A zero growth prospect? OR A how to capitalise on the next resources cycle?
The post GFC business cycle in Australia is poised to shift the focus of economic growth from powerhouse regions like the Pilbara, Surat/Bowen Basins and Darwin to Eastern Seaboard capital cities (Melbourne, Sydney and Brisbane). Regions hard hit by the GFC like Gold Coast, Cairns/Townsville the Kimberley and Geelong are unlikely to enjoy short term growth as their regional economies restructure and as business investment and business confidence either plateaus or remains low.
So why could regional Australia have a zero growth prospect in the next business cycle? First let’s be clear. Resource based regional economies are likely to remain strong by historic standards. As the following graph indicates resource investment will remain at high levels until around 2016/17 without major new project announcements (which are likely to occur, particularly in relation to LNG, CSG and shale oil/gas). This will deliver trend population and employment growth in the resource regions partly due to real economic growth and partly due to the substitution of FIFO construction labour for local operational labour.
Agriculture is likely to grow at above trend rates in the next business cycle. Despite the on-going rhetoric about an Asian Food bowl (maybe an Asian cut lunch is more apt), traditional cattle and wheat sectors will drive growth. The Agricultural sector will not deliver major private sector investment or major jobs growth but will deliver growth in expert volumes.
Manufacturing in regional Australia is continuing to weaken with major off-shoring of production. Job losses in this sector will far outweigh any gains in Agriculture.
Tourism is a sector with growth potential in the short run in regional Australia. Slow growth in domestic tourism coupled with Eastern Seaboard capital cities continued growth in markets share of Chinese/Asian tourism adds up to low to negative tourism growth in regional Australia in the short term. Off low post GFC visitation and room occupancy rates regional tourism will continue to struggle.
The key regional tourism projects in Australia which are game changers are the Broadwater (Gold Coast) and Aquis (Cairns). Both integrated resort projects require more than $5b private investment to create tourism products which can attract Chinese/Asian tourism.
Private sector investment in Australia is not growing but is still at relatively high levels. For regional Australia the picture is worse. Project funding in regional areas remains difficult to secure. Private sector project funding is just rebounding in Melbourne, Sydney, and Brisbane. Smaller capitals like Adelaide (early stage of recovery) and Canberra are still not securing growth in private sector project funding.
The next Australian business cycle will be shaped by interest rate movements firstly and by slowing demand (i.e. increasing vacancy rates and decompression of yields). Current data shows growth in the US economy is translating into the Australian economy and into Eastern Seaboard property markets. This suggests some upward interest rate movement before 2016. It is unlikely that major regional private sector projects outside of Broadwater and Aquis will emerge in the short term, hence the outlook for regional Australia economically is negative.
Other than maybe Queensland it is therefore a strong prospect that regional Australia could miss out on major private sector investment in this business cycle i.e. prior to 2020.
We note that Federal government policies in relation to regional Australia are getting some (slow) traction. For example, the Regional Migration Agreement for Darwin will deliver much needed staffing. The Developing Northern Australia green paper suggestions that no positive economic policy discrimination be applied (e.g. no economic zones, no tax breaks) has been challenged by the Joint Parliamentary Committee and maybe some good news will emerge. History suggests however that the economic ‘dries’ and policy ‘wonks’ in Canberra will shut down incentives for private investment in Northern Australia and this position will strengthen in relation to all of regional Australia. This means that we may see some (welcome) announcements about a couple of new dams, but not much else. Other regional initiatives announced in the election campaign have not emerged in any size or shape. This includes Tasmania and indigenous policies.
The Sydney/Canberra corridor growth will be shared by Melbourne and Brisbane. As the resources boom shifts into a long term lower growth phase regional hubris in Australia will recede and the reality of private and public investment being heavily weighted in Eastern Seaboard capital cities will become apparent.