2     Tasmanian Economy

Key Issues

·       Favourable local conditions have been supporting the Tasmanian economy, with growth expected to be 2¾ per cent in both 2018-19 and 2019-20, which is above the long-term trend rate.

·       The tourism sector remains very buoyant and is contributing positively to current economic performance. Visitor numbers and spending continues to grow and this is supporting retail trade in the State. Visitor spending contributes to additional investment in accommodation and tourism facilities across the State, which supports increased employment opportunities for Tasmanians.

·       There is a strong pipeline of investment projects for the State, with business investment likely to remain robust over the next few years. High levels of residential building approvals also suggest strong growth in dwelling investment in the near to medium-term.

·       Population growth has been double the long-term trend over the past year and is contributing to increased housing demand. Population growth is estimated to be 1.1 per cent in 2018-19 and forecast to be 0.9 per cent in 2019‑20. This growth is expected to provide support to consumption and retail trade levels, as well as housing demand, in the State.

·       The market for long-term rental accommodation continues to be very competitive. Building approvals continue to be strong, suggesting that the current high level of dwelling construction will be sustained in the medium-term to meet demand. Data from the Australian Bureau of Statistics show that Hobart house price growth has been the strongest of all Australian capital cities over the past year. However, recent data suggests that house price growth has slowed significantly.

·       Employment levels and participation rates reached a peak in June 2018 and have eased over recent months, resulting in a modest increase in the unemployment rate. Given the relatively strong labour market performance over recent years, employment growth is expected to moderate in the short‑term and return to around trend in coming years. The participation rate is also expected to ease marginally in the short-term, but is projected to settle at around 60½ per cent across the Forward Estimates period. The unemployment rate is expected to remain at around current levels with 6¼ per cent for 2018-19 and 2019-20.

·       Inflation for Hobart remains subdued but is above national inflation levels. Cash rate futures markets are indicating that the Reserve Bank of Australia will reduce the cash rate from current historically low levels before the end of 2019. Inflation in Hobart is expected to be around 2½ per cent in 2018-19 and forecast to be 2¼ per cent in 2019-20.

 


 

Tasmanian Economy Estimates, Forecasts and Projections

The Table below shows Treasury’s estimates for key Tasmanian economic indicators for the 2018‑19 financial year, forecasts for 2019‑20 and projections from 2020-21 to 2022‑23.

Table 2.1:         Estimates, Forecasts and Projections1

 

 

 

Budget 2019-20

 

2017-18

 

2018-19

2019-20

2020-21

2021-22

2022-23

 

Actual

 

Estimate

Forecast

Projections2

Gross State Product (real, % change)

3.3

 

2

2

2

State Final Demand (real, % change)

4.5

 

4

Employment (year-average, % change)

3.0

 

¼

¾

1

1

1

Labour Force Participation Rate

(year-average, %)

61.1

 

60¾

60½

60½

60½

60½

Unemployment Rate (year-average, %)

6.0

 

Consumer Price Index

(year-average, % change)

2.1

 

Population (year-average, % change)

1.1

 

1.1

0.9

0.7

0.7

0.7

Source: Actual - Australia Bureau of Statistics; Estimates, forecasts and projections - Treasury.

Notes:

1.    Based on Labour Force data (ABS Cat No 6202.0) for March 2019 and National Accounts data (ABS Cat No 5206.0) for the December quarter 2018.

2.    The projections are not forecasts, but are based on the long‑term averages for the economic indicators. In the case of the labour market, the projections of employment growth reflect the long‑term trend. The projections for the unemployment rate and the participation rate are developed using prevailing rates, projected increases in the working age population, projected employment growth and the historic relationship between employment and labour market participation.

 

The estimates and forecasts rely heavily on the official data produced by the Australian Bureau of Statistics. As a small jurisdiction, some of the key data for Tasmania are more volatile and less reliable than for the larger states, including data relating to the labour force and gross state product and its components, including interstate and international trade. As well as this, data are subject to revision, which may be more significant than for other jurisdictions.


 

Recent Trends

Global Economy

Global economic conditions have eased over the past year, with continuing global economic expansion but at lower levels than have been forecast previously. The International Monetary Fund estimates that the global economy expanded by 3.6 per cent in 2018, with expected growth of 3.3 per cent in 2019. The IMF expects growth to return to around the long-term trend with 3.6 per cent growth expected in 2020.

Over the past year, a trade dispute has continued between the United States and China resulting in new tariffs being applied to imported goods originating from the other party. Whilst there are indications that concessions are being made on both sides, and progress is being made to reach a settlement, there are continued concerns of the impact on the global economy. Activity in the Chinese manufacturing sector has also slipped over several months, which was not helped by the trade dispute. Recent data indicate a potential return to manufacturing growth, but lower Chinese imports.

Lower imports by China has been linked to potential for a slowdown across advanced economies. For example, Germany recently experienced the steepest decline in manufacturing output for several years, which has been attributed by some commentators to its growing reliance on, and declining demand from, China.

At the time of writing, no agreement has been reached in relation to the United Kingdom’s departure from the European Union. Continuing uncertainty weighs on business sentiment and markets in both the UK and Europe given the potential impacts of a difficult separation.

The US economy has been performing strongly, with annual growth of 3.2 per cent estimated for the March quarter 2019. The labour market has also experienced strong gains in employment and the unemployment rate is currently 3.6 per cent.

Global interest rates remain at historically low levels but recent commentary by the Federal Reserve has not ruled out United States interest rates moving either up or down, despite the expectation of economic expansion. The confidence of United States financial markets was impacted when long-term government bond rates moved below short-term rates in late March 2019 for the first time since the Global Financial Crisis. This was a short lived occurrence, but increases the uncertainty over the future path of monetary policy. European monetary policy and interest rates, on the other hand, have been stable with no change in headline rates since early 2016.


 

National Economy

Overall, Australian economic conditions have been relatively strong due to continued global economic growth and a low interest rate environment. Although increases in gross domestic product have slowed over recent quarters, the Australian Treasury forecasts growth of 2¾ per cent in 2019-20, which is above the decade average. In addition, the Australian Treasury expects business investment to strengthen in 2019‑20, but this may be partially offset by slowing construction activity.

In its 2019-20 Budget, the Australian Treasury downgraded its forecast for household consumption noting that consumption of discretionary items was particularly soft. This was reflected in a significant reduction in the Australian Government’s forecasts of the GST pool in the 2018‑19 Mid-Year Economic and Fiscal Outlook and the 2019-20 Australian Government Budget. However, the Australian Treasury forecasts that the rate of growth in consumption will pick up in future years, based on an assumption of continued growth in employment and increasing wage growth. The Australian Treasury notes that the extent to which housing prices continue to fall presents a downside risk to consumption forecasts.

Export growth has continued to be robust over recent years and now accounts for over 21 per cent of GDP. Commodities continue to be Australia’s main exports, although an increasing proportion of exports are service exports such as educational, recreational and professional services. The Australian Treasury expects export growth to remain strong at four per cent in 2019-20.

National employment levels in 2017-18 recorded the strongest growth rate since 2007-08, with an additional 366 000 persons employed. Of these additional persons employed in 2017-18, close to 60 per cent were females and three quarters of all additional persons employed were in full-time roles. The Reserve Bank of Australia has acknowledged that the unemployment rate is now in a range that is conventionally regarded as full employment, but it considers that spare capacity still remains in the Australian economy.

As spare capacity in the labour market reduces, wages would be expected to pick up. However, while wage growth has increased over recent quarters, the wage price index has only produced modest increases.

The national inflation rate remains subdued with annual inflation in the March quarter 2019 being 1.3 per cent. The release of this soft inflation data has seen a significant change in market expectations in relation to cash rate adjustments by the RBA, with futures markets indicating the RBA will cut rates further below the current historic low level of 1.5 per cent.

Tasmanian Economy

The Tasmanian economy has performed strongly during 2018-19, following an increase of 3.3 per cent in gross state product in 2017‑18, which was the strongest result since 2007-08. This performance is being supported by above trend growth in household consumption and dwelling investment in 2018-19. Business investment has been supported in part by strong growth in tourism over recent years that has driven a number of tourism-related developments around the state, particularly hotels. Government consumption and investment also grew steadily, and a pipeline of infrastructure projects is still underway with increased infrastructure spending planned over coming years.


 

State final demand continues to increase above the national average rate and for 2018-19, growth is estimated at four per cent. This is slightly lower than the 4.5 per cent increase estimated by the ABS for 2017-18, but much higher than the long-term trend rate of 2¼ per cent. Growth of 2½ per cent is forecast for 2019‑20, which remains above the long-term average. Together with spending in Tasmania by interstate and international visitors, which is not included in state final demand, overall domestic demand in Tasmania is expected to remain buoyant in the medium-term.

Gross state product, is estimated to grow at 2¾ per cent in 2018-19, which is above the long‑term trend of two per cent. For 2019-20, gross state product is forecast to remain at 2¾ per cent. Positive contributions are expected from government expenditure, business and dwelling investment, and international exports of goods and services, accompanied by positive but lower household consumption growth.

Chart 2.1:         Gross State Product, Tasmania

Title: Gross State Product, Tasmania - Description: This chart shows that the Gross State Product increased above the long term average growth in 2017 18 to 3.3%. The strongest result since 2008 09. The 2018 19 and 2019 20 estimates shows that the Gross State Product is estimated to grow at 2¾ per cent in these years.

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

 

As a consequence of the strength of the Tasmanian economy, labour market conditions have been favourable over recent times, resulting in positive net interstate migration into Tasmania due to higher retention of Tasmanian workers and a greater number of people moving to Tasmania from other Australian states and territories. This has resulted in strong population growth that has further supported demand and economic activity in the State.

Consumption

Tasmanian household consumption has been growing strongly above the long-term trend and has exceeded the national rate over recent quarters. This is likely to have been supported by above average population growth and increased household wealth due to a buoyant housing market over recent times. Consistent with national trends, increases in Tasmanian consumption may also be due to reduced household savings.

Retail spending, which unlike household consumption includes spending by visitors to the State, has continued to grow, increasing by 4.0 per cent in nominal terms in the 12 months to March 2019, which is higher than the national growth rate.

The near term outlook for household consumption is for softer growth, partly due to consumption coming off a period of such strong performance consistent with national trends.

Private Investment

Tasmanian business conditions and confidence remain strong. This is consistent with the improvements seen in business investment in 2017-18 and has continued over recent quarters driven by high levels of investment in machinery and equipment. There are a number of development projects currently underway, including further retail and tourism accommodation developments. Work has also commenced on the Cattle Hill and Granville Harbour wind farms to boost on-island electricity generation.

There is a strong pipeline of major projects planned in the State. While the timing of major investment projects can lead to volatility in business investment levels from quarter to quarter, business investment appears likely to remain robust over the forecast period.

Based on ABS data, house price growth in Hobart was the strongest of all Australia’s capital cities, increasing by just under 10 per cent over the past year. However, consistent with experiences in other mainland capital cities, recent data suggests that the Tasmanian property market may have peaked. The Real Estate Institute of Tasmania March 2019 Quarterly Report indicated that there were 8.5 per cent fewer property transactions in the March quarter 2019 compared with the March quarter 2018. Rental demand has been consistently strong in the Greater Hobart area, and has also increased across other urban areas in Tasmania. Rental vacancy rates are still below one per cent and rental prices have been increasing as investors seek to take advantage of higher rental yields.

Residential building approvals and commencements remain strong, and residential building work yet to be done indicates that further private investment activity can be expected. Strong population increases are expected to maintain pressure on housing supply, and the Government has announced various measures to help alleviate this pressure and make available more affordable housing options for lower income households.

Government Expenditure

Government expenditure includes the costs of providing goods and services by all levels of government (public consumption) and public capital expenditure. Government expenditure has increased over recent years, including increased public investment in infrastructure.

Public investment levels are currently high, largely due to spending by the State Government and government businesses, as well as significant infrastructure commitments by the Australian Government. The 2018‑19 Budget included significantly increased funding for infrastructure projects across the State, including investment in affordable housing, health facilities, roads funding, as well as additional funding for education, justice and tourism related facilities. The 2019-20 Budget maintains a strong Government commitment to investment in infrastructure.

Investment by the University of Tasmania on new teaching and accommodation projects across the State is also captured within government expenditure. The University has a number of major investment projects underway across the State including The Hedberg arts precinct, new student accommodation options and a reconfiguration of its Sandy Bay campus in Hobart, as well as continuing work on the Inveresk precinct in Launceston.

Combined with State Government businesses also continuing to steadily invest in infrastructure renewal, it is expected that public spending levels will remain very strong over the forecast period.

Exports

International exports of goods and services accounted for 15.8 per cent of the State’s economic activity in 2017-18. The real value of export sales as estimated by the ABS can be volatile from year to year, but in 2017-18 exports of goods and services were estimated to have increased by 17.7 per cent.

Tasmanian merchandise export trends show rapidly increasing trade over recent years to regional neighbours such as Malaysia, South Korea, Thailand, Indonesia and Japan. However, China (including Hong Kong) remains Tasmania’s most significant trading partner, accounting for almost one third of merchandise exports.

Tasmanian education exports have increased over recent years as international student numbers have grown. The University of Tasmania is targeting further growth in this sector over coming years.

Many of Tasmania’s key exporters have also benefitted from price increases over recent years, but prices have been easing for some commodities over the past year. For example, year-average prices for copper and zinc remain higher than two years ago by about 23 per cent and 16 per cent respectively, but have fallen over the past year. Favourable exchange rates continue to be supportive for Tasmanian exporters and import competing businesses.

The agriculture industry has also experienced solid export sales over the past year, especially meat and dairy products. Forestry-related exports have seen increased volumes over recent years after a prolonged period of mixed performance. In particular, private forest activity has been gaining momentum indicating positive market conditions, supported by favourable exchange rates.

After a period of extremely strong increases in export sales, data from the ABS points to a slowing in recent months. However, the nominal value of merchandise exports in the year to March 2019 is estimated to be 6.6 per cent above the level of the previous year.

The outlook is positive for Tasmania’s export sector as a whole. If current relative monetary policy settings persist, exchange rates are expected to remain supportive for exporters. Global economic performance has slowed, but relatively strong trading conditions are expected to continue and this is likely to benefit Tasmanian commodity exports as well as education and tourism services.

Monetary Conditions

The March quarter 2019 consumer price index shows Hobart prices increased by 2.1 per cent on an annual basis, while the Australian average was 1.3 per cent and well below the target range set by the RBA. On an annual basis, inflation in Hobart has been ahead of the Australian average since the March quarter 2017.

Australian interest rates continue to be supportive to the economy, with the cash rate set by the RBA remaining at the historically low rate of 1.5 per cent. Global economic momentum has eased over recent months and this, combined with soft inflation, indicates there is potential for interest rates to be lowered rather than raised to help support economic activity. This has resulted in Australian financial markets pricing in two interest rate cuts by the end of 2019.

Hobart’s CPI is estimated to increase by around 2½ per cent in 2018-19, but then forecast to fall marginally to 2¼ per cent growth in 2019-20.

Labour Market

Employment levels and the number of people in the labour force have eased somewhat, but the labour market remains relatively strong and remains very high by historical standards at 247 300 persons. Tasmania’s participation rate has decreased over the past year to be 60.3 per cent in March 2019, while there has been an increase in the State’s unemployment rate of around half a percentage point to 6.5 per cent in March 2019.

The fall in employment over recent months largely reflects lower female full-time and part-time employment. Male full-time employment levels have also fallen marginally over recent months, but remain about the same level as they were a year ago, while part-time male employment has increased over the same period. Overall, full-time employment has eased while part-time employment has not increased sufficiently to offset the falls in full-time employment.

Employment in Hobart and the South East region has been strongest over the past 12 months, but current growth has moderated. The Launceston and North East region has experienced a fall in year-average employment over recent months, but is largely unchanged compared to the previous 12 months. The West and North West region is also largely unchanged across the period.

The State’s participation rate has been easing recently and this is mirrored across all three Tasmanian regions.

After very strong employment growth of three per cent in 2017-18, employment growth is expected to be ¼ per cent for 2018-19. Employment growth at around the long‑term trend rate is forecast through the year for 2019‑20. In year-average terms, the forecast for 2019-20 is for an employment increase of around ¾ per cent and is consistent with around 2 500 more persons employed in June 2020 than in June 2019.

Whilst Treasury does not provide labour market forecasts for the period of the Forward Estimates, employment growth of around 10 000 persons from June 2019 to June 2023 would correspond with long‑term trends across the Forward Estimates period. The year-average unemployment rate is estimated to be 6¼ per cent for 2018-19, up marginally from the previous year. The unemployment rate is forecast to remain at this level in 2019-20 and across the projection period based on employment growth at the long‑term trend.

Population Growth and Demographic Change

Population growth is currently at its highest level since 2009, with the ABS estimating that Tasmania’s population was almost 530 000 persons in the September quarter 2018, which was 1.15 per cent above the level in the September quarter 2017. Expectations are that population growth will remain relatively strong over the next few years and exceed the long-term population growth rate of 0.56 per cent per year.

Tasmanian population growth and migration movements generally reflect the ebb and flow of economic cycles in the State. Economic strength usually results in increased employment opportunities and population movements to the State. Increasingly, over recent decades, long-term Tasmanian population levels have been driven less by natural population increase but by these interstate and overseas migration flows.

Tasmania’s natural population increase (births less deaths) has declined over time. This reflects Tasmania generally having a proportionally smaller population of females within the reproductive age groups due to migration impacts, women delaying having children until later in life, and lower female fertility rates with women having fewer children. For example, the Tasmanian fertility rate has fallen by about 0.4 children per woman over the last decade to be 1.82 children per woman in 2017.

At the same time, the number of deaths occurring in Tasmania has also been increasing each year due to the increasingly older demographic profile of the population. The median age in Tasmania in 2017 was 42.2 years, which was almost five years above the Australian median age of 37.3 years in that year, and was an increase of 1.4 years since 2012, the largest increase of all Australian states and territories. Chart 2.2 shows the annual number of births and deaths over the past 20 years. Note that while the number of deaths has steadily increased over time, the number of births has been more erratic, but a distinct trend of declining births has been evident since a peak in the number of births in 2008.

Chart 2.2:         Annual Number of Births and Deaths, Tasmania

Title: Annual Number of Births and Deaths, Tasmania - Description: This chart shows that Tasmania has experienced a 20 year low in 2017 with just over 5 600 births recorded, while the number of deaths of Tasmanian residents has been on increased over the last 20 years, reaching the current high, with just under 4 800 deaths recorded in 2017.

Source: Births, Australia, ABS Cat No 3301.0 & Deaths, Australia, ABS Cat No 3302.0

As quarterly data tends to be much more volatile than annual estimates, much greater swings between the number of births and deaths can occur. With this in mind, in the September quarter 2017, Tasmania became the first Australian jurisdiction, since the ABS population series began in 1981, to record a natural population decline (the number of deaths was higher than the number of births in the quarter). Population projection work undertaken by both the ABS and Treasury indicates that if current trends persist, the number of deaths may consistently exceed the number of births within the next 10 to 15 years. If this were to occur, the State would be entirely dependent on migration to maintain population and labour force levels.

Historically, net interstate migration tends towards zero growth in the long-term as population moves in and out of the State according to the economic cycles, but net interstate migration has been positive since the March quarter 2016. Net overseas migration is less influenced by economic cycles and has been increasing steadily over recent years and has been positive since the September quarter 2005.

The age profile of interstate and overseas migrants are quite different. Net overseas migration generally brings younger migrants to the State, while net interstate migration results in a net loss of younger people but gains of people who are older than 55 years of age. However, this trend has moderated recently.

The population movements resulting from net interstate migration results in Tasmania having the most rapidly ageing population of any state or territory in Australia, and this presents challenges for the economy over future years and for the provision of government services.

Population levels are a key element to support economic growth in the State through the influence on the size of Tasmania’s labour force. The State is currently in the position of having a greater number of workers at the age that people traditionally exit the labour force than enter it each year, and this means that Tasmanian employers will have a decreasing labour pool from which to recruit suitable employees. However, the trend over recent decades is for older people to remain engaged for longer within the labour force, which eases the pressure on employers to attract younger workers and retain older workers to maintain staffing levels.

These population and labour force pressures are not unique to Tasmania, as many regional areas of other states and territories of Australia also face similar issues, with major metropolitan centres drawing young people away from regional centres for work and study, and some older people choosing to move away from urban areas to gain lifestyle advantages and access more affordable housing.


 

Risks to the Outlook

The risks to the outlook for the Tasmanian economy are currently balanced. Locally the Tasmanian economy has been buoyant, but there is uncertainty arising both nationally and globally through lower economic growth expectations.

Internationally, there are concerns over China’s future growth prospects, with rapidly growing debt levels and declining imports. China is Tasmania’s principal international merchandise export market and an important source of tourists and students, and any significant easing in the Chinese economy may impact a range of businesses and activities in Tasmania.

Global trade levels have been impacted by increased protectionism, including the protracted trade dispute between the United States and China, as well as disruption in trade flows due to the continuing Brexit situation. These could result in further downward revisions to global economic forecasts.

Nationally, the combination of high levels of household debt, property price declines and weak wages growth presents risks to household spending. This may result in households seeking to adjust spending patterns and increase savings rates, which may be through reduced spending by mainland households on travel, including to Tasmania. If this leads to slower national economic growth, this would likely impact on the State’s interstate exports.

Tasmanian households are also vulnerable to these pressures, though average debt levels are significantly lower. As a consequence, the impact is likely to be less significant than in other states and territories.

The outlook for private investment in the State is positive, with a strong pipeline of business investment projects, but levels can be volatile from quarter to quarter due, in part, to the timing of major projects, which may negatively impact reported investment levels. The outlook remains strong for dwelling investment with the housing market expected to see positive activity over coming years based on high levels of building approvals and above trend population growth. This upside risk may see the construction industry benefit in particular, with the potential for stronger than expected activity in both the residential and non-residential sectors. Sustained demand for increased housing supply may also provide support for increased household spending in a range of areas, including the purchase of furnishing and other household equipment, including white goods.

Tasmania’s exports (interstate and international) may also increase by more than expected in future years. The lifting of the fruit fly restrictions will provide a welcome boost to export volumes for affected businesses, and a range of agriculture-related goods and seafood, in particular, have seen strong increases. If the trend is continued, this may stimulate agriculture, fishing and food processing industries across the State. The State’s forestry‑related industries have also grown significantly in response to improved market conditions, and there may be potential for further expansion.

The levels of the Australian dollar should remain generally favourable, with upward pressure from commodity prices for Australia’s major exports, balanced by potential downward pressure arising from shifts in interest rate differentials. This would continue to support Tasmania’s exporters and demand for international education and tourism in the State.