Australian Industry Group – (25 October 2013) AUSTRALIAN ECONOMIC OUTLOOK

International economic developments

This week the Australian dollar (AUD) was buffeted by conflicting forces, locally and globally. In Australia, the latest CPI data (see below) temporarily pushed the AUD to a high of US97.59 cents on Wednesday. But global influences emanating from China (trade data, debt forecasts and property market reports), Japan (the Nikei stock market index) and the US (rising concerns about the future of US Government debt negotiations) subsequently pushed the dollar down again, as risk aversion returned to volatile, vulnerable financial markets. Even so, this week’s trading range for the AUD was its highest since June. Concerns are now increasing in some quarters that the AUD could rise above parity against the USD once more, if the fragile US economic recovery stalls – and the USD plunges – due to US Government procrastinations or due to other economic shocks (such as a disruption to global trade or US confidence).

Australian economic developments

This week Treasurer Hockey made several significant announcements for the economy and industry:

· An increase in the maximum debt level allowed for the Australian Government (the Government’s ‘debt ceiling’) from $300mn to $500mn. The Australian Government now expects its debt to peak at

just over $400mn within the next four years, funded through the issuance of Government securities.

· An increase of $8.8bn for the RBA’s ‘buffer’ fund, which is used to absorb temporary losses in the RBA’s $89bn balance sheet, amid concerns about renewed threats to global financial stability.

· The immediate appointment of a Commission of Audit to make recommendations on how the Australian Government can best bring its budget back into balance and eventually, surplus. The Commission will make an interim report to Government in January 2014 and final report in March 2014, with a view to incorporate its recommendations into the next Federal Budget in May.

· The Productivity Commission will commence an inquiry into the automotive industry, commencing as soon as next week, pending final agreement on the terms of reference. An interim report could be available before the end of 2013, with a final report delivered to Government around June 2014.

Also

Also of relevance to the Australian economic outlook, this week the Bureau of Resources and Energy Economics (BREE) released its latest annual summary of major electricity generation projects that are under way or being planned around the country. Like the BREE’s regular list of major resources projects (last published in April and due for an update on 27 November), this list provides a timely snapshot of real investment activity in one of our key industrial sectors. With regard to electricity industry investment, BREE notes that “falling electricity demand since 2010–11 has resulted in a capacity overhang in the market, and led to a general softening of investment in new electricity generation projects, particularly for non-renewable projects”. Even so, BREE found there are currently 163 projects in the investment pipeline with a combined disclosed value of $58.5 billion and 42 947 megawatts of planned capacity. This includes:

· 37 projects at the Publicly Announced Stage, worth a combined $7.9 bn and with 6,246 megawatts of

capacity;

· 100 projects at the Feasibility Stage, worth a combined $42.8 bn and 33,129 megawatts of capacity;

· 22 projects at the Committed Stage, worth $5.6 bn and with 2,689 megawatts of capacity; and

· 4 projects that are near complete, worth $2.2 bn with 883 megawatts of additional capacity.