Quarterly Economic Outlook

Transcription

1 Quarterly Economic Outlook Global and Australian Forecasts KPMG Economics November 2016

2 Contents Page Executive summary 3 Global outlook 4 Global forecasts 10 Domestic outlook 11 Production 13 Consumption 14 Investment 15 Labour 16 Government 17 Net exports 18 Australian forecasts 19 State summary 20 State statistical summary 27 KPMG Economics contacts 29 2

3 Executive summary Global economy Australian economy Geopolitical factors are currently dominating considerations around future world economic growth. The performance of the world economy remains lackluster, with growth anticipated to be only 3.0% for 2016, stepping up to 3.3% and 3.7% for 2017 and 2018 respectively. The Euro area continues to achieve uneven and muted economic growth, resulting in stagnant labour market outcomes and belowtarget inflation. The post-brexit UK economy has been dominated by a substantial depreciation of the Sterling. Preliminary estimates show the US economy surprised on the upside in terms of real GDP growth in the September quarter 2016, expanding on an annualised basis by 2.9%. By the middle of 2016 the Japanese economy was barely registering positive real GDP growth. While achieving strong GDP growth in the September quarter 2016 (annualised 6.7%), it is anticipated that the Chinese economy s increasing dependence on credit will eventually result in a disruptive adjustment. World trade as a proportion of world GDP started to decline during The Australian economy continued to experience moderate real growth during the second quarter of 2016, increasing 0.5% over the March Quarter 2016, and 2.9% on a rolling 12-month basis. Real GDP per capita grew at nearly 1.6% for the year, the strongest result since 2012, and only marginally slower than the average growth rate from 1980 (1.76%). Imports surged by nearly 3% during the June quarter 2016, double the growth experienced in the export sector (1.3% q/q). Government consumption spending increased by nearly 2% q/q, and 4% over FY15 results. Growth In household expenditure was more subdued, increasing by just 0.4% q/q and 3.0% y/y respectively. Investment activity across all sectors added nothing to growth for the June quarter Australian forecasts FY15 FY16 FY17 FY18 FY19 GDP (Real) 2.3% 2.9% 2.7% 3.0% 3.1% Inflation (1) 1.6% 1.2% 2.0% 2.4% 2.4% Unemployment, %(1) 6.1% 5.7% 5.3% 5.3% 5.6% $A/U S$ (1) (1) = Average through the year 3

4 Global outlook

5 Global outlook Geopolitical factors, including Brexit, the civil war in Syria, the election of Trump as President of the United States and Duterte as President of the Philippines, and rising tensions in the South China Sea over sovereignty of the Spratly Islands, are currently dominating considerations around future world economic growth. The impact of these rising geopolitical tensions, combined with the overhang of complex economic challenges, has created a juncture for the development and implementation of economic policy the world over. Chart 1 shows the Global Economic Policy Uncertainty Index has pulled back from its recent peak caused by the Brexit vote in the United Kingdom, but it remains high and is likely to peak again once the impact of the US election is included in the data. The trend is clearly upward sloping, and is markedly higher in the period post-gfc. The rise of the insular protectionist policies, not only from a trade standpoint, but also from an immigration and defence perspective, has created an environment that seeks to implement second-best popular policies as opposed to growth enhancing outcomes. Clearly, the lessons of recent history show that pursuing policies without consideration of adjustment costs and distributional consequences is not sustainable. A broader sweep of history suggests that people are tolerant of change if their aspirations for economic advancement are not bull-dozed aside and if the inevitable structural adjustments costs are handled sensitively and equitably. The performance of the world economy remains lackluster, with growth anticipated to be only 3.0% for 2016, and stepping up to 3.3% and 3.7% for 2017 and 2018 respectively. The lift in economic growth is being pushed by an upswing in Emerging and Developing Countries, with the likes of Brazil and Russia climbing out of recession and enjoying positive economic growth for the first time in several years. Economic growth within Advanced Economies remain anemic, with concern mounting with regard to the heavy dependence on monetary policy as the primary lever to stimulate activity. Chart 1 Global Economic Policy Uncertainty Index 300 Chart 2 World GDP Growth 10% 250 8% 6% Index Number Annual % change 4% 2% 0% -2% -4% 0-6% Source: KPMG Economics, Davis, Emerging Markets and developing Economies Advanced Economies World Source: KPMG Economics, IMF 5

6 Global outlook Participation and productivity two out of the 3P s of economic growth are the primary drivers behind this weak global demand. Unemployment rates have declined in recent years across most advanced countries, yet wages and prices have not come under pressure to lift, suggesting labour markets have been hiding excess capacity through under utilisation of labour (ie: labour hoarding). Such a theory seems increasingly plausible as the Output Gap for nearly every advanced economy has remained negative since the GFC. This negative Output Gap also reflects poor labour and capital productivity outcomes, which as an underlying problem remains undiagnosed. Until productivity becomes a contributor, rather than a detractor, to economic growth, then most governments will be fighting with one hand tied behind their backs. While the current status of these variables remains concerning, what is more concerning is the prospect of a permanent shift downwards in the expectations of future growth. The US, UK, Japan, and Europe are all anticipated to achieve below-average growth into the medium term, raising the prospect of secular stagnation in many first world economies. The source of this concern appears to be the decline of the real natural rate of interest1 to near 0%. The cause of this decline in the real rate of interest over the past few decades is due to global factors associated with increased savings and soft investment expenditure. Savings have risen broadly in line with increased surpluses in Emerging Economies current accounts and income growth of the wealthy. Declining real capital costs per new unit of potential output for most plant, equipment, and buildings means the differential between the demand and supply of funds has put downward pressure on the return offered on savings (i.e. the real rate of interest). Chart 3 Output Gap by Country % difference between Actual and Potential GDP 6% 4% 2% 0% -2% -4% -6% -8% Chart 4 Total Factor Productivity by Country Annual % change 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% US Japan Germany UK Australia Source: KPMG Economics, The Conference Board US Japan Germany UK Australia Source: KPMG Economics, The Conference Board 6

7 Global outlook A contributing factor to the more recent decline in the real rate of interest has been the extraordinarily accommodating monetary policy settings applied by the central banks in most Developed Economies. This is evident in the four-fold increase in the value of the Balance Sheets of the central banks of the US, Japan and the Euro area, which now have securities outstanding of about 15% of World GDP. Most Developed Economies have their official interest rate at or near 0%, while Denmark, Switzerland, Japan, Sweden, and the Euro Area have theirs set at below the lower bound. The IMF noted in its October 2016 Financial Stability Report that about 40% of all outstanding government bonds for Developed Economies were carrying negative yields. However, at the time of writing it appears the market is now questioning the sensibility of such settings, particularly as Governments are now indicating they may revert to applying expansionary fiscal policy in the belief that the unconventional monetary policy settings are no longer working (or in some cases never have worked). The US Federal Reserve s latest dot plot presented in the September 2016 Minutes confirmed a bias towards tightening monetary policy, with FOMC participants target level of the federal funds rates rising from current settings of 0.38% to 0.52% by the end of 2016 and 1.18% by the end of US Bond yields have been responding to this market questioning, rising from a low of 1.36% in July 2016 to now be 2.21% in mid-november. A similar profile has occurred with Australian 10- year bonds as well, rising from a low of 1.8% in August 2016 to now be 2.6% in mid-november. Turning to individual economies, the Euro area continues to achieve uneven and muted economic growth, resulting in stagnant labour market outcomes and belowtarget inflation. Investment activity remains weak, but household consumption and net exports have lifted within the region. Economic growth is expected to be soft over the coming years 1.4% in 2016 and 1.3% in 2017 principally because of the exit of the UK from the EU and the uncertainty that policy brings with it. Chart 5 Official Interest Rates % US Japan Euro UK Australia Source: KPMG Economics, RBA Chart 6 Value of Central Bank Balance Sheets Value of Central Bank Balance Sheet (Current US$ Trillion) $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $ US Japan Euro % of World GDP 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Source: KPMG Economics, US Federal Reserve, Bank of Japan, ECB % of World GDP 7

8 Global outlook Of the key economies in the Euro zone, Germany continues to be the most buoyant, with unemployment at a relatively low rate of 4%, and the current account and Federal budget remaining in surplus. France is likely to experience marginally softer growth in 2017, again for the reasons outlined above that will impact all EU countries to some degree. Youth unemployment in France remains high at about 25%, although there is a marked difference between unemployment rates of French nationals (14%) and 1st and 2nd generation migrants (30%). The Italian economy is anticipated to achieve sub-1% real GDP growth for 2016 and 2017, with its banking sector still subject to high levels of non-performing loans despite the recapitalisation through the Atlante ( 4.2bn) and Atlante2 ( 1.7bn) private equity funding. The post-brexit UK economy has been dominated by a substantial depreciation of the Sterling, which has fallen from a rate of 1.48/USD to 1.24/USD at the time of writing. One of the consequences of this currency adjustment will be higher consumer price inflation, which is likely to be in excess of the Bank of England s target band for the next few years. Risk of recession and declining real wages remains a real prospect, with real GDP growth forecast to be 2% for 2016 and 1% for Preliminary estimates by the Bureau of Economic Analysis shows the US economy surprised on the upside in terms of real GDP growth in the September quarter 2016, expanding on an annualised basis by 2.9%. This growth was driven by positive contributions from personal consumption expenditures, exports, private inventory investment, federal government spending, and nonresidential fixed investment2. Prior to the recent US election, we were forecasting economic growth of just under 2% for 2016, increasing to just over 2% for 2017 and By the middle of 2016 the Japanese economy was barely registering positive real GDP growth, with declining exports dragging down total economic activity which was driven by a 20% appreciation in the Yen over the last 12 months and the general pullback in global trade more broadly. Inflation is slightly negative, and importantly, inflationary expectations continue to have a trajectory below the BoJ target band for the foreseeable future. Chart 7 World Inflation 10% 9% 8% 7% Chart 8 Yield Curve-10 year bond less 3 Month T-Bill yield % per annum 6% 5% 4% 3% 2% 1% 0% % Emerging Markets and developing Economies Advanced Economies World Source: KPMG Economics, IMF AUS GER UK US Source: KPMG Economics, RBA 8

9 Global outlook This outlook, plus concerns regarding pension fund viability at negative rates, caused the BoJ to revise its monetary policy, stating it will seek to control both short term and long term rates, and manage monetary settings in manner that will overshoot inflationary targets. While achieving strong GDP growth in the September quarter 2016 (annualised 6.7%), it is anticipated that the Chinese economy s increasing dependence on credit will eventually result in a disruptive adjustment 3. Calls for the orderly reform, and likely closure, of various state owned enterprises, and the acceptance of lower economic growth rates as a consequence of limiting credit, are becoming louder across the global governance community. House price escalation has become a problem again in many Tier 1 cities, resulting in the adoption of tighter prudential lending controls for the second time in 2 years. However this time, it appears the government is unable or unwilling to implement complementary monetary policy settings due to concerns of a broader impact across the whole economy. While world trade as a proportion of world GDP has been flat since the GFC, it actually started to decline during While disappointing, it is not surprising given the acceleration of new trade restrictions being adopted by developing countries the world over. By far the biggest driver of this slowdown has been subdued investment growth, as trade relies heavily on investment activity (ie: imports fall especially sharply when investment declines). The WTO now expect world trade to grow at only 1.7% in This is well below their initial forecast of 2.8%, which was only released in April this year. Unfortunately, it doesn t look like 2017 will be much better the WTO forecasts at this stage expect trade growth of only 1.8% for next year. Chart 9 Index of Selected Commodites Index Number Chart 10 Trade Restrictions since October ,400 1,200 1, Number 80% 70% 60% 50% 40% 30% 20% 10% % Annual Change Cruide Oil Iron Ore Corn Source: KPMG Economics, RBA, FRED 0 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 0% Net New Measures % Annual Increase Source: KPMG Economics, WTO 9

10 Global forecasts Growth in Real GDP Year End December Annual Inflation Year End December OECD 2.1% 1.7% 1.8% 2.0% 2.1% OECD 0.8% 1.0% 1.8% 1.8% 1.8% Americas Brazil -3.9% -2.8% 1.2% 2.0% 2.4% Canada 1.1% 1.5% 2.0% 2.3% 2.2% Latin America 1.7% 2.0% 2.3% 2.9% 3.0% Mexico 2.5% 2.6% 2.3% 2.8% 3.1% USA 2.4% 1.9% 2.3% 2.2% 2.2% Americas Brazil 10.3% 5.7% 5.5% 5.0% 4.3% Canada 1.3% 1.5% 2.0% 1.0% 0.8% Latin America 4.5% 4.2% 3.6% 3.4% 2.6% Mexico 2.3% 3.6% 3.2% 2.3% 2.2% USA 0.5% 1.0% 1.7% 1.7% 1.8% Europe EMU 1.9% 1.4% 1.3% 1.6% 1.5% France 1.2% 1.2% 1.0% 1.4% 1.3% Germany 1.4% 1.7% 1.5% 1.4% 1.0% Greece -0.3% -1.3% -0.3% -0.4% 1.5% Ireland 26.3% 1.5% 2.4% 3.2% 3.1% Italy 0.6% 0.7% 0.5% 1.3% 1.7% Russian Federation -3.7% -0.9% 0.0% 4.3% 3.4% UK 2.2% 2.0% 1.1% 1.5% 1.6% Europe EMU 0.3% 0.4% 1.5% 1.7% 1.6% France 0.0% 0.6% 1.5% 1.6% 1.6% Germany 0.7% 0.3% 1.7% 1.7% 1.7% Greece -0.5% -1.0% -0.8% -0.5% -0.2% Ireland 0.9% -0.6% 0.3% 0.8% 1.1% Italy 0.3% 0.4% 1.5% 2.2% 1.9% Russian Federation 14.5% 5.2% 5.1% 4.8% 4.5% UK 0.1% 0.7% 2.4% 2.7% 2.5% Africa 3.9% 2.8% 3.4% 4.3% 4.0% South Africa 1.3% -0.2% 2.3% 3.0% 3.0% Africa 9.9% 10.5% 6.8% 6.1% 5.1% South Africa 4.7% 6.1% 6.2% 5.4% 5.2% Middle East 2.5% 2.6% 3.1% 3.4% 3.0% Middle East 7.3% 5.8% 5.9% 5.4% 4.3% Asia China 6.9% 6.6% 6.1% 5.9% 5.6% East Asia 5.0% 3.6% 5.0% 5.3% 5.1% Hong Kong 2.4% 0.9% 2.3% 2.4% 2.3% Indonesia 4.8% 4.4% 4.6% 5.7% 4.9% India 7.2% 7.5% 6.9% 7.3% 6.8% Japan 0.6% 0.3% 0.5% 0.7% 0.6% Singapore 2.0% 1.4% 2.8% 3.3% 3.1% South Korea 2.6% 2.5% 2.6% 3.1% 3.5% Taiwan 0.6% 0.7% 2.3% 2.9% 3.1% Vietnam 6.6% 7.2% 4.4% 4.3% 4.2% Asia China 1.5% 2.5% 1.3% 1.9% 1.9% East Asia 1.8% 1.1% 2.5% 3.3% 3.6% Hong Kong 1.0% 1.4% 1.5% 1.6% 1.9% Indonesia 4.8% 3.8% 5.2% 5.1% 4.7% India 5.3% 6.9% 3.4% 4.4% 4.1% Japan -0.2% -0.5% 0.1% 0.4% 0.4% Singapore -0.7% -0.5% 0.8% 1.1% 1.6% South Korea 1.1% 1.4% 1.7% 1.6% 1.7% Taiwan 0.1% 0.0% 0.7% 0.3% 0.5% Vietnam 0.5% 5.1% 3.2% 4.0% 4.8% Oceania New Zealand 3.0% 2.6% 1.8% 2.2% 2.3% Oceania New Zealand 0.7% 0.8% 1.5% 1.5% 2.2% World 3.1% 3.0% 3.3% 3.7% 3.6% 10

11 Domestic outlook

12 Domestic outlook The Australian economy continued to experience moderate real growth during the second quarter of 2016, increasing 0.5% over the March Quarter 2016, and 2.9% on a rolling 12-month basis. Real GDP per capita grew at nearly 1.6% for the year, the strongest result since 2012, and only marginally slower than the average growth rate from 1980 (1.76%). Imports surged by nearly 3% during the June quarter, double the growth experienced in the export sector (1.3% q/q). Government consumption spending increased by nearly 2% q/q, and 4% over FY15 results. In comparison, growth in household expenditure was more subdued, increasing by just 0.4% q/q and 3.0% y/y respectively. Investment activity across all sectors added nothing to growth for the June quarter 2016, although there was a significant divergence by type. Public investment expenditure increased by a massive 15% q/q, although it was much more moderate for the year as a whole, with 2.0% growth for FY16 over FY15. Private dwelling investment increased by 1.6% q/q, while private business investment declined by nearly 6% q/q, driven primarily by a fall off in spending in non-residential building construction activity and mineral and petroleum exploration activity. Inflation remains under control, driven in part by muted wages growth. Underlying inflation grew by 0.7% between the June and September quarters 2016, and annually by 1.3%. On a trimmed mean basis the measure used by the RBA for targeting inflation annual inflation is estimated to be 1.7%, with 0.4% growth over the September 2016 quarter. Inflation grew fastest over the quarter within the Food and non-alcoholic beverage group (1.9% q/q), followed by Alcohol and tobacco (1.1% q/q) and Furnishings, household equipment and services (1.1 q/q). In contrast, Communication (-2.3% q/q), Transport (-0.5% q/q) and Health (-0.3% q/q) groups all experienced declining average prices for the quarter, while Automotive fuel (-12.6% y/y), Audiovisual and computing equipment (-8.9% y/y) and Telecommunication equipment and services (-7.9% y/y) recorded the most significant price falls over the year. Chart 11 Real GDP and Real GDP per capita, Australia Chart 12 Annual GDP growth by Component $1,800,000 $80,000 7% 7% Real GDP ($millions) $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 Real GDP per capita % growth per annum 6% 5% 4% 3% 2% 1% 0% -1% 6% 5% 4% 3% 2% 1% 0% -1% % growth per annum $200,000 $10,000-2% -2% $- $- -3% -3% Real GDP Real GDP Per Capita C I G NX GDP Source: KPMG Economics, ABS Source: KPMG Economics, ABS 12

13 Production Industry Gross Value Added (IGVA) measures the value of industry production, and is used to measure the contribution of individual industries to the gross product of a state or territory (ABS). IGVA contributes about 85% of the value of Australian GDP, with the remaining expenditure supplied through the ownership of dwellings (~9%) and taxes less subsidies on products (~6%). Mining and Finance and insurance services were the two single largest industries in the Australian economy during FY16, with mining increasing importance at the expense of the agriculture sector. The composition of the Australian economy today is noticeably different to what it was only 16 years ago at the turn of the century. It is nearly 60% larger in real terms, with manufacturing contributing about the same dollar value today as it did in FY00, meaning its proportional contribution to Australia s economy today is much smaller. This is consistent with the industrial growth patterns of many Developed Economies, where the services sector is increasing in relative importance compared to goods producing sectors. 13

14 Consumption Consumer confidence has remained positive since August 2016 after declining in June and July, which corresponded with a kick up in petrol prices. A continuation of a low interest rate environment and stability within the domestic labour market are likely to be key drivers influencing consumers perceptions about the economy and their relationship with it. These confidence levels have been translated into physical economic activity, with retail sales dipping in the June quarter 2016 in line with the decline in the Index of Consumer Sentiment. However, despite stability in the confidence readings since then, ABS statistics show retail sales have fallen away during the September quarter The largest decline in retail sales was in the Department store sector, falling 3.6%, followed by Other retailing (-0.9%) and Food retailing (-0.7%). In contrast, the NAB Online Retail Sales Index shows positive quarterly online retail sales for the September quarter of 1.9%, even though July 2016 sales were negative (-0.3%). Further, the NAB analysis shows online sales for Takeaway food increased by 41.1% over the year to September 2016, but this significant growth was off a low base as this group represents only about 6% of total online spending. Homewares and Fashion, groups found in traditional Department Stores (as per the ABS definition), account for about 20% and 16% respectively of total online sales, and are growing at 18% and 10% per annum. This suggests the fall in sales at traditional Department Stores is coming from consumers moving their purchases online, but to different suppliers rather than the online websites of the traditional Department stores. This divergence between results suggests there may be a measurement issue with the ABS Retail Sales survey. That is, the ABS survey does not capture online sales by non-employing businesses and non-resident retailers which sell directly to the Australian general public via online stores, and it could be these suppliers are capturing a greater proportion of retail spend than before. Chart 14 Consumer confidence and petrol prices Chart 15 Retail Sales, Australia 1.6% 3.5% Consumer sentiment index Rolling 3-month average petrol prices (Inverted) Quarter Growth 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Annual Growth Consumer Sentiment Petrol Prices Source: Melbourne Institute, Westpac, AIOP, KPMG Economics Quarterly (LHS) Rolling Annual (RHS) Source: KPMG Economics, ABS 14

15 Investment Housing affordability has reemerged into the spotlight after recent comments by the Federal Treasurer and continuing solid growth in house prices, especially in Melbourne where average house prices have grown more than 8% over the year to June However, while the headline growth in house prices continues to strengthen in most states, with the exception of Darwin (-6.5% y/y) and Perth (-4.8% y/y), housing affordability has actually been improving due to declining interest rates and rising wages (albeit minor). From a state-by-state perspective, NSW remains the least affordable jurisdiction with median house prices in Sydney $880,000 and gross household disposable income per capita of $50,800 as at the end of June In comparison the ACT is the most affordable, with a median house price of $419,000 and gross household disposable income per capita of $80,500. Declining investment activity remains a drag on national economic growth, with private and public sector investment contributing -1.3% to annual GDP growth of 2.9% over FY16. That is, if Australia had merely maintained its real investment spend at FY15 levels, real GDP growth would have been 4.2% for FY16. This negative contribution to overall economic growth was more pronounced in FY16 than in the previous 2 years, where investment activity contributed -0.4% in FY14 and -0.5% in FY15 to annual GDP growth of 2.7% and 2.3% respectively. The ABS Survey of Private New Capital Expenditure is indicating that spend will continue to trend lower over the coming 12 months, down from $127.5Bn this year to $105.2Bn in FY17. About 60% of the reduction in capex is anticipated to come from lower spend on Building and Structures, with the remaining 40% coming from lower spend on Plant and Equipment. Investment in the Mining sector continues to wind down, with expected spend falling to about $42Bn in FY17, down from $53Bn in FY16 and more than half of the $95Bn capex spent by the sector in FY12. Chart 16 Housing Affordability Index, Australia 45.0 Chart 17 Actual and Expected Private New Capital Expenditure 180, , ,000 Index Number More affordable Less affordable $ million 120, ,000 80,000 60, ,000 20, Australia Long-run average Source: REIA, KPMG Economics Actual Capex Spent Expected Capex Spend 12 Months Prior (1) Source: ABS, KPMG Economics 15

16 Labour The Australian labour market is experiencing a structural shift in its composition, with a significantly greater number of people being employed on a part time and causal basis. At the end of September 2016 the domestic labour force comprised about 8.1 million full time employed persons (~68%) and 3.8 million part time employed persons (~32%). In comparison, the split between full time and part time employed persons at September 2006 and September 1996 was 71%/39% and 75%/25% respectively. While the unemployment rate has been steadily declining from its recent peak in the low-6% s to now be 5.6% at the end of September 2016, the level of underemployment within Australia has been steadily rising. Workers in Australia preferred to work about an additional 15 million hours than what they did work in the 3-months to August 2016, which represents about 3.3% of the potential total hours available in the national labour force. South Australia (3.9%), Tasmania (3.7%) and Western Australia (3.6%) are the jurisdictions with the greatest difference between actual hours worked and hours of work sought by employees, with the Northern Territory (1.7%) and the Australian Capital Territory (1.9%) recording the least difference. From a gender perspective, female workers are seeking absolutely and proportionally more work hours than they are currently achieving, suggesting there is a greater structural impediment to match labour demand and supply for females. From a tenure perspective, it seems that part time workers are staying with their employers for longer than has previously been the case. As at May 2001, part time employees who had been with their employer for 12 months or more represented 70% of all part time workers, however by August 2016 this ratio had increased to 75%. In comparison, full time employees who had been with their employer for 12 months or more represented 82% of all full time workers in May 2001 and 83% in August Chart 18 Unemployment and Participation Rates Chart 19 Total Employment by Type, Australia 14,000 Unemployment Rate (%) Participation Rate (%) '000 12,000 10,000 8,000 6,000 4, , Unemployment Rate Participation Rate Source: KPMG Economics, ABS Full-time Part-time Source: KPMG Economics, ABS 16

17 Government Government consumption expenditure grew by nearly 4% in the June quarter 2016, underpinned by more than $30Bn in defence spending. Investment spending in the defence sector also grew significantly over the quarter, up $0.5Bn to $2.2Bn, however total defence spending over FY16 was about 2% less than FY15 levels. Despite the observations by politicians that Australia should be embarking on a major infrastructure development program, the national accounts show such activities have not materialised. Infrastructure spending (as measured by Gross Fixed Capital Formation) by Commonwealth, State and Local Governments totaled just over $51Bn for FY16, which was only marginally higher than FY15 spend. Rather, recurrent consumption expenditure continues to grow at much higher rates than spending on infrastructure and other capital projects, and represent a much higher proportion of the total expenditure basket. That is, for every $1 spent on capital expenditure by the Commonwealth Government, more than $7 is spent on consumption expenditure; while the ratio at the state and local Government level is more like $1:$5 respectively. Taxation revenue as a proportion of GDP increased from 27.5% in FY14 to 27.7% in FY15, with tax receipts for the Commonwealth Government being 22.2% of GDP, state government 4.6% of GDP and local government 1.0% of GDP. Australian s paid nearly $18,900 in government taxes on a per capita basis during FY15, of which $15,200 is levied by the Commonwealth Government and $3,800 is levied by State and Local Government s. The imbalance between Government revenues and expenditures continues to add to overall net debt levels for Australia. Net debt and unfunded superannuation liabilities grew by more than $75Bn between FY15 and FY14, with nearly 90% attributable to borrowings from the Commonwealth Government. Across all levels of Government net debt and unfunded superannuation liabilities now represent about 50% of national GDP. Chart 20 Government tax receipts by level 500, , , ,000 Chart 21 Net Government Debt plus Unfunded Superannuation Liabilities 900, , , % 50.0% $ millions 300, , ,000 $ millions 600, , , % 30.0% 150, , % 100,000 50, , , % % Commonwealth State Local Government Source: ABS, KPMG Economics Commonwealth State Local Multi-jurisdictional Net Debt+UPL-to-GDP (RHS) Source: ABS, KPMG Economics 17

18 Net exports Australia s net exports added $37.4Bn to GDP for FY16, the most significant positive contribution for more than decade. A slight uptick in the Terms of Trade in the June quarter 2016, driven by increases in the global price of both Base Metals and Bulk Commodities, helped with this result. Services exports continue to improve in absolute dollar terms, growing from $62.1Bn in FY15 to $66.2Bn in FY16, however as merchandise exports increased by similar growth rates, service exports as a proportion of total exports remains flat. Education related personal travel contributed nearly $20Bn towards total Service Exports, an increase of $1.7Bn over FY15 levels. FY16 also saw Personal travel grow by nearly 17% to $16.5Bn, while Financial services grew by 6% to $3.7Bn and Other business services (Professional and Management Consulting services) grew by 5.0% to $5.2Bn. Exports (FOB Value $M) Rank Country FY15 FY16 1 China (excluding SARs and Taiwan) 74,814 74,764 2 Japan 43,949 35,220 3 South Korea 18,138 17,064 4 United States of America 12,709 13,163 5 India 9,713 9,590 6 Hong Kong (SAR of China) 9,083 8,824 7 New Zealand 8,178 8,578 8 United Kingdom 3,582 7,064 9 Taiwan 6,652 6, Singapore 8,261 5,334 Chart 22 Net Tourism Exports and AUD/USD Ratio of Tourism Exports to Tourism Imports 160% 140% 120% 100% 80% 60% 40% AUD/USD (inverse) Imports (Customs Value $M) Rank Country FY15 FY16 1 China (excluding SARs and Taiwan) 56,993 61,343 2 United States of America 27,448 29,958 3 Japan 18,238 19,133 4 Thailand 12,117 14,556 5 Germany 11,763 13,238 6 South Korea 14,094 13,120 7 Malaysia 10,143 9,754 8 New Zealand 7,627 7,671 9 Singapore 10,677 7, United Kingdom 6,243 7,584 Source: ABS Ratio of Tourism Exports to Tourism Imports AUD/USD Source: ABS, RBA, KPMG Economics 18

19 Australian forecasts FY15 FY16 FY17 FY18 FY19 FY20 FY21 GDP (Real) 2.3% 2.9% 2.7% 3.0% 3.2% 3.5% 3.4% Private Consumption 2.7% 3.0% 2.9% 2.8% 2.9% 2.9% 3.1% Investment Housing 6.7% 7.3% 2.5% -1.0% 4.4% 6.6% 7.9% Business -6.7% -11.6% -8.5% -3.1% 3.0% 4.5% 4.6% Government Consumption 1.3% 3.3% 2.3% 2.2% 2.1% 2.0% 1.9% Investment -5.4% -2.6% -1.0% -1.3% 0.0% 0.2% 1.2% Total domestic demand 1.0% 1.3% 1.0% 1.6% 2.7% 3.1% 3.3% Export volumes 6.5% 7.2% 8.5% 8.1% 4.4% 4.1% 3.8% Import volumes 0.1% -0.5% 1.0% 2.2% 2.6% 3.0% 3.8% Inflation (1) 1.6% 1.2% 1.9% 2.3% 2.4% 2.7% 2.8% Real Personal Disposable Income 2.1% 2.0% 2.5% 2.7% 3.2% 3.3% 3.2% Unemployment, % (1) 6.1% 5.7% 5.7% 5.6% 5.3% 5.6% 5.8% Government Balance as % of GDP -1.9% -1.6% -0.9% -0.2% -0.2% -0.3% -0.4% Govt. debt as % of GDP 42.1% 44.0% 44.1% 42.8% 41.1% 39.2% 37.3% Current account as % of GDP -3.7% -5.3% -3.1% -1.6% -0.9% -0.8% -0.7% $A/US$ (1) Terms of Trade (1)

20 State summary

21 State summary Australia s population ticked over the 24 million mark during the March quarter New South Wales is the most populous state, with 7.7 million residents, or 32% of Australia s total population. Victoria and Queensland are the next most populous jurisdictions, with 6.0 million and 4.8 million residents respectively. Slightly less than 250,000 and 350,000 people live in the Northern Territory and the Australian Capital Territory respectively, which combined represent only 2.6% of Australia s population. While these jurisdictions have the smallest population of all the States and Territories, they have the highest birth rates, at 16.4 and 14.2 live births per 1,000 residents respectively. New South Wales is also the largest state economically, generating just over $530Bn of Gross State Product (GSP) during FY16. This represents 32% of Australia s GDP, a proportion consistent with its relative population. Victoria and Queensland record the second and third highest GSP, at $374Bn and $315Bn respectively. The Northern Territory and Tasmania are the smallest state economies, generating some $24Bn and $26Bn respectively in GSP during FY16. Western Australia generates the highest GSP on a per capita basis, some $97,600, just over 40% greater than the national average. The Northern Territory ($96,900) and the Australian Capital Territory ($91,700) are also generating a significant GSP per capita premium over the national average. These results have been influenced by dominant industries in each jurisdiction, with mining in Western Australia generating 22.6% of that jurisdictions GSP, construction in the Northern Territory (19.0%) and public administration in the ACT (30.9%). While New South Wales is the largest jurisdiction, during FY16 it also recorded the strongest real economic growth at 3.5% (y/y). The ACT and Victoria also achieved above average real economic growth at 3.4% (y/y) and 3.3% (y/y) respectively. Tasmania (1.3%), South Australia (1.9%) and Western Australia (1.9%) achieved the slowest annual growth rates of all Australian jurisdictions. Chart 23 Estimated Resident Population by State, March 2016 Chart 24 GSP and Household Consumption as % of GSP 9,000,000 35% 600, ,000 Estimated Resident Population 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 30% 25% 20% 15% 10% 5% % of Australian Population $ millions 500, , , , , ,000 80,000 60,000 40,000 20,000 GSP per capita - 0% NSW VIC QLD SA WA TAS NT ACT Population Population as % of Australia Source: ABS, KPMG Economics - - NSW VIC QLD SA WA TAS NT ACT GSP GSP per capita Source: ABS, KPMG Economics 21

22 State summary The resource states of Western Australia ($66.3Bn) and Queensland ($11.4Bn) achieved significant positive merchandise trade balances over the past 12 months to September In contrast, New South Wales and Victoria recorded negative merchandise trade balances as two-thirds of all imports into Australia are landed in those jurisdictions. Household consumption activities represent about 56% of economic activity in Australia, with investment spending, government spending and net exports making up the balance. From a jurisdiction-by-jurisdiction perspective, higher than average consumption expenditure can mean a number of things, including a relatively lower productive economic base or a higher degree of economic self sufficiency. The jurisdiction with the highest contribution of consumption expenditure to overall GSP is Tasmania, at 68.2%, followed by New South Wales (62.4%) and Queensland (60.9%). When looked at in combination with various other indicators, including GSP per capita and capital investment, it would seem that Tasmania s higher propensity for consumption expenditure reflects the limited diversity within its productive economy. In contrast, the higher proportion of consumption expenditure in New South Wales more so reflects the larger and deeper structure of its economy. This is further reinforced when new private capital expenditure is analysed. Over FY16, Western Australia recorded new private capex spend of $43Bn, or nearly 35% of total capital expenditure spent in Australia over that period. The majority of this expenditure, or $35Bn, was spent on capital projects within the mining industry. While still significant, this is down by 28% from FY13 peak spending of $48.2Bn. Victoria and New South Wales which have a broader, more traditional economy, spent a higher proportion of its new capital expenditure for FY16 on plant and equipment as opposed to building and structures. That is, Victoria spent 62% more on plant and equipment than it did on building and structures, while New South Wales spent 40% more on plant and equipment. $ millions Chart 25 Merchandise Exports and Imports, 12 months to 30 September , ,000 50,000 - (50,000) (100,000) (150,000) NSW VIC QLD SA WA TAS NT ACT Merchandise Exports Merchandise Imports Source: ABS, KPMG Economics Chart 26 New Private Capital Expenditure, 2015/16 % of Total Australian New Capital Expenditure 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% WA QLD VIC NSW 5.0% NT SA TAS 0.0% ACT 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% GSP as a % of Australian GDP Source: ABS, KPMG Economics 22

23 State summary The Australian Capital Territory enjoys a significantly higher gross household disposable income per capita than any other jurisdiction in Australia. This income is generated through both high employee compensation and property income. That is, receivable property income represents about 26% of primary income for households in the ACT, which is about double compared to all other jurisdictions. For example, for New South Wales, Queensland and Victoria receivable property income is only 13% of household primary income. One potential reason for this higher percentage could be lower wages, but this is not the case. For FY16 average household employee compensation per capita, which is derived from the household income account in the ABS national accounts, is approximately $55,500 in the ACT, some 25% higher than the next jurisdiction, being the Northern Territory at $44,400. This analysis suggests the ACT is a jurisdiction of landlords and highly paid wage earners. At the other end of the spectrum is Tasmania, who achieved an average household employee compensation per capita of just $23,900 in FY16. It is therefore not surprising that Tasmania has equal lowest retail sales per capita at $11,400 for the 12 months to the end of September Even though this is the lowest per capita retail spend in Australia, it represents nearly half of the average per capita gross compensation income for the State, suggesting average households in Tasmania are operating under tighter financial constraints than elsewhere in the country. This is further supported by the fact that Tasmania has the lowest per capita new car sales of any State or Territory, with just 3,700 new vehicles sold per 100,000 residents in the 12 months to the end of September 2016 compared to the national average of 4,900. Rather it appears Victorian s have the highest propensity to purchase new vehicles, recording sales of nearly 5,400 per 100,000 residents over the same time period. Chart 27 Gross Household Disposable Income per Capita, 2015/16 90,000 80,000 Chart 28 Motor Vehicle and Retail Sales, 12 Months to 31 September ,000 $16,000 $ 70,000 60,000 50,000 40,000 30,000 20,000 Car sales per 100,000 residents 5,000 4,000 3,000 2,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $ per person 10,000 1,000 $2,000 - NSW VIC QLD SA WA TAS NT ACT Gross Household Disposable Income per Capita Australia Source: ABS, KPMG Economics - $0 NSW VIC QLD SA WA TAS NT ACT New Motor Vehicle Sales per 100,000 residents Retail sales per capita Source: ABS, KPMG Economics 23

24 State summary The unemployment rate for Australia was steady at 5.6% in October 2016, accompanied by a steady participation rate of 64.4%, both in seasonally adjusted terms. From a jurisdiction perspective, the ACT and the Northern Territory have the lowest unemployment rates, at 3.4% and 3.5% respectively, with also above average participation rates of 68.8% and 76.4% respectively. At the other end of the spectrum Western Australia, Tasmania and South Australia have the highest rates of unemployment at 6.5%, 6.4% and 6.4% respectively. Of greater concern are the rates of unemployment for people aged 15 to 24 years. Nationally, the unemployment rate for this cohort is 12.0% as at October 2016, a rate which more than double the broader economy-wide unemployment rate. The Northern Territory records the lowest unemployment rate for 15 to 24 year olds at 6.2%, while Tasmania s is nearly three times higher at 17.8%. Nearly 240,000 new dwellings were approved to be built in Australia over the 12 months to the end of September 2016, which reflects an approval rate of slightly under 1,000 new dwellings per 100,000 residents. The ACT recorded the highest approval rate relative to its population for the past 12 months with just over 1,350 approvals per 100,000 residents, followed by Victoria at 1,135. Tasmania, Northern Territory and South Australia have the lowest new dwelling approval rates of 428, 629 and 702 per 100,000 residents respectively. Nearly $250Bn was borrowed to finance home purchasers by owner occupiers during the 12 months to September 2016, with Victoria and New South Wales recording growth in lending of 18% and 17% respectively over the previous year. Owner occupier mortgage lending activity declined in both Western Australia and the Northern Territory over the previous 12 months, falling 15% and 8% respectively. The size of average mortgages being taken out by borrowers to purchase existing dwellings varies considerably between jurisdictions. In New South Wales residents are now borrowing $435,000 on average to purchase an existing property. Chart 29 Unemployment rate and Youth Unemployment Rate, October % Chart 30 Dwelling approvals per 100,000 residents and average loan size for existing dwellings 1, Unemployment rate (%) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% NSW VIC QLD SA WA TAS NT ACT Unemployment rate Youth unemployment rate Source: ABS, KPMG Economics Dwellings per 100,000 residents 1,400 1,200 1, NSW VIC QLD SA WA TAS NT ACT Dwelling approvals per 100,000 residents Average Loan Size to Purchase Existing Dwelling Average Loan Size ($'000) Source: ABS, KPMG Economics 24

25 State summary Inflation varies considerably across capital cities in Australia. There was no change in the CPI for Darwin being recorded over the 12 months to 30 September 2016, while inflation in Sydney grew at 1.7% over the same time period. While there is a wide divergence in inflation across jurisdictions, all capital cities achieved inflation below the Reserve Bank of Australia s Target Band for Inflation (being between 2% and 3%). While inflation has remained subdued over the year, growth in wages also remained sluggish. Surprisingly wages growth was strongest in South Australia (2.3%), Tasmania (2.2%) and Northern Territory (2.2%), even though both South Australia and Tasmania have above average unemployment rates. As at 30 June 2015 there were a total of 36,134 persons incarcerated in prisons across Australia. The largest prisoner population is found in New South Wales, followed by Queensland and Victoria. Relative to the population in each State, Tasmania and the ACT have about 130 prisoners per 100,000 residents, while the Northern Territory and Western Australia have 885 and 278 prisoners per 100,000 residents respectively. This high per capita imprisonment rate is highly correlated to the indigenous imprisonment rate. There were nearly 10,000 indigenous persons in prison on 30 June 2015, representing 27% of the prisoner population despite the fact indigenous people are only approximately 3% of the broader Australian population. The Northern Territory have a ratio of indigenous to non-indigenous prisoners of 5.4 meaning for every 1 non-indigenous prisoner there are 5.4 indigenous prisoners, while the ratio for Western Australia is 0.6 and Queensland is 0.5. Victoria has the lowest ratio of indigenous to non-indigenous prisoners at 0.1, which reflects the low number of indigenous prisoners incarcerated within the State (483). Chart 31 CPI and Wages Growth, 12 Months to 30 September % 3.5% Chart 32 Prisoners and ratio of Indigenious to non-indigenious prisoners, as at 30 June , % 12,000 5 % Change 2.5% 2.0% 1.5% 1.0% RBA Target Band for Inflation Number of Prisoners 10,000 8,000 6,000 4, % 2, % NSW VIC QLD SA WA TAS NT ACT CPI for Capital Cities Wages growth Source: ABS, KPMG Economics - NSW VIC QLD SA WA TAS NT ACT Prisoners - All Ratio of Indigenious to non-indigenious prisoners (RHS) 0 Source: ABS, KPMG Economics 25

26 State summary The Commonwealth Grants Commission (CGC) recommends how the revenues raised from the Goods and Services Tax (GST) should be distributed to the States and Territories to achieve horizontal fiscal equalisation (HFE). HFE is defined by the CGC on the following basis: State governments should receive funding from the pool of GST such that, after allowing for material factors affecting revenues and expenditures, each would have the fiscal capacity to provide services and the associated infrastructure at the same standard, if each made the same effort to raise revenue from its own sources and operated at the same level of efficiency. If all the States and Territories had the same social, demographic and economic characteristics, then GST payments on a per capita basis would be the same across all of Australia. However, given this is not the case, and some States and Territories have the capacity to earn higher taxes through their natural endowments and/or manage their service delivery more efficiently due to population density, then achieving HFE means that GST revenues are not distributed evenly. GST relativity measures a State or Territory s comparative ability to raise revenue and manage service costs, which a relatively measure less than 1.0 indicating a stronger capacity and below 1.0 indicating a weaker capacity. In FY16 the pool of GST revenues amounted to an estimated $57.3Bn, an increase of about $3.5Bn over FY15 GST revenue pool. The Northern Territory has been designated with the highest GST relativity of 5.6 due to factors such remoteness, indigenous status, and administrative scale. Western Australia was assessed as having the highest capacity to achieve HFE and therefore was designated the lowest GST relativity at Factors such as mining production, payroll revenues and socio-economic status were all seen as significant positive contributors to the state s strength. However, given the timing differences between the data in which the GST relativities are based and current fiscal conditions, WA has found itself in the situation of receiving reduced GST payments at the same time as royalty income has been declining. To ameliorate this situation nearly $1Bn has been allocated to WA in the Commonwealth Budget over the last two financial years to allowing its GST relativity to be maintained at its 2014/15 level (37.6%). Chart 33 Commonwealth Grants Commission GST Distribution and Relativities, 2015/16 20,000 6 Chart 34 Net Debt and Unfunded Superannualtion Liabilities, $ per capita and % of GSP 30,000 40% $ millions 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, GST Relativity Net debt + UFSL per capita ($) 25,000 20,000 15,000 10,000 5,000 35% 30% 25% 20% 15% 10% 5% % - 0 NSW VIC QLD SA WA TAS NT ACT GST Distribution GST Distribution Relativities Source: CGC, KPMG Economics - 0% NSW VIC QLD SA WA TAS NT ACT Net Debt + UFSL per capita Net Debt + UFSL as % of GSP Source: ABS, KPMG Economics 26

27 State statistical summary Indicator Date Source NSW VIC QLD SA Population Mar-16 ABS , Tab 4 7,704,287 6,039,078 4,826,966 1,706,503 Population as % of Australia Mar-16 KPMG 32.0% 25.1% 20.1% 7.1% Population Jun-15 ABS , Tab 4 7,620,231 5,944,827 4,779,915 1,699,024 Crude Birth Rate 2015 ABS.STAT GSP 2015/16 ABS , Tab 1 531, , , ,096 GSP as % of Australia GDP KPMG 32.0% 22.5% 18.9% 6.1% GSP Growth (y-o-y) 2014/15 / 2015/16 KPMG 3.5% 3.3% 2.0% 1.9% GSP per capita 2015/16 KPMG 68,965 61,868 65,169 59,242 Household Consumption 2015/16 ABS , Tab , , ,808 61,553 Household consumption as % of GSP 2015/16 KPMG 59.6% 62.4% 58.1% 60.9% Unemployment rate Oct-16 ABS , Tab % 5.7% 5.8% 6.4% Youth unemployment rate Oct-16 ABS , Tab % 11.6% 13.1% 13.2% Prisoners - All Oct-16 ABS , Tab 13 11,797 6,219 7,318 2,732 Prisoners - Indigenious Oct-16 ABS , Tab 14 2, , Crude Imprisonment Rates per 100,000 residents Oct-16 ABS , Tab Ratio of Indigenious to non-indigenious prisoners (RHS) Oct-16 ABS , Tab Merchandise Exports 12-mths to Sept 16 ABS , Tab 15a 36,218 23,293 47,438 11,009 Merchandise Exports a % Total Australian Merchandise Exports 12-mths to Sept 16 KPMG 15.0% 9.6% 19.6% 4.5% Merchandise Imports 12-mths to Sept 16 ABS , Tab 15b (103,778) (70,391) (36,086) (8,492) Merchandise Imports a % Total Australian Merchandise Exports 12-mths to Sept 16 KPMG -40.2% -27.2% -14.0% -3.3% Net Merchandise Trade 12-mths to Sept 16 KPMG (67,560) (47,098) 11,352 2,517 Gross Household Disposable Income per Capita ABS Tab ,806 43,259 43,851 43,959 Gross Household Disposable Income per Capita % of Australian Average KPMG Property income as % Primary income ABS Tab Gross Household Compensation Income per Capita KPMG 35, , , , Retail Sales 12-mths to Sept 16 ABS 96,202 75,135 60,174 19,478 Retail Turnover as % of Australian Retail Turnover 12-mths to Sept 16 KPMG 32.2% 25.1% 20.1% 6.5% Retail sales per capita 12-mths to Sept 16 KPMG 12,487 12,442 12,466 11,414 Retail Sales per capita as % of Gross Household Compensation income per capita 12-mths to Sept 16 KPMG 35.7% 40.8% 39.4% 38.4% Motor Vehicle Sales 12-mths to Sept 16 ABS , Tab 2 396, , ,377 71,724 New Motor Vehicle Sales per 100,000 residents 12-mths to Sept 17 KPMG 5,143 5,371 4,876 4,203 New Private Capital Expenditure - Actual ABS , Tab 10 Report 28,155 19,519 24,132 5,248 New Private Capital Expenditure (Actual) as % Total Australia KPMG 22.1% 15.3% 18.9% 4.1% Dwelling approvals 12-mths to Sept 16 ABS , Tab 7 75,482 68,640 49,878 11,976 Dwelling approvals per 100,000 residents 12-mths to Sept , , Housing Finance Commitments - Owner occupation ($'000) 12-mths to Sept 16 ABS , Tab 7 89,586,483 67,929,740 40,947,396 13,074,422 Housing Finance Commitments - Owner occupation (% annual growth) 12-mths to Sept 16 KPMG 17.3% 18.3% 8.3% 12.1% Average Loan Size to Purchase Existing Dwelling 12-mths to Sept 16 ABS , Tab 10c Average Loan Size to Purchase Existing Dwelling (% Annual Growth) 12-mths to Sept 16 KPMG 8.4% 6.9% 3.2% 4.0% CPI for Capital Cities 12-mths to Sept 16 ABS , Tab 5 1.7% 1.4% 1.5% 1.2% Wages growth 12-mths to Sept 16 ABS , Tab 2b 2.1% 2.0% 1.9% 2.3% Taxation Revenue ABS , Tabs ,197 18,600 12,575 4,393 GST Distribution CGC 17,401 12,807 13,024 5,556 GST Distribution Relativities CGC Net Debt + UFSL ABS , Tabs ,809 47,431 64,806 24,752 Net Debt + UFSL per capita KPMG 14,935 7,979 13,558 14,568 Net Debt + UFSL as % of GSP KPMG 22.2% 13.1% 21.0% 24.9% 27