Economist's overview
At the macro level, Australia’s economy is continuing to perform strongly compared to most of its industrialised peers. Taking into account the impact of the largest and most sustained upswing in Australia’s terms of trade – the ratio of the average prices received for our exports to the prices paid for our imports – in at least 140 years, Australia’s national income is growing at around 7.5 to eight per cent per annum in real terms. And the unemployment rate is once again below five per cent, the level conventionally regarded – at least since the mid-1970s – as representing full employment.
Of course, these averages conceal a substantial amount of variation both geographically across different regions of Australia, and between different industries or sectors of the economy. Thus the resources sector is, as one would expect, experiencing especially buoyant conditions, as are firms involved in engineering construction. On the other hand, parts of the manufacturing, tourism and retail sectors are experiencing difficult trading conditions. Similarly, trend unemployment is down to 4.3 per cent in Western Australia and 2.4 per cent in the Northern Territory, but remains at 5.6 per cent in Queensland and 5.8 per cent in Tasmania.
The stronger Australian dollar – which at time of writing had just passed US$1.05, its highest level in 29 years – is exacerbating these diverging experiences.
But it’s an oversimplification to characterise Australia as having a two-speed economy, with mining (or Western Australia) at one end of the spectrum and everything (or everywhere) else at the other. Many parts of the services sector are continuing to experience buoyant levels of activity; while New South Wales and Victoria, which are hardly at the centre of the mining boom, have experienced faster growth in employment than anywhere else in Australia over the past six months.
It is likewise a misreading of history to characterise the dispersion in levels of economic activity across the country, or among the different sectors of the Australian economy, as a recent development. Indeed, the spread between the growth rates of the fastest and slowest growing states and territories, or those of the fastest and slowest growing industry sectors, has been no greater in the past three years than in the previous 15.
The experience of Australia’s private businesses, as captured by the PwC Private Business Barometer, bears out many of the messages conveyed by official statistics. Readers should regard the fact that there are very few private businesses operating in the resources sector, and that on this particular occasion the survey on which the PwC Private Business Barometer is based excluded businesses located in Queensland to avoid the results being distorted by the natural disasters that struck that State just before the survey was conducted.
Indeed, despite excluding Queensland, just over half the private businesses responding to the survey reported being affected by those disasters, more of them negatively than positively. This backs up official forecasts that the Queensland floods and Cyclone Yasi will detract from measured economic activity in the first half of 2011, although it is likely that recovery and reconstruction activities will provide a stimulus to economic growth in the second half of this year and beyond.
Interestingly, 84 per cent of private businesses said they thought the Federal Government should have been willing to push back its plans to return the budget to surplus by 2012-13 to assist those adversely affected by natural disasters. Half of respondents were opposed to the Federal Government’s flood levy as a means of paying for part of the costs it would incur in responding to the disasters.
Consistent with the general message conveyed by official statistics, more than twice as many private businesses reported higher sales over the past year as reported lower sales. Those reporting higher profits outnumbered those reporting lower profits by a ratio of about four to three. However, overall rates of sales and (more noticeably) profits growth have slowed since the first half of 2010. This is particularly apparent among private businesses in the retail sector, where more than half of the businesses surveyed failed to meet their sales expectations during the past six months.
Private businesses are now more cautious about their sales and profit expectations for the year ahead than they were six months ago, but remain optimistic about the medium-term (three-year) outlook.
Only one-third of private businesses have significant investment plans for the next six months, which is consistent with other evidence suggesting that, outside of the resources sector, capital expenditure intentions remain soft. It is encouraging that bank funding is becoming significantly more available for those businesses considering investment plans, suggesting that the constraints on lending imposed in the aftermath of the global financial crisis are now easing.
By contrast with their cautious investment plans, almost 60 per cent of private businesses intend to hire more staff over the next six months, the highest proportion in the PwC Private Business Barometer’s history. Although more than 40 per cent of respondents cite a lack of qualified staff as the primary constraint on hiring, this is down around 10 per centage points from the previous survey. Businesses appear more willing, or resigned, to pay higher wages to attract and retain staff; more than 80 per cent expect wage costs to increase (by an average of six per cent) over the next 12 months.
Probably reflecting the ongoing rise in the value of the Australian dollar, competitive pricing represents the second most significant challenge facing private business operators (after shortages of competent staff), as nominated by 38 per cent of respondents. This is likely to become an increasingly important consideration for businesses over the next six months.
Overall, the results are consistent with an economy that is enjoying reasonably buoyant levels of activity but with some sharply contrasting experiences in different sectors and regions.