The global forecasts from The Economist magazine (September 10-16) and the Economist Intelligence Unit (September 14) suggest little improvement in global economic growth for the next three to five years. World economic growth is stuck at about 3.3 per cent per annum. World economic growth of more than 4 per cent per annum is needed for global employment conditions not to deteriorate.
China’s economic growth is expected to slow from 6-7 per cent per annum now, to 4-5 per cent in three to five years’ time, while India’s economic growth is expected to plateau at around 7-7.5 per cent per annum (its current level). Europe is stuck around 1.5 per cent growth and North America around 2 per cent.
The brightest outlooks (relative to the past) are in Latin America, the Middle East and Africa, where economic growth will recover to about 3 per cent per annum in a few years’ time.
This is not a good backdrop for Australia’s economic prospects in the immediate-medium term.
Our GDP is expected by The Economist to grow by only 2.7 per cent in both 2016 and 2017. With the likely slowdown in China’s economic growth, it is hard to see a booming economic performance here in the medium term. We need more than 3 per cent per annum growth in GDP to tread water in unemployment terms.
The latest GDP figure for Australia (3.3 per cent per annum growth) is somewhat deceptive in terms of economic activity. It is driven by export production increases off the back of the extra capacity built up in the mining boom, and by falling imports.
Falling imports suggest that domestic demand conditions are weak. This is, in fact, the case. Australian domestic final demand increased in the year to the end of June 2016 by only 1.5 per cent (well below its annual average increase over the last five years of 1.8 per cent per annum).
What is particularly disturbing is that business investment fell over the last 12 months by just over 11 per cent. This does not look like an economic boom happening.
The state equivalents of the national Gross Domestic Product (GDP) data are the Gross State Product (GSP) data, also issued by the Australian Bureau of Statistics. The GSP data are issued once a year (in November). For in-between periods, people look at the data issued by the ABS for State Final Demand – which is the same as GSP but without taking into account exports and imports.
The final demand data in the June national accounts, released by the Australian Bureau of Statistics on September 7, reveal how South Australia is travelling, economically compared with the other states and territories, as well as with Australia as a whole.
Over the last year to June 2016, final demand grew in South Australia by 1.3 per cent, compared with 1.5 per cent for Australia as a whole, 5.5 per cent for the ACT, 4.5 per cent for New South Wales and 3.5 per cent for Victoria. Final demand grew in Tasmania by 1.6 per cent. Final demand in all the other states and territories shrank as mining investment fell.
Over the past five years (June 2011 – June 2016), final demand grew by 1.2 per cent per annum in South Australia, compared with 1.8 per cent per annum in Australia as a whole, 5 per cent in the Northern Territory, 2.9 per cent in New South Wales, 2.3 per cent in Victoria, 2.2 per cent in the ACT, and less than 1 per cent in Queensland, Western Australia and Tasmania.
Over the past five years, despite its slow rate of economic growth, South Australia has picked up against all the former “mining boom” states (except the Northern Territory).
Comparison between our economy and Canberra’s is instructive. Over the past 30 years, South Australia’s final demand has shrunk relative to the ACT’s from 2.6 times to only 1.6 times. At this rate, South Australia could have a smaller economy than the ACT’s within 20 years.
Over the past year to June 2016, the final demand increase in South Australia was entirely due to spending by households and governments. Households’ final consumption increased by nearly 3 per cent; general government final consumption increased by just over 4 per cent, and general government gross fixed capital formation increased by nearly 28 per cent.
By the same token, business investment fell in South Australia by just over 16 per cent (and nationally, by just over 11 per cent). Private investment in machinery and equipment fell in South Australia over the year to June 2016 by just over 15 per cent (nationally, the fall was just under 2 per cent).
Tellingly, private investment in intellectual property fell in South Australia by nearly 11 per cent, compared with a fall of about 1.5 per cent nationally. Over the last five years, private investment in intellectual property in South Australia fell by 0.4 per cent per annum, compared with a rise of 1 per cent per annum in Australia as a whole. So much for South Australia reinventing itself economically!
Over the past five years, every sub-category of private investment in South Australia has fallen, even dwellings (a fall of 0.6 per cent per annum, compared with a rise nationally of 2.5 per cent.).
However, most sub-categories of private investment have fallen nationally, as well as in South Australia – sometimes by more than in South Australia. For example, non-dwelling construction fell nationally over the past five years at the rate of 2.2 per cent per annum, compared with South Australia’s fall of 0.6 per cent. Overall, however, the national fall in private gross fixed capital formation over the last five years was 1/10th the rate of the fall in South Australia: a national fall of 0.1 per cent per annum compared with a fall of nearly 1 per cent in this state.
The employment consequences of the private-sector malaise in South Australia have been disastrous. Over the past five years (from August 2011 to August 2016), employment has increased by only 2300 people in total, at the average rate of 0.1 per cent per annum. For comparison, over the last five years, employment has increased in Australia as a whole at the average rate of 1.3 per cent a year.
Moreover, the employment picture in South Australia is worse than simply counting employed heads would suggest – there has been a big shift to part-time employment within the ranks of the employed. There are now 16,200 fewer people employed full time in South Australia than there were five years ago.
There is no particular reason why South Australia is condemned to under-perform the average for the rest of the country.
All this impact has fallen on males. In fact, the number of full-time jobs held by females in South Australia has increased by 5200 over the past five years (a growth rate of 0.6 per cent per annum). This implies there are 21,400 fewer full-time jobs held by males in South Australia than there were five years ago (a fall of 1.2 per cent per annum).
For comparison, the number of full-time jobs in Australia increased by 0.7 per cent per annum over the past five years; the number of full-time jobs held by females increased by 1.2 per cent, and the number of full-time jobs held by males increased by 0.4 per cent.
The “strong government” economic strategy being pursued by the South Australian Government over the past five years has failed to deliver acceptable economic and employment outcomes for the people of the state. There is no particular reason why South Australia is condemned to under-perform the average for the rest of the country.
Keynesian pump priming by running Government deficits does not work in small open economies.
The only thing that works is stimulating investment in the private sector, by cutting its costs and deregulating its working environment, not by offering subsidies of one sort or another (which have to be paid for by current and future taxpayers – including businesses).
Only when private business investment picks up and stays up will we know that the economic battle in South Australia has been won.
Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia and a weekly contributor to InDaily.Jump to next article