2     Tasmanian Economy

Key Issues

•    Over the past year, the Tasmanian economy has continued to perform very strongly, despite the challenges posed by the COVID‑19 pandemic and other national and global events.

•    In the second half of 2021, the State’s successful containment of the virus allowed the economy to operate mostly as normal, particularly in comparison to other jurisdictions which experienced widespread outbreaks of COVID‑19 and prolonged lockdowns. More recently, Tasmania, along with the rest of Australia, has transitioned to a new phase of living with COVID‑19. This is expected to reduce the economic impact of the virus and facilitate the return of many pre-pandemic behaviours, including international travel.

•    The Tasmanian economy is expected to grow by 3¾ per cent in 2021‑22, well above the long-term average and on the back of very strong growth of 3.8 per cent in 2020-21. Despite coming off a high base, above-average growth of 2¾ per cent and three per cent is forecast in 2022-23 and 2023‑24, respectively. Over the forecast period, growth is expected to be driven by strong government expenditure, household consumption and increases in exports.

•    The strength of the Tasmanian economy is also evident in the State’s labour market. In March 2022, employment was at its second highest level on record, above its pre‑pandemic level and the unemployment rate was very low by historical standards, at 4.5 per cent, well below the level recorded prior to the onset of COVID‑19. In year‑average terms, employment is expected to grow by 2¼ per cent in 2021‑22, more than double the long-term average. Employment growth is forecast to moderate and grow by 1¼ per cent in 2022‑23, before growing at around the long-term average of one per cent in 2023‑24.  These forecasts are consistent with an increase in employment of around 6 000 persons over the forecast period to June 2024.

•    The unemployment rate is expected to remain very low, with a year-average rate of 4½ per cent estimated for 2021‑22, and forecast to be maintained for the following two years. Labour force participation is also expected to remain above its long‑term average over the forecast period.

•    The lifting of many domestic and international border restrictions in late 2021 and early 2022 is expected to drive the return of positive net interstate and overseas migration to Tasmania. This is forecast to result in population growth rising to around the long-term average, growing by 0.7 per cent in 2022‑23 and then 0.9 per cent in 2023‑24, close to the pre‑pandemic level of population growth.

•    These forecasts have been developed using available information at a point in time, and their likelihood will be influenced by the uncertain evolution of risks and policy settings. In particular, despite the positive outlook for the Tasmanian economy, there are a number of risks that may affect its performance over the forecast period. Although Tasmania has adapted well to living with COVID‑19, the evolution of the virus remains uncertain, and it is possible that more virulent, or vaccine-resistant, variants of the virus may emerge and require the reintroduction of some restrictions, which could impact economic activity.

Key Issues (continued)

•    Inflationary pressures also pose a risk to the economy. Tighter monetary policy settings intended to curb these pressures may lead to a greater than expected decline in the demand for goods and services and have varying effects across the economy. Additionally, ongoing supply chain disruptions and the evolution of geopolitical events continue to pose risks to the economy.

Economic Outlook

Both the Tasmanian and Australian economies have recovered well from the impacts of the COVID‑19 pandemic, displaying considerable resilience. The recovery has been aided by the successful rollout of the vaccination program, which has allowed most travel restrictions to be lifted, with most state borders reopening towards the end of 2021, while the international border reopened widely in early 2022.

At both a State and national level, the management of the pandemic has moved to a new phase of living with COVID‑19, with the aim no longer being to contain and eliminate COVID‑19, but rather to adapt to living with the virus in the community. As a result, many of the measures previously in place to contain the virus (such as travel restrictions) have been lifted, with the intention that COVID‑19 will be dealt with in a similar manner to other seasonal respiratory illnesses, such as influenza. This approach is supported by high levels of vaccination within the community, along with ongoing, low‑level public health measures.

The transition to living with COVID‑19 commenced in Tasmania with the reopening of the State border on 15 December 2021. While there were some initial disruptions as the virus began to circulate in the community, Tasmanians adapted quickly, with most economic effects appearing to be temporary.

Global and National Economic Environment

Over the past year, the global economy has continued its recovery from the pandemic, but there has been some divergence between the recoveries of advanced economies, and those of emerging market and developing economies, reflecting differences in vaccination availability, policy support provided and economic structures.

In its April 2022 World Economic Outlook, the International Monetary Fund outlined that the global outlook has deteriorated recently following the Russian invasion of Ukraine, which has resulted in a humanitarian crisis in Eastern Europe, and sanctions imposed on Russia. It noted that risks to the outlook have increased, not only as a result of the invasion of Ukraine, but also due to other factors. Frequent and wider‑ranging lockdowns in China have affected some of its key manufacturing hubs, which has slowed activity there and could cause additional global supply chain issues. Persistent and broad price pressures also pose a significant risk, leading to an earlier‑than‑expected tightening of monetary policy. The IMF expects that the global economy will grow by 3.6 per cent in both 2022 and 2023, which is 0.8 and 0.2 of a percentage point lower, respectively, than was expected at the time of its January 2022 forecasts.

The Australian economy has recovered strongly from the earlier impacts of the pandemic, growing by 1.5 per cent in 2020‑21. Widespread lockdowns across a number of jurisdictions led to a contraction in the national economy in the September quarter 2021. However, the economy rebounded strongly in the December quarter 2021, as restrictions were eased, to be 3.4 per cent larger than its pre‑pandemic level, two years earlier. The national labour market has continued to perform strongly, with employment at a series high in March 2022, while the unemployment rate reached the equal lowest rate on record, at four per cent in both February and March 2022.

The Australian Government released its 2022‑23 Budget on 29 March 2022. Reflecting improved consumer spending and employment outcomes, the Australian Treasury expects real gross domestic product to grow by 4¼ per cent in 2021‑22, above the growth of 3¾ per cent forecast at the time of the 2021‑22 Mid-Year Economic and Fiscal Outlook. The Australian Treasury forecasts that the economy will grow strongly in 2022‑23, at 3½ per cent, before moderating to 2½ per cent in 2023‑24.

At the time of the 2022‑23 Australian Budget, the Australian Treasury expected that the economic recovery would drive further employment growth, with the strong labour market expected to see national wages growth accelerate to its fastest pace in almost a decade.

Australia’s population is expected to grow by 0.7 per cent in 2021‑22, reflecting the impact of international travel restrictions on overseas migration to Australia that were in place for a substantial portion of the year. The population is then forecast to grow by 1.2 per cent and 1.3 per cent in 2022‑23 and 2023‑24, respectively, reflecting the expected return of positive net overseas migration following the reopening of international borders.

Recent Performance, Estimates, Forecasts and Projections of the Tasmanian Economy

This chapter presents Treasury’s revised estimates for key Tasmanian economic indicators for the 2021‑22 financial year, forecasts for 2022‑23 and 2023‑24, and projections for 2024‑25 and 2025‑26 (Table 2.1).

The estimates and forecasts included in this chapter use a number of assumptions and judgements that are based on information available at the time of preparation and are inherently uncertain and subject to change. While events or changes to policy settings occurring after the finalisation of these estimates and forecasts may affect the likelihood of some of the underlying assumptions, it is not possible to reflect the impact of such events in the information presented in this chapter. Further information on the approach used to develop estimates, forecasts and projections is described in Box 2.1.

Table 2.1:         Economic Actuals, Estimates, Forecasts and Projections

 

 

 

Budget 2022‑23

 

2020‑21

 

2021‑22

2022‑23

2023‑24

2024‑25

2025‑26

 

Actuals

 

Revised Estimates

Forecasts

Projections

Gross state product (real, % change)1

3.8

 

3

State final demand (real, % change)1

3.6

 

6

3

Employment (year‑average, % change)2

1.6

 

1

1

1

Labour force participation rate (year‑average, %)2

61.2

 

61

61¼

61½

61½

61½

Unemployment rate (year‑average, %)2

6.4

 

Consumer Price Index

(year‑average, % change)3

1.8

 

4¾ 

Population (year‑average, % change)4

0.5

 

0.2

0.7

0.9

0.7

0.7

 

 

 

 

 

 

 

 

Source: Actuals ‑ Australian Bureau of Statistics; Estimates, forecasts and projections ‑ Treasury.

Notes:

1.    State final demand actual is an ABS estimate calculated using December quarter 2021 National Accounts data, while gross state product is calculated using 2020‑21 ABS State Accounts data.

2.    Labour force actuals are ABS estimates calculated using March 2022 data.

3.    The CPI actual is an ABS estimate calculated using March quarter 2022 data.

4.    Population actual is an ABS estimate calculated using September quarter 2021 data.

 


 

 

Box 2.1 - Treasury’s forecasting approach

Since the onset of the pandemic, Treasury has developed economic estimates, forecasts and projections using a methodology that relies less on historical trends and more heavily on timely economic indicator 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, such as interstate and international trade. Data are also subject to revision. These revisions can have a greater impact for smaller jurisdictions.

Year-average forecasts and projections

Where data are reported frequently, such as employment growth, the unemployment rate and population growth, Treasury’s economic estimates, forecasts and projections featured in Table 2.1, are presented on a year-average basis.

Reporting in year-average terms provides a better overall measure of a particular indicator taking into account fluctuations that may have occurred throughout the year. Most Australian jurisdictions report economic indicators on a year-average basis.

A year-average value is calculated by taking an average of the monthly or quarterly levels of an indicator over a year. A year-average growth rate is then calculated as the percentage change of that year-average value from the previous year‑average value.

This calculation approach differs from point-to-point growth, which is calculated as the percentage change from one period to another period.

Year-average growth rates can vary from annual point-to-point growth rates because:

·           monthly or quarterly levels can move up and down and mean that the average level for the year can be very different to the level in the starting or final month or quarter of that year; and

·           point-to-point calculations are very sensitive to the level at the end or start of each period.

Projections

For the final two years of the Forward Estimates, projections, not forecasts, are presented in Table 2.1.

The use of projections is relatively common across Australian jurisdictions, reflecting the level of uncertainty involved in forecasting a number of years into the future.

Projections differ from forecasts in that they are generally based on the long‑term average growth rate of the economic indicators. However, unemployment and participation rates are proportional measures rather than measures of growth and often differ from their long‑term averages for extended periods. Therefore, these rates are projected forward using the last forecast rates for 2023‑24.

 

 


 

Economic Activity

In 2020‑21, the Tasmanian economy recovered strongly from the shock caused by the pandemic in the previous year, growing by 3.8 per cent. This growth was the second strongest growth recorded of all jurisdictions, after South Australia, and more than double the growth experienced by the national economy. Tasmania’s strong performance in 2020‑21 reflected the State’s successful management of COVID‑19, which allowed the community to largely return to pre‑pandemic behaviours and activities over that time.

This strong performance also builds on previous years of sustained growth, with the State being one of the strongest performing economies in the country prior to the pandemic (Chart 2.1).

Chart 2.1:         Gross State Product

Title: Gross State Product - Description: The chart shows the GSP of most states increases from 2016-17 to 2018-19 before dipping the following year in 2020-21, then increases again during 2020-21. Victoria’s GSP has decreased slightly since 2019-20. Tasmania’s GSP grew strongly in 2020-21.

 

Source: Australian National Accounts: State Accounts, ABS.

 

Further detail on measures of economic activity discussed in this section is provided in Box 2.2.

 

Box 2.2 - Gross state product and state final demand

State final demand measures the total value of goods and services that are sold in a state to buyers (who wish to consume them or retain them in the form of capital assets), and is represented by the following equation:

Where:

C = consumption

I = investment

G = government spending

 

Gross state product measures the value of all goods and services produced within the state. Treasury’s estimates and forecasts are developed using the GSP expenditure method. This is represented by the following equation:

Where:

SFD = state final demand

X = international exports

M = international imports

BI = balancing item (which includes interstate exports and imports, and changes in inventories)

SD = statistical discrepancy1

Note:

1.    The statistical discrepancy is calculated as the difference between the individual aggregate income, expenditure and production measures of GSP and the headline GSP measure.

 

The Tasmanian economy performed particularly well in the first quarter of 2021‑22, recording the highest growth in SFD of all states and territories. This was driven by strong growth in most key components, but particularly in business investment and government consumption. Following this strong growth, SFD fell slightly in the following quarter, largely reflecting a moderation in private investment and government consumption following the high growth of those components in the previous quarter.

The final two quarters of the year are expected to see further growth in the economy, with household consumption expected to grow as the return of interstate and international tourism boosts spending in sectors that were impacted by the pandemic, such as hospitality and tourism. While private investment is expected to moderate further following the strong September quarter 2021 result, overall, it is expected to remain at an elevated level. In particular, dwelling investment is expected to be supported by the pipeline of construction work that has built up, in part due to the Australian and Tasmanian HomeBuilder programs. Government expenditure is also expected to experience further growth, as high levels of government consumption are maintained over the remainder of 2021‑22. Additionally, growth in government capital investment is expected to continue to be supported by a range of State Government infrastructure programs and projects.

With the reopening of the domestic and international borders, international services exports are expected to grow strongly (from a low base) in the final two quarters of 2021‑22, driven by the gradual return of international students and tourists to Tasmania. In turn, as Tasmanians become more confident about travelling overseas, international services imports are expected to increase over the same period. International goods exports are also expected to continue to grow, as global demand for commodities remains strong.

Overall, SFD is expected to grow strongly for 2021‑22, at six per cent, while GSP is expected to grow by 3¾ per cent. While GSP growth is high, the stronger SFD growth rate reflects the expectation that a number of non‑SFD components (including international imports and exports) of GSP will start to normalise over the 2021‑22 year, returning closer to pre‑COVID‑19 patterns.

Household consumption is expected to grow through each of the four quarters in 2022‑23, boosted by increased expenditure in areas that were heavily affected by COVID‑19, including travel and hospitality, as households largely return to normal spending patterns. Similarly, through 2023‑24, household consumption is forecast to continue to grow consistently over the year. The growth over the forecast years is expected to be supported further by the gradual return of international migration to the State.

Most components of private investment are forecast to grow throughout 2022‑23. Dwelling investment is expected to continue to grow, supported by a significant pipeline of work. High demand for housing is expected to continue, and is likely to be further boosted by the return of international migration to Tasmania, which will also support continued growth in dwelling investment. In 2023‑24, private investment is expected to grow positively through the year, with most components expected to grow in line with long‑term trends.

Economic growth is expected to continue to be supported by strong growth in government expenditure through 2022‑23 and 2023‑24, which will largely be driven by growth in government investment. In particular, substantial progress is expected to be made on a range of large capital investment projects, including the purchase of the TT‑Line vessels, the redevelopment of the Port of Devonport, the construction of the Bridgewater Bridge, and significant housing projects.

International exports are forecast to make a positive contribution to GSP over the forecast period, with merchandise exports expected to experience steady growth. Services exports are forecast to grow strongly, though from a low base, through both 2022‑23 and 2023‑24, reflecting the reopening of the international border and the expected return of international students and international tourists over the forecast period.

International imports are also expected to grow strongly over the forecast period. The strong growth in imports of international services is expected due to the pick‑up in international travel by Tasmanians. Large purchases, such as the purchase of the TT‑Line vessels, will boost merchandise imports.

Overall, these factors mean that the Tasmanian economy is forecast to grow by 2¾ per cent in 2022‑23, and by three per cent in 2023‑24. The slightly lower growth rate forecast for 2022‑23 is in part due to the strong growth expected in 2021‑22. In addition to this, higher population growth is also expected in 2023‑24, which will support stronger economic growth in that year.


 

Labour Market

Mirroring the broader economy, Tasmania’s labour market has continued to strengthen over the past year. Many headline indicators, including employment and the unemployment rate, have surpassed expectations and are stronger than their pre-pandemic levels. As at March 2022, the ABS estimates that there were 261 700 persons employed in Tasmania, the second highest number on record. Tasmanian job vacancies, a forward‑looking labour demand indicator, continue to grow and are at a series high, suggesting high future demand for labour in the State.

Full‑time employment has grown strongly over the past year, with overall seasonally adjusted full‑time employment sitting near its series high in March 2022, at 167 800 persons (Chart 2.2). This was 12 100 persons higher than the level of full‑time employment in March 2020, prior to the onset of the pandemic.

Chart 2.2:         Tasmanian Full-time Employment

Title: Tasmanian Full Time Employment  - Description: The chart shows that Tasmanian full time employment increased from June 2019 to February 2020. Full time employment then decreased sharply between March and May 2020 and then grew strongly from May 2021 to reach a series high in March 2022.Source: Labour Force, Australia, ABS.

 

Females have accounted for around half of the increase in full‑time employment since March 2020, with full‑time female employment near its series high in March 2022 (Chart 2.3). The series has recovered strongly from the initial impact of the pandemic, with full‑time female employment growing by close to 11 per cent relative to its pre-pandemic level.

Chart 2.3:         Tasmanian Full‑Time Female Employment

Title: Tasmanian Full Time Female Employment - Description: The chart shows that Tasmanian Full-Time Female Employment increased from June 2019, dipping in the second half of 2020, then increased to a series high in March 2022.Source: Labour Force, Australia, ABS.

Strong employment conditions have seen Tasmania’s unemployment rate fall to historically low levels in recent months. In March 2022, the ABS estimates that Tasmania had an unemployment rate of 4.5 per cent.

For the rest of 2021‑22, employment is expected to remain at around its current level, with the series estimated to grow by 2¼ per cent in year‑average terms in 2021‑22, more than double the long-term average growth rate. The labour force participation rate, which has shown some volatility in recent months, is estimated to be 61 per cent in year-average terms in 2021‑22. Over the same period, it is estimated that the unemployment rate will be 4½ per cent in year‑average terms, which would be the equal lowest financial year‑average value recorded in the history of the series.

In 2022‑23, employment in Tasmania is expected to be boosted by stronger population growth in the State, driven by increased overseas and net interstate migration. Alongside strong overall economic conditions, it is forecast that these factors will lead to year­‑average growth of 1¼ per cent in employment in 2022‑23, slightly above the long-term average for the series. The participation rate is expected to increase during the year and is forecast to be 61¼ per cent in year-average terms in 2022‑23.

In contrast to the earlier stages of the pandemic, it is expected that the impacts of COVID‑19 will cause limited disruption to the labour market in Tasmania going forward. Supported by strong economic conditions, the unemployment rate is expected to remain very low in 2022‑23, with the rate forecast to be 4½ per cent in year‑average terms.

After two years of above‑average growth, employment growth is forecast to moderate a little in 2023‑24, with employment forecast to grow at around its long-term growth rate of one per cent in year‑average terms. It is anticipated that increasing overseas migration to the State will provide a boost to employment throughout the year. In 2023­‑24, the growing economy is expected to support strong workforce participation and maintain the very low unemployment rate. In year‑average terms, the participation rate is forecast to be 61½ per cent and the unemployment rate is forecast to remain at its 2022‑23 year‑average value of 4½ per cent.

Prices

Since mid‑2020, Hobart, along with the rest of Australia, has experienced strong growth in the Consumer Price Index. This growth has been driven by a number of factors, including secondary impacts from the pandemic, such as supply chain issues, and more recently, the Russian invasion of Ukraine. Higher input costs have also started to flow through, placing upwards pressure on the prices of many items, including food. Over the first three quarters of 2021‑22, inflation in Hobart has reflected increases in automotive fuel prices, dwelling construction costs and the price of food and non‑alcoholic beverages.

National inflationary pressures prompted the Reserve Bank of Australia to raise the cash rate by 25 basis points to 35 basis points in early May 2022, the first time it had been increased since November 2010. The RBA has signalled that the cash rate will rise further over the period ahead, with national inflation forecast to return to the top of the two to three per cent target range in 2024.

In line with the RBA’s forecasts for national CPI, the Hobart CPI is expected to continue to grow in the final quarter of 2021‑22 and it is estimated that the series will grow by 4¾ per cent in year‑average terms in 2021‑22, above the long-term average.

Growth in the Hobart CPI is expected to remain elevated and year‑average growth of 5½ per cent in 2022‑23 is forecast, reflecting sustained broad-based cost pressures across the economy. In 2023-24, year‑average growth in the Hobart CPI is expected to moderate with growth of 3¼ per cent forecast.

At both a State and national level, tighter labour market outcomes in recent months, and their persistence, are expected to place upward pressure on wages over the forecast period. Annual growth in Tasmanian wages in the December 2021 quarter was reported to be the highest in the country. Higher wage growth is expected to contribute to price growth over the forecast period.

Population

Over the past year, Tasmania’s population growth has remained subdued, reflecting the impact of the closure of Australia’s international border, as well as domestic border restrictions limiting migration to the State. ABS population estimates for Tasmania will be revised in mid‑2022, when the estimates of population levels will be rebased with the ABS 2021 Census of Population and Housing. Given that the effect of this rebasing is unknown, it has been necessary to make an assumption that the forecast growth rates will not be affected by the rebasing.

Tasmania is expected to see positive net overseas and interstate migration in the second half of 2021‑22, facilitated by the lifting of many international and domestic border restrictions that have interrupted migration to the State in recent times. Reflecting this, Tasmania’s population is estimated to grow by 0.2 per cent in year‑average terms in 2021‑22.

Population growth is forecast to bounce back strongly in 2022‑23, to grow at 0.7 per cent in year‑average terms, which is around the 20‑year average growth rate. It is expected that this will largely be driven by higher levels of net interstate migration to the State. In 2023‑24, population growth is expected to rise again and return to levels close to those seen prior to the onset of the pandemic, with forecast year‑average growth of 0.9 per cent, reflecting a pick-up in net overseas migration throughout the year.


 

Risks to the Outlook

The ongoing evolution of the COVID‑19 pandemic remains a risk to the outlook for the Tasmanian economy. While this risk has abated as a result of the transition to living with COVID‑19, at both a State and national level, there are still downside risks involved. In particular, the potential emergence of new, more virulent or vaccine-resistant variants of COVID-19 pose a threat to the outlook. New strains or variants of the virus could have substantial impacts on the economy and employment, particularly if they necessitated the reimposition of increased public health measures.

While the primary risks related to the pandemic have abated, there are secondary impacts from the virus that persist. In particular, outbreaks of COVID‑19 and associated lockdowns since 2020 have resulted in supply chain disruptions at a global and national level. Prolonged or worsening disruptions pose a risk to the outlook. Further supply chain disruptions, particularly in the construction sector, may lead to delays in construction (including public and private infrastructure projects and dwellings and other buildings) and will continue to place upward pressure on construction costs and disrupt the operations of businesses.

Tasmania, along with the rest of Australia, has experienced very strong price growth over the past year. While the RBA has initially responded by tightening monetary policy in May 2022, and signalled likely further increases into 2022-23, there is considerable uncertainty around the path interest rates will take over the next few years and the impact such changes will have on both households and businesses. Tighter monetary policy settings are intended to curb demand and reduce inflationary pressures. The direct impact will be to increase the cost of borrowing across the economy, including for mortgage holders, many of whom have never experienced an interest rate increase on their mortgage.

The response by consumers and businesses to interest rate changes, and the flow-on impacts across the economy, will take some time to emerge. There is a risk that the monetary policy responses required to curb inflationary pressures may lead to a greater than expected decline in the demand for goods and services, alongside a deterioration in consumer and business sentiment and potential impacts on property values. Tightening monetary policy is likely to have varying impacts across the economy, with some sectors or regions more affected than others. Domestic and international monetary policy settings will also affect financial markets more broadly, with consequential impacts on assets such as equities, as well as the exchange rate.

Current and ongoing global political events also present a risk to the outlook, as they have the potential to severely impact global prices and economic activity. In particular, they pose risks to commodity trade and already strained global supply chains, which will add to existing global inflationary pressures. It is possible that the realisation of these risks could spill over to the Tasmanian economy.