2018 CCF Victorian Infrastructure Outlook Report 1 | Page 13

Outlook for the Australian
Economy The challenge for Australia is that mining exports, in
particular, are capital – rather than labour – intensive.
Stronger, sustainable growth in employment requires
stronger growth in local expenditures in domestic
demand. In turn, this requires the return of growth in non-
mining business investment, which has remained stalled
since the GFC.
Large slices of luck and lessons learned from the last
recession (in 1990/91) have helped successive Australian
governments and the Reserve Bank of Australia (RBA)
steer t he economy through the 1997/98 Asian crisis, the
2000/01 downturn, the global financial crisis (GFC) in
2008, and a large bust in resources investment since
2012/13. The problem for non-mining industry sectors has
generally been weak growth in demand, weak profits
and excess capacity. In that environment, it is foolhardy
for businesses to invest ahead of requirements, straining
cash flows and locking in additional costs before they
had the revenue to support them. Most businesses are
still in cost cutting mode, preserving cash and deferring
investment until demand recovers. Low interest rates in
this environment have had relatively little impact. While
there has been plenty of funds available, this just has not
been the business environment for investment. That will
come later.
The Australian economy grew by just 2.0 per cent in
2016/17 – the weakest rate of growth since 2008/09.
While a weak outcome, this result extends Australia’s
long period of uninterrupted economic growth to 26
years – a new world record.
Overall, however, the Australian economy has been unable
to sustain economic growth above 3 per cent since the
peaking of the resources investment cycle in 2012/13.
Much of this weaker economic performance is due to
very weak growth in domestic demand during the period,
which has been negatively impacted by the ongoing
decline in resources investment.
While partially cushioned by a boom in residential
investment since 2013/14 and, more recently, by a
recovery in public infrastructure investment, economic
growth has also been hampered by record low growth
in wage incomes, with households spending more of
what they earn and reducing savings just to maintain
only moderate household expenditure growth. Weak
wage growth has also driven weaker than budgeted tax
revenues for governments, lengthening the time horizon
required to return to sustainable budget surpluses, and
limiting the firepower of governments to counter weak
private investment with higher public investment without
further increasing public debt.
Unlike many other resources-exporting economies,
Australia did not experience a recession in the wake of
the resources investment bust. Strong growth in mining
production and exports from world class, competitive
deposits, and supercharged by a much lower dollar
– which also stimulated other exports of goods and
services, such as tourism, education services, agriculture,
manufacturing and business services – has helped offset
some of the pain from weaker demand growth. Economic
growth (which includes net exports) has generally been
higher than growth in domestic demand.
The next growth phase in the Australian economy will be
driven by non-mining business investment. When it does
recover, it will be to service growing demand, driven by a
growth logic (evidenced by rising profits) and augmented
by a technology catch-up. In turn, this will have a strong
multiplier through business services into the rest of the
economy. While non-mining business profits have staged
a healthy recovery over the past year (to September
quarter 2017), it is still too early to say that businesses are
confident in the path of future demand and profits, and
are willing to make the psychological shift from caution to
a ‘go for growth’ investment mentality.
Part of the reason for this is that nationally, by region and
industry, growth and profitability is highly fragmented.
Very strong economic growth has returned to New South
Wales and Victoria, after spending much of the mining
boom years suppressed. However, growth in demand is
still very weak in many other regions. In some states such
as Western Australia and Queensland, State Final Demand
has outright declined. Growth in the South Australian
economy has remained weak for several years, but did
pick up somewhat in 2016/17 on the back of higher public
investment.
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