Saturday, May 30, 2015
It kicks off its annual assessment of the economic outlook by reminding all us worriers that the economy is entering its 25th consecutive year of growth, which is the second longest continuous period of growth of any advanced economy in the world.
And, we're reminded, though the economy has grown by less than its medium-term average ("trend") rate of 3 per cent-odd for five of the past six financial years, and is now forecast to grow by just 2.5 per cent in the financial year soon to end and 2.75 per cent in the coming year, this still leaves us as "one of the fastest growing economies in the advanced world".
Treasury gives us an update on the story we've become so familiar with in the past few years: the boom in investment in new mines and natural gas facilities is fast subsiding, leaving a big vacuum in economic activity that needs to be filled by faster growth in the rest of the economy.
To encourage such growth, the Reserve Bank has resumed cutting the official interest rate, such that it's now fallen 2.75 percentage points since its peak in late 2011, to a record low of 2 per cent. And, despite all the complaints about spending cuts, Joe Hockey has ensured his budget is only a minor drag on economic activity.
In response, we're now getting quite strong growth in new home building, and consumer spending is stronger than it was.
Fine. But that brings us to the crux of our continuing sub-par performance: business investment spending. Treasury expects mining investment to fall by more than 15 per cent this financial year, then by 25 per cent in the coming year and a further 30 per cent in 2016-17.
Yipes that's precipitous. And Treasury fears non-mining investment will show only modest growth until 2016-17 when it should increase by 7.5 per cent.
Put mining and non-mining together and you see business investment spending is the economy's continuing weak spot. After falling by 5 per cent last financial year, total business investment is expected to fall by another 5 per cent in the year just ending, then by 7 per cent in the coming year and even by a further 3.5 per cent in 2016-17.
Now you see why this week's figures for business "cap-ex" were such a downer. They really confirmed Treasury's dismal outlook. They showed a weak outcome for the March quarter and an unexpected deterioration in how much non-mining businesses expect they'll be spending in the coming financial year.
Moving right along, Treasury reminds us the economy does have a couple of things going for it apart from rock-bottom interest rates: one is lower petrol and oil prices and another is lower electricity prices (with more falls to come in some states).
And then, of course, there's the lower dollar, down mainly because the prices of our mineral exports are down, but perhaps also because our interest rates are lower than they were relative to those of other countries.
Our "real" exchange rate – that is, after adjusting the nominal exchange rate for our inflation rate relative to those of our trading partners – appreciated by about 30 per cent during the mining prices boom, but since September 2011 it has depreciated by about 13 per cent.
That's bad news for businesses and households buying imports, of course, but good news for Australian firms competing against imports in the domestic market. It's also good news for Australian exporters, who now get more Aussie cents for every US dollar they earn.
Treasury is forecasting strong growth of 5 or 6 per cent a year in the volume (quantity) of our exports over the next few years. Most of that is increased exports of minerals and energy as new mines come on line, but some of it comes from faster growth in non-mining exports.
On the other side, Treasury's expecting the volume of our imports to fall by 3 per cent in the year just ending and by a further 1.5 per cent in the coming year, before growing moderately by 2.5 per cent in 2016-17.
Why? Mainly because of fewer imports of heavy mining equipment, but also because the lower dollar will allow local firms to recapture market share from imports.
Such as? A classic exporting and import-competing industry is tourism. Real travel spending by international visitors to Oz has grown by 11 per cent since the start of 2012, whereas real travel spending by Aussies travelling abroad has decreased by 11 per cent.
The combined effect has been to turn our balance of trade in tourism services from a small deficit to a much bigger surplus. The increased inflow of tourists has been shared by all states.
Remember how much our leaders bang on about the big bucks to be made from China's rapidly growing middle class? Tourists from China accounted for more than a quarter of the growth in tourist spending in Oz last financial year.
The more than three-quarters of a million Chinese visitors that year spent an average of $8600 per person with our businesses.
Now get this: the volume of our exports of medium-skilled and technology-intensive manufactures has grown almost continuously over the past 30 years, as have our exports of high-skilled and technology-intensive manufactures, with the latter now bigger than the former.
It's really only the low-skilled and labour-intensive manufactures that have fallen back. The starring industries make goods such as pharmaceuticals, professional and scientific equipment, and machinery and transport equipment.
Strikes me we're not dead yet.