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SA’s economic outlook: flat but with a potential upside


InDaily columnist Richard Blandy forecasts South Australian economic growth and employment, and offers his plan to make the state competitive again.

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Ahead of the Commonwealth and state budgets, I thought I should provide readers of my column in InDaily with my assessment of South Australia’s economic performance and outlook for the next few years.

This is not independent of what is happening in Australia and the rest of the world. So I am looking at the Australian and world economies as well.

As we all know, South Australia’s economic performance has been unacceptable over the last five years.

Employment has increased by only 5000 jobs (by 0.6 per cent) in the five years since March 2011. By comparison, employment has increased in Australia as a whole by 718,000 jobs (6.4 per cent) – 10 times the South Australian rate – over the same period.

Furthermore, all of the increase in jobs in South Australia has been in part-time jobs. There are 15,000 fewer full-time jobs in SA now than there were five years ago. In Australia as a whole there are 300,000 more full-time jobs than there were five years ago.

The unemployment rate in SA is now 7.2 per cent, up 1.7 per cent over the last five years, whereas Australia’s (in total) has risen to only 5.8 per cent, up by 0.9 per cent.

If we look at a broader range of economic indicators, over the last five years South Australian economic output has grown by 1.4 per cent pa, about half the rate in Australia as a whole (2.6 per cent p.a.). Investment has actually fallen in SA at the average rate of 0.5 per cent p.a. over the last five years, while national investment has increased by 2.4 per cent p.a.

We have held our own with the rest of the country in exports over the last five years, growing at 4.1 per cent p.a. But SA household consumption has grown by only 1.3 per cent p.a. over the last five years, just over half the national rate (2.5 per cent p.a.).

Looking at other economic indicators over the past five years, retail sales have grown in SA by 2.2 per cent p.a. (3.9 per cent p.a. for Australia); new motor vehicle sales have grown in SA by 2 per cent p.a. (2.9 per cent p.a. nationally); established house prices have increased in SA by 1.1 per cent p.a. (4.7 per cent p.a. nationally); building approvals have increased by 0.2 per cent p.a. (5.6 per cent p.a. nationally); and building activity has actually fallen over the past five years by 3.2 per cent p.a., while it has been increasing nationally by 1.3 per cent p.a.

South Australia is tracking along at about half the rate of economic growth of Australia as a whole – or worse, on a number of indicators.

What about the future?

World economic growth needs to exceed 4 per cent p.a. to be at its trend rate, where incomes and jobs increase steadily, unemployment does not rise, inflation is stable, and international balances of payments are acceptable to foreign lenders.

World economic growth this year and up to 2018 is expected to be much less than this by the International Monetary Fund (IMF), the World Bank, the Organisation for Economic Cooperation and Development (OECD) and the Economist Intelligence Unit (owned by The Economist magazine).

They forecast world economic growth to be around 3 per cent in 2016 rising to about 3.4 per cent (on average) by 2018. That is, the immediate outlook is for world economic growth to be below trend for the next few years.

Economic growth in the USA is expected to be about 2.5 per cent p.a., in Europe about 1.7 per cent p.a., in Asia about 6.7 per cent p.a., and in Australia about 2.6 per cent this year, rising to 3 per cent in 2018.

It should be noted that trend economic growth in Australia is about 3.2 per cent p.a., so Australia’s economy is expected to grow below trend, also, in the immediate future.

The Economist Intelligence Unit also believes that China’s growth rate may fall below 5 per cent p.a. within a few years and that the USA may have a recession in a few years’ time. India is seen as one of the bright spots in the global economic outlook.

It is easier to kick goals with the wind than against. The world context is not favourable for strong economic growth in Australia or South Australia in the immediate future. I expect Australian economic growth to be about 2.8 per cent in 2016 and 2017, with annual employment growth of about 1.5 per cent and the unemployment rate falling slightly to 5.7 per cent.

Similarly, I expect South Australia’s economic growth to stay about where it is – about half Australia’s rate at about 1.4 per cent p.a. in 2016 and 2017, with annual employment growth of about 0.4 per cent p.a. and with the unemployment rate rising to 7.5 per cent in the middle of 2017.

These forecasts may be optimistic. There is a balance of downside risks associated with Whyalla, the closure of Holden, the RAH and other health issues, high electricity and water prices, South Australian Government debt and deficits, credit rating downgrades, and so on, which could see a worse outcome. Upside prospects are longer term, and require changes in South Australian Government economic strategy.

So, summing up on the economic outlook, the world will continue to struggle (experiencing below-trend economic growth), Asian growth will slow, Australia’s growth will be sub-trend, and South Australia’s economic outcomes will continue to be bleak until a new economic strategy, which emphasises private sector renewal, comes into being.

It is imperative for this private sector renewal to come about that the Commonwealth and South Australian governments, together, improve the private sector’s investment outlook by:

It is also imperative that the South Australian Government cut spending significantly to make way for income tax cuts for South Australia taxpayers negotiated with the Commonwealth Government in exchange for reduced Commonwealth grants.

In addition, the State Government should free service units (schools, hospitals, etc.) from centralised bureaucratic control and make them responsible to their own councils, boards, etc. for meeting government-set targets.

The State Government should also utilise Adelaide’s global “liveability” to attract the highly-skilled design, R&D, and marketing teams of international businesses, especially Asian businesses to locate in Adelaide.

If we get this strategy right, South Australia can look forward to a dynamic, evolving economic future of specialised small businesses emerging from a very high rate of start-ups and many highly skilled units of Asian global businesses.

These businesses will be active in high quality, innovative, agriculture, manufacturing, design, R&D, marketing, finance, health, education, housing and construction, recreation, retailing and restaurants.

In particular, Adelaide will be world-renowned as a standout centre for the creative arts industries: movies, TV programs, computer programming, advertising, photography, apps, and artworks of all kinds.

Richard Blandy is an Adjunct Professor of Economics in the Business School of the University of South Australia and is a weekly contributor to InDaily.

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