Weekly economic briefing: State of the states (and territories)

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

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

State of the states (and territories)

The 2016-17 State Accounts, released by the ABS, reveal that economic growth for the latest financial year was spread quite unevenly across Australia’s states and territories.

A broad measure of economic performance at state level is growth in real Gross State Product (GSP), and this is shown below in per capita terms.

Figure: Real annual per capita GSP growth, 2016-17

Source: Deloitte Access Economics using ABS cat. 5220

On this measure the Northern Territory came out on top in 2016-17, with 3.7% growth. However, this was mostly fuelled by construction of the Territory’s mammoth Ichthys LNG project. As construction draws to a close, and the far less employment-intensive production phase begins, the NT will be at risk of falling into the same post-mining boom slump that has already taken hold in Western Australia (and is already seen across many other indicators in the Territory).

A massive slump in construction (mostly mining construction) in Western Australia has contributed to that state’s significant 3.3% decline in per capita GSP, making it the only state or territory to go backwards on this measure in 2016-17.

Other slow growing states were Queensland and Tasmania, with 0.3% and 0.5% per capita GSP growth, respectively. Queensland suffered from declines in construction and manufacturing, while Tasmania’s growth was fairly slow across the board, due to a lack of business investment impetus.

Victoria’s per capita GSP growth of 0.9% was dragged down slightly by declines in its manufacturing sector, while strong population growth saw the state’s total aggregate GSP grow by a massive 3.3%. Strong population growth was also been at play in New South Wales, with per capita growth of a solid 1.3%, but population driving aggregate growth to a very strong 2.9%.

South Australia showed a solid performance in 2016-17, with a strong contribution from the state’s agriculture sector. Last but not least, the ACT put in a very strong performance, with per capita GSP growth of 2.9%. The ACT is in the fortunate position of having a large public sector and professional services presence, both of which have been performing very well of late.¹

So how does current growth compare to the past? Output growth in Australia in 2016-17 was weaker than it had been since 2009-10, as business investment fell again and activity moved towards more labour intensive sectors. Hence, while output growth has been weak, employment growth in Australia has been very strong.

The chart below shows how the last two financial years’ real GSP growth rates compared to average growth of the past 20 years (with standard deviation differences are used to account for the increased economic volatility of some states/territories). It shows that per capita GSP growth in Australia’s largest states has fallen below (or further below) the 20-year average.

Chart: Financial year per capita real GSP growth, standard deviations from 20-year average

Source: Deloitte Access Economics using ABS cat. 5220

In 2016-17, growth fell slightly below average in New South Wales and Victoria, reflective of housing investment activity (new builds and renovations, not prices) reaching a peak and slowing.

Western Australian growth in 2015-16 was already over a standard deviation below trend and has since moved to almost three standard deviations below trend. This is largely due to the influence of the end of the mining investment boom and the tail-end of major project completions. The other states falling further below average growth were Queensland and Tasmania, which were nearly matching Australian growth, but performing slowly relative to their previous track records.

The ACT led the nation by performing the best relative to its own previous trend growth rate, taking that mantle from New South Wales the previous year.

The State Accounts remind us that overall economic growth across the country has only been moderate over the past year, and there have been some particular weak spots.

Not surprising then, that Australia has had no inflationary pressure and the Reserve Bank has been unable to raise interest rates since August 2016.

¹Much of that from Deloitte’s amazing Canberra office!

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

 

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/

Is low productivity here to stay?

  • It’s official, the UK growth outlook has taken a turn for the worse. By far the biggest news in last week’s budget was the downgrade in the Office of Budget Responsibility’s (OBR) forecast for UK productivity growth over the next four years, from an average of 1.6% to 0.9% a year.
  • There is no consensus about why UK productivity growth has been so weak in recent years. But with the under-performance running into its sixth year, and other countries struggling with similar problems, the OBR has thrown in the towel and accepted that the days of rapid productivity growth are over.
  • The OBR downgrade points to much weaker growth ahead.  Just two years ago the OBR thought that the UK economy might be able to grow by 2.5% a year. Today that figure stands at 1.5%.
  • At the risk of piling on the pessimism the OBR’s new growth numbers do not take account of the all the effects of Brexit.
  • As Paul Johnson, director of the Institute of Fiscal Studies said last week, these new forecasts, “suggest that GDP per capita will be 3.5% smaller in 2021 than was forecast less than two years ago, in March 2016. That’s a loss of £65 billion to the economy. Average earnings look like they will be nearly £1,400 a year lower than forecast back then, still below their 2008 level. We are in danger of losing not just one, but getting on for two, decades of earnings growth”.
  • To put it mildly, this is gloomy stuff.
  • The downgrade to the OBR’s view of UK productivity is understandable. For the last few years its forecasts have erred on the side of being too optimistic. But is there a chance that the OBR has become too pessimistic?
  • Here are some things which might, just, go right for the UK in coming years.
  • One likely culprit for the UK’s productivity problem is the way in which sluggish wages and a plentiful supply of workers have encouraged firms to build capacity using employees rather than through investing. Far from machines taking peoples’ job, the amount of capital deployed per employee has fallen in recent years. That helped push employment to record highs but has almost certainly dampened productivity. Today, with unemployment at a 45 year low and Brexit on the horizon the era of easily available labour may be coming to an end. Added to this is the way in which policies introduced in recent years, such as pensions auto-enrolment, the apprenticeship levy and the National Living Wage, are adding to the cost of labour. The incentives for companies to make productivity-enhancing investments are likely to sharpen as labour becomes scarcer and more expensive.
  • A tighter labour market also strengthens the hand of workers and, by increasing the rate of job changing, speeds the diffusion of knowledge across the economy. Meanwhile gradual rises in interest rates will put pressure on lower productivity businesses to up their game or quit the field.
  • There is a lot of gloom about the capacity of new technologies to raise productivity. Yet history shows that the effects of technological improvements on growth come it fits and starts, often with long lags. Despite rapid developments in IT productivity growth disappointed in the 1970s and 1980s, prompting the quip from the US economist Robert Solow that, “you see the computer age everywhere but in the productivity statistics”. By the 1990s the productivity and growth numbers had caught up and the general view was that we had entered a new area of faster, technology driven growth.
  • We may be in a Solow moment today. We see technology at work at all around and, through innovations such as AI, driverless cars and Blockchain, more is to come. But, as in the 1970s and 1980s, we don’t yet see it in the productivity data.
  • Productivity growth is not something we have to live with, determined, like the weather or the tides, by forces entirely beyond human control. Much lies in the hands of management, something which is underscored by the varying profit and share price performance of different businesses. Recent research by the UK’s Office for National Statistics shows that foreign owned firms operating in the UK are 74% more productive in terms of the value of output per worker per hour than equivalent UK firms. The implication is that the application of new techniques and ideas across sectors, particularly from larger to smaller firms and from foreign to UK businesses, could raise productivity.
  • Nor is government powerless. Zimbabwe and Venezuela shows what happens to growth when governments get things badly wrong, but careful reform, pursued over years, can reboot growth. Thus Mrs Thatcher’s reforms in the 1980s helped arrest the alarming decline in the UK’s growth rate. Chancellor Schroder’s shake up of German labour market rules in the early 2000s helped turned Germany from a high to a low unemployment nation.
  • After years of disappointments optimism about UK productivity is low. Yet history shows that productivity growth comes in waves. In the 1930s in the wake of the Great Depression the US economist, Alvin Hansen, argued that technology and population-driven growth was played out and the US had entered a new era of low growth. Three decades of unprecedented growth followed.
  • Economic forecasts, especially long term ones, are fallible. Productivity growth is not predestined. Business and government should view the OBR’s forecasts as numbers to be beaten – not a self-fulfilling counsel of despair.

PS: I was in Washington the week before last for Deloitte’s annual conference of US Chief Financial Officers. I was very struck by the focus on tax reform and the boost it might give US growth and investment. The reforms would involve large cuts in corporate and personal taxes. Fiscal hawks worry about the effects on the US budget deficit; many Democrats see the cuts as being regressive and focused on the better off. The proposals face fierce opposition though I returned home with the sense that the chance of the US pulling off major tax reform are higher now than they have been for a very long time.

PPS: We recently wrote a Briefing on Tim Harford’s BBC series, ‘50 things that made the modern economy’. Tim invited entries for the 51st thing and the Economics Team offered the assembly line, the tin can, optical glasses, anaesthesia, on-line networks and sat-nav. The winner, from over 600 entries, was the credit card, invented in its modern form by Bank America in 1958. It has the distinctive feature of offering revolving credit or the ability to keep rolling over credit. Credit cards have made spending easier and, like many innovations in the field of credit, have increased levels of indebtedness. In the US credit card debt amounts to $860bn, equivalent to $2500 for every adult. Whether a force for good or bad, credit cards have certainly helped to shape the modern economy.

OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week up 0.4%, at 7,413.

Chancellor Phillip Hammond’s Autumn Budget involves an easing of the pace of austerity which was overshadowed by the striking downgrade to official forecasts for productivity and GDP growth. The growth forecast to 2022 would represent the slowest period of UK growth outside of a recession for more than 40 years.

International economic briefing by Ian Stewart

Economics and business

  • Euro area indicators are booming: German business confidence hit a record-high and Euro area job growth and manufacturing activity hit their highest levels since 1999
  • ECB president Mario Draghi said euro area wage growth will take time to pick up
  • French utility group, Veolia, issued a 3-year €500m bond with a negative yield (-0.03%), the first for a BBB issuer
  • Online takeaway firm JustEat is set to be promoted to the UK’s FTSE 100 index on the back of its soaring share price
  • UK households withdrew money from tax-free savings accounts at their fastest pace on record in October
  • The CBI reports that UK manufacturers reported the most robust demand for 29 years
  • UK households have some of the highest housing costs as a percentage of income in the EU, according to Eurostat
  • Japanese companies are tackling chronic shortages by offering more generous permanent contracts, providing job security and pensions, reversing a decades-long trend towards part-time and contract work
  • Uber is to buy 24,000 specialised electric Volvo cars, signalling its intention to develop a driver-less ride-hailing service
  • Goldman Sachs announced it would have European hubs in Paris and Frankfurt after Brexit

Brexit and European politics

  • The left of centre SPD abandoned its earlier refusal to consider coalition talks with Angela Merkel’s CDU. A sticking point in the talks is likely to be the SPD’s opposition to a cap on the number of refugees entering Germany
  • The European Commission warned that France’s first budget under Emmanuel Macron risks breaking EU fiscal rules
  • Philip Hammond, The Chancellor of Exchequer, set aside a further £3bn for spending on Brexit preparations
  • The FT reports that UK businesses are stockpiling goods over concerns that Brexit could disrupt their international supply chains
  • The European Banking Authority will move from London to Paris
  • Amsterdam won its bid to host the European Medicines Agency
  • A leaked EU paper suggested UK airlines risk losing their flying rights if Britain exits the single market
  • Michel Barnier, the EU’s chief negotiator, suggested that the UK will have no preferential access for financial services other than “equivalence” arrangements, such as those with the US or Singapore

And finally…

  • Students in the Russian Arctic were expected to attend school this week as temperatures reached minus 50 degrees Celsius. The children must go to school until temperatures hit minus 52C – Frosty reception

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