Economy

<html><body>
GUEST OBSERVER
The Australian economy is going through a period of transition. The mining investment boom is coming to an end, the terms of trade has fallen sharply and the AUD has been trending lower.
The weaker local unit is largely the result of the decline in Australia’s terms of trade. Since mid-2014, the AUD has fallen some 25% against the USD and 16% on a TWI basis. Over the year to June-2015, the terms of trade is estimated to have declined by 15%.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.07.11%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.07.11%20PM.png" alt="">
The decline in the AUD is a welcome development for sectors of the economy with a high export propensity or high import intensity. Tourism is one such sector. A lower AUD provides assistance to the Australian tourism industry in essentially two ways: (i) it encourages international holidaymakers to visit Australian because it reduces the relative cost of a trip; and (ii) it makes a domestic holiday more attractive to Australian residents because the relative cost of an overseas holiday rises.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.08.23%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.08.23%20PM.png" alt="">
How important is tourism to the Australian economy?
Tourism has long been an integral part of the Australian economy. The industry accounted for 2.7% of GDP in 2013/14 ($43.4bn), down a touch from 2.8% of GDP in 2012/13. By way of comparison, the tourism sector is a little bit larger than the agriculture sector, as a share of GDP. It is Australia’s third largest export and the largest services export.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.10.28%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.10.28%20PM.png" alt="">
More importantly for the Australian economic story, the tourism sector employs around half a million workers, which represents a significant 4.6% of total employment. Tourism’s share of total employment is greater than its share of GDP because it’s more labour intensive than other industries (as distinct from capital intensive industries like mining production). Tourism industry workers largely comprise those employed in the sectors of accommodation, cafes, hotels, transport, travel agencies, retail trade and education and training.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.15.26%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.15.26%20PM.png" alt="">
In recent years, however, it hasn’t all been smooth sailing for Australia’s tourism sector. Since the GFC, the sector’s share of the Australian economy has declined a little (down from 3% of GDP in 2007/08). The small fall is largely the result of the slowdown in the global economy, which has a negative impact on the number of inbound visitors and also the elevated level of the AUD. There is little that policymakers can do on either of those fronts. But as key export commodity prices have fallen, which has been the key factor in the decline in the AUD, the tourism sector has benefited.
How does the level of the AUD impact on tourism in Australia?
In a nutshell, a lower AUD is positive for the tourism sector. It benefits both the domestic tourism sector and also the international tourism sector. The recent trends in the AUD and tourism flows confirm that the lower AUD is having a positive impact on the Australian tourism sector. Since mid-2014, the ratio of arrivals to departures has gradually lifted. Or put another way, growth in the number of arrivals has outpaced growth in the number of departures. Over the same period, the AUD has fallen some 25% against the USD and 16% on a TWI basis.
The monthly trade balance data paints a similar picture. Since early-2014, tourism related service credits have been larger than tourism related service debits. In other words, the monthly tourism trade balance has moved into surplus. In our view, this will be the new norm.
Our forecasts have the AUD drifting a little lower over the next 12 months (both compared to the USD and on also on a TWI basis). On that assumption, the tourism sector will receive further support from the level of the exchange rate, particularly given there is a lagged effect between changes in the level of the currency and holiday-related decisions. The lag represents the timing differential between booking a holiday and taking it. We put this differential at 3-6 months. So the tourism sector’s share of the Australian economy and its contribution to growth is set to lift over the next couple of years.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.27.37%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.27.37%20PM.png" alt="">
 
Where will the tourists come from?
 The lower level of the AUD means that domestic tourism will receive a boost as more Australian residents holiday locally rather than overseas. Equally, the lower AUD will boost the number of international holidaymakers visiting Australia.
Tourists from Asia, and in particular tourists from China, are the major growth area for Australian tourism exports. In 2014/15, the number of short-term arrivals from China to Australia rose to 935k (compared with 770k in 2013/14). If current trends are maintained, 1 million Chinese residents will holiday in Australia in 2016. In our view, this is likely to happen. The number of holidaymakers from China was already rising steadily when the AUD was elevated. This was partly the result of rising Chinese household income which has generated a resultant lift in tourism- related consumption. Some softening around travel controls over Chinese residents also helped. The lower level of the AUD will simply serve to act as a tailwind on the growth in tourists from China.
The impact of the lower AUD will be most noticeable on the number of tourists arriving from the UK and USA. The UK and USA economies have recovered and their currencies have appreciated commensurately. The lower AUD (and stronger GBP and USD) will see tourists to Australia from both the UK and USA lift. This has already started to happen with the number of tourists from the UK and USA rising on the back of stronger currencies against the AUD.
The tourism investment pipeline
A pickup in the tourism sector has benefits for non-residential construction and other capital expenditure. The tourism investment pipeline was estimated to have grown by 8.7% in 2014 to $53.7bn1. The pipeline constitutes aviation investment, accommodation investment and arts, recreational and business services.
Which regions will benefit the most?
All States benefit from a lift in tourism, but the States which have the highest specialisation to tourism will benefit the most. These States are NSW and QLD. Both States have a tourism specialisation ratio greater than 12. The Barrier Reef has been a major drawcard for international tourists while Sydney Harbour is one of Australia’s iconic places. The tourism sectors in ACT (specialisation ratio close to 2), being the national capital, and NT (with Kakadu National Park and Ayres Rock) are also important to local economies.
<a href="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.29.19%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2015/08/17/Screen%20Shot%202015-08-17%20at%202.29.19%20PM.png" alt="">
The national accounts spending data is telling. It shows that since the AUD started heading lower, real spending on hotels, restaurants and cafes has lifted considerably. The lift in QLD, in particular, is significant and illustrates the positive impact that a lower AUD has had on the tourism industry. We expect this trend to continue. Robust growth in the tourism industry will help to offset the downturn in mining investment and associated job losses in QLD.
<div class="page" title="Page 1">
<div class="layoutArea">
<div class="column">
Gareth Aird is an economist with the Commonwealth Bank of Australia and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905" target="_blank">here.</a>
</div>
</div>
</div>
</body></html>

jchancellor-FAypfDUnLy

Tourism dollar key to riding out mining slump: Gareth Aird

<html><body>
GUEST OBSERVER
Employment rose by 26,100 in March after rising by 700 in February (previously reported as a rise in jobs of 300). Full-time jobs fell by 8,800 while part-time jobs rose by 34,900. Economists had tipped a 17,000 increase in jobs.
Hours worked fell by 1.1 per cent in March. Hours worked are up by 0.7 per cent over the year.
Jobless rate: The unemployment rate fell from 5.8 per cent to a 2ó-year low of 5.7 per cent in March (lowest since September 2013). The trend unemployment rate held steady at 5.8 per cent – a 27-month low.
The participation rate was steady at 64.9 per cent.
Unemployment across states in March: NSW 5.3 per cent (February 5.3 per cent); Victoria 5.7 per cent (6.0 per cent); Queensland 6.1 per cent (5.6 per cent); South Australia 7.2 per cent (7.7 per cent); Western Australia 5.5 per cent (6.0 per cent); Tasmania 6.8 per cent (6.9 per cent). In trend terms unemployment in the Northern Territory rose from 4.4 per cent to 4.5 per cent; ACT unemployment fell from 4.5 per cent to 4.3 per cent.
In smoothed terms, discount fares fell by 3.6 per cent over the year to April. But business class airfares rose at a smoothed 7.4 per cent annual rate with “restricted economy” fares up by 3.6 per cent.
A raft of companies is affected by the employment data but especially those dependent on consumer spending. Amongst stocks affected are Fairfax, West Australian Newspapers, Seek Limited, McMillan Shakespeare and Skilled Group.
<a href="/images/2016/04/14/Screen%20Shot%202016-04-14%20at%203.16.48%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/14/Screen%20Shot%202016-04-14%20at%203.16.48%20PM.png" alt="">
What does it all mean?
The latest employment result was just what households and businesses ordered. After a couple of months of consolidation, employment has recorded a sizeable rebound. And while the pessimists may focus on the fact that hours worked fell in the March, the slide in the unemployment rate to 5.7 per cent - the lowest levels in 2ó years – will provide a big boost to confidence amongst Aussie consumers. And as we saw over the latter part of 2015, job security plays a big part in household consumption.
Labour market conditions have certainly improved over the past year; business conditions are healthier; profitability has improved; and more importantly the housing sector is providing significant support to an array of industries.
After racking up almost 300,000 new jobs in 2015, there was likely to be inevitable period of consolidation. And the volatility in financial markets in the early part of 2016 was unlikely to see businesses commit to significant hiring. The employment growth in March is a positive shift in momentum, however while we expect employment to strengthen over 2016, it is likely that employers will be more circumspect in hiring given the uncertainty around the timing of the Federal Election.
The Reserve Bank will be comforted by the latest job market figures. No doubt it would like to see a lift in productivity but that will take time as the significant new job hires over 2015 get settled into their new working environments. In addition policymakers will take the latest figures with a degree of caution given the seasonality issues with the early timing of Easter and even the extra day in February (leap year). The key will be the inflation data, due on April 27. A super low inflation result would allow the Reserve Bank to contemplate another rate cut – in effect asking the question whether the economy could run at a faster pace without creating asset bubbles. We expect rates to remain on hold over the next couple of months.
The Reserve Bank will also be heartened that the youth jobless rate (15-24 year olds) fell from 12.2 per cent to a near 3-year low of 12 per cent.
It pays to shop around. That is common advice but it certainly is the case with airfares. In smoothed terms, discount airfares are almost 4 per cent lower than a year ago but business and full fare economy fares are up on a year ago – over 7 per cent higher in the case of business fares. With plenty of people travelling – especially businesspeople – airlines aren’t keen to trim fares.
<a href="/images/2016/04/14/Screen%20Shot%202016-04-14%20at%203.18.40%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/14/Screen%20Shot%202016-04-14%20at%203.18.40%20PM.png" alt="">
What do the figures show?
Labour force:
Employment rose by 26,100 in March after rising by 700 in February (previously reported as a rise in jobs of 300). Full-time jobs fell by 8,800 while part-time jobs rose by 34,900. Economists had tipped a 17,000 increase in jobs.
Hours worked fell by 1.1 per cent in March. Hours worked are up by 0.7 per cent over the year.
The unemployment rate  fell from 5.8 per cent to a 2ó-year low of 5.7 per cent in March (lowest since September 2013). The trend unemployment rate held steady at 5.8 per cent – a 27-month low.
The participation rate  was steady at 64.9 per cent.
A total of 235,300 jobs were added over the year to March . The annual growth rate eased from 2.1 per cent to 2 per cent. In trend terms, employment has risen for 28 consecutive months.
The working age population  rose by 30,900 in March. The working age population rose by 285,600 over the past year. The working age population is up 1.49 per cent over the past year.
Unemployment across states in March: NSW 5.3 per cent (February 5.3 per cent); Victoria 5.7 per cent (6.0 per cent); Queensland 6.1 per cent (5.6 per cent); South Australia 7.2 per cent (7.7 per cent); Western Australia 5.5 per cent (6.0 per cent); Tasmania 6.8 per cent (6.9 per cent). In trend terms unemployment in the Northern Territory rose from 4.4 per cent to 4.5 per cent; ACT unemployment fell from 4.5 per cent to 4.3 per cent.
Jobs across states and territories in March:  NSW +4,800; Victoria +10,600; Queensland -15,400; South Australia +4,600; Western Australia +16,600; Tasmania +800. Trend terms: Northern Territory -600; ACT unchanged.
 Airfares
The Bureau of Infrastructure, Transport and Regional Economics (BITRE) reports that business class airfares fell by 0.2 per cent in April to stand 6.2 per cent higher than a year ago. Earlier in February airfares were up 8.2 per cent on a year ago – the strongest growth in 10 months. In smoothed terms, business class airfares are up 7.4 per cent on the year, the fastest growth pace in 13 months.
“Restricted economy” airfares also fell by 0.2 per cent in April after rising by 0.1 per cent in March. Restricted economy airfares are up 3.6 per cent on a year ago. In smoothed terms restricted economy fares were also up 3.6 per cent over the year. Airfares have been rising at a 6.5 per cent average annual pace for the past three years.
Discount airfares remain volatile. Discount fares rose by 6.4 per cent in April after falling by 6.6 per cent in March and rising by 7.5 per cent in February. Discount fares are 9.9 per cent higher than a year ago after being down 13 per cent on a year ago in March. In smoothed terms, discount airfares are down 3.6 per cent on a year ago.
In real terms however, discount airfares are only 6.0 per cent above the lowest levels recorded (March 2011).
Why is the data important?
The Labour Force estimates are derived from a monthly survey conducted by the Bureau of Statistics. The population survey is based on a multi-stage area sample of private dwellings (currently about 22,800 houses, flats, etc.) and a sample of non-private dwellings (hotels, motels, etc.). The survey covers about 0.24 per cent of the population of Australia and includes all people over 15 years of age, except defence personnel.
If more people are employed, then there is greater spending power in the economy. But at the same time companies may adjust the work hours of employees. If employees work less hours, and therefore get paid less, then spending power in the economy is reduced.
<a href="/images/2016/04/14/Screen%20Shot%202016-04-14%20at%203.20.12%20PM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/04/14/Screen%20Shot%202016-04-14%20at%203.20.12%20PM.png" alt="">
The Bureau of Infrastructure, Transport and Regional Economics (BITRE) releases regular aviation data. The BITRE releases  Airport Traffic data and the  Australian Domestic Airline Activity publication each month as well as the  Domestic Air Fares publication. The data provides insights on airline activity as well as trends in the broader Australian economy. If more people are flying, then it suggests businesses are more active and/or consumers are more confident
What are the implications?
Interest rates remain on hold. The Reserve Bank will want to assess a lot more data before deciding the next move on rates.
The Bureau of Statistics has estimated that the number of people in the working age population. Rather than rising by 22,300 a month, the increase in the past three months averaged almost 31,000 – the biggest increase in almost two years. If this assumption is correct and retained, it may make it more difficult for the jobless rate to ease further in the next few months.
Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>
</body></html>

Jobless rate falls to 2½-year low: CommSec's Savanth Sebastian

<html><body><div class="page" title="Page 1">
<div class="layoutArea">
<div class="column">
GUEST OBSERVER
<div class="page" title="Page 1">
<div class="layoutArea">
<div class="column">
RBA Deputy Governor Philip Lowe struck an optimistic tone today, and noted that the Bank retains flexibility on interest rates. 
He emphasised that Australia’s economic fundamentals were good and the economy has high degree of flexibility at the CFA Institute Australia Investment Conference in Sydney. 
Most of Dr Lowe’s remarks focused on the microeconomic reform agenda that would lift Australia’s living standard over the medium term, and so he did not directly address the near term path for interest rates in his speech. In the Q&amp;A though, he answered several questions related to the immediate outlook and monetary policy and repeated the bank’s expectation that growth will gradually pick up. 
Some key points Dr Lowe made were: 
There continued to be some flexibility in monetary policy given the cash rate had not been reduced to zero as policy rates have in many other advanced countries. Monetary policy still works, as seen through its impact on housing construction and the exchange rate. But lower interest rates are not as effective as they used to be, as low interest rates seem to be helping households to pay back their debt sooner, rather than encouraging household spending.
</div>
<div class="column">
 There is still some flexibility in fiscal policy due to our history of fiscal prudence. The probability of recession is low but we cannot rule out the possibility of a downturn. There will be a cycle, and we have had a remarkable 25 years.
He said that comments about consumer and business confidence being weak were not correct. On cue, this morning’s ANZ-Roy Morgan Australian Consumer Confidence index showed a 5.1% rise in the week ending 11 October, bringing confidence 2.6% above its long run average
</div>
<div class="column">
 Dr Lowe said business conditions were above average overall and that business was reporting that current conditions are ok. He said firms were willing to hire and as they have stated many times before, it is not clear at what point this will translate into higher capex.
</div>
<div class="column">
 When asked if state stamp duties should be used to soften demand for housing, he said it is a mistake to think house prices can be managed through levers that affect demand. He repeated that regulatory action on lending is working its way through the system. Dr Lowe said that ideally there would be a period of quite modest house price growth. On the US he said there has been some movements in capital flows from emerging markets back to the US, even ahead of the Federal Reserve increase in rates. He said there might be some stresses in capital markets.
Dr Lowe did not address our concerns about growth in 2016 and 2017, which recently led us to lower our interest forecast to 1.5% by mid next year. We think further rate cuts will be necessary as concerns simmer about the unpredictability of international economic conditions, while the boost from housing starts to fade as the impact of the lower AUD on services trade lessens. Dr Lowe noted that monetary policy maintains a key role in dealing with cyclical swings in the economy. 
</div>
</div>
</div>
<div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
Cherelle Murphy is co-head of Australian economics, ANZ, and can be contacted <a href="https://bluenotes.anz.com/authors/our-economists/" target="_blank">here</a>.
</div>
</div>
</div>
</div>
 
</div>
</div>
</div></body></html>

RBA's Lowe strikes optimistic tone: ANZ's Cherelle Murphy

<html><body>
<div class="row">
<div class="meta">GUEST OBSERVER</div>
</div>
<div class="body">
The Reserve Bank of Australia announced it will hold the official cash rate in September at the historically low rate of 1.50 percent.
The decline of rates throughout 2016 may be partly attributed to the stubborn Australian dollar, which hovered around US$0.76 for most of July and August. The RBA have used subtle language and interest rate cuts in an attempt to de-value the Australian currency over the year.
A lower Australian dollar increases competitiveness of Australian goods. It also increases general prices through imported inflation, lifting the price of imported inputs for Australian goods and services. The annual inflation rate of just 1% to June in Australia looks set to remain low, at least over the remainder of the year.  
Despite the best efforts of the RBA, the AUD continued to climb gradually since May, which partially contributed to the August cut. The persistently high AUD made a case for further rate cuts.
That was, until, Federal Reserve Chair Janet Yellen spoke at a symposium on the 26th of August.
Yellen argued that strengthening in the US labour force meant “the case for an increase in the federal funds rate has strengthened in recent months”. The speech was followed by comments from the Vice Chair Stanley Fischer, who indicated that US rates could rise as soon as September.
This hint at higher interest rates saw a boost to the USD, and a complementary weakening in the AUD. Graph 1 shows the movement of the AUD relative to the USD over August. This took pressure off the RBA to use monetary policy as a means to lower the dollar, and may have contributed to the hold decision this month.
Graph 1: AUD/USD-August 2016
<a href="/images/2016/09/08/Screen%20Shot%202016-09-09%20at%208.50.40%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/09/08/Screen%20Shot%202016-09-09%20at%208.50.40%20AM.png" alt="">
Source: RBA &amp; Trading Economics
The next Fed rate decision is September 22nd, and an increase is likely to place further downwards pressure on the AUD and potentially create room for the RBA to delay further rate cuts.
This is important, because residential property value growth and dwelling approvals in Sydney and Melbourne have continued to be reactive to rate cuts earlier this year. Across Australia, dwelling construction saw a 1.2% increase over the June quarter, and a strong 6% increase over the year. Meanwhile, other sectors of construction work fell dramatically: engineering work fell by 9% in the quarter, and private construction fell by 14% over the period. 
Building approvals were up across Australia in July, as the number of units approved increased 4.97% year on year. However, across the country the number of separate houses approved fell by 3.19%. Much of the growth in dwelling approvals for the year was driven by the Sydney and Melbourne markets. This was expected following a May rate cut as more dwelling development projects gain cost benefit. A hold in rates is likely to see the market steady.  
Graph 2: Trend Data - Residential Dwelling Approvals Australia Wide
<a href="/images/2016/09/08/Screen%20Shot%202016-09-09%20at%208.49.29%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/09/08/Screen%20Shot%202016-09-09%20at%208.49.29%20AM.png" alt="">
Source: RBA &amp; Onthehouse.com.au
Graph 3: Trend Data - Total Residential Dwelling Approvals by Capital City
<a href="/images/2016/09/08/Screen%20Shot%202016-09-09%20at%208.48.09%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/09/08/Screen%20Shot%202016-09-09%20at%208.48.09%20AM.png" alt="">
Source: RBA &amp; Onthehouse.com.au
The number of dwelling approvals across Australia over time is shown in Graph 2. While 2012-15 saw a steep increase in the number of dwelling approvals, another small upward trend can be seen over 2016. Graph 3 shows the original monthly data of total dwelling approvals by capital city (which is volatile relative to the trend data), with Sydney and Melbourne experiencing a significant surge.
The movements in dwelling approval data is expected, as it follows capital growth in the dwelling market. Following the May rate cut, Residex observed strong growth in Sydney and Melbourne dwellings for the June quarter, including a 1.85 percent surge in Sydney units, and 2.29 percent in Melbourne units.
The RBA faces a two-tiered economy in which housing has boosted growth in the south-east coast of Australia, while growth in other cities across Australia is subdued. Part time employment in Australia also reached a record high of 31.63 percent in July, suggesting ongoing structural challenges in full time job creation and wage growth. As the rate is held for September, we may expect these east coast markets to steady a little, and growth in approvals start to flatten.
Eliza Owen is market analyst for Onthehouse.com.au and can be contacted <a href="https://www.onthehouse.com.au/" target="_blank">here</a>.
 
</div>
</body></html>

The RBA faces a two-tiered economy: Eliza Owen

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
GUEST OBSERVER
Australia's economy has done well, considering it has had to absorb a significant negative shock from the end of the mining boom. 
Over the past few years, commodity prices have fallen by 60 percent and mining investment has declined from around 8 percent to 3.5 percent of GDP. 
Historically, much smaller falls have typically caused recessions. But, as last week's GDP figures clearly illustrated, Australia's 'R-word' has been rebalancing not recession. Although business investment was a -1.6ppt drag on growth, overall GDP grew by a strong 3.3 percent y-o-y in Q2. 
The mining investment fall has been more than offset by a ramp up in resources exports and growth in services exports, housing construction and household spending. Looking forward, the drag from mining investment and falling commodity prices should now fade. This is expected to mean continued solid overall GDP growth, despite the housing construction boom nearing its end. We see the RBA on hold in coming quarters. 
The more downbeat economic observers have, in recent years, described the economy as falling off the 'mining investment cliff' and said that Australia would have an 'income recession' as a result of the fall in commodity prices. The end of the mining boom has, indeed, been a big negative shock to absorb. 
But although mining investment has fallen significantly and declining commodity prices have weighed on nominal GDP, growth in real GDP and employment has remained solid. Last week's GDP numbers showed that Australia's economy grew at an above-trend 3.3 percent over the year to Q2 2016. Over the past five years, GDP growth has averaged 2.8 percent (which is around its trend rate) and jobs growth has been strong enough to see the unemployment rate fall from its early-2015 peak of 6.25 percent to now sit around 5.75 percent. 
How has this happened? Australia's growth has been rebalancing from the mining to the non- mining sectors ('Australia's great rebalancing act', December 2012). Low interest rates have supported a housing price and construction boom while the lower AUD and rising middle class incomes in Asia are driving increased demand for Australia's services exports, including tourism, education and business services. 
Importantly, the big drag from mining investment and commodity prices is almost done. The worst is in the past. As a result, even those that have been pessimistic about the impact of the end of the mining boom should now have less to worry about. 
Mining investment, which has been a drag of a hefty 4.5ppts of GDP over the past four years, will stop being a drag soon. On our estimates, mining investment subtracted around 1.8ppts from GDP over the year to Q2 2016, but will only subtract 0.5ppts from growth in the year to Q2 2017 and will not be a drag the following year. 
The drag will therefore subside by 1.3ppt this coming year and 0.5ppt the next year. And, because the LNG export ramp up will still be underway, the resources sector as a whole should contribute to overall real GDP growth. 
<div class="page" title="Page 2">
<div class="layoutArea">
<div class="column">
We also expect that commodity prices have already passed the trough. If so, nominal GDP growth, tax revenues and even wages should get some support. Commodity prices have already made up the losses from late last year and are flat y-o-y, so are no longer a drag. On our forecasts, nominal GDP growth could pick-up from 3.4 percent y-o-y in Q2 2016 to 6 percent y-o-y by Q2 2017. 
Other downbeat commentators now point out that the end of Australia's housing price and construction boom could see weaker growth next year and into 2018. Having grown so strongly recently, housing construction will fall at some point and weaker house prices could deliver a negative wealth effect. While we agree that the housing price boom is over and that housing construction will start to be a drag on growth from around mid-2017, to us, the arithmetic suggests that this will be more than offset by the subsiding mining investment drag. 
Mining will stop being a drag just as the housing sector becomes one. The net of the two effects should still leave the economy growing, as the fall in mining investment was much bigger than the decline in housing investment is likely to be. 
We see little evidence that the housing price boom has driven a particularly strong positive wealth effect so doubt that the cooling of the housing price boom will see a significant negative one. 
What will be the main driver of growth? Services exports, led by tourism, education and business services. It's already happening, and in our view, is set to continue. Keep in mind that the services sector accounts for over 70 percent of Australia's GDP. 
This should continue to support jobs growth, as it has done in recent years. It should also start to spur more business investment. Last week's GDP numbers showed tentative signs of a pick-up in non-mining business investment. 
Australia's rebalancing is almost complete, at which point we expect domestic wages and inflation to stabilise. Once we have passed the trough in domestic wages and underlying inflation we expect that the RBA is unlikely to cut further. Our central case has the RBA on hold at 1.50 eprcent in coming quarters. 
 <a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 
</div>
</div>
</div>
 
</div>
</div>
</div>
</div></body></html>

Property 101: Mining's big drag is almost done: HSBC's Paul Bloxham

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
GUEST OBSERVER
I have written extensively about the need for the new Governor of the Reserve Bank to adjust his inflation target from 2–3 percent to 1–3 percent to reflect the reality of lower global inflation relative to the mid 1990’s, when the target was originally successfully adopted. 
However, as noted at the time, I held out little hope that the new Governor would take my advice. 
Accordingly, I was not surprised to see this week’s announcement that the target had been “confirmed” as 2–3 percent. However, there has been a subtle change from “on average over the cycle “ to “over time”. The Governor also emphasised in his Statement to the House of Representatives on Thursday that “the main drafting change is to make the link between monetary policy and financial stability a little more direct”. 
If we weigh those two changes together, they go some way to achieving the objective that I was most concerned about. My concern was that the new Governor might, when confronted with an impossible task of lifting inflation to above 2.5 percent to “average” 2.5 percent over the cycle, might unnecessarily impact asset markets. By using the vague term “over time” and linking policy directly to financial stability (read asset markets), he has allayed much of my concern on that issue. Markets are likely to eventually scale back prospects for further rate cuts given these developments. 
With that policy issue now resolved, I am allocating the rest of this note to some of the opportunities and risks now facing the evolving Australian economy. 
While overall growth in the Australian economy has been remarkably stable since the Global Financial Crisis – holding in the 2.5 percent – 3.0 percent range – the source of this growth has changed markedly. We have seen the huge terms of trade and mining investment cycles almost run their course. The early stages of these cycles were marked by strong income boosts, particularly in the mining states of Western Australia and Queensland, due to surging commodity prices and a spectacular mining investment cycle. Of course, these two cycles were linked, with the surge in commodity prices signalling a commercial opportunity to raise capacity, particularly in the LNG and coal seam gas sectors.
A necessary adjunct to these cycles was a strong AUD and elevated interest rates. The impact on the mining states of these uncompetitive market settings was minimal, with the strong volume and price boosts underpinning their prosperity. On the other hand, the south eastern states – New South Wales and Victoria – struggled under the weight of the high currency and rising interest rates. 
With the mining investment boom now unravelling; Australia’s terms of trade having peaked in September 2011 and both the Australian dollar and interest rates down substantially, Australia is now looking to other sources of demand to sustain its admirable growth record. Those sources are services exports; residential construction; public transport infrastructure and population growth. 
These growth sources are dominated by the south eastern states. New South Wales and Victoria have been the major beneficiaries of the services boom. Education exports; business services and tourism are the key drivers of this success. Between 2007 and 2013, net services exports subtracted around 0.3 – 0.8ppts from GDP growth on average over most years. Since 2013, these sectors are responsible for adding 0.3 – 0.7ppts to growth.
<div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
Residential construction, particularly driven by the boom in high rise apartments, has shown a considerable lift in its contribution to growth. The construction “boom” has equally been centred around the south eastern states. 
Partly funded by the revenue windfalls from housing activity in their states, New South Wales and Victoria are also experiencing a welcome boost to public sector infrastructure investment. In the last six months, “projects committed or under construction” have lifted from $32bn at the beginning of this year to $51bn in New South Wales, and from $7bn to $21bn in Victoria. That compares with a net lift of only $7bn in all the other states combined. 
Finally we are now seeing population growth in both New South Wales and Victoria exceed the national pace for the first time in 20 years. 
But, just as the mining and commodity cycles were heavily dependent on China, so are these latest sources of growth. Growth in tourism and education is dominated by China. This partly reflects the sharp increase in China’s overall services trade deficit. This deficit has more than doubled as a proportion of GDP over the last five years, and in the first half of 2016 was more than 50 percent of the goods trade surplus. 
At some point, the Chinese authorities, who appear to have stabilised last year’s spectacular near USD 1 trillion loss in foreign reserves, may decide to slow this leakage. Certainly we have seen marked evidence of a tightening of capital controls, particularly for the non-corporate sector.
That tightening of capital controls might also impact the construction boom. The number of high rise apartments currently under construction in March this year (ABS latest) has surged to 110,000 – including 44,000 in New South Wales; 34,000 in Victoria; and 23,000 in Queensland. 
As discussed, the south east is dominating the high rise boom. However, a significant proportion of the buyers are offshore based (so called FIRB buyers). Local banks have stopped funding FIRB buyers, presenting risks to local developers who may have sold more than 50% of their stock to these buyers. 
It is generally accepted that apartment buyers in the Melbourne CBD have incurred some capital losses, while Sydney purchasers are seeing their profits squeezed. These liquidity and capital loss prospects may discourage foreign buyers, with the result of sharply slowing the apartment construction cycle. 
On the other hand, foreign banks are seeking to partly fill the funding gap, while large foreign developers may also be able to relieve liquidity stresses for these buyers. 
Overall, huge uncertainty prevails in this market, with possible outcomes ranging from ongoing spectacular momentum to a sudden liquidity driven slowdown. In those circumstances, one part of the recent boost to Australia’s growth story might fade quickly. 
BILL EVANS is chief economist of <a href="https://www.westpac.com.au/" target="_blank">Westpac</a>. Justin Smirk is ‎senior economist, Westpac Group and can be contacted <a href="https://www.westpac.com.au/about-westpac/westpac-group/" target="_blank">here</a>.
</div>
</div>
</div>
</div>
 
</div>
</div>
</div>
</div></body></html>

Future challenges for the Australian economy: Westpac's Bill Evans

<html><body>
<img src="https://counter.theconversation.edu.au/content/66414/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
It is surely time for governments around the world, including Australia’s, to remember the first law of holes: if you’re in one, stop digging.
Governments have been digging madly since the global financial crisis, injecting massive amounts of monetary and fiscal stimulus. It hasn’t worked. 
We don’t have much to show for it in Australia - an interest bill of $16 billion on government debt compared with zero before the crisis, and a growth rate and unemployment rate that are struggling to meet long term averages. 
The International Monetary Fund (IMF) has repeatedly downgraded its global growth forecasts over the past decade and is about to releaseanother downbeat global growth forecast.
The world economy is in its 6th year of below average growth since 1990. Japan has not grown at all - its GDP in 2016 is exactly at the level it was in 2008 – despite massive amounts of monetary and fiscal stimulus over a decade. 
Growth in Europe has remained below 1% every year since 2008, well below its pre-crisis levels, despite the United States Federal Reserve relentlessly pumping new money into the banking system with interest rates already zero. And the US also remains in a funk with growth at 1.5%, less than the 2.5% long run average, having also pumped new money into its banking system and running budget deficits every year that have seen government debt steadily grow as a share of the economy.
Incredibly, the IMF and some governments have not given up. They now accept that perhaps cheap money and plenty of it hasn’t worked, but they still cling to fiscal stimulus as the last great hope as long as it’s the right kind. 
According to the IMF, debt-financed government infrastructure spending is the answer – think roads, ports, power and communication networks. They have constructed a mathematical model showing that such infrastructure spending, funded by borrowing, actually reduces the government debt to GDP ratio in a world of low interest rates. This is because it boosts GDP by more than it raises debt, and boosts overall economic wellbeing.
This will be music to the ears of those politicians who want to spend big on infrastructure. It is however a pipedream. 
The problem is not so much what the debt is used for, although that does matter, it is more the size of debt itself. Since 2008, government debt has increased in almost all advanced countries as a ratio to GDP. 
In the US total government debt has increased from 92 to 125%, in the UK from 63 to 114%, in Japan from 184 to 246%, in Australia from 34 to 65%, and even in relatively austere Germany from 68 to 82%. The combination of rising government debt and booming asset prices (stocks and housing) financed by monetary stimulus is dangerous. 
We have seen through the global financial crisis the devastating effects of a collapse in asset prices on the economy, especially on economies with debts whether held by the private or public sector. Indeed it’s this memory that is surely one of the factors currently holding back spending by households and firms.
In this environment, it would be reckless of governments to embark on major fiscal stimulus that raises their debt levels further. The IMF’s model does not take account of the risk of an asset price collapse in a world of high debt and the effect this has on private sector spending. 
It needs to be said that the IMF’s model is essentially the same type of model that it uses to forecast GDP growth of countries and which The Economist found had an appalling record of inaccuracy. The Economist team took a sample of 220 instances from 1999 to 2014 where a country went from growth in one year to recession in the next, and found that the IMF had never once predicted the looming recession in its April forecasts of the previous year.
There is at least one prescription to the world’s low growth problem that governments have not yet tried. That is to do precisely nothing – stop digging. We may even discover things about the economy’s restorative powers that we didn’t know, or had forgotten.
A related idea is to actively unwind government intervention where evidence suggests it is not working. It is easy to dismiss such prescriptions as the old-hat 1990s deregulation agenda. 
But that was a period of great prosperity in Australia and elsewhere. In any case it’s not about deregulation, but more like what David Cameron in the UK called “better regulation” which was enabled through the Deregulation Act 2015. It is worth noting that growth in the UK has been the strongest in Europe in recent years.
Back to home, the Reserve Bank of Australia should keep its power dry when it meets today and hold its official interest rate steady at 1.5 percent. And so it should for some time to come. 
The Australian government should do the same and not be seduced by the siren call from the IMF and others to spend up big on infrastructure.
Ross Guest is professor of economics and National Senior Teaching Fellow, Griffith University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/ross-guest-13155" target="_blank">here</a>.
</body></html>

Governments and central banks should stop trying to stimulate the economy

<html><body><div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
GUEST OBSERVER
Australia has a new “two-speed” economy that comprises: (i) NSW and Victoria (driven largely by Sydney and Melbourne); and (ii) the rest of Australia.
The size and relative strength of the NSW and Victorian economies means that economic data presented at the national level is masking weakness throughout the rest of Australia.
Economic activity in NSW and Victoria, along with strong dwelling price growth in Sydney and Melbourne, is likely to see the RBA sit on the sidelines. But the rest of Australia could probably do with more policy easing. 
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.22.22%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.22.22%20AM.png" alt="">
During the mining investment boom it was fashionable to talk about Australia’s “two- speed” economy. Surging commodity prices drove a spectacular lift in activity in the resources sector that sent the WA, QLD and NT economies into full blown growth mode.
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.23.31%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.23.31%20AM.png" alt="">
Meanwhile, relatively high interest rates (compared to other advanced economies) and a strong AUD weighed heavily on the rest of Australia. As such, the term “two-speed” was coined to characterise the Australian economy. 
Fast forward some six years and Australia yet again finds itself with a “two-speed” economy. But this time it’s NSW and Victoria that are driving demand and employment growth while the rest of Australia is feeling the pinch (chart 1). In fact, it’s largely Sydney and Melbourne propping up national outcomes.
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.24.46%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.24.46%20AM.png" alt="">
Capacity utilisation is high in Australia’s two largest cities and demand growth is strong, courtesy of incredibly low interest rates. As a result, the NSW and Victorian economies have performed much better than the rest of Australia. 
The big influence that NSW and Victoria have on the national figures means that pretty soft conditions throughout the rest of Australia have flown under the radar. In fact, economic outcomes in most regions of Australia are probably weaker than the national figures are suggesting unless you’re in Sydney or Melbourne. There are some exceptions, notably the ACT, but the generalisation holds for most places. 
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.25.47%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.25.47%20AM.png" alt="">
In this note we look at how the Australian economy is faring on the new “two-speed” basis. We slice the economy into two pieces – (i) NSW &amp; Victoria (termed VicNSW); and (ii) the rest of Australia (termed ROA). For dwelling prices that are published on a capital city basis we split the data between Sydney &amp; Melbourne (SydMel) and the remaining capital cities (ROA). Basically we are trying gauge how the rest of the Australian economy is going when you strip out NSW and Victoria (or Sydney and Melbourne). Of course, it can be argued that if you exclude the strongest parts then all you are left with is the weakest bits. But that is precisely the point. We want to better understand how the rest of the Australian economy is going outside of NSW and Victoria. 
The numbers – setting the scene.
To understand what we are analysing it makes sense to briefly look at the size of our two pieces. By Gross State Product (GSP), which is effectively output, NSW is worth 32% of the national pie and Victoria 221⁄2%. So our VicNSW economy is worth 541⁄2% of the national economy which leaves the ROA comprising 451⁄2% (chart 2). By population, NSW has 32% of Australia’s residents and Victoria clocks in at 25%. This leaves 43% of people residing in the ROA. By capital city, 64% of people who live in NSW are in Sydney and 75% of Victoria’s residents are in Melbourne. For the ROA, 62% of people are in the capital cities (chart 3). So our VicNSW and ROA split 
Population growth
We kick off with population growth because it heavily influences aggregate growth rates like output and employment. The latest figures show that in the year to QI 2016, population growth in VicNSW was running at 1.6% while it was growing at 1.1% for the ROA (charts 4 and 5). This is a material difference. It largely reflects two forces (i) interstate migration, in particular from WA and SA to Victoria due to a lack of job opportunities; and (ii) a significant proportion of overseas migrants settling in either Sydney or Melbourne.
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.26.53%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.26.53%20AM.png" alt="">
We need to keep the population growth rates of VicNSW and ROA in mind when looking at the economic data because the ROA is at a “handicap” of about 0.5%pa. Put another way, if the ROA is clocking in at 0.5%pa less than VicNSW for growth rates then performance per capita is effectively the same. We consider this to be important because differing population growth rates can give a misleading impression of economic performance. And per capita measures are a better barometer for gauging changes in living standards (see here). As our analysis shows, even accounting for the 0.5%pa difference in population growth, VicNSW is performing far better than the ROA. 
State Final Demand
State Final Demand (SFD) is basically the sum of household and government expenditure and investment. It does not include exports and is therefore a better measure of demand (i.e. the total value of goods and services that are sold domestically) than GSP which includes exports.
The data shows that demand growth has been strong in VicNSW while it has been contracting throughout the ROA since mid-2014 (chart 6). The decline in SFD throughout the ROA reflects falling business investment and weak consumption growth. SFD has been hit particularly hard in the mining regions of WA, QLD and NT where investment in the resources sector has fallen sharply (chart 7). SFD growth has been tepid in SA and Tas leaving the ACT as the only bright spot. All up, demand growth in the ROA is consistent with very soft economies.
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.27.49%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.27.49%20AM.png" alt="">
Strong demand growth in VicNSW has been assisted by the positive wealth effect from rising dwelling prices. Higher asset prices have supported household consumption growth and dwelling investment in Australia’s two largest states. These two economies did not experience a downturn in mining investment and were able to benefit from both the fall in interest rates and the AUD. 
Employment growth
There is plenty of evidence of our new “two-speed” economy in the labour market data. Jobs growth has slowed nationally. But the slowdown in jobs growth for the ROA has been sharp. In fact, there has been a contraction in the level of employment for the ROA through the year to October (chart 8). The number of people working in the ROA has fallen by 40k over the past year. The reality is that jobs growth in Australia has been driven by NSW and Victoria over the past year. For the ROA, the labour market is incredibly weak. In some states, conditions in the labour market are commensurate with a recession, particularly WA (chart 9). 
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.28.56%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.28.56%20AM.png" alt="">
Unemployment rate
The national unemployment rate has been trending down over the past year thanks to a decline in participation. But when we look at the economy through our “two- speed” lens it becomes apparent that the unemployment rate for the ROA has been stuck above 6% for two years (chart 10). It has basically trended sideways since mid-2015 while the unemployment rate has been falling in VicNSW. A disappointing story for the ROA which reflects a decline in the level of employment offset by a fall in participation. 
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.30.13%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.30.13%20AM.png" alt="">
Of course new jobs have been “created” in the jurisdictions that comprise ROA. But there have also been a lot of job losses, primarily in the mining and manufacturing sectors. To be fair to our Territories, the unemployment rate is low in the ACT and NT. But it’s well above the level associated with full employment (considered to be around 5%) in QLD, SA, WA and Tasmania (chart 11).
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.31.13%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.31.13%20AM.png" alt="">
In our view, the jobless rate for the ROA is likely to sit a touch above 6.0% over the next six months. It will continue to be a different story in VicNSW and we see the unemployment rate holding at around 51⁄4%. A big lift in public investment in NSW should keep the unemployment rate anchored around 5%. 
It’s worth noting here that the unemployment rate is not proving as useful as usual to determine the amount of slack in the labour market. That’s because underemployment has bene rising while the unemployment rate has been falling due to the casualisation of the workforce (see here). As a result, wages growth has been easing.  
Business investment 
Investment in VicNSW has trended up recently because of a lift in capex in NSW. But for the ROA business investment is down 17.2% through the year to QII 2016 (chart 12). The big decline has been driven by a huge fall in spending in QLD and WA because of the downturn in mining capex. There has also been a decline in capex in SA, Tas, and NT. For the ROA, only the ACT has posted a lift in business investment. This is a pretty poor result considering the stimulus that has come through from lower interest rates and a lower AUD. It should be a concern to policymakers.
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.32.13%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.32.13%20AM.png" alt="">
We expect business investment to continue to decline in the ROA as resource related projects are completed. The pace of the downturn, however, will start to slow as the worst of the downturn in mining capex is now behind us. The outlook for the non- mining part of the economy remains mixed. Our forecasts have non-mining capex lifting a little over 2016/17 which should see VicNSW post a further modest lift in business investment. 
Dwelling Prices
National dwelling prices have risen substantially over the past 31⁄2 years. But the data shows that the lift in dwelling prices has largely been a Sydney and Melbourne story (chart 13). Demand for housing has been strong in Australia’s two largest cities, driven by a variety of factors which include: (i) interest rate cuts; (ii) a high level of investor demand; (ii) foreign investment; (iii) strong population growth; and (iv) some supply issues (particularly in Sydney).
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.33.24%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.33.24%20AM.png" alt="">
For the ROA, however, dwelling price growth has been much more modest. In fact, dwelling prices have been falling for a few years in Perth (chart 14). Price rises in most of the other capital cities have been significantly lower than those in Sydney in Melbourne.
Commentators often make the mistake of generalising about dwelling prices in Australia and assume that the housing market is homogeneous. But the data shows that there is a significant divergence between price growth across Australia’s capital cities. 
Building approvals
Strong dwelling price growth in Sydney and Melbourne has translated into a big lift in building approvals, particularly for apartments. For the ROA, however, building approvals have eased. On a rolling annual total basis dwelling approvals are down 7.1%pa for the ROA (chart 15). There is a bit of a multispeed story for approvals in the ROA. There has been a big fall in approvals in WA as vacancy rates rise and dwelling prices fall. Approvals in QLD have actually been quite strong and a big lift in apartment supply will hit the Brisbane market over the next few years. But when we look at the ROA as a collective, dwelling investment will cool. For VicNSW, however, there is still a lot of residential construction in the pipeline. The supply response is welcome given the big lift in dwelling prices. 
<a href="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.35.04%20AM.png" target="_blank">Click to enlarge</a>
<img src="/images/2016/11/22/Screen%20Shot%202016-11-22%20at%2010.35.04%20AM.png" alt="">
Are there implications for monetary policy?
The RBA has recently shifted from an implied easing bias to a neutral tone. And market pricing for a rate cut has receded (chart 16). We think the RBA’s reluctance to ease policy further is generally related to the strength of the NSW and Victorian economies, in particular the exceptionally strong housing markets of Sydney and 
Melbourne, and the lift in commodity prices. But the economic data suggests that the ROA could do with more policy easing.
Last week’s wages and employment data were weak. Normally, softness in the labour market and below-target inflation would imply that policy easing is forthcoming. A lower cash rate would, among other things, push the AUD down which would boost activity in Australia’s tradables sector. But clearly the RBA has a degree of discomfort at the strength of dwelling price growth in Sydney and Melbourne that has taken a near term rate cut off the table.
The lesson here is that the new “two-speed” economy means that current monetary policy settings are likely to be suboptimal for the ROA outside of Sydney and Melbourne. If the Sydney and Melbourne property markets stall or falter then policy easing will probably come back onto the agenda because the ROA could do with more stimulus. Of course that stimulus could also come via fiscal policy as we have previously argued (see here). But that’s a conversation for another day. 
Gareth Aird is economist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905" target="_blank">here</a>.
</div>
<div class="column">
<div class="page" title="Page 1">
<div class="section">
<div class="layoutArea">
<div class="column">
 
</div>
</div>
</div>
</div>
</div>
</div>
</div>
</div></body></html>

Our new two-speed economy – how does it look? CBA's Gareth Aird

<html><body>
<img src="https://counter.theconversation.edu.au/content/68802/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Over the last few years, we’ve seen a massive shift in the way we work.
Thousands of Australians have abandoned the traditional 40-hour work week to work fewer hours or take on ad-hoc work, such as driving for Uber or doing odd jobs on Airtasker. 
But the way we measure the labour market has not kept up. We still rely on the Australian Bureau of Statistics’ labour force survey, a survey from the 1960s conducted according to international conventions that is no longer appropriate for today’s labour market.
Today’s economy – one of independent contractors, ad-hoc work, irregular and flexible hours – needs a new form of measurement. 
<h2>How the government measures the workforce</h2>
Every month the Australian Bureau of Statistics (ABS) surveys about 0.32% of the civilian population aged over 15 years about their employment status.
In short, you’re counted as employed if you completed at least one hour of paid work in the week before the survey.
But this doesn’t sound quite right. Clearly, one hour of paid work per week doesn’t fit most people’s idea of employment.
In fact, over one million workers are counted as “underemployed”, meaning they would work more hours if they could. This raises the question of whether these people should really be considered “employed”. The answer depends on what policy question you are trying to address.
<h2>Is our unemployment rate right?</h2>
Let’s get right into how our unemployment rate is calculated.
If respondents haven’t done any paid work in the last week, they are asked two further questions – first, have they actively sought work in the last four weeks, and second, are they currently available to start work? They are only considered unemployed if they answer yes to both of these questions. Otherwise, they’re not counted as part of the labour force. 
This means full-time homemakers, carers, the ill and non-working retirees aren’t considered unemployed.
The labour force is the sum of the employed and the unemployed. The unemployment rate is the percentage of the labour force who are unemployed. 
Lastly, the participation rate is the percentage of the population aged 15 and older who are in the labour force. According to the latest ABS trend estimates, the participation rate stood at 64.5% in November, no change from October.
The participation rate has been consistently trending upwards over time for women and falling for men. This does not mean women are increasingly doing more work but that over time they have switched from unpaid to paid work. One of the main reasons for falling participation among men is that unskilled manual jobs for older men have been declining over several decades and many men have been reclassified as unemployed, disabled or retired. 
<h2>More issues with the survey</h2>
The Labour Force Survey only provides a measure of employment and not the number of jobs. For example, a person might work 20 hours per week at a supermarket and 10 hours per week as an Uber driver. Employment is always classified according to the “main job”, so the ABS deems them as one person employed part-time (working fewer than 35 hours) in the retail industry. 
If that person worked five more hours as an Uber driver the next week, they would be classified as full-time (35 hours) but the supermarket job would still determine the industry in which they are employed.
The crucial problem here is that there are two jobs being done, but the ABS employment estimate only counts one. So be wary of commentators and politicians making statements like “the economy gained/lost 10,000 jobs last month”! What jobs are they measuring?
The labour force survey also fails to make distinctions between different types of workers. About two million Australians work as independent contractors like construction workers or other business operators such as hairdressers working from home. However, in the figures they are not distinguished from regular employees.
Whereas it might be relatively easy for an employee to know if they did any paid work in the week before the survey, it might not be so obvious for a non-employee. For instance, an author might work 50 hours on their book one week and three hours the next. Most of their work is basic research rather than writing. They receive a royalty payment twice a year. How would they answer the question of whether they did any paid work in the last week?
For non-employees the question of whether they are prepared to start work and have been actively looking for work can also be complex. Someone doing consultancy work might not actively look for work because clients seek them out instead.
<h2>We need something new</h2>
The ABS has tried tackling some of these issues by conducting some different surveys, including the Characteristics of Employment Surveywhich presents information on all employed persons according to their status of employment. However, the framework classifies jobholders by their main job. That is, only the job in which they usually worked the most hours. This doesn’t capture many of the issues of concern in, say, the “sharing” or “gig” economy 
The ABS has also attempted to compare the number of filled jobs to the amount of employed people, using estimates in the labour force survey. This can reveal interesting information about the labour market. For instance, in February 2013 there were 11,628,300 employed people in Australia, but an estimated 12,287,200 filled jobs. That is, there were 658,900 more filled jobs than there were employed people. 
But even then, the estimates still use the conventional definition of a job. 
The ABS is still working on an Australian Labour Market Account, based on International Labor Organisation (ILO) methodology, which may address some of the issues discussed here. But this will still be based on traditional definitions of jobs, employment, and unemployment.
Our conventional employment measures are no longer equipped to inform us about important aspects of our labour force and a reliance on them could lead to inappropriate policy. We need labour force numbers than can capture the nuances of a modern economy.
 
Phil Lewis is professor of economics, University of Canberra and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/phil-lewis-8714" target="_blank">here</a>.
</body></html>

Finding new ways to measure the Australian labour force

<html><body>
<img src="https://counter.theconversation.edu.au/content/57114/count.gif" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
A long-term plan to cut the company tax rate from 30 percent to 25 percent is the centrepiece of the Coalition’s economic plan for jobs and growth.
The Coalition maintains the change will boost GDP by more than 1 percent in the long-term, at a budgetary cost of $48.2 billion over the next 10 years.
But the very Treasury research papers relied on by the Coalition tell a more modest story than the headlines. Using these papers, we show that the net benefit to Australians in the real world will be only about half of the headline benefit, and it will be a long time before we are any better off at all.
<h2>The short story</h2>
The Government has made two claims about the economic impacts of its plan to cut the company tax rate.
On Budget night Treasurer Scott Morrison said that the tax cuts would:
“… mean higher living standards for Australians and an expected permanent increase in the size of the economy of just over one percent in the long term.”
Later last week, Prime Minister Malcolm Turnbull said:
“The Treasury estimated last year…that for every dollar of company tax cut, there was four dollars of additional value created in the overall economy.”
<h2>Sound in theory, but there’s a back story</h2>
In theory, cutting the company tax rate boosts the economy in the long term. All taxes distort choices, and thereby drag on economic activity. Taxes on capital often have especially large economic costs because they discourage investment, which is mobile across borders. By some estimates, roughly half of the economic costs of Australian company tax ultimately fall on workers, as lower company profitability leads to lower investment, and therefore lower wages and higher unemployment.
But while the theoretical argument for company tax cuts is straightforward, the real story is more complicated.
<h2>The twist: a tax cut for foreign investors</h2>
The twist in the tale comes from Australia’s system of dividend imputation, or franking credits. The effect of this system is to make the company tax rate for Australian resident shareholders effectively close to zero. In nearly every other country, company profits are taxed twice: companies pay tax, and then individuals also pay income tax on the dividends, albeit often at a discount to full rates of personal income tax.
But in Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.
As a result, although Australia has a relatively high headline corporate tax rate compared to our peers, in practice the comparable tax rate is lower – at least for local investors. As a result, many of the international studies about the impact of cutting corporate tax rates are not readily applicable to Australia.
Local shareholders do get one small benefit from cutting corporate tax rates. If companies pay less tax, then they have more to reinvest, so long as the profits are not paid out to shareholders. Yet in practice, most profits are paid out. Therefore a company tax cut will generate little change in domestic investment.
By contrast, foreign investors do not benefit from franking credits. They pay tax on corporate profits twice: first at the company tax rate, and then as income tax on the dividends. This means that a cut to the company tax rate provides big benefits to them.
This week The Australia Institute pointed out that foreign investors from the United States and other countries that have tax treaties with Australia may not benefit from the company tax cut, because their home governments will collect the gains from any cut to Australia company tax as additional company tax. Yet this would only occur when foreign firms repatriate profits earned in Australia to the home country.
The big reductions in net tax revenue – and therefore the large benefits to companies – are expected when the corporate tax rate is cut from 30% to 25% between 2022 and 2027 for larger companies, including the bulk of businesses that are foreign-owned.
The headline from the Treasury modelling for the 2016-17 Budget is that this cut will ultimately increase GDP by up to 1.2% meaning larger foreign companies are attracted to invest more in Australia. The finding is based on work contained in a Treasury research paper that modelled the long-term impact of a company tax cut.
<h2>Activity is not income</h2>
However, it is a mistake to assume that all the increase in economic activity will make Australians better off. We often use Gross Domestic Product – the sum of all economic activity – as a short-hand measure for prosperity. But when the benefits disproportionately flow to non-residents, GDP can be misleading. It’s much better to look at Gross National Income (GNI), which measures the increase in the resources available to resident Australians.
Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.
<h2>You don’t get something for nothing</h2>
Yet even this increase in GNI of 0.8% is not the best estimate of the improvement in living standards Australians can expect from the Government’s company tax plan. If company taxes are lower, other taxes have to be higher, all other things being equal. In the modelling discussed so far, Treasury first assumes that these revenues can be collected by a fantasy tax that imposes no costs on the economy.
But that’s not what happens in the real world. So the Treasury research paper also models the scenario in which personal income taxes rise to offset the reduced company tax revenue. On this more realistic assumption, Treasury estimates that GNI will increase by just 0.6% in the long term, or roughly $10 billion a year in today’s dollars.
<a href="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122984/width754/image-20160518-13455-yxfw6e.jpg" target="_blank">Click to enlarge</a>
<h2><img src="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122984/width754/image-20160518-13455-yxfw6e.jpg" alt=""></h2>
<h2>Other wrinkles in the story</h2>
Even this more modest Treasury figure may well over-estimate the long-term boost to GNI. In the real world, progressive income taxes impose higher costs than the hike to a hypothetical flat-rate personal income tax that Treasury modelled. Companies may also not increase investment as much as Treasury expects, and those firms that are part of oligopolies in Australia may not increase wages by as much as Treasury assumes.
While these are reasons to expect that the Treasury modelling overestimates the economic benefits of a company tax cut, they are offset by some more conservative assumptions. Treasury believes that tax cuts modestly change how much firms shift profits overseas; it may overstate how much tax cuts flow into additional profits rather than higher wages in those industries that it does recognise as oligopolies; and it may discount the benefits of investors making less distorted choices between debt and equity funding.
<h2>The verdict on the first claim</h2>
The bottom line is that, on Treasury’s own modelling, a corporate tax cut will increase Australian incomes in the long term by up to 0.6%. The Treasury research paper doesn’t commit itself to a timeframe, but it cites other work that expects the economic benefits of company tax cuts to take 20 years to bear fruit, with half the benefit in 10 years. Given that the important (and expensive) part of the corporate tax cuts only starts to take effect from 2022, Australia will be waiting 25 years for a 0.6% increase in incomes.
This economic benefit needs to be seen in context. If Australian per capita GDP and GNI increase at 1.5% a year (as the budget papers routinely assume), then over 25 years, incomes will rise by 45.1%. Corporate tax cuts mean that instead, incomes will rise by 45.7% – or perhaps a bit less. It may still be worth doing, but it’s not a plot twist that dramatically changes Australia’s story.
Others claim that in the past, company tax cuts have had no measurable effect on the economy. This is disputed – there may well be a link between corporate tax cuts and economic growth. But it’s inevitably hard to see in practice because on Treasury’s own modelling the economic effect of company tax cuts is small relative to other changes.
<h2>Not four-to-one, more like dollar for dollar</h2>
This brings us to the Government’s second claim. Late last week, Mr. Turnbull said that each dollar in company tax revenue cut would deliver an extra four dollars in GDP.
His claim appears to be drawn from an earlier 2015 Treasury research paper that modelled the economic impact of major Australian taxes, including company tax. The more <a href="https://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">recent</a> Treasury working paper, released in Budget week, implies a slightly larger $4.30 increase to GDP from each $1 in revenue cut.
But again this misses a big part of the story.
First, this claim is about GDP, and therefore includes the disproportionate increase in the income of foreigners. Our analysis of the Treasury modelling shows that the increase to Australian incomes, or GNI, is only $2.80 per dollar of revenue lost from a corporate tax cut.
Second, when corporate tax is replaced by a still hypothetical but marginally more realistic flat rate income tax – rather than a complete fantasy tax that has no impact on the economy – the increase to Australian incomes is less again: only $1.80 per dollar of revenue lost.
Third, the Prime Minister has framed the boost to the economy in terms of the long-term increase to GDP per dollar of company tax cut. Treasury calculates the revenue “dollar” lost after considering the additional tax revenue that the government hopes to collect from all taxes in twenty years time as incomes rise because of greater investment.
<a href="https://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&amp;login=1">Many people</a> would interpret the Prime Minister’s statement to compare the ultimate benefit per dollar of tax revenue given up in the shorter term. On this basis, the increase to Australian incomes in the long term is only $1.20 for every dollar given up in the short term as a result of corporate tax cuts.
This story ends the same way. Corporate tax cuts may be worth doing, but the outcome is unlikely to set pulses racing.
<a href="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122985/width754/image-20160518-13481-1ugr3e5.jpg" target="_blank">Click to enlarge</a>
<h2><img src="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122985/width754/image-20160518-13481-1ugr3e5.jpg" alt=""></h2>
<h2>The journey matters</h2>
So far, as the Treasury research paper does, we’ve focused on the long-term economic boost from a company tax cut once the economy has fully adjusted. But the journey to get there also matters.
For a decade, a cut to corporate taxes will reduce national income. Foreigners will pay less tax on the profits from their existing investments in Australia, reducing Australian incomes. Foreigners own about 20% of all capital in the economy, so it’s a big windfall gain for them. We estimate that when a 5 percentage point tax cut for big business is first implemented, national incomes will be reduced by about 0.5%, as a result of the immediate loss in company tax revenues formerly paid by foreign investors.
The benefits to Australians from a corporate tax cut only accumulate slowly as foreigners make additional investments. Treasury cites a paper that estimates that the benefits of corporate tax cuts take 20 years to flow through. Assuming that these benefits increase at a constant rate, Australian income will only be larger than otherwise after about 10 years.
Of course, the upfront costs of a company tax cut over the first decade must be offset against the long-term gains. On our estimates, the loss of income incurred over the first decade will only be offset by higher incomes after about 19 years. If Australians want the modest economic benefits of a corporate tax cut, they will be waiting a long time.
<h2>The moral of the story</h2>
Company tax cuts are not a knight in shining armour to save the Australian economy. On the basis of the modelling that the government uses to support its case, corporate tax cuts can make a modest contribution, and then over the very long term. That story won’t sell as many copies. Truth, on this occasion, is duller than fiction.
John Daley<a href="https://theconversation.com/profiles/john-daley-1870" rel="author" style="line-height: 1.3em;"> </a>is chief executive officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>.
Brendan Coates is fellow, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>.
Both are authors for The Conversation
</body></html>

Economy

Editor's Picks

Have something to contribute?

Developments

New apartments

New townhouses

News

Economy

Editor's Picks

Receive the latest news stories to your inbox

Have something to contribute?

Developments

New apartments

New townhouses

News