Australian Government, 2012‑13 Budget

Statement 2: Economic Outlook (Continued)

The outlook for the domestic economy

Demand and output

The Australian economy is expected to grow at around trend over the next two years, with real GDP growth forecast to be 3¼ per cent in 2012‑13 and 3 per cent in 2013‑14.

Growth is expected to be driven by surging resources sector investment and growth in non‑rural commodity exports. Growth is also expected to be supported by moderate growth in household consumption. However, there is expected to be little contribution from either dwelling investment or public spending (Chart 5).

Economic conditions are expected to remain uneven across sectors over the forecast period. The resources and resources‑related parts of the economy are expected to grow strongly, but activity in other parts of the economy is likely to be uneven. While some parts of the services sector are expected to continue performing solidly, pressures from the ongoing global uncertainty, the high Australian dollar, consumer caution and changes in expenditure patterns (Box 4) are all expected to continue to weigh heavily on other sectors, particularly retailing, manufacturing and tourism.

Chart 5: Contributions to real GDP growth

Chart 5: Contributions to real GDP growth

Note: Business investment and public expenditure are adjusted for second‑hand asset sales from the public

sector to the private sector.

Source: ABS cat. no. 5206.0 and Treasury.

Box 2: Direct spillovers from the resources boom

The mining sector (which includes liquefied natural gas) directly produces over 9 per cent of the economy's output and employs around 2 per cent of the workforce. While the mining sector is still relatively small, it is contributing both directly and indirectly to higher activity across a range of other sectors in the economy.

A substantial part of resources‑related activity is occurring in the construction sector. The construction sector supports the mining sector through the construction of mines and plants, road and rail infrastructure, and through dwelling construction. With other areas of construction weak, mining sector demand is providing timely support for the sector. Around 60 per cent of capital expenditure on buildings and other structures over the past year has been mining related, up from 29 per cent at the start of the mining boom in 2003‑04 (Chart A).

Chart A: Buildings and other structures
(capital expenditure)

Chart A: Buildings and other structures (capital expenditure)

Source: ABS cat. no. 5625.0 and Treasury.

There is also resources‑related activity occurring in the manufacturing sector, especially in that part which makes specialised machinery for mining. The mining sector also generates investment in research and development and mineral and petroleum exploration, which have grown strongly in recent years.

The resources sector supports activity in the transport sector as a significant user of road and rail networks, port facilities and shipping.

The resources sector also has direct spillovers to the services sector, including, for example, the financial and insurance services sector, and the professional, scientific and technical services sector, which has grown strongly in recent years (Chart B).

Chart B: Professional, scientific and
technical services

Chart B: Professional, scientific and technical services

Source: ABS cat. no. 5206.0 and Treasury.

The Government is also helping spread the benefits of the boom, for example, through the Minerals Resource Rent Tax and other targeted policy initiatives.

Box 3: Indirect spillovers from the resources boom

The mining sector has substantial indirect effects on many parts of the economy. For example, the strong growth in incomes in the mining sector is supporting retail activity, particularly in the resources states, helping to offset some of the broader weakness in the sector. Retail sales in Western Australia (WA) have grown 6.4 per cent per year since the start of the mining boom compared with 4.0 per cent for the rest of Australia (Chart A).

Chart A: Retail sales

Chart A: Retail sales

Source: ABS cat. no. 8501.0 and Treasury.

The effects of the boom are also being felt outside of the resources states, with consumption growing around trend nationally during 2011. One channel is through the fly‑in fly‑out (FIFO) workforce, which has been expanding rapidly in recent years. The Chamber of Minerals and Energy of Western Australia estimates that in 2011 over 50 per cent of the WA mineral and energy sector's workforce was employed on FIFO rosters and this is expected to continue to rise.

Over the year to July 2011, the fastest growing domestic airline routes were predominantly those involving key mining centres (such as Newman and Port Hedland) and Perth. Growth in aircraft movements to mining centres such as Port Hedland, Karratha, Newman and Gladstone has averaged around 10 to 20 per cent from 2008 to 2011, compared with a national average of around 2 per cent. While there are concerns about FIFO in some host communities, it is helping to spread the income and spending associated with the resources boom to many other parts of the country.

The benefits of the boom are also being shared in ways that are less obvious. For example, the sharp increase in commodity prices since the start of the mining boom has also been accompanied by a substantial rise in the Australian dollar. While this has made conditions more challenging for many businesses, it has helped hold down the prices of imported goods, including consumption imports and capital goods imports.

Indeed, the prices of goods, including manufactured goods and food, have only grown, on average, by about 0.6 per cent per year since the start of the boom, while household incomes have grown, on average, by 7.2 per cent per year. This has left households with more income to spend on services, where activity has increased strongly over recent years, generating large increases in employment and declines in many regional unemployment rates, not just in the resources states.

Household consumption

Household consumption growth is expected to be moderate over the next two years in line with slower, albeit still‑solid growth in household income.

Global instability and ongoing global uncertainty have dampened consumer confidence and reinforced the cautious consumer attitudes to borrowing and spending that have persisted since the global financial crisis. Borrowing is unlikely to provide much support for consumption. With consumers reluctant to take on new loans and having a greater propensity to pay down existing debt, credit growth is likely to be much lower than it has been over recent decades.

Difficult global conditions have reduced real household net worth, which is considerably lower than a year ago and well below pre‑GFC levels, despite the cautious recovery in share prices and stabilisation in house prices in recent months. Households are expected to continue to save at elevated rates, rebuilding wealth and strengthening their balance sheets.

In this environment, consumption growth is likely to be more closely tied to income growth. Consumption growth is forecast to be 3¼ per cent in 2011‑12, before easing to 3 per cent in both 2012‑13 and 2013‑14.

Box 4: Changing patterns of consumer spending

The past decade has seen ongoing changes in the pattern of consumer spending, with the services share of nominal household consumption continuing to rise and the goods share continuing to decline (Chart A).

Chart A: Services and goods shares
of nominal household consumption

Chart A: Services and goods shares of nominal household consumption

Source: ABS cat. no. 5206.0 and Treasury.

The solid growth in the share of consumption of services reflects a range of factors, particularly the strong growth in real household income, which grew by an average of around 4 per cent per year over the past decade.

This has seen increased demand, particularly for some services such as overseas travel and recreation, the consumption of which has grown relatively rapidly as households have become wealthier.

Trends in consumer tastes and the rise of new products in areas such as cultural and entertainment services, have also supported services demand.

Services demand has also been supported by household preferences to maintain similar levels of consumption of 'essentials', like housing and utilities, even in the face of substantial price rises over the past decade.

The declining share of household spending on goods has contributed to particularly challenging conditions for Australian retailers in recent years.

Retailers have also been affected by higher rates of household saving and a reluctance of households and businesses to take on more debt. The high dollar has also seen Australian consumers spend more on overseas travel.

These factors have seen subdued growth in domestic retail volumes and prices, with aggregate turnover growing well below trend over recent years (Chart B).

Chart B: Retail trade turnover

Chart B: Retail trade turnover

Source: ABS cat. no. 8501.0.

Within retail, the pattern of demand has been uneven. While sales growth has been especially subdued for clothing and book retailing and department stores, other retail segments such as food and beverages, and pharmaceuticals retailing have fared considerably better.

While the internet has opened up new opportunities for businesses to expand their customer base, it has also contributed to easier price discovery and a compression of some retailers' margins. However, it does not appear to be responsible for the recent slowdown in retail sales.

The Productivity Commission estimates that, despite strong growth, total internet sales account for only 6 per cent of total retail sales in Australia, and that only around 2 per cent of total retail sales (or $4.2 billion) are sourced from overseas internet retailers.

As in the rest of the economy, patterns of demand are changing, even within the retail sector, challenging some businesses and providing opportunities for others.

Dwelling investment

The outlook for dwelling investment is subdued, reflecting weak demand (due in part to households' cautious attitude towards taking on new debt, notwithstanding the prospect of lower mortgage interest rates) and ongoing supply constraints in some areas.

Over the past three years dwelling investment has been supported by particularly strong growth in Victoria's new housing market, but that market is now returning to more normal levels of activity, while demand in other markets is expected to remain weak. Outside Victoria, ongoing supply constraints associated with state and local planning and approval processes, as well as high costs of development and land release restrictions are also expected to continue to restrain dwelling investment growth.

Dwelling investment is expected to contract by 1 per cent in 2011‑12. This reflects very weak recent outcomes and the ongoing deterioration in near‑term forward indicators, with dwelling approvals and commencements both declining in 2011, also led by Victoria. (Chart 6).

Dwelling investment is forecast to be flat in 2012‑13 before recovering a little in 2013‑14.

Chart 6: Forward indicators of dwelling investment

Dwelling approvals (qrtly)

Chart 6: Forward indicators of dwelling investment - Dwelling approvals (qrtly)

Dwelling commencements (qrtly)

Chart 6: Forward indicators of dwelling investment - Dwelling commencements (qrtly)

Source: ABS cat. no. 8731.0 and 8750.0.

Business investment

An expectation of strong ongoing demand for Australia's non‑rural commodity exports over the next decade, particularly from Asia, continues to underpin robust growth in new business investment in the resources sector and record investment intentions. Growth in resources investment has rapidly gathered momentum over the past year and this is expected to continue in 2012‑13 and 2013‑14. Total resources investment, including exploration and research and development, is expected to reach around 9 per cent of GDP in 2013‑14. However, elsewhere in the economy, the investment outlook is more subdued, with investment in non‑resources‑related machinery and equipment and non‑residential building expected to record only modest growth. New business investment is expected to grow a robust 12½ per cent in 2012‑13 and 8 per cent in 2013‑14, taking it to record levels as a share of GDP.

Investment in the resources sector continues to be strong despite global uncertainty. The most recent ABS Private New Capital Expenditure and Expected Expenditure survey reported record highs in both actual and expected expenditure levels in the resources sector, with investment intentions jumping to a record $120 billion in 2012‑13 from an expected $95 billion in 2011‑12. Despite ongoing global uncertainty, the resources sector has committed to, or commenced construction on, over half of the estimated $456 billion resources investment pipeline. The strength of investment in the resources sector is expected to continue to be largely related to new engineering construction investment. Engineering construction investment has surged over the past year, up nearly 50 per cent in through‑the‑year terms, and is expected to continue to grow rapidly over the next two years. New engineering construction is forecast to grow 20½ per cent in 2012‑13 and 9 per cent in 2013‑14 (Chart 7).

Chart 7: New engineering construction (volumes)

Chart 7: New engineering construction (volumes)

Source: ABS cat. no. 5206.0 and Treasury.

The surge is underpinned by large‑scale investment in the liquefied natural gas sector, although the iron ore and coal sectors will also make significant contributions. Over $80 billion of liquefied natural gas investment has received final investment approval in the past year, despite challenging global conditions.

New machinery and equipment investment is also expected to grow solidly over the next two years, driven by investment in the resources and resources‑related sectors. Investment is also expected to be supported by taxation reforms commencing in the 2012‑13 income year that will allow small businesses to immediately write off assets costing less than $6,500 and claim up to $5,000 as an immediate deduction on the purchase of any new or used motor vehicle costing $6,500 or more. Investment in new machinery and equipment is forecast to grow 12½ per cent in 2012‑13 and 8½ per cent in 2013‑14.

Investment in new non‑residential building is expected to remain subdued over the next two years, despite some recent improvement. Underlying demand in the sector, particularly for new office and retail floor space, continues to be weighed down by the moderate employment outlook and weakness in some non‑resources related sectors of the economy. Investment in new non‑residential buildings is expected to fall ½ of a percentage point in 2012‑13 before growing a modest 3½ per cent in 2013‑14.

Box 5: Manufacturing

Manufacturing output has grown over the long term, but as a share of total output it has been trending down for many years, consistent with the experience of most advanced economies. Recently, the sustained high Australian dollar has placed additional pressure on the sector, accelerating the transition.

Over the past decade, manufacturing's share of output has fallen from over 12 per cent to around 8½ per cent, while its share of employment has fallen from over 11 per cent to around 8½ per cent.

However, these high‑level trends mask important differences, with some parts of manufacturing struggling while other parts are doing well.

Those industries that are linked to Australia's resources sector, or are higher up the value chain and more reliant on human capital, are generally performing better than others.

Chart A: Manufacturing export volumes

Chart A: Manufacturing export volumes

Source: ABS cat. no. 5302.0.

Over the past decade, professional and scientific equipment exports have tripled, while chemicals and related‑products exports have increased by around 60 per cent. Exports of machinery have also grown solidly (Chart A).

Despite a difficult backdrop, there is evidence that manufacturing firms continue to look to become more competitive, both by bringing new products to market, as well as by driving productivity gains through improved processes and systems.

Around 25 per cent of manufacturing firms reported introducing new or significantly improved goods in 2009‑10, with manufacturing exceeding the economy‑wide average, as it has done for many years.

Manufacturing firms have also been more likely to innovate in the way they do business. In 2009‑10, almost 30 per cent of manufacturers reported making process innovations such as in methods of manufacturing, logistics and distribution and back‑office functions — almost twice the proportion for the economy as a whole (Chart B).

Chart B: Manufacturing innovation (2009‑10)

Chart B: Manufacturing innovation (2009‑10)

Source: ABS cat. no. 8167.0.

Public final demand

Public final demand is expected to fall in 2012‑13 and remain flat in 2013‑14. Falling Commonwealth Government spending in 2012‑13 is expected to be partially offset by weak, albeit positive growth in state spending, consistent with recent state budget updates, notwithstanding the planned fiscal consolidations announced by most states.

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