QTPA Member Alert | AUSTRALIAN ECONOMIC REPORT (19/6/2012)

AUSTRALIAN ECONOMIC REPORT

“AUSTRALIAN INDUSTRY GROUP” (June 19 2012)

The State Council of the Australian Industry Group (AiG) met today Tuesday the 19th of June.  At that meeting the AiG Australia’s leading employer group provided information on the Australian economy within the State Council papers.  I have edited this to provide information that I believe is of interest to you as members of Turf Queensland.  This is definitely the bigger picture but something worthwhile thinking about for the next two years as household consumption is tipped to increase.

The economic downturn in the US and the Euro area economies plus the detrimental effects of the high Australian dollar have taken their toll on the Australian economy.  The Australian GDP showing a further slowing into 2012 because most economic indicators (e.g. employment growth, housing starts and retail sales) have all been weaker than expected so far in 2012.  This has seen the Reserve Bank of Australia (RBA) reduce the cash rate by 50 basis points to 3.75% in early May.

Despite the slow pace of domestic demand and especially residential housing activity, Australia is never the less likely to outperform most other developed economies in 2012, supported by strong growth in developing Asian economies.  Indeed the OECD forecasts Australia to achieve the world’s best growth rate for a developed country in 2012.  Robust demand in Asia should continue to underpin the positive outlook for the resources sector that is driving Australia.  Related businesses expect to invest a record $120 billion into the resources sector in 2012-13, around 150% higher than its level just two years previous.  Showing the two paced economy the resources investment pipeline is currently over $450 billion, with more than half of these projects already committed or under construction. In saying that there is an increasing mood of risk.  Many mining companies have recently pointed to the fall in commodity prices and the high cost of infrastructure construction in Australia as factors that may cause them to reconsider their long-term expansion plans.

The federal Treasury forecasts Australia’s real GDP to grow 3.25% in 2012-13 and 3% in 2013-14.  Main drivers of economic growth are expected to be business investment and a renewed strength in household consumption.  Household consumption is expected to be supported by solid household incomes growth and relatively low (but nevertheless rising) unemployment rates.  These forecasts are broadly consistent with those from the RBA and international agencies.

“Industry Performance Indicators” show that a poor demand and subdued workloads pushed the national construction sector further into the red in April.

• Falling Construction activity in April is further evidence of the widespread nature of the current slowdown in the broader economy.  The ongoing weakness in the residential and commercial construction subsectors was exaggerated by the slowing in engineering construction activity that has now been in train since the start of the year.
• The services sector recorded its most severe slump in three years in April driven by significant declines in new orders and low sales across the sector.  Strongest declines were recorded in finance and insurance, personal and recreational and health and community services.  The Services sector is being held back by weak household and business demand, flow on impacts of the slump in residential and commercial construction and the competitive challenges of the high dollar.
• In Manufacturing the basic metals, textiles and wood products and furniture subsectors recorded the largest falls while construction materials and paper, printing and publishing expanded in April.  Manufacturers continue to be adversely affected by the strong dollar comparatively high unit labour costs and rising energy prices.

GLOBAL COMPARISONS:

• Fears that the US, economic recovery is running out of steam again were heightened after the US job market weakened for a second month in April.  The US unemployment rate fell to 8.1% in April.  US household incomes are recovering only slowly and weakness persists in the all-important US housing market, as house prices and construction activity levels continue to drift along the bottom.  Though business and consumer confidence underscores the heightened mood of risk aversion and extreme caution surrounding any new investment.
• In Europe and the UK after a brief period of stabilisation and 2011, economic and financial indicators in the Euro area and the UK have been deteriorating again in 2012 so far to date.  This is the “double dip” recession that was feared at the time of the GFC in 2007-08.  Financial market pricing continue to indicate an expectation of distress reason to default in European markets, emanating from Greece.  Extremely high unemployment rates and contracting in investment activity in many Euro area economies point to a prolonged period of weakness ahead.  UK economy shrank 0.3% in Q1 2012 while the euro area economy stagnated in the same period. The IMF forecast the euro area economy to contract 0.3% this year a very significant growth downgrade of 1.6 percentage points since September 2011 and is expected to last for one year this is supported by the OECD .  Any recovery is anticipated to be exceedingly slow, the economy expanding only 0.9% in 2013, as governments struggle to get their economies moving again without the possibility of significant fiscal stimulus.
• Developing Asian economies are not immune to the economic downturn in Europe.  China’s export growth slowed in April but remained firmly positive, indicating that the economic downturn in Europe and the global volatility more generally, it is dragging on China’s export performance and in turn on its overall economic growth.  China’s economy continues to grow at 8.1% in the March quarter of 2012 lower than the targeted 8.9% GDP growth rate achieved in the previous quarter.  Interestingly this was the slowest rate of growth in China in nearly 3 years.  China’s gradual slowdown is believed to have already bottomed out however, because China’s success in reducing inflation together with global economy’s recent strong negative effects on commodity prices means there is now a widespread expectation that China will soon relax its required reserve ratio of banks.  This will see the Chinese domestic demand accelerate again into 2013.