Weekly economic briefing: The competition for investment

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

The competition for investment

Private investment shapes the productive capacity of an economy, drives job creation and works to support sustainable development. Additionally, when investment has a foreign source, there are further benefits that can be generated, including the exposure to new international markets, global supply chains and new technologies.

But if we are to continue to enjoy the prosperity we have come to expect over recent decades, Australia will need to continue to invest, in order to increase capacity and contribute to productivity growth. To put a figure on it, at the end of 2016, net savings and investment represented 21.8% and 25.5% of GDP respectively. Foreign investment works to fill the gap between what Australia saves and invests every year, as does foreign borrowing. In 2016, total investment flows stood at $422 billion, comprising $377 billion in domestic savings and $45 billion in foreign investment.[1]

Chart 1: Australia’s savings gap, 1990 – 2016

Source: ABS 5206.0 – Australian National Accounts: National Income, Expenditure and Product, Sept 2017

So what are the benefits?

Reserve Bank Governor Phillip Lowe explains the benefits of foreign investment flow through to the entire community. “Capital from the rest of the world has helped build our country. If we had to rely on just our own resources, we would not be enjoying the prosperity that we do today. Our asset base and our productive capacity would be lower, and so too would our standard of living”.[2] Private investment increases employment, wages, consumption opportunities, and tax revenues that can fund public services. Specifically, the benefits attributable to households and businesses include those shown in the Figure below.

Figure 1: Benefits of private investment

Source: Deloitte Access Economics, Partners in prosperity: The benefits of Chinese investment in Australia (2017)

Investment attraction

Given these benefits it is not surprising that there is significant competition between Australia’s States and Territories to attract investment, in order to shore up their future economic growth.

This investment attraction comes in many forms, from broad brush policies such as lowering State taxes, keeping regulation in check, proving supporting infrastructure and developing skilled workforces.

All jurisdictions are mindful of these considerations, with some more successful than others. The Productivity Commission explains the role of government in overcoming “the investment slump” and explains that without government support, slow growth in non-mining sector investment will place downward pressure on labour productivity, and therefore on living standards.

Less standard (and less transparent) are the incentives offered by State governments to attract large scale discrete investment opportunities (either from the private sector or the Federal government), which generally do provide economic opportunities to the State, but at the cost of the taxpayer dollar. But they do occur, and occasionally a bidding war breaks out in public.

Take the competition between Sydney and Melbourne for example. Last year, David Jones announced it was shifting its headquarters from Sydney to Melbourne, a move that will create an extra 1,500 jobs for the Victorian economy (at the expense of NSW).[3] In the same year, Western Australia fought for shipbuilding contracts that had previously been attributed to South Australia.[4] Going back a few years, in 2012 the Queensland Government convinced Qantas to continue maintenance hub operations in Brisbane rather than Melbourne, after CEO Alan Joyce announced the company would shut down one of the two facilities.[5]

The competition for private investment is stronger and fiercer than ever.

Who’s winning?

Well, it’s hard to tell, particularly over recent years when mining investment has swamped the general level of investment from other sources.

In 2017, the boom mining investment phase is widely seen to be nearly over, though its final phases remain, as seen in the chart below, with the Northern Territory, WA and Queensland still having the highest ratios of business investment to output, but well below what has been seen in recent years.

Chart 2: Total private business investment as a proportion of GSP

 

Source: ABS 5220.0 – Australian National Accounts: State Accounts, November 2016

 

Across other States, Victoria and South Australia are recording decent levels of business investment as a share of their economies over the past year, a little ahead of that being seen in New South Wales, Tasmania and the ACT.

[1] DFAT, The benefits of foreign investment, Australian Government, <http://dfat.gov.au/trade/topics/investment/Pages/the-benefits-of-foreign-investment.aspx>.

[2] Dinner Remarks to A50 Australian Economic Forum (2017) Phillip Lowe, Governor Reserve Bank of Australia.

[3] David Jones to shift HQ to Melbourne (2016) Yahoo Finance, <http://www.abc.net.au/news/2016-04-18/shipbuilding-austal-colin-barnett-happy-but-mark-mcgowan-angry/7335548>.

[4] Eliza Laschon, Navy shipbuilding contracts delight Premier Colin Barnett but WA Opposition says WA ‘ripped off’ (2016) ABC News, <http://www.abc.net.au/news/2016-04-18/shipbuilding-austal-colin-barnett-happy-but-mark-mcgowan-angry/7335548>.

[5] Robyn Ironside, Jobs cuts but hopes soar for Qantas maintenance facility in Brisbane (2012) The Courier Mail, <http://www.abc.net.au/news/2016-04-18/shipbuilding-austal-colin-barnett-happy-but-mark-mcgowan-angry/7335548>.

For more information on the Australian brief, please contact co-authors David Rumbens and Monique Champion.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/


Commodities make a comeback

Cheap money has driven a surge in asset prices around the world. The pries of equities and bonds are at record highs and in much of the world so, too, are house prices.

One class of assets that has been late to the party, and doesn’t look pricey, is commodities.

This broad category includes everything from agricultural products, such as rice, to base and precious metals and most energy sources.

Commodity prices tend to move in long, boom, bust cycles. They boomed in the 1970s as oil producers drove prices higher. One of the dominant themes in that decade was of commodity scarcity limiting global growth. That consensus was shattered by the fall in commodity prices through most of the 1980s and 1990s. By the late ‘90s The Economist pronounced that the world was drowning in oil. It didn’t last long. From the late 1990s demand from emerging economies and a quickening pace of globalisation led to a quadrupling of commodity prices by 2008. City analysts talked of an endless upwards commodity ‘supercycle’. The global financial crisis put paid to that theory. By early 2016 commodity prices had fallen by two thirds from their 2008 peak.

The latest data from the World Bank, released this month, shows that many global commodity prices have started to recover. Energy commodities, including coal, natural gas and oil, have risen in value in the last year with coal seeing the largest gains. China, which accounts for roughly half of global coal consumption, has been a major swing factor supporting prices.

Metals prices have also seen sharp rises, with aluminium, copper, iron ore and lead growing at double digit rates over the last year. The price of copper, which is used in everything from wiring, to plumbing and for coins, has risen by more than 30%.

The revival in commodity prices reflects four main factors.

Firstly, a synchronised global recovery has driven demand for commodities, such as copper, iron ore and coal, which are sensitive to the economic cycle.

Second, because most commodities are priced in dollars a weaker dollar has exerted downward pressure on prices, helping support consumption.

Thirdly, oil producers have restricted output in an attempt to reduce the supply glut and support prices. Natural disasters have also hit production of some commodities. The price of Brazil nuts, for instance, has risen by around 60% over the course of the year as a result of the Amazonian drought brought about by the cyclical El Nino weather pattern. The shortages are so bad that Brazil has become a net importer of Brazil nuts.

Fourth, some commodities are benefiting from a step change in technology.  Growth in the use of battery storage capacity and electric cars, for instance, constitute a vast potential source of demand for lithium, cobalt and nickel.

The rising tide has not lifted all boats. Precious metals have generally bucked the trend as the global recovery has reduced demand for ‘safe haven’ assets. The prospect of further interest rate rises, which increases the attractions of cash relative to commodities, has also weighed on demand for assets such as gold. Meanwhile, with some notable exceptions, agricultural prices have moved sideways this year.

Rising commodity prices signal a stronger world economy and, within that, better prospects for commodity-dependent economies such as Nigeria and Russia. Higher commodity price have also driven up inflation in the rich world, crimping consumer spending power and encouraging central banks to tighten monetary policy.

And what of the future?

The recovery in prices is just over 18 months old and, by the standards of the last 20 years, prices do not look especially high. Agricultural price indices have not seen much growth at all. In a world of demandingly priced assets commodities are lagging behind. Barring a global downturn they probably have further to rise.

PS – a fascinating new analysis by the UK’s Office for National Statistics shows that foreign owned firms operating in the UK have far higher levels of productivity than their UK equivalents. Keeping industry, region and size of firm constant, such businesses were 74% more productive in terms of the value of output per worker per hour than UK firms.

OUR REVIEW OF LAST WEEK’S NEWS

The European Central Bank announced that it would cut the pace, but extend the length of its quantitative easing programme. The announcement was seen as dovish and achieved its objective of minimising the reaction in financial markets.

International economic briefing by Ian Stewart

Economics and business

  • The strength of US Q3 growth despite hurricane damage is likely to confirm the Fed in its view that US monetary policy needs to be tightened
  • US consumer confidence hit a 12 year high
  • German central bank chief Jens Weidmann questioned the ECB’s logic of extending QE when growth is robust
  • In a pro-business budget French President Emmanuel Macron cut a controversial wealth tax and introduced a flat rate for capital gains
  • Italian consumer and business confidence saw further increases
  • A GfK survey showed that the gap between downbeat consumer economic sentiment in the UK and upbeat euro area sentiment is at its widest on record
  • Japanese Prime Minister Shinzo Abe won a ‘super majority’ in Japan’s snap election, giving him a fresh mandate for ‘Abenomics’
  • Chinese President Xi Jinping was confirmed as China’s most powerful ruler since Mao Zedong
  • Saudi Arabia announced plans for a $500bn economic zone as part of its transformation agenda
  • India’s government announced a $32bn plan to recapitalise the country’s state-controlled banks
  • A surge in the Amazon share price pushed Jeff Bezos to the top of the Bloomberg Billionaires Index, moving ahead of Bill Gates who had held the top spot as the world’s richest person for more than four years

Brexit and European politics

  • Catalonia’s parliament voted for independence from Spain as the Spanish authorities prepared to take direct control of the region
  • The FT reports that EU officials will offer the UK a 20-month Brexit transition period
  • The EU’s chief Brexit negotiator, Michel Barnier, said Britain can expect a trade deal similar to the EU-Canada agreement
  • The German financial regulator said it would not tolerate “empty shells” operations moving from the UK to Frankfurt
  • A report by the Migration Observatory suggested “subnational visas” and regional immigration policies could better match migration with economic needs
  • The European Investment Bank warned that it could take thirty years to fully repay €3.5bn of capital to the UK
  • Refractory product maker RHI Magnesita, previously listed in Brazil and Austria, listed on the London Stock Exchange. CEO Stefan Borgas, said, “We asked ourselves is this the right time now to come to the UK?…we took a deep dive…[we believe London’s stock market will] not be affected at all” by Brexit
  • UBS could move as few as 250 people, less than the 1,000 originally feared, from London after Brexit

And finally…

  • Saudi Arabia made history by becoming the first country to grant nationality to a robot. Sophie, the humanoid robot, said that she was “honoured”, whilst addressing an audience in Riyadh – citizenchip

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