2     Tasmanian Economy

Key Issues

·       The outlook for the Tasmanian economy is positive, with strong household consumption and a buoyant tourism industry, which is supporting employment and investment across the State.

·       Business and consumer confidence remains at record levels with Tasmania continuing to record higher levels of business confidence than is occurring nationally.

·       Tasmania also has Australia's strongest growth rate for international exports. Tasmania's export sector is benefitting from the depreciation of the Australian dollar and the extension of the Tasmanian Freight Equalisation Scheme to international exports that are trans-shipped via a mainland Australian port.

·       Business and dwelling investment are expected to make positive contributions to Tasmania's economy in 2015-16 and 2016-17, supported by the increase in the First Home Owner Grant to $20 000 until 30 June 2017.

·       Public sector activity is also forecast to support economic growth, particularly some major public investment projects across the State.

·       Tasmania's economy is expected to grow by 2½ per cent in 2015‑16 and by 2¼ per cent in
2016-17, both above the long‑term trend. Continued strong growth in re
al gross state product per capita is expected, following the large increase in 2014-15.

·       The unemployment rate is expected to average 6¾ per cent in 2015-16 and employment growth through the 2016-17 year is forecast to be around the long‑term trend.

·       Tasmania's population growth rate has been increasing, supported by a return to net interstate in‑migration since the June quarter 2015. The improved economic and employment opportunities in Tasmania are expected to result in Tasmania's population growing at the long‑term trend rate of 0.6 per cent in 2016-17.

·       The inflation outlook remains very subdued, with CPI growth expected to remain below trend in
2016-17 and wa
ge inflation also expected to remain low.

 


Current Environment ‑ Overview

Global Conditions

Global economic conditions remain uncertain, with some recent slowing in economic growth in developing countries and a modest improvement in advanced economies. Forecasts of global economic growth have been revised downwards, reflecting the weaker outlook for some emerging economies and the slower than expected recovery in the United States. The risks are generally seen to be on the downside. They include China's capacity to transition to a more consumption-oriented economy and sustain stability in financial markets, concerns over deflation in some advanced economies and the ongoing sovereign debt issues in the euro area. The International Monetary Fund is forecasting global growth of 3.2 per cent in 2016, increasing to 3.5 per cent in 2017.

Despite concerns over slowing growth, overcapacity in manufacturing and share market volatility, the Chinese economy continues to outpace other major economies and remains, along with India, the leader of growth in Asia. The current Chinese economy is so large that even with an easing in growth rates, its contribution to regional and global economic growth remains very substantial. The outlook for Tasmania's other major trading partners in the Asian region is less favourable, with below trend growth expected in the medium‑term. Japan, in particular, is facing very subdued economic conditions due, in part, to weak internal demand from population ageing and concerns over deflation and challenging external conditions made worse by the appreciation of the yen.

Conditions in the euro area remain subdued, with modest economic growth and high unemployment rates. Uncertainty in the euro area is also affected by the potential exit of the United Kingdom from the European Union and the responses of member countries to the inflow of migrants from the Middle East and North Africa. There has also been some softening in the recovery in the United States, with weak investment and a stronger US dollar constraining export growth. Very low oil prices have contributed to low global inflation and also led to some major shifts in income and wealth. Major oil exporters, notably Russia, some Middle East countries and Venezuela, have experienced sharp revenue decreases, which has been benefitting energy-importing countries.

These factors have resulted in monetary policy remaining highly stimulatory in most advanced economies, with exceptionally low cash rates and expansionary money supply measures. Many central banks are keen to allow their currencies to depreciate to stimulate demand.

International prices have been increasing for some commodities important to Australia, particularly iron ore, and to Tasmania, including zinc and tin. This has been accompanied by a recent appreciation in the value of the Australian dollar, offsetting, at least in part, the benefits to producers. The international prices of some other commodities important to Tasmania remain subdued, including aluminium and milk powder.

The value of the Australian dollar is nonetheless substantially lower than its peak in 2011, as the prices of key commodities, notably iron ore and coal prices are well below the extraordinary levels at that time. Demand has also increased for other currencies, especially the US dollar, for the purchase of safe haven assets.

Australian Conditions

The Australian economy has been growing below the trend rate of the past two decades, though at a rate that is still almost unmatched among advanced economies. The reduction in mining‑related investment, however, has not been offset by equivalent growth in business investment in other industries. Domestic demand has been supported by strong growth in dwelling investment and modest growth in household consumption. This is resulting in historically very low growth in private final demand in Australia.

International merchandise exports have become a key driver for Australia's growth, including increased exports from recently completed mining and other resource projects. This reliance on Australia's exports to sustain national economic growth is expected to continue.

The Australian Treasury, in the 2016‑17 Budget, expects national economic growth of 2½ per cent in 2015‑16 and forecasts the same growth rate for 2016‑17; these are below the long‑term trend of 3¼ per cent. These forecasts include a winding down of the national dwelling investment boom.

Australian labour market conditions improved over the past year, with strong employment growth and a moderately rising participation rate, according to the Australian Bureau of Statistics. National labour market data from the ABS are positive, notwithstanding the softer estimates of economic activity nationally. The unemployment rate has been falling but remains above the average of the past decade. This has been contributing to low wages growth in the public and private sectors. Some further modest decline in the national unemployment rate is forecast by the Australian Treasury over 2016-17.

National CPI fell by 0.2 per cent in the March quarter 2016, the first quarterly decline since the December quarter 2008, and is below the Reserve Bank of Australia's target band of two to three per cent. The RBA and the Australian Treasury are forecasting below trend inflation for the next two years. Interest rates are at historically very low levels.

Economic Outlook

Table 2.1 presents Treasury's estimates for key Tasmanian economic indicators for 2015‑16, forecasts for 2016‑17 and projections from 2017‑18 to 2019‑20. Changes in gross state product are derived from component‑based estimates of household consumption, private investment, government spending and net exports.

The estimates and forecasts rely very heavily on the official data produced by the Australian Bureau of Statistics. The reliability and volatility of some of the key data for Tasmania, including data relating to the labour force, average earnings and gross state product and its components, especially international trade, is of concern to Treasury. These concerns are compounded when major revisions are made to the data, which can require a major reassessment of past economic trends and potentially significant changes to the economic forecasts prepared by Treasury. Treasury continues to work closely with the ABS on these issues, which are not unique to Tasmania as they are present in other small jurisdictions.

Table 2.1:       Tasmanian Economic Estimates, Forecasts and Projections

 

 

 

RER1

 

Budget 2016‑17

 

2014‑15

 

2015‑16

 

2015‑16

2016‑17

2017‑18

2018‑19

2019‑20

 

Actual

 

Estimate

 

Estimate

Forecast

Projections

 

 

 

 

 

 

 

 

 

 

Gross State Product2,3

1.6

 

 

2

2

2

State Final Demand2,3

0.6

 

 

2

Employment3

2.9

 

½

 

0

½

1

1

1

Labour Force Participation Rate4

61.1

 

61

 

60½

60½

60½

60½

60½

Unemployment Rate4

6.8

 

 

Consumer Price Index (Hobart)3

1.1

 

 

Population3

0.3

 

0.5

 

0.5

0.6

0.6

0.6

0.6

 

 

 

 

 

 

 

 

 

 

Source:       Data ‑ ABS; Estimates, Forecasts and Projections ‑ Treasury.

Notes:

1.   The Revised Estimates Report 2015‑16 (including December Quarterly Report), which was released on 14 February 2016.

2.   Real, percentage change.

3.   Year‑average, percentage change.

4.   Year‑average, percentage level.

 

The projections over the period 2017‑18 to 2019‑20 contained in Table 2.1 are not forecasts. They are based on the long‑term averages for each of the indicators and do not take into account the potential impact of any future economic events or policy changes by the State or Australian Governments.

Tasmania's Economic Outlook

Tasmania's economy continues to recover after several years of weak economic activity. Economic growth in 2014-15 was below the long‑term trend but the strongest since 2008-09, driven by private sector demand. This improvement has been continuing, with household spending showing strong growth and private investment maintaining its recovery. Tasmania's international exports have returned to growth, after an extended subdued period.

Business confidence levels have remained around the highest in the country, which is reflected in the high levels of activity in the construction sector. Tasmania's primary industries also generally face favourable economic conditions, with strong export sales, though some agricultural output was affected by the extended dry period in 2015-16. The expansion of irrigation schemes across the State is providing greater protection in periods of low rainfall to an increasing number of farm businesses.

Other industries face more subdued conditions, particularly mining, with the Mt Lyell copper mine not returning to production and the Avebury nickel mine, near Zeehan, yet to re-open. The manufacturing industry is no longer declining at the rate experienced earlier this decade and has been supported by the depreciation of the Australian dollar. It still faces an uncertain outlook in the face of competition from lower cost economies, including New Zealand. There has been a small temporary reduction in output by some major industrial businesses due to the electricity supply problems faced by Hydro Tasmania owing to the combination of record low inflows and a prolonged outage of the Basslink interconnector with mainland Australia. There is no evidence of a fall in general business confidence arising from these temporary energy supply issues.

Household expenditure in Tasmania has increased strongly, with many households benefitting from increased disposable income due to the reduction in fuel prices and lower mortgage and other interest-related payments. Retail spending has been growing at a greater rate than nationally, increasing by 4.2 per cent in the 12 months to March 2016. This increase in household spending, including retail spending, may also be due to lower saving rates, consistent with the recent national experience.

Consumer spending has also been supported by strong growth in the tourism industry. In the year to December 2015, total visitor numbers to Tasmania increased by eight per cent (to 1.15 million persons), visitor expenditure increased by 11 per cent and international visitor numbers increased by 20 per cent, including a substantial increase in visitors from China. This has provided an economic boost across the State and also stimulated tourism investment, particularly in the greater Hobart area. These trends are expected to continue.

One factor that constrains Tasmania's economic growth, in the long run, relative to Australia as a whole, is low population growth. This affects trends in all components of state final demand, including household spending and private investment, particularly dwelling investment. There would have to be very high and sustained growth in Tasmania's exports to result in Tasmania's economic growth matching the national rate over an extended period.

Tasmania's economy is expected to grow by 2½ per cent in 2015‑16, which would be the strongest growth rate since 2007-08 (Chart 2.1). This is above Tasmania's long‑term trend of around two per cent growth.

For 2016-17, a slight easing in economic growth is forecast, to 2¼ per cent. Business investment and public investment are forecast to increase, together with some modest further growth in dwelling investment. Smaller contributions than in 2015‑16 are expected from export demand, both from interstate and overseas, and from household consumption in 2016-17.

Chart 2.1:          Gross State Product, Tasmania

Title: Gross State Product, Tasmania - Description: This chart demonstrates that Gross State Product in Tasmania is expected to grow above the long-term trend rate at 2½ per cent in 2015-16, with a slight easing in growth to 2¼ per cent forecast in 2016 17.

Source:       Australian National Accounts: State Accounts, ABS Cat No 5220.0; Treasury forecasts and projections.

State final demand within the State is forecast to increase marginally to 2¼ per cent in 2016-17, reflecting the greater contribution to economic growth that is expected from demand within Tasmania.

No change in the year-average level of employment in Tasmania is expected for 2015‑16, compared to 2014‑15, based on the ABS employment estimates to date. The unemployment rate is estimated to be 6¾ per cent for 2015-16 in year-average terms, similar to the unemployment rate for 2014-15. Labour market participation has been easing and this lower level is expected to remain over the forecast period.

For 2016-17, labour market conditions are forecast to be stable. Employment growth through the 2016-17 year is forecast to be around the long‑term trend, consistent with the expected growth in gross state product, increasing employment by around 2 300 through the year, if the monthly growth rate were consistent. The modest year-average growth forecast of ½ of one per cent for 2016-17 is due to the low reported level of employment in Tasmania in recent months. This is more likely to reflect the volatility in ABS labour force data than any underlying employment trend, particularly having regard to the divergent trend these data are suggesting relative to other economic indicators, which remain strong.

Low inflation of 1½ per cent is expected for 2015-16, increasing only slightly to 1¾ per cent in 2016-17. This reflects the Hobart CPI data to date and the low national outlook for inflation. The projections for inflation after 2016‑17 are based on the middle of the Reserve Bank of Australia's target, adjusted for the tendency for the Hobart CPI to increase at a marginally lower rate than the national inflation rate. For 2017-18, the projection is above the mid-range of the most recent forecast by the Reserve Bank of Australia of between 1½ per cent and 2½ per cent. Wage inflation is expected to remain weak, consistent with national labour market wage conditions and the expectation of very modest CPI growth.

Tasmania's population growth continues to increase slowly, supported by a return to net interstate migration in recent quarters after an extended period of net out-migration. A growth rate of 0.5 per cent is expected for 2015-16, increasing to the long‑term trend growth rate of 0.6 per cent in 2016-17.

Continued strong growth in real gross state product per capita is expected in 2015-16 and 2016-17. This follows the large increase in 2014-15 of 1.3 per cent for Tasmania, which was above the national growth rate for gross domestic product per capita of 0.8 per cent.

Further details are provided in the remainder of this chapter.

Private Investment

Business confidence in 2015-16 in Tasmania, according to surveys of business conditions and business expectations, has consistently been amongst the strongest of all jurisdictions.

The level of expenditure on commercial structures has been high and is likely to continue over the near‑term with several major construction projects underway. This is particularly evident in the southern region of the State and includes tourism-related investments, the parliament square project and further work on the Myer site redevelopment.

New major developments planned in the near and medium‑term include several hotel developments in Hobart, the new Port Arthur resort, additional tourism facilities at the MONA site north of Hobart and the Silo Hotel development in Launceston. Additional private investment across Tasmania will occur from the $24 million Jobs and Investment Fund, established by Australian and Tasmanian Governments, which requires private funding on a 2-for-1 basis for private sector projects.


 

Indicators of residential building work yet to be done remain strong, following an increase in dwelling investment of over nine per cent through the year to the December quarter 2015. This high level of dwelling investment in Tasmania is expected to be sustained over the remainder of 2015-16 and 2016-17, supported by the increase in the First Home Owner Grant to $20 000 until 30 June 2017 and exceptionally low mortgage rates.

The housing market in Tasmania has been strengthening, with price increases in recent quarters. This may also stimulate investment in alterations and additions to dwellings, which have been at relatively low levels over the past three years.

There is also increased interest in foreign investment in the State. The Foreign Investment Review Board reported that the total value of approvals for the purchase and development of commercial and residential real estate in Tasmania by overseas buyers exceeded $1 billion in 2014-15, a very substantial increase from $30 million in 2013-14. Around one third of these approvals were for the development of new commercial and residential properties. The extent to which these approvals are resulting in new investment in the State cannot be determined. However, the increased interest is promising for future investment.

While the short‑term outlook for private investment is positive, the level of activity in a small economy such as Tasmania can be affected by the timing of major projects. For some major private projects in Tasmania, the timing is uncertain. Given the historical volatility of private investment in the State, it is not possible to confidently forecast even near term outcomes. The Treasury forecasts assume that investment projects are rolled‑out without large peaks or troughs in 2015-16 or 2016-17.

The economic impact of stimulatory measures, such as the increase in the First Home Owner Grant until 30 June 2017, are temporary in nature. In part, this is because they bring forward investment activity that would otherwise have occurred in later years. Sustaining strong levels of private investment in future years will require Tasmania to offer attractive investment opportunities in a range of industries.

Government Expenditure

Government expenditure in Tasmania comprises Australian, State and Local Government consumption and investment spending, including the University of Tasmania, and accounts for a larger share of economic activity in Tasmania than nationally. Total government expenditure in Tasmania is estimated to increase modestly in 2015-16, following a decline in 2014-15. Major public investment projects include the Midlands Highway upgrades, the ramping up of activity at the Royal Hobart Hospital Redevelopment project, and the University of Tasmania projects in Hobart and Launceston.

For 2016-17, a larger increase in government expenditure is expected, driven by growth in public investment, which includes water and sewerage projects across the State, the continued roll-out of irrigation schemes, the Northern Cities Major Development Initiative, and high schools infrastructure upgrades, including major projects at the Parklands, Latrobe and Smithton high schools. Further investment by the University of Tasmania includes the $90 million Creative Industries and Performing Arts Development, to be collocated with the Theatre Royal in Hobart.

Exports

International and interstate exports of goods are a significant component of Tasmania's economy, accounting for around 40 per cent of the State's gross state product, on average, over the past five years according to the ABS.

Interstate exports, which account for around two thirds of Tasmania's total exports, are determined largely by economic conditions, including household spending trends, in mainland Australia. The forecasts of below trend growth for Australia as a whole for 2015-16 and 2016-17 suggest that growth in these exports from Tasmania may be lower than in recent years.

The depreciation in the value of the Australian dollar in recent years has supported Tasmania's international export sector. Export levels have been rising, with the nominal value of Tasmania's merchandise exports increasing by almost 8.5 per cent in the year to March 2016, the strongest increase of all states and territories in that period. Strong export sales are reported for non-ferrous metals, such as zinc and aluminium, and for seafood and meat. China (including Hong Kong) remains Tasmania's largest export market, accounting for one third of merchandise export sales.

Since January 2016, many Tasmanian exporters have benefitted from the extension of the Tasmanian Freight Equalisation Scheme to international exports that are trans-shipped via a mainland Australian port, principally the Port of Melbourne.

International exports are expected to make a significant contribution to Tasmania's economic growth in
2015-16. Some further increase in international exports in 2016-17 is forecast, making a more modest contribution to Tasmania's growth in that year.

Despite these recent increases, Tasmania's international export levels remain below the peak in the previous decade due, in part, to the decline in woodchip and non-ferrous metal exports.

Labour Market

Recent ABS data report that labour market conditions have been softening in Tasmania. According to the ABS, trend employment has declined by around 4 000 persons since its recent peak in September 2015. ABS data also report a recent increase in the unemployment rate and lower labour market participation. There is a high level of volatility in these data from month to month (Chart 2.2).


 

Chart 2.2:          Employment level, Tasmania

Title: Employment level, Tasmania - Description: This chart shows that the year average employment level for 2014 15 was high compared to previous years.

Source:    Labour Force, Australia, ABS Cat No 6202.0.

These trends follow reported employment growth in 2014-15 of 2.9 per cent, which was well above the long‑term trend, despite Tasmania's economic growth being below trend in that year, as estimated by the ABS.

The year-average employment level for 2014-15 was therefore surprisingly high. On the basis of these ABS data, it is highly unlikely that any employment growth will be reported for 2015-16 in year-average terms, despite the indicators suggesting that above trend economic growth can be expected for this year.

For 2016-17, long‑term trend employment growth of just under one per cent is forecast through the year. On the basis of recent ABS estimates, the employment level at the start of this period is likely to be low, relative to the year-average level for 2015-16. This results in a modest forecast for employment growth of ½ of one per cent, in year-average terms, from 2015-16 to 2016-17.

Similar issues arise with the ABS estimates of participation rate levels in Tasmania. Estimates in 2014-15 were surprisingly high and have been followed by a large decline.

In 2015-16, the year‑average unemployment rate is estimated at 6¾ per cent, very close to the ABS estimate of 6.8 per cent for 2014-15. This represents an improvement in labour market conditions compared to the preceding two years, when the unemployment rate averaged 7.5 per cent.

For 2016-17, the year-average unemployment rate is forecast to remain at 6¾ per cent. With an unchanged participation rate from 2016-17, this forecast assumes that employment demand will grow at around the same rate as the increase in the Tasmanian labour force.

The longer‑term projections of an unemployment rate of 6¾ per cent and a participation rate of 60½ per cent are based on long‑term trends of employment growth, taking into account the labour market forecasts for 2016-17.

Tasmania's Population

Tasmania's population growth rate has been increasing in recent quarters, supported by positive net interstate migration in the June and September quarters in 2015. This follows 16 consecutive quarters of net out‑migration when employment opportunities in mainland states were significantly greater than in Tasmania. Net interstate migration exerts a greater influence on the trends in Tasmania's population growth rate than the levels of net overseas migration and the natural population increase (Chart 2.3).

Tasmania's population growth is expected to increase to 0.5 per cent in 2015-16 and is forecast to be around the long-term average of 0.6 per cent in 2016-17.

Tasmania's population growth is likely to remain well below the national growth rate of around 1.5 per cent. This is partly due to demographic factors, including a small share of females in the main child-bearing age groups, and also the absence of large metropolitan centres in Tasmania that tend to attract overseas migrants.

 

Chart 2.3:       Annual historical change in population by category

Title: Annual historical change in population by category - Description: This chart illustrates that Tasmania’s population growth rate has been increasing in recent quarters, supported by positive net interstate migration in the June and September quarters 2015

Source:    Australian Demographic Statistics, ABS Cat No 3101.0; Treasury forecasts.

Economic factors also play a major role. Many younger Tasmanian adults are keen to seek employment opportunities in mainland Australia. Even in years when there was overall net interstate in-migration into Tasmania, there was a net out-flow in the 15-29 age group. Treasury analysis has shown that population growth in Tasmania is strongly correlated with the performance of the Tasmanian economy, relative to the national economy.  


 

Risks to the Outlook

The outlook for the Tasmanian economy is positive, with above trend economic growth in 2015-16 and 2016‑17. However, one driver of this growth is external demand, for which the risks appear on the downside. If China experiences increased obstacles to its structural transition, or there is a return to volatility in its financial markets that has economy-wide impacts, this could lead to lower export demand and weaker commodity prices. It could also affect tourism demand to Australia, and reverse the trend of increased visitors from China to Tasmania.

On the positive side, the tourism sector may provide a greater stimulus than expected to Tasmania's economic and employment growth, given the potentially very large market in China and other Asian economies and the improved tourism offerings in Tasmania.

Tasmania's international export demand, and potentially the tourism sector, would be adversely affected if there were a further significant appreciation of the Australian dollar, which could be in response to a further firming of key commodity prices for Australia. Upward pressure on the Australian dollar has been eased as a result of the decision of the Reserve Bank of Australia, at its May 2016 meeting, to reduce the cash rate to 1¾ per cent and the comment by the RBA that there is scope for further easing in monetary policy if the conditions require it.

Interstate export demand would be lower than forecast if national economic growth is more sluggish than expected. This could arise if private investment in Australia falls sharply due to weak growth in investment in the non-mining industries. Slower national economic growth would also arise if the housing market weakened, leading to a decline in housing-related activity and lower consumer confidence that impacts on household spending.

The timing of major public and private investment projects in Tasmania presents risks to the outlook, though the balance of risks is uncertain. A lull between the completion of some very large current projects and the commencement of new projects could lead to a large temporary decline in investment activity in the State in 2016-17. It is equally likely, though, that some major new projects will commence while many existing projects are still underway. This could lead to a surge of investment activity in the State and higher than expected economic and employment growth.