investment would be supporting new housing developments as well as renewable energy installations.
As has been noted in past economic updates, the past year has been a volatile period for the residential construction industry. Construction activity is currently at peak levels led by the apartments segment. Activity should retreat from here following the recent correction in new apartment approvals with risks in the sector mounting.
While SFD has been negative in recent years, the headline growth rate for the Queensland economy (Gross State Product) has remained positive. The difference is due to the exports sector which has shifted up a gear following the installation of LNG facilities in Gladstone. A weaker Australian dollar has also benefited trade exposed industries such as agriculture, manufacturing and the services sectors, providing an additional boost on top of the growth in minerals sector exports.
Based on the data which has been released, we are expecting to see Queensland GSP growth of around 2.5 per cent for 2016/17 when the data is published in November. This growth level would fall short of the treasury forecasts published in the latest state budget of 2.75 per cent. Nevertheless, Queensland growth now exceeds the growth of the national economy for the first time since 2013/14.
Outlook for the Queensland Economy
The Queensland economy continues to inch forward on the path to recovery, however the strength of the recent June quarter overstates the current trend trajectory for growth. In particular, the June quarter data contained a strong element of rebound following Cyclone Debbie which are not expected to be sustained in coming periods.
Going forward we expect to see less impact from dwellings construction following the slowdown in dwelling approvals, while sluggish wages growth and rising household costs are dampening discretionary spending. Despite these constraints, the pick-up in the jobs market and rising employment levels, along with stronger levels of population growth should support an acceleration in household expenditure over the short to medium term.
Government consumption and investment is likely to be constrained by the thin projected surpluses over the forward years of the state budget. The commitment to build the Cross River Rail project despite failure to win federal funding for the project should help lift publicly funded infrastructure following the completion of the current round of major road projects.
With government asset sales ruled out by both political parties, whoever forms the next government will likely have their hands tied in terms of expenditure. A positive upside risk to the budget is commodity prices remaining at elevated levels, even as coal export volumes recover. The budget projections and general market consensus is for coking coal prices to retreat through the second half of 2017 and into 2018, however, the price of coal has remained resilient to this point.
Business investment is in a delicate position given the stages of the residential construction and minerals investment cycles. A mounting oversupply of residential properties should result in lower construction levels over the short term as the excess stock is absorbed, while improved commodity prices may not necessarily lead to further investment given the considerable levels of idled capacity across the minerals sector. However other industries are starting to invest, with key labour intensive sectors such as health and aged care, tourism and hospitality, retail and wholesale trade all expanding capacity.
The Australian dollar remains the big swing factor which could really help accelerate growth. A lower dollar will help spur the transition of growth toward the labour intensive trade exposed industries. However, the dollar has recently appreciated in value against the US dollar due to the strength in commodity prices and a generally weaker US dollar. The Australian dollar remaining around the US$0.80 level for an extended period is a significant risk particularly as the trade exposed industries have been showing signs of recovery lately.