Industry Focus

INDUSTRY ECONOMICS Australia's economy: barely more than bovine It may not be for profit, but the Social Sector's health directly depends on the state of the economy WORDS: DANA WORTH The Social Sector's investments, as well as its donations and government funding, are all affected in one way or another by market sentiment, and monetary and fiscal policy. Demand for charitable services can sometimes have a clear link to the economy, too. So what should the Social Sector take note of as we head towards the end of 2013? The Reserve Bank of Australia could be tempted to call Australia a cow of an economy. The central bank has applied the cattle prod—also known as a rate cut—so often over the last year that you'd expect the economy to be a bucking bronco by now. But alas, that is not the case. Andrew Hanlan, Westpac Senior Economist, characterises the current state of play in Australia as "an ongoing economic expansion, but at a subdued pace". He sees encouraging as well as challenging signs for the near future. Jobs growth is sluggish, wages growth has softened and retail spending is lacklustre. The federal government has reined in expenditure—with one notable exception being the National Disability Insurance Scheme. Taken together, these factors indicate an economy that is far from booming, but there are signs of improvement. The Australian stock market is up off its lows and the housing markets are now responding more positively to recent RBA rate cuts. Business credit growth is up since mid-2013, which may be linked to lower interest rates. "As the housing market has risen, there's been a lift in consumer confidence," says Hanlan. "The removal of political uncertainty at the federal level has also led to a bounce in confidence, both among consumers and the business community." Although consumer confidence has risen to above average, Hanlan says he would normally expect it to be higher after all the cuts from the RBA. Still, the consumer does appear to be at a turning point. With confidence rising off its recent lows, house prices rising and housing construction picking up, consumer spending looks set to strengthen somewhat after a disappointing 2012–13 financial year. In mid-October, the International Monetary Fund (IMF) lowered its Australian growth forecast to 2.5 per cent for this calendar year and 2.8 per cent for 2014. That brings it in line with Westpac's estimate of 2.5 per cent for 2013, but it remains more optimistic than Westpac's 2.3 per cent forecast for 2014. While lower interest rates are beginning to have more of an impact, there are a number of constraining factors—notably, below-trend world growth, a still relatively high Australian dollar and a decline in the level of mining investment. Economic growth of less than 3 per cent is unlikely to be strong enough to generate jobs growth sufficient to meet Australia's rising population. That points to a further gradual upward grind in the unemployment rate, adding to household concerns about job security. Investments A buoyant economy, and consumer and business confidence will continue to rely on low interest rates. Therefore, and with little danger that inflation will hijack the economy, Hanlan expects the RBA will next year consider injecting more liquidity into the system via two rate cuts of a quarter of a percentage point each. "Lowered rates have had the effect of placing downward pressure on term deposit rates, which, after taking into account inflation, are approaching zero," says Hanlan. "It's encouraging consumers, investors and businesses to diversify from deposits. They're taking on some more risk." The downside is that low interest rates reduce the yield from traditional defensive investment assets such as term deposits and fixed interest instruments. Beyond 2013 Hanlan questions whether the postelection bounce in consumer and business confidence will be sustainable. There is the real possibility that confidence will begin to fade by year's end. Adding to that risk is the prospect that the world economy will fail to provide much impetus. "The US will continue to struggle," says Hanlan. "Westpac estimates that growth is below 2 per cent. While jobs in the private sector are picking up, overall the income boost is not that strong." Europe, too, will remain stagnant in Hanlan's view, although he says that the risk of a major financial calamity has gone. That leaves China. "China remains critical to Australia," says Hanlan. While its government clearly wants to rein in the rate of credit growth, fears that this will tamp down the economy are overstated, he says. The IMF has downgraded its China growth expectations for 2014 from 7.7 per cent to 7.3 per cent and Westpac expects 7.1 per cent. That's not strong enough to compensate for the challenges in the US and Europe—but it's still solid growth. For Australian commodity exporters, however, the days of runaway prices are probably over. Despite ongoing China demand, there is now a great deal more supply of iron ore and coal coming on stream, including from Australia, with resource export volumes advancing at a double-digit annual pace. It all adds up to an Australian economy in which anyone looking for the discretionary dollar must contend with an ongoing element of caution among consumers. Borrowing, however, will remain cheap for some time to come. Social Sector • Issue 1 13

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