Staggered investment boom to continue, but risks remain for the Australian economy
Business investment will remain at an elevated level for the next 12 to 18 months, before moderating in 2009, according to BIS Shrapnel’s Long Term Forecasts, 2007 to 2022 report. However, the report states this weakening in business investment will be partially offset by a new round of dwelling investment and the significant volume of public infrastructure spending currently underway, before business investment cycles up again early next decade.
The report was written by senior economist Richard Robinson and economist Rachael Logie. The authors warn that although BIS Shrapnel’s near-term outlook for the Australian economy seems upbeat, there is a downside. “Capacity constraints, and particularly labour shortages, leave the economy prone to inflationary pressures, which will keep the Reserve Bank (RBA) on a tightening bias while the economy continues to nudge its speed limit,” explained Robinson.
“A marked pick up in inflation remains a real threat for the economy -- either resulting from a speculative surge in investment or a sharp fall in the Australian dollar -- which would draw a more aggressive response from the RBA and result in a more protracted economic downturn.”
BIS Shrapnel forecasts total investment will weaken during 2008/09 due to the completion of a number of key mining and infrastructure projects. This and a pick up in productivity -- largely in export-oriented sectors -- will ease pressure on labour markets, which together with higher interest rates will have a dampening effect on investment and consumer spending more generally, according to the report.
“We are forecasting the slowdown in investment and consumer spending in 2008/09 will cause employment growth to slow later this decade and push the unemployment rate above five per cent,” said Robinson.
“However, we don’t expect the slowdown will lead to widespread job losses and this should help prevent a marked weakening in consumer spending.”
Long Term Forecasts, 2007 to 2022 states the residential sector is likely to provide some offsetting stimulus to the slowdown. A shortfall in new dwellings in the key Brisbane and Sydney markets, coupled with strong net migration, has created significant pent-up demand for housing in these markets. Although affordability remains an issue, Robinson believes the strength of the rental market will encourage a new round of dwelling investment, despite limited scope for a drop in interest rates.
”With new mining and transport infrastructure capacity now coming on-stream, exports will also become increasingly supportive of growth. However, large parts of the tradeables sector will continue to struggle with the sustained high Australian dollar, which is likely to have long-term implications for parts of the industrial sector,” said Robinson.
The strength of investment in recent years has largely represented a catch-up phase following an extended period of under-investment, according to BIS Shrapnel. Consequently, the authors do not expect markets to be significantly oversupplied when the cycle peaks in 2008/09, enabling another phase of business investment to come through early next decade. However, BIS Shrapnel warns labour shortages mean the economy will be prone to inflationary episodes and truncated investment cycles, presenting ongoing challenges for the business community.
BIS Shrapnel’s outlook for industry sectors
The industry sectors forecast to exhibit the strongest growth in output during the next five years include mining, communications, property and business services, agriculture, wholesale trade, cultural and recreational services, and transport and storage.
The sectors expected to exhibit the weakest growth over this period are electricity, gas and water, construction, manufacturing and education.
Robinson believes the mining, transport and storage sectors will benefit from substantial capacity coming on-stream from the current investment boom, the continued strength of the world economies (particularly the Chinese economy), and rising trade and tourism.
An eventual breaking in the drought will produce a rebound in agricultural output and underpin higher average growth up to 2012, but Robinson says the longer-term outlook is poor, with only two per cent per annum growth expected in the decade to 2022. The rebound in agricultural output will also lift wholesale trade, with solid growth in overall domestic demand for goods also boosting output in the wholesale trade sector.
“The overall plateauing in investment growth will lead to much slower growth in the construction sector during the next five years, after averaging nine per cent per annum since 2002,” said Robinson.
“Slower private investment growth will also restrain growth in the finance and insurance sector (compared to the last five years), but this will be partially offset by the continued expansion of superannuation funds and a recovery in residential investment, which will also boost the property and business services sectors.
“We are forecasting slower growth, on average, in employment and household disposable incomes during the next five years and this will have a direct impact on activity in the retail trade, accommodation, cafes and restaurants, and cultural and recreational services sectors. Nevertheless, the output of these sectors will still outpace GDP growth.”
Robinson explains slower growth in cultural and recreational services will also emanate from a maturing in gambling -- a key driver of growth in the sector during the past decade -- while the hospitality and tourism-related sectors will be hit by the high Australian dollar in the near-term, as more residents holiday overseas and inbound tourism suffers from a lack of international competitiveness.
“A sustained high Australian dollar represents the biggest threat to overall growth. While BIS Shrapnel has forecast the Australian dollar to fall below US$0.70 sometime in 2009, a sustained Australian dollar over US$0.80 would cause long-term structural damage to the non-commodity trade-exposed sectors of manufacturing and tourism,” said Robinson.
Overall manufacturing growth is forecast to average 2.2 per cent per annum during the next five years which is double the 1.1 per cent per annum averaged in the last five years, but still slower than the projected GDP growth of 3.4 per cent per annum out to 2012, according to BIS Shrapnel.
About BIS Shrapnel
BIS Shrapnel is Australia's leading provider of industry research, analysis and forecasting services. BIS Shrapnel helps clients better understand the markets in which they operate, through reliable and detailed market data, analysis of developments and drivers and thoroughly researched forecasts.
BIS Shrapnel compiles accurate, clearly explained and detailed information on industry sectors, markets and industries in which their clients operate. BIS Shrapnel provides market size and segmentation data, market shares, consumer attitudes and supplier reputation information, and regularly conducts both business-to-business and consumer research.
Over the company’s 43-year history, BIS Shrapnel has built up a strong level of expertise and unique methodologies for forecasting.
This article appears courtesy of the Franchise Council of Australia .
19.11.2007
FCA Member
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