civil contractors federation sa 18 may 2016

©Baillieu Holst Ltd 1

Darryl GobbettChief Economist and [email protected]

How are things Looking for South Australia and What can be DoneWednesday 18 May 2016

Civil Contractors Federation (SA)South Australian Infrastructure Conference Adelaide Oval Adelaide SA


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Economic and Financial Background: Low Growth, Slower Productivity gains, Private Sector deflation

Output Growth, Inflation Adjusted, % pa

Cons Price Inflation %pa

Interest Rates %pa 29 April 2016

Structural Central Govt Budget

% of GDP1997

- 2006

2014 2015E 2016F 2017F 2017F 3 moInterbank

10 year Govt Bonds 2017F

United States 3.3 +2.4 +2.4 +2.4 +2.5 +1.5 0.64 1.82 -3.4Japan 0.9 0.0 +0.5 +0.5 -0.1 +1.2 -0.02 -0.12 -3.5

Euro Area 2.3 +0.9 +1.6 +1.5 +1.6 +1.1 -0.22 0.27(Germany)

-0.9

United Kingdom 3.1 +2.9 +2.2 +1.9 +2.2 +1.9 0.59 1.60 -2.2

China 9.4 +7.3 +6.9 +6.5 +6.2 +2.0 3.3 2.90 -2.6India 6.6 +7.2 +7.3 +7.5 +7.5 +5.3 7.27 7.44 -6.6Indonesia 2.5 +5.0 +4.8 +4.9 +5.3 +4.5 6.55 7.72 -2.8ASEAN 5 na +4.6 +4.7 +4.8 +5.1 +3.8 na na naBrazil 2.7 +0.1 -3.8 -3.8 0.0 +6.5 14.25 12.74 -7.0

Russia 5.0 +0.6 -3.7 -1.8 +0.8 +6.5 11.72 8.88 -3.0 Australia 3.6 +2.6 +2.5 +2.5 +2.5 +2.4 2.5 2.52 -0.9

World +3.4 +3.1 +3.2 +3.5 Group of 7, 1.7New & Emerg, 5.9

Source: IMF World Economic Outlook, April 2016; www.tradingeconomics.com


2016/17 Federal Budget Forecasts

• Economic growth very slow• Falling Mining Investment being offset by increased housing investment, exports, • Govt growth forecasts revised down from December 2015 MYEFO

• Mining investment falling faster than expected• Non Mining Investment not growing as fast as expected • Private dwelling investment growth to slow more sharply• Public Final Demand growth is lifting with Infrastructure spending

% change, inflation adjusted

(Italicised are BH forecasts)

13/14 14/15 15/16e 16/17f 17/18f

Household Consumption 2.5 2.7 3.0 3.0 3.0

New Motor Vehicle Sales, m* 1.12 1.2 1.35 1.40 1.43Private Investment - Dwellings 5.1 7.9 8 2 1

No. of Private Dwellings Started (‘000)* 178 200 215 220 222 Business Investment – Mining

Business Investment – Non Mining

-7.0

-3.7

-17.3

1.2

-27.5

-2

-25.5

3.5

-14

4.5Private Final Demand 0.9 1 0.5 1.5 2.5

Public Final Demand 1.6 0 2.25 2.25 2.0

Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1

*BH forecasts


• Employment and Wage Growth slow and slowing• Forecast fall in Household savings ratio to support retail spending growth• Labour force participation lower for 19 – 65 year old males, rising for baby boomers• Population and Working age population growth slower than earlier estimated• Inflation staying lower for longer, Private Sector deflation as part of global phenomenon

13/14 14/15 15/16e 16/17f 17/18fEmployment, % change to June qtr 0.7 1.6 2 1.75 1.75

Wage Price Index, % change to June qtr 2.6 2.3 2.25 2.5 2.75

Unemployment Rate, % June qtr 5.9 6.1 5.75 5.5 5.5

Labour Force Participation Rate, % June qtr 64.6 64.8 65 65 65

Household Savings Ratio, % June qtr, trend 10 9 8 7 7

Consumer Prices, % change to June qtr 3.0 1.5 1.25 2 2.25

Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1

2016/17 Federal Budget Forecasts


Reserve Bank Forecasts

• Inflation now forecast to be below 2-3% pa policy range• Economic growth below reduced potential growth rates

• Slower population growth• Low productivity gains

• Cash rate to 1.25% by end 2016

Source: RBA Statement on Monetary Policy May 2016


Non Mining Investment Expectations not Offsetting Lower Mining Investment

Gross Investment by Major Industry Sector, $b, Current $ 10/11 11/12 12/13 13/14 14/15 15/16

4th Est16/171st Est

Mining 46.9 82.0 94.7 90.4 76.1 56.8 32.8Manufacturing 12.3 13.2 9.5 9.2 8.6 8.3 7.4Electricity, Gas & Water 6.2 5.4 5.5 5.8 5.1 5.4 6.6Construction 5.4 4.7 5.0 4.7 6.3 3.4 2.3Wholesale & Retail Trade 7.4 7.5 7.4 8.1 9.1 8.9 9.2Transport, Post & Warehousing

11.6 13.7 11.1 11.2 12.5 9.9 10.6

Rental, Hiring & Real Estate

11.9 10.5 9.8 9.6 12.2 11.4 10.0

Other 17.6 17.9 17.7 19.0 20.8 19.9 19.2Total 119.3 154.8 160.5 158.0 150.7 124.0 98.1

Source: ABS 5625.0 Private New Capital Expenditure and Expected Expenditure December Quarter, Australia, February 2016. Average of last 5 year realisation ratios applied to 2015/16 4th estimates and 2016/17 1st Estimates.


Global and National Trends: Implications for SA


The South Australian OutlookSmall, Regional Economy: 1.7 million people

•Smaller than Western Sydney or Brisbane, Irrelevant nationally•Population older & ageing faster, sicker, more obese, less educated and lower skilled•Driving policy decisions but are these also outcomes of past policies?•Impacts on Housing, retail, tax base, attitudes, national representation

No Exports means No economic or Population growth

Industry structure & policy makers still adapting from 1960s, not 21stC challenges•No private sector employment growth since 2010 •Manufacturing employment soon to be 30,000, or 30%, lower than mid 2000s peak

• Traditional motor vehicle and metal fabrication industries are disappearing• Growth is in Food processing• Losses in SA in most Manufacturing has been faster than in NSW or Victoria

•Growth is principally in aged care, the public sector and associated social support

More international competition and More opportunities


Sources of SA Employment Change by Sector


The South Australian Outlook

Public finances rely on Federal Support

• Lower per capita income, slower & slowing population growth, higher costs• Large & growing Public Sector, Higher taxes and poor Budgetary outlook

• Increased GST and Asset Sales currently reasons for low deficits

• Large & Low Productivity Public Sector, High Deficits, Increasing Tax Burden & Debt• ALP sees big public sector and high taxes as politically acceptable• Liberals not a small government party

• Likely less support from Federal Govt and Other States• Tax Reform expected to reduce income taxes, increase GST• Likely impacts on GST relativities, Special Grants, States’ own taxes

• Don’t criticise the SA Government but it is starting to recognize change is needed• Transparency on Regulatory Impact Statements is poor• Focus is on more efficient regulation, not less regulation • ICAC, Royal Commission on Nuclear Fuel Cycle are beginnings

©Baillieu Holst Ltd 12Please read the disclaimer at the beginning of this report.

Economic Forecasts: South Australia

Retail Turnover % (Nominal, year total) 7.9 1.7 0.6 1 -0.4 3 4.4 3 3

New Motor Vehicle Sales (000) 59,400 66,080 62,836 65,340 70,268 70,074 69,262 68,000 70,000

Business Investment, %, Current Prices

- Plant & Equipment 1.1 0.2 -1.3 6 -12.9 0.7 7.8 -8 0

- Non Residential Construction 18.7 -6.8 17.3 18.2 11 -1.5 -0.4 0 -15

- Cultivated Bio Resources & Intel Property -7.4 -2.7 12.4 6.8 5.1 0.6 -3 4 4

Public Investment 34.6 55.6 -12 -5.1 -1.8 -8.5 -17 15 10

Unemployment Rate % (June, Trend), 5.6 5.4 5.2 5.5 6.2 6.7 7.7 8 8

Actuals ABS; forecasts DG

0.7

3

10,798 10,091

10,000 9,750

10,250 10,000

0.5

0.8 0.7

-2 3

0.2 -0.4 0.1 0

8,433 8,447

8,096 8,653

2016/17f

0.8 1.6 1 1

2013/14 2014/15 2015/16f

10,819 10,147

2008/09 2009/10 2010/11 2011/12 2012/13

Employment Growth % (Year to June, Trend) 0.6 1.3 1.6 -0.7

1.7GSP(Total Output) % (Real) 2.7 1.6 2.4 0.6

Private Dwelling Approvals Private Dwelling Commencements

11,777 11,676

11,480 11,061

10,952 10,058

4.6 6.7

Population Growth % (Yr to June) 1.3 1.1 0.8 1 0.9 0.9

Private Avg Weekly Earn % (FTAOT, (Yr to May) 7.4 0.7 4.5 3.2


Recent trends suggest SA’s population growth will be lower than projected:•Running below Projection B assumptions on net overseas migration; and•At or above Projection B assumptions on net interstate migration.19 – 55 age groups therefore likely to be smaller than Projection B.

Net Natural Increase

Net Overseas Migration

Net Interstate Migration

2010 7143 10894 -30382011 7501 10044 -24012012 7369 10915 -30382013 7082 11336 -39442014 7249 10481 -2744

Dec 2014-Sep 2015 6266 10255 -4125

Population Outlook

Please read the disclaimer at the beginning of this report.


By 2030 those over 60 will exceed those 0 – 19, or 20 – 39, or 40 – 59•Likely bigger market for Last Home Buyers than First Home buyers•Land, Staffing, Training, Investment and Cost issues for institutional aged care•Health care issues for Baby Boomers wanting to stay mobile longer•Education, Entertainment, Employment, Politics, Tax, Travel

More expected of the public sector but Boomers not willing to pay•Adverse Impact on income taxes and spending taxes of combination of:

• Reduced employment growth and increased part time employment• Low/no productivity growth meaning low/no real per capita income growth

Points to need now for more efficient and effective decisions on and implementation of•Taxation•Spending•Investment

Some Implications of Ageing Population



Metropolitan Home Prices Rising, Activity Should Lift

Auction clearance rates (REISA)Dec 2015 63%Sept 2015 71%June 2015 66%March 2015 61%Dec 2014 59%Sept 2014 66%June 2014 63%March 2014 61%March 2013 55%March 2012 41%March 2011 48%March 2010 64%For 2016/17•Employment flat to lower, population growing •Interest Rates on hold •Vacancy rates should steady•High land costs continue•Funding constraints on investment housing•Dominance of the big banks impacting competition •First Home Buyer Affordability and overall confidence are the big issues

Adelaide House Prices



Housing Construction Activity


Units and Retirement Homes Main Drivers


Food Turnover


Eating Out


Household Goods


Clothing Etc


The Other


SA New Motor Vehicle Sales


Sensis Small and Medium Business Index, March Qtr 2016 (released 7 April 2016, Interviews 18 Jan 2016 to 15 Feb 2016)


Business Confidence in SA




“The SA Government, which has really struggled on this measure for over two years was criticised for high taxation, (19%), payroll tax (11%), poor economic management (17%) and excessive wasteful spending (12%).” (December Qtr 2015 Report)

“The major criticisms of the SA Government, which has been the least popular for over two years, were a lack of incentives or support for small business (14%), poor economic management (13%) and payroll tax (12%).” (March Qtr 2016 Report)



SA Govt Investment Spending ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16

$10.8 billion to be invested over next 4 years:•$3.3b in health – mainly buying the new RAH•$1.4b on roads: mainly North-South Road corridor•$353m on public transport•$216m on education facilities•$197m on Festival Centre precinct•$1.7b on water infrastructure

• This seems to be SA Water’s normal capital spend

•Pre Fed Election promises


Private Investment Flat, Public Investment Falling


South Australian Growth: Where from and to?Gross Value Added, ABS Cat 5220.0

1989/90 - 1999/00

1999/00 - 2005/06

2005/06 - 2013/14

2013/14 Share of State Gross Value Added

excluding Dwellings,

Current Prices

Health care and social assistance 3.1% 3.9% 3.2% 10.1% Supportive DemographicsManufacturing 1.7% -1.3% -0.1% 9.1% Tough, shrinking, changingFinancial and insurance services 3.7% 3.2% 5.0% 8.4% Oligopoly, funds managementConstruction 2.9% 5.1% 4.7% 8.4% Housing, public infrastructurePublic administration and safety 3.6% 3.2% 1.8% 7.1% Slowing further on Budget restraintsAgriculture, forestry and fishing -0.5% 7.2% 7.2% 6.1% Overseas demand lifting furtherProfessional, scientific and technical services 2.9% 4.0% 4.5% 5.9% Change, Outsourcing, RegulationEducation and training 1.9% 1.4% 1.8% 5.9% Should lift on overseas demand with lower $ARetail trade 3.3% 4.5% 2.4% 5.7% Growing but changingTransport, postal and warehousing 3.0% 2.6% 2.6% 5.6% Growth with online buying, inbound tourismWholesale trade 2.8% 3.4% 3.1% 4.8% As per Retail Trade but slowerElectricity, gas, water and waste services -1.3% 4.4% 0.8% 4.4% Waste services main growth areaMining 1.8% 1.0% 6.5% 4.1% Increasing exports. Investment to rise in 3-4 years

Average of Annual Rates, inflation adjusted


Economic and Financial Update


Investment that leads to lower Costs and increased Output and Exports– Increased real per capita incomes– Stronger population growth through less population loss interstate

» Increased retail spending and new home buyer activity» Better public sector finances and possibility of tax cuts

– Growing sustainable workforce provides better support for ageing population Focus on regional SA, not urban commuters

– Eyre Peninsula rail, energy and water and ports– Sealing of Strzelecki Track– SE Drainage Scheme– Kangaroo Island water transport links– Nuclear Waste repository– Base Load electricity and micro grids– Water for agriculture not urban consumption– Rail/Road Bypass of Adelaide

Establish a SA Productivity Commission to determine priorities– Get more innovative on funding infrastructure– Look at tax mix– Regulation load

Need for More Investment, Private and Public What and Where?


Move to a broad based Land Tax• Residential transfer costs becoming a substantial drag on turnover

• Increased turnover and consolidation to lift new developments and civil construction

SA Government asset sales•Set time and price targets for public sector land release as part of City boundary implementation•Review local zoning issues

Reduce “gold plating” and “future proofing” requirementsReduce Size and Cost of SA Public Sector to save $800m pa•Cut number of Ministers to 10 or less•Reduced regulation should result in cost savings•Bring SA Public pay relativities to average of 115% of Private Sector (now 120%)•Reduce SA Govt Full Time Equivalent (FTE) staff numbers to 2007 levels

How to Fund this


Focus on SA’s strengths and advantages• Agriculture, Mining, Health and Medical research, Defence; and associated

manufacturing: - Ingham’s announcement is a good announcement

• Tertiary Education and Speciality Tourism, eg wine, Kangaroo Island• Intellectual capital: NGOs, Water industry, Land titles, Waste management,

Ageing population eg.• Size of Adelaide: Private and Public Decision makers very close together• SME focus, and recognise importance of local procurement • What part of the value chain is most profitable and sustainable?

- Design- Financing- Logistics- Making- Management- ?

Some other Issues

civil contractors federation sa 18 may 2016

Economy & Finance