Key Issues ·       The outlook is for Tasmania's economic growth and employment growth over 2017-18 to be significantly stronger than in recent years. ·       The tourism sector continues to be a very significant contributor to the Tasmanian economy, with record levels of visitor numbers and spending. This is stimulating investment in tourism accommodation and supporting employment across the State. ·       Other industries enjoying strong growth include agriculture, supported by high prices and favourable weather conditions, and aquaculture, which continues to expand. The State's forestry industry has shown some recovery and the prospects for Tasmania's mining industry have improved. ·       Tasmanian businesses continue to report a positive view of the Tasmanian economy, with Tasmanian business confidence significantly increasing over the past two years. Significant public investment in roads, rail and irrigation projects has been ongoing, further supporting the construction sector, and Tasmania's housing market has been buoyant. ·       Demand within the State, as measured by state final demand, is expected to have grown above trend in 2016-17. However, a reduction in international exports following extremely strong growth over 2015-16 is expected to constrain growth in gross state product to one per cent in 2016-17. ·       The Tasmanian economy is forecast to expand by 2½ per cent in 2017-18, stronger than the long‑term average rate of growth. Private activity is expected to increasingly drive growth in 2017-18, with continued strong household spending, a return to growth in exports and some recovery in private investment. ·       Above trend employment growth is forecast over 2017-18, building on the increased employment in recent months. The unemployment rate is expected to average 6¼ per cent in 2016-17 and remain at that rate in 2017-18, with labour market participation responding to improved labour market conditions. ·       Tasmania's population growth rate has been increasing to around the long-term trend rate, with a return to net positive interstate migration inflow. These trends are expected to continue over the medium‑term. ·       Monetary conditions are expected to remain supportive, though there are indications that inflation and interest rates are trending upwards. Continued modest wages growth is expected for Tasmania, consistent with national trends. Hobart's CPI is forecast to increase by 2¼ per cent in 2017-18.

 

Current Environment ‑ Overview

Global Conditions

Global economic conditions have been improving, with forecasters reporting a more favourable outlook and presenting higher global economic growth estimates than in recent years. The International Monetary Fund estimates that the global economy expanded by 3.1 per cent in 2016 and forecasts growth of 3.5 per cent in 2017, followed by 3.6 per cent growth in 2018. Despite this general improvement in the economic outlook, significant risks to the global economy persist, with increased pressure towards protectionism, a tightening of global financial conditions, consistently slow productivity growth in some advanced economies and increased energy commodity prices.

The change in the administration in the United States has not dampened domestic US economic activity, with a strengthening US labour market and increased private sector activity. Near-term expectations of an expansionary fiscal policy are helping to promote a positive short-term outlook, while a mild tightening of monetary policy suggests the US Federal Reserve has a positive outlook for the US economy.

The Chinese economy continues its transition away from industrialisation and mainly manufacturing-led growth. The Premier of the State Council of the People's Republic of China, Li Keqiang, has reinforced a minimum 6.5 per cent growth target in 2017. Given the importance of China as a trading partner for the national and Tasmanian economies, the continued commitment of Chinese policy makers to robust economic growth remains important for Australia and Tasmania's exporting industries.

Global international trade continues to be subdued, especially for manufactured goods, with very modest growth in recent years. This has particularly affected emerging and developing economies, including many that are significant export markets for Tasmania. In the near‑term, a pickup in emerging Asian markets is expected, assisted by a partial recovery in commodity prices.

There has been a modest recovery in the euro zone, though overall growth rates remain low and debt issues persist for some southern European nations. There is continued uncertainty over the conditions of the United Kingdom's exit from the European Union and how strong the pressure will be on other nations to withdraw from the European Union.

An appreciation in oil prices and other commodity prices has contributed to a modest increase in global inflation, following very low global inflation rates in recent years. The improved global outlook is expected to lead to some further increases in inflation. Despite this, accommodative monetary policy positions are expected to remain for some time in most developed economies. This is particularly the case in the euro zone, where interest rates are close to zero and the European Central Bank has stated that it expects rates to remain at this level or zero for an extended period.

 

Australian Conditions

The national economy continues to grow quite strongly compared to many advanced economies, supported by strong growth in exports and sustained high levels of household spending. Vigorous growth in dwelling investment, especially in New South Wales and Victoria where the housing market has been buoyant, has helped to offset reduced business investment levels over the past few years. Following the peak of the mining construction boom in 2012, when investment was at exceptionally high levels, mining investment has been decreasing sharply. Non‑mining business investment also continues to slowly expand.

These trends are contributing to diverging economic conditions across Australia. The Western Australian and Queensland economies are now experiencing negative employment growth as mining investment winds down. By contrast, Victoria and New South Wales have been enjoying above trend employment growth and forecasts are for much stronger economic growth and higher population growth.

Export conditions remain favourable, with a relatively low Australian dollar against most major currencies and improved commodity prices for iron ore and other key commodities. The newly completed mining investment projects are now in the production phase, contributing to higher export volumes. The recent improvement in the terms of trade and the increase in export volumes have supported national real income growth.

National household consumption growth has been a little below trend, supported by continued growth in household wealth. Much of the growth in household spending has been on services that are less discretionary in nature, such as rent and other dwelling services, health and insurance. Part of the growth in household spending has been due to lower national savings rates, as household income growth has been modest, in line with the low wage increases in recent years.

Consumer confidence levels appear subdued, despite increased household wealth, which may reflect concerns that, with relatively high levels of indebtedness, many households are vulnerable to higher mortgage costs if interest rates increase.

Government expenditure growth continues to increase, with public consumption growth returning to close to trend rates and public investment picking up strongly. Much of the recent growth in public spending nationally has been in Australian Government consumption and in infrastructure investment at the state, territory and local government level.

Commonwealth Treasury is forecasting a gradual increase in national economic growth from around 1¾ per cent in 2016-17 to three per cent by 2018-19. A return to positive business investment growth is looking increasingly likely as the decline in mining investment comes to a close.

National labour market conditions remain quite strong though the unemployment rate has been increasing marginally in recent months. The expected pick-up in economic growth is likely to be associated with employment growth that would put downward pressure on the unemployment rate over the year ahead.

Inflationary conditions have firmed over recent quarters. The Reserve Bank of Australia estimates that underlying inflation is currently at around 1¾ per cent, a little higher than a year earlier. Further modest increases are expected as economic conditions continue to improve. While there are no indications from the Reserve Bank that the cash rate is likely to move significantly upwards from its current very low level of 1.5 per cent, mortgage rates have started to increase, especially for investors and those on interest-only loans.

 

Economic Outlook

Table 2.1 presents Treasury's estimates for key Tasmanian economic indicators for 2016‑17, forecasts for 2017‑18 and projections from 2018‑19 to 2020‑21. 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. Concerns remain over the reliability and volatility of some of the key data for Tasmania, including data relating to the labour force and gross state product and its components, especially international trade. 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's capacity to prepare economic forecasts is also constrained by the lack of data on interstate trade in goods and services. Treasury continues to work closely with the ABS on these issues, many of which also arise for other small jurisdictions.

Table 2.1:       Tasmanian Economic Estimates, Forecasts and Projections

			Budget 2017‑18
	2015‑16		2016‑17	2017-18	2018-19	2019‑20	2020‑21
	Actual		Estimate	Forecast	Projections
Gross State Product1,2	1.3		1	2½	2	2	2
State Final Demand1,2	2.2		2¾	2½	2¼	2¼	2¼
Employment2	-0.3		0	1¼	1	1	1
Labour Force Participation Rate3	60.4		59¾	60	60	60	60
Unemployment Rate3	6.5		6¼	6¼	6	6	6
Consumer Price Index (Hobart)2	1.4		2	2¼	2¼	2¼	2¼
Population2	0.4		0.6	0.6	0.6	0.6	0.6

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

Notes:

1.   Real, percentage change.

2.   Year‑average, percentage change.

3.   Year‑average, percentage level.

 

The projections over the period 2018‑19 to 2020‑21 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

The Tasmanian economy continues to grow and is forecast to expand by 2½ per cent in 2017‑18, stronger than the long‑term average rate of growth. Private activity is expected to increasingly drive growth in 2017‑18, with continued strong household spending, a return to growth in exports and some recovery in private investment. Tasmania experienced little upside from the mining investment boom but also had less downside exposure following the shift to the boom's production phase. In particular, Tasmania's exporting and tourism industries have benefited from the depreciation of the Australian dollar over the past five years.

According to the ABS, Tasmanian gross state product increased by 1.3 per cent in 2015‑16, with some Tasmania‑specific events, including the Basslink outage, very low rainfall which was followed by floods detracting from growth. Household consumption and government expenditure have contributed to sustained growth in state final demand, despite private investment easing in recent quarters. International exports have been easing from their high levels in 2015-16 and are likely to detract from the State's economic growth in 2016-17.

Tasmanian business sentiment continues to be very positive across the State, although this has not yet been reflected in business investment, which remains subdued according to the ABS.

The export value of some agricultural commodities is expected to ease slightly in 2016-17 following very strong results in 2015-16. Confidence is particularly strong in the agricultural sector, with generally high commodity prices and favourable seasonal conditions contributing to a strong near-term outlook for the sector.

The tourism industry continues to be a significant and growing contributor to the Tasmanian economy. Growth in visitor expenditure in the State has been over eight per cent, on average, for the five years to 2016. While the full effects of tourism on the economy are difficult to measure, the tourism industry is relatively labour intensive, providing employment opportunities across the State. It has also led to very significant investment in tourism accommodation and other tourism facilities across the State.

After a period of decline, Tasmania's manufacturing industry is now more stable. At the sub-industry level, the trends have been mixed. For example, Incat reported in April 2017 that it has record orders as a result of the strong demand for fast ferries and is planning to expand employment from 500 to almost 750 workers. By contrast, Murray Goulburn more recently announced the closure of its milk processing factory in Edith Creek in northern Tasmania, which employs 120 workers.

Tasmania's economy is expected to grow by one per cent in 2016‑17, below Tasmania's long‑term trend of around two per cent growth. The stronger growth in state final demand, expected at 2¾ per cent, is expected to be partly offset by a reduction in international exports.

Hobart inflation growth has been modest over the past few years, as has been the case nationally. More recently, Hobart inflation has been increasing, due partly to higher automotive fuel costs and domestic travel and accommodation costs. Inflation growth of two per cent is estimated in 2016-17, followed by a forecast 2¼ per cent growth in 2017-18.

Tasmania's population growth has been increasing since 2010-11, supported by increased net overseas in‑migration to Tasmania and, more recently, positive net interstate in-migration. While individual migration decisions occur for a variety of reasons, in aggregate, Tasmanian net interstate migration flows are influenced by housing affordability and labour market conditions in Tasmania, which currently are relatively more attractive compared to mainland Australia than in recent years.

This suggests the near‑term outlook for Tasmania's population growth is positive, supported by the reported high level of property purchases in Tasmania in recent months by interstate households. Tasmania's population is expected to increase by 0.6 per cent over 2016-17.

Further details are provided in the remainder of this chapter.

Consumption

Household consumption has been expanding at around the national growth rate, despite Tasmania's much lower population growth. Retail sales, in particular, have been strong, increasing by more than the national growth rate, and supported by tourism‑related expenditure on household goods, and in cafés, restaurants and takeaways, department stores and other retailing categories.

With improved economic conditions and employment prospects for the year ahead, household consumption is expected to remain a major contributor to economic growth. This is being partially offset by recent increases in petrol prices and interest rates for some home loans, which reduce household disposable income. However, households in Tasmania are less exposed to interest rate increases than households nationally as a higher proportion of households own their home outright and average mortgages are significantly below national levels.

Private Investment

Tasmanian private investment levels remain below the record high levels recorded prior to the global economic downturn. Dwelling investment contributed to growth in 2015-16, supported by the Tasmanian Government's First Home Owner Grant and very low interest rates. More recently, despite the strong housing market, there has been reduced activity in construction of new dwellings, which has led to a fall in dwelling investment. Key forward indicators of dwelling investment ‑ residential building work yet to be done and building approvals ‑ suggest that activity may continue to be subdued in the near term without further stimulation.

A number of major projects continue to be progressed in the Hobart CBD, such as the Myer redevelopment, the new hotel as part of the $150 million parliament square project, the $35 million hotel at the former Macquarie Wharf Shed No. 1 and hotel developments in Macquarie Street. Some major projects are underway in other parts of the State, including the Silo Hotel project and the CH Smith building in Launceston and several manufacturing-related investments in the north and the north-west of the State.

However, the ABS estimates indicate that business investment has also been easing for the State as a whole. It is unclear whether the changing composition of Tasmania's industries, with an increase in labour-intensive private services and a reduction in the relative importance of manufacturing, is leading to lower longer‑term investment levels.

Recent ABS estimates of investment in non‑residential building and construction activity have been volatile, which may reflect the timing of projects included in the ABS estimates. Continued strength in relevant forward indicators of activity, such as non-residential private work yet to be done, suggests a modest pick-up in activity is likely over coming quarters.

Tasmanian private investment is expected to contribute to growth in 2017-18, due to the solid pipeline of new and recently commenced projects, including the ramping up of the CH Smith redevelopment in Launceston, and the continuation of existing projects.

Government Expenditure

Government expenditure, which comprises public consumption and public investment, has been increasing in Tasmania. This followed a period of moderate decrease between early 2014 and early 2015 which, in part, reflected fiscal pressures faced by all levels of government at that time. Government expenditure is more than five per cent above the level of one year earlier, due largely to increased public investment.

Public investment in 2016-17 to date has been supported by State Government infrastructure expenditure, including increased expenditure on the ongoing Royal Hobart Hospital Redevelopment project, roads projects and repairs to infrastructure in response to the June 2016 floods. There has also been significant spending by the University of Tasmania on accommodation projects in Hobart and Launceston and the commencement of the Creative Industries and Performing Arts Development by Hobart's Theatre Royal.

Government expenditure is expected to make a significant contribution to Tasmania's state final demand and economic growth in 2016-17, with public consumption growth close to trend and a very strong increase in public investment expected.

Over 2017-18, government expenditure is expected to further contribute to Tasmania's economic growth, although not to the same extent as in 2016-17. Some further increase in public infrastructure spending is forecast, together with continued high levels of public consumption.

Exports

International export sales were particularly strong in 2015-16. The increase was boosted by favourable factors relating to some food exports (salmon, cherries and beef) and exports of non-ferrous metals, principally zinc and aluminium. According the ABS, the volume of Tasmanian international exports of goods and services increased by 20.2 per cent in 2015-16, the strongest percentage increase since 1997-98. This was achieved despite a small reduction in production by major industrials in the last quarter of the financial year due to the electricity supply shortage resulting from the extended Basslink outage and very low rainfall.

Since then, sales of these products have returned to more normal levels with the effect that international export volumes over 2016-17 are expected to be substantially reduced in year‑average terms.

The near-term outlook for Tasmanian exports is positive, given the improved international and national outlooks and strengthened international commodity prices for major Tasmanian mineral and agricultural exports, such as iron ore, zinc, beef and milk powder. To date, these impacts have not been significantly offset by any significant appreciation in the Australian dollar, resulting in favourable local prices for these exports.

Forecasts for economic growth for Tasmania's major trading partners are generally high, which also suggests the prospects are positive for Tasmania's exports, including the export of services such as education and tourism-related services.

Tasmania's exports will also be boosted by the return to production at the Henty Gold mine in January 2017. A resumption of production at the Mt Lyell copper mine would further enhance longer-term growth prospects.

Labour Market

Tasmanian labour market conditions have improved over the past year. The ABS estimates that employment has increased by 3 300 persons from June 2016 to March 2017, or around 1.4 per cent, in trend terms (Chart 2.1 below). Over this period, an increase in part-time employment has more than offset a decline in full time employment. The labour market appears to be stronger in the south and the north-west than in the north, where the unemployment rate remains relatively high.

The monthly estimates (seasonally adjusted) have been highly volatile, as the chart shows. This volatility affects the trend estimates, such that it can be difficult to draw inferences about the underlying trends in Tasmania's labour market.

ABS data suggest that the services sector (public and private), which represents more than 75 per cent of all persons employed, continues to be the primary driver of employment growth. In contrast, labour demand is weaker for some industries in the non‑service sector (agriculture, mining and manufacturing). The construction sector, along with growth in education and training, and administrative and support services, recorded the largest increases in employment levels over the past year.

Chart 2.1:       Employment level, Tasmania

Source:  Labour Force, Australia, ABS Cat No 6202.

This recent increase in employment has been accompanied by the labour market participation rate declining to a relatively low level, estimated to be 59¾ per cent over 2016-17. Along with employment growth, this has contributed to a sharp decline in Tasmania's unemployment rate which, at March 2017, was 5.8 per cent, lower than the national unemployment rate of 5.9 per cent.

In year‑average terms, employment levels are expected to be unchanged in 2016-17, compared to 2015-16. The unemployment rate is expected to be 6¼ per cent, on average, in 2016-17, which is above the current rate due to higher unemployment rates earlier in the year, lifting the year-average unemployment rate estimate.

Job vacancy estimates have recently improved, suggesting that this strong recent growth will be consolidated over the short‑term. For 2017-18, employment growth of 1¼ per cent is forecast, which is above the long‑term trend.

The forecast unemployment rate for 2017-18, in year‑average terms is 6¼ per cent, unchanged from the 2016-17 estimate. Two factors that prevent the unemployment rate forecast from being lower are an expected increase in the participation rate in response to the improved labour market conditions and increased growth in the working age population.

Labour market projections over the Forward Estimates period are based on the long-term growth rates for employment and population in Tasmania and on the assumption that the participation rate remains around the level forecast for 2017-18.

Risks to the Outlook

The outlook is for Tasmania's economic growth and employment growth over 2017-18 to be significantly stronger than in recent years and above the long‑term trend. It appears that the balance of risks to the outlook for the Tasmanian economy is even, with no evident upside or downside bias.

Factors which may improve the outlook include a greater than expected recovery in private investment. To date, private investment levels have been subdued and have not fully reflected the improved economic conditions or the high business confidence levels. Business investment is typically volatile for small jurisdictions such as Tasmania and the timing of private sector projects could result in higher investment levels than forecast.

Current levels of dwelling investment may partly reflect the overhang effect of the First Home Owner Grant, as these schemes typically bring forward investment which then results in a lull in activity. Given the increased population growth and the growth in property prices in recent years, there is potential for a return to higher levels of dwelling investment in the medium term.

External economic conditions may also be more favourable than expected, which could lead to a greater recovery in exports, and an increase in export-related investment. The prospects for Tasmania's major export partners have been improving, which could lead to significantly increased exports from Tasmania, especially if this is accompanied by favourable weather conditions.

Against this, however, increased tension in the Korean peninsula, and potentially the South China Sea, could increase uncertainly and disrupt international trade, adversely affecting Tasmania's exporters. There are also downside risks from any trends to increased protectionism globally, which would result in reduced income for Tasmania's major trading partners and unfavourable flow-on effects for Tasmanian exports.

Housing market trends are becoming very important, following the very large increases in property prices, and household indebtedness, in recent years. Tasmanian households are generally less exposed to a reduction in domestic property prices than households in several other states and territories. However, if there were a significant reduction in property prices, especially in the mainland states where the increases have been most pronounced, this could have far reaching impacts on consumer spending. This, in turn, could have a strong contractionary impact on Australia's economy, which would flow through to Tasmania's economy.

The tourism sector is becoming a major contributor to Tasmania's economy. The recent strong growth is expected to continue, as Tasmania improves its tourism offerings, especially new tourism accommodation, and as national and international economic conditions continue to improve. Given the size of the potential market, there is scope for further growth in this sector, representing an upside risk to Tasmania's outlook.