20 July 2018 AUSTRALIAN ECONOMIC DEVELOPMENTS

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1 20 July 2018 AUSTRALIAN ECONOMIC DEVELOPMENTS This week the RBA reiterated its view that there is no case for a near-term change in the cash rate. Eventually the next move in the cash rate would more likely be an increase than a decrease. Australia s economy is growing faster in 2018 than it did in 2017 and inflation is gradually moving back toward the RBA s target band of 2-3%. The Minutes of the July Board Meeting where the cash rate was kept at 1.50% - indicate the RBA is increasingly concerned about the high level of household debt in Australia, which is contributing to higher vulnerability to economic shocks and slower growth in local household consumption. Internationally, the IMF expects global economic growth to accelerate in 2018 and into 2019, but warns that new risks to the outlook are mounting due to escalating trade tensions and political uncertainty affecting several regions (see below). The RBA s upbeat assessment of the Australian economy in 2018 was confirmed by the latest Australian labour market data (released this week by the ABS), which indicated relatively strong growth in employment (+51,000 and 2.8% p.a., seasonally adjusted), rising labour participation (65.7%) and a gently falling unemployment rate (5.4%) in June In trend terms, the unemployment rate has been very slowly falling since early 2017 and is now at its lowest since early The proportion of the workforce in part-time work (under 35 hours per week) remains elevated however, at 31.9% of all workers. The underemployment rate (those working but willing and able to work more hours) is also relatively high, at 8.6% of the labour force (9% of all workers). This suggests there is more spare capacity than is indicated by the unemployment rate alone. The OECD s Employment Outlook 2018 (released last week) also confirmed that labour market conditions are improving in Australia. In the first quarter of 2018, 67% of Australia s adult population (aged between 15 and 74 years) were working, which is about 5 percentage points above the OECD average. Australia s unemployment rate in the first quarter of 2018 was at 5.5%, just above the OECD average of 5.4%. The unemployment rate has since fallen to 5.4%. Less positively, ABS data indicated that a lower proportion of Australian businesses undertook various innovative activities in , relative to one year earlier. The fall in that year was particularly evident among manufacturing businesses. Disappointingly, a significant proportion of all businesses remain inactive with regard to innovation, with access to funding and skills identified as their main barriers. For those that did undertake some innovation activity in , the main source of ideas for innovation came from within the business and the major benefits from innovation included increased revenue and enhanced customer service. 1

2 IMF forecasts strongest global growth since 2011 but risks are rising In its latest World Economic Outlook Update, the IMF forecasts growth in global output of 3.9% p.a. in each of 2018 and 2019 (as it did in its last Update in April 2018). If realised, this would be the fastest rate of global growth since However, the IMF warns that downside risks to the outlook have increased. While there was no update for Australia in this latest Outlook, in April the IMF forecast Australia s economic growth at 3.0% in 2018 and 3.1% in Among both advanced and developing economies, growth prospects are becoming more uneven. In advanced economies, growth divergences between the United States on one side, and Europe and Japan on the other, are widening. The United States is forecast to grow by 2.9% in 2018 and 2.7% in 2019 driven by stimulatory tax cuts, low levels of unemployment and robust demand. In contrast, Japan s forecast for 2018 has been cut by 0.2 percentage points to 1.0% in 2018 following a contraction in the first quarter, owing to weak private consumption and investment. Japanese economic growth is being limited by an ageing and (uniquely) shrinking population. On a per capita basis, Japan s economic growth is not dissimilar to other advanced economies. Growth is also becoming more uneven among developing economies due to rising oil prices. Many oil producing countries are likely to do better, while many oil importing countries have been downgraded. For example, Saudi Arabia a net oil exporting country- is likely to grow by 1.9% in 2018 (up by 0.2 percentage points from IMF forecasts in April), whereas India a net oil importing country is likely to grow by 7.3% in 2018 (down by 0.1 percentage points from IMF forecasts in April). In India, the IMF expects higher oil prices to detract from domestic demand and to push up inflation due to rising input costs. Growth in China is projected to slow to 6.6% in 2018 and 6.4% in 2019 as regulatory tightening of the financial sector takes hold. The IMF says that escalating trade tensions are the greatest near-term threat to global growth because it damages confidence, asset prices and investment. The re-emergence of trade threats is especially disappointing because global growth strengthened in 2017 to 3.7% p.a., due in part to a notable rebound in global trade in that year. Global trade volumes increased by 5.1% in 2017, accelerating sharply from 2.2% p.a. in In contrast, the IMF has reduced its forecasts for global trade volumes by 0.3 percentage points in 2018 and 0.2 percentage points in In response, the IMF recommends multi-lateral cooperation within an open, rule-based trade system (such as through the World Trade Organisation) and resolve disagreements without raising tariffs and/or non-tariff barriers. In order to strengthen their medium-term growth prospects, the IMF recommends that countries should prioritize supply side measures that raise potential output and productivity, including investing in physical and digital infrastructure, boosting labour force participation (e.g. of older people) and enhancing workforce skills. 2

3 Table 1: IMF growth forecasts and revisions, selected economies, July 2018 Real GDP, % change p.a p 2019p (Revision from April) World output (0.0) 3.9 (0.0) Australia* (NA) 3.1 (NA) Advanced economies (-0.1) 2.2 (0.0) US (0.0) 2.7 (0.0) Euro area (-0.2) 1.9 (-0.1) UK (-0.2) 1.5 (0.0) Japan (-0.2) 0.9 (0.0) Emerging and developing economies (0.0) 5.1 (0.0) China (0.0) 6.4 (0.0) ASEAN (0.0) 5.3 (-0.1) India (-0.1) 7.5 (-0.3) World trade volumes, % change p.a (-0.3) 4.5 (-0.2) p = projection. Source: IMF World Economic Outlook Update, July 2018 *There was no update for Australia in July. This forecast is from the IMF Outlook in April Jobs growth continues in June 2018 The ABS estimates that total employment increased by 50,900 people and the unemployment rate held steady at 5.4% in June (seasonally adjusted). This lack of movement in the unemployment rate occurred because the increase in jobs was almost exactly matched by an increase in the number of people who were actively participating in the labour market (working or searching for work); 49,800 additional people entered the labour force in June to work or search for work. More than 80% of the monthly jobs growth in June was in full-time employment (+41,200), while part-time employment increased by a smaller amount (9,700). These monthly labour market data are volatile and are subject to revision. For example, May s monthly increase in employment was originally reported to be 12,000 but has now been revised up to 13,500 (seasonally adjusted). For these reasons, the ABS recommends the trend estimates as the best guide to underlying patterns in the labour market 1. In trend terms, the national unemployment rate ticked down to 5.4% in June. This was the lowest rate of unemployment since 1 The ABS recommends that Trend estimates are considered the best indicators of the underlying behaviour in the labour market. ABS , Labour Force, Australia, Media Release. June The data below are all trend. 3

4 January The unemployment rate has been gradually declining since a recent peak of 6.3% in November Even more positively, monthly employment growth now appears to be picking up again after a slower patch at the start of 2018, albeit at a lower rate than the high growth rates experienced in mid In trend terms, 26,900 jobs were added in June, comprising of 13,400 full-time jobs and 13,500 part-time jobs. Over the year to June 2018, employment increased by 317,800, growing at 2.6% p.a., which was above the historical average growth rate of 1.9% (since February 1979). The share of part-employment is beginning to rise again with part-time employment (defined by the ABS as 35 hours or less per week) accounting for 31.9% of the total workforce in June 2018, just below the record high in November 2016 (see Chart 1 and Table 2). Chart 1: Full-time and part-time employment growth (trend) Source: ABS, Labour force Australia June 2018 Table 2: Key labour market numbers, June 2018 (trend) Number Change per month Change per year m/m % m/m 000 p.a. % p.a. Employment 12, Full-time 8, Part-time 4, Aggregate hours worked 1,752,033 3, , Labour force 13, Adult civilian population 20, Number Rate Change from one year ago 000 % of labour force Percentage point change p.a. Unemployment (trend) Underemployment (orig) 1, Underutilization (orig) % of adult population Percentage point change p.a. Participation rate Employment to population ratio Source: ABS, Labour force Australia June

5 Across the states, employment growth over the 12 months to June 2018 was strongest in New South Wales (3.7%), followed by Queensland (2.6%) and South Australia (2.3%). State unemployment rates were highest in Western Australia (6.2%) and Queensland (6.1%) and lowest in New South Wales (4.8%) and Victoria (5.3%) in June 2018 (see Table 3). Table 3: Employment, unemployment and participation by state, June 2018 Employment growth Part time workers Unemployment Underemployment Participation Trend '000 m/m '000 y/y % p.a. % rate % rate % (orig) rate % NSW VIC Qld SA WA Tas NT ACT Australia Source: ABS, Labour force Australia June So far in 2018, employment growth has been strongest in New South Wales, pushing the state s unemployment rate down and increasing the employment to population ratio to a record high, despite the headwind of an aging population (this is a measure of employment as a share of the total adult population, aged 15 years and over). In 2017, the employment to population ratio increased in all states, indicating that employment growth outpaced adult population growth in all states, even in Victoria where population growth was fastest at 2.3% p.a. In 2018, the employment to population ratio was relatively stable or decreased a touch in Western Australia, Victoria and Queensland but it increased in New South Wales, South Australia and Tasmania (Chart 2). Chart 2: Employment to population ratio, by state, to June 2018 Source: ABS, Labour force Australia June

6 Innovation in Australian business in This week the ABS released statistics tracking innovation by Australian businesses in the financial year. Business innovation is key to improving productivity and living standards across the economy. It is increasingly important to the Australian economy, as it transitions away from a recent reliance on mining investment and commodity exports as primary sources for economic growth. According to the OECD, as much as 50% of long-term economic growth in its member countries can be explained by innovation. Although there are many different definitions of innovation, the ABS measures innovation as the introduction of a new or enhanced good or service; marketing method; operational process or organisational/managerial process. Across all Australian businesses, the ABS estimates that 38.3% of businesses were innovating businesses, or businesses which introduced any type of innovation in The percentage of businesses considered to be innovation active - those with any innovative activity during the year 2 - was higher at 44.5%. This means nearly half of all Australian businesses attempted to develop or introduce an innovation in Over the longer term, the proportion of innovating businesses in Australia has been growing and this is encouraging, but the proportion of innovation-active businesses in fell from , when 48.7% were innovation-active. The proportion of innovation-active business in Australia rises then falls from one year to the next (chart 3). This pattern of activity has been noted previously (e.g. by the Department of Industry in 2016) but the reasons for it remain unclear. Chart 3: Innovation activity in Australian businesses, to Source: ABS, Summary of IT Use and Innovation in Australia The ABS has two different measures on business innovation. Innovating businesses are businesses that introduced any type of innovation and innovation-active businesses are businesses that had undertaken any innovation activity including: the introduction of any type of innovation; and/or developing or introduction still in progress or abandoned. 6

7 Encouragingly, over the past decade, the proportion of innovation-active businesses has increased in 16 of the 17 industries measured by the ABS. The only industry where the proportion of innovation-active firms has fallen over this decade is manufacturing. In , 48.4% of manufacturing businesses reported being innovation active compared to 50.0% in Manufacturing reported its highest proportion of innovation-active firms in at 58.3%. In both and , the information media and telecommunications industry had the highest proportion of innovation-active firms, followed by retail trade and wholesale trade. Industries that have a lower proportion of innovation-active businesses including construction (36.2%), transport & warehousing (40.0%) and rental and real estate services (42.4%). Chart 4: Innovation active businesses, by industry, and Note: excludes agriculture and public administration. Source: ABS, Summary of IT Use and Innovation in Australia

8 Of the goods and/or service innovations implemented, only 8% were new to the world, with the majority being adopted from existing examples or practices elsewhere. Over half of all innovationactive businesses sourced their ideas and information for the development of innovation from within the business or another owned by the same company (53%). Other high-ranking sources of ideas for innovation-active businesses include sourcing ideas from clients, customers, or buyers (38.4%), competitors and other businesses from the same industry (25.8%) and website, journals and research papers (24.6%). Chart 5: Source of ideas for innovation-active businesses, Source: ABS Innovation in Australian Business In terms of barriers that prevent business innovation, the primary reason nominated by businesses that did not innovate in was a lack of funding (19.1%), followed by a lack of skilled staff (16.8%). Businesses also nominated costs (12.0%), uncertain demand (11.1%) and government regulations (8.7%) as significant barriers to innovation in (chart 6). 8

9 Chart 6: Innovation barriers, Source: ABS Innovation in Australian Business

10 This week s data and events, 16 Jul 20 Jul 2018 Day Date Data/event Data period Previous release Mon 16 Jul ABS Overseas Arrivals and Departures May (M) Arrivals: +1.4% m/m Departures: +1.2% m/m Tue 17 Jul RBA Meeting Minutes Jul (M) Cash rate 1.50% Thu 19 Jul ABS Labour Force Jun (M) Unemp rate 5.4% (trend) emp growth +2.6% p.a. (trend) ABS Innovation in Australian Business NAB Quarterly Business Survey (B) Jun (Q) 44.5% of businesses undertook any innovation activity Conditions +15 Confidence +7 Seek Job Ads Jun (M) +8.3% p.a. M = monthly. Q = quarterly. H = half-yearly. A = annual. All data are seasonally adjusted unless otherwise noted. Next week s data and events, 23 Jul 27 Jul 2018 Day Date Data/event Data period due for release Previous release Wed 25 Jul ABS Consumer Price Index Jun (Q) Mar (Q): headline 0.4% q/q, 1.9% p.a. core +0.5% q/q, 2.0% p.a. Department of Jobs and Small Business Internet Vacancy index Jun (M) May (M): -1.6% m/m, +5.8% p.a. (trend) Thu 26 Jul ABS Labour force, Detailed Electronic Delivery Jun (M) - ABS International Trade Prices Indexes Jun (Q) Mar (Q): import prices +2.3% p.a., export prices -1.3% p.a. Fri 27 Jul ABS Producer Price Index Jun (Q) Mar (Q): final demand +1.7% p.a., intermediate demand +3.7% p.a., preliminary demand +3.6% ABS Motor Vehicle Census 2018 (A) 2017 (A): 18.8mn registered motor vehicles in Australia ABS Migration (A) : Net migration 182,165 M = monthly. Q = quarterly. H = half-yearly. A = annual. B= Biennial. All data are seasonally adjusted unless otherwise noted. 10

11 Australian economy: latest full-year growth rates and government forecasts RBA SoMP (May 2018) actual f f f GDP, % change p.a., year end Unemployment rate, %, year end Inflation (CPI), % change p.a., year end Treasury Budget (May 2018) p GDP, % change p.a., year average Household consumption, % p.a., year average Dwelling investment, % p.a., year average Business investment, % p.a., year average p Employment growth, % p.a., year end Unemployment rate, %, year end Terms of trade, % change p.a., year end Inflation (CPI), % change p.a., year end Wages (WPI), % change p.a., year end f = forecast. p = projection. Sources: ABS various data; RBA Statement on Monetary Policy (SoMP), latest quarter; Australian Treasury, Budget (May 2018). Australian economy: latest indicators Economy FX and commodity prices (Friday morning) RBA official cash rate, % Jul (M) 1.50 AUD/USD exchange rate US$ Real GDP, % change p.a. Mar (Q) 3.1% Oil price (WTI light crude, USD/BBL) US$69.83 Headline CPI, % change p.a. Mar (Q) 1.9% - Gold price (USD/OZ) US$1, Unemployment rate, % trend Jun (M) 5.4% Copper price (USD/tonne, LME spot) US$ Australian Industry Group monthly performance of industry indices Australian PMI Jun (M) 57.4 Australian PSI Jun (M) 63.0 Australian PCI Jun (M) 50.6 M = monthly. Q = quarterly. All data are seasonally adjusted unless otherwise noted. Arrows represent direction of movement relative to last week for prices, and last observation for growth rates and indices. Sources: ABS various data; Ai Group; Australian Financial Review market prices (as of Thu); London Metals Exchange market prices (as of Fri). Ai Group Economics and Research Team Julie Toth Chief Economist (03) David Richardson Senior Economist (02) Colleen Dowling Senior Research Analyst (03) Andrew Bridger Economist (03) Molly Knox Research Assistant (03) economics@aigroup.com.au 11