Border Economy July 2015

Tom Taylor – Head of International Economics (NAB)

What we will cover

1. Show how the lower currency and interest rates that accompany the fading mining investment boom are shifting growth back toward the big SE States. 2. Lower currency helps manufacturing and tourism compete better after several hard years and lifts farm incomes – all important in the Border region 3. Lower interest rates is boosting housing markets, construction and consumer spending on household goods – but so far the big property price and constructions gains concentrated in metro areas, waiting to see more spill-over into regions of the State’s economy and focus of growth on metro fringe 4. Increased provision of public services in key regional centres also helps Albury Wodonga – key medical facilities for surrounding regions ageing population, cultural assets like new Art Gallery for tourists/locals 5. Border NSW region badly needs job growth – area of high unemployment and until recently employment had been failing to grow.

Regional pattern of growth shifting in the nation

Growth set to pick up in Australia – 2.4% in 2014/15, 2.6% in 2015/16, 3% in 2016/17 Regional pattern shifting as mining boom fades and low interest rate and weaker $A boost activity in the big SE States – which had been underperformers till recently.

WA and Queensland hit by falling commodity prices and downturn in mining investment – export volume ramp–up under way but not many jobs there Low interest rates boosting housing market, construction and that is spilling over into increased demand for household goods.

Weaker $A helping manufacturing and tourism to compete better against imports and overseas destinations as well as to lift exports

3 phase mining cycle explains a lot of Australia’s economic situation

Phase 1 – Price boom Phase 2 Investment surge Phase 3 – exports ramp-up

Growth already rotating away from mining States to SE Metropolitan States

Business investment explains the intra-State difference – mining boom fades and NSW pick up

Bigger pick up in jobless rate in mining than in SE States but jobless rates now turning down

Growth shortfall between SE Metro States and Australian GDP forecast to narrow or close

Consumer and housing driving most of the upturn in NSW economy

Consumption also a key factor driving growth in Victoria

Border region well placed to do better in new macro-economic environment

Lower $ help lift farm incomes and competitiveness of manufacturing and services Lower interest rates give a boost to construction and consumption Solid population growth in Sydney and Melbourne boosting size of consumer and business market in adjacent metro areas (freight, tourism, consumer demand, building)

(1) Lower $A helping activity in the region •

Around 75% of the 502 firms who replied to the August 2014 Albury-Wodonga business survey felt that the $A had no impact on their operations

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But it might be more important than people think! – via indirect channels

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(1) Local incomes that are spent in the community - consequences for incomes and spending of the big farm export sector on the Border (Murray region over $1 ½ Billion, Riverina $2 Billion, NE Victoria $½ Billion)

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(2) Impact on the competitive position of manufacturing sector – hit by low cost imports and need to be price competitive overseas when the $A was so high – but offsetting effect via lower costs for imported inputs and machinery.

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(3) Encourage more tourists to travel domestically rather than overseas $A210 million in domestic overnight travel and A$21 Million international spending in 2013 – already a big industry.

$A depreciated a lot against $US and RMB but much less against other big currencies

NAB Currency Forecasts

Dec-15 Jun-16 Dec-16 Jun-16 Dec-16 US$ 0.72

0.71

0.73

0.75

0.76

Euro 0.69

0.69

0.69

0.69

0.68

Yen 90 89.5

92.7

93.8

93.5

NZD 1.16

1.18

1.18

1.17

1.15

RMB 4.5

4.5

4.6

4.7

4.8

(a) Manufacturing - $A depreciation finally delivers boost to competitiveness of Australian industry

High $A took Australian industry’s labour costs above those in US, Japan, much of W Europe

Profits squeezed in manufacturing, food and oil dominate earnings, big sectors loss making

Manufacturing sector shrinks as imports squeeze out local producers and high $A hits exports

Official view that mineral prices would stay historically high – writing off some manufacturing?

Repeated cutbacks in Treasury forecasts

Look at Border Region Economy - The wedding cake structure of regional economies

Regional Victorian economies follow a 3 tier wedding cake pattern 3 Need a sector to inject income from outside the region for sustained income growth – can’t just deliver pizzas to each other and relying on inflow of taxes from other regions leaves you vulnerable to spending cutbacks – local private sector has to generate sustained income Public sector services – based on population and age structure (health, education, police) 2 1 Private sector services based on commodity, tourism, industry income and public funds (retail, legal, accountancy, transport) Competitiveness of service sector SMEs Commodity sector, tourism, industry, public sector spending (eg defence bases) Competitiveness of commodity price takers Tier 1 vital, holds up whole economic structure – look at commodities, industry

Employment solid in NE Victoria, Border NSW starting to lift after a long weak patch

ABS Statistical regions in Victoria Regional areas (SA 4)

Services dominate Border employment, helps understand why so many firms downplay $’s role

And reliance on service jobs has been increasing as local industrial base has eroded

Border region manufacturing sector shrinking – lower $A will help it compete

Still major manufacturing plants in region

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processing local raw materials (Uncle Toby oats, Kiewa milk, Uncle Bens meat, Myrtleford plywood mill

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Important presence of big corporations – Mars, Nestle, Murray Goulburn, Carter Holt Story of Borg Warner Drivetrain shows what can go wrong

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1250 staff at peak in early 1980s

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Bought by Chinese group Geely and shut after chequered history,

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technology transferred to 3 new plants in China, its gearboxes were world famous

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Lost valuable source of well paid jobs, training and skill development in border region – how many apprentices learned their trade there?

Albury newsprint mill shows disciplines involved by globalisation – lower $A help competitive position

Albury newsprint mill among the worlds best Product demand falling, low Asian prices Series of mill closures around globe (Walsum) Weaker $A helps support the plant Boyer mill partly converted to magazine paper Helped Oceania financial results Scope for another conversion from newsprint to magazine paper – still importing 150 kts pa

Manufacturing sectors losing ground are often very high productivity sectors, growing ones not

Much lower average earnings in the fast growing service sectors too than in contracting industry

Impact of shift from high to low productivity jobs evident in the Victorian growth model

Lower $A will boost returns for big diverse farm export sector in Border Region

Riverina broadacre farm incomes high by historic standards even before latest price increases

Surge in grain incomes underpinned rise in Riverina real broadacre farm cash incomes

Surge in cattle prices plus high meat and wool markets lift farm incomes

(2) Lower interest rates feed into property market, construction and consumption •

Policy interest rates cut to historic low of 2% in May – as RBA seeks to lift growth to offset headwind of fading mining boom

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We see rates staying down for a long time as little inflation pressure, first rate rise probably not until the very end of 2016

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Retail business and mortgage lending rates down too

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Triggers upturn in housing lending, house prices, construction and retail sales of household goods

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Upturn in dwelling construction concentrated in metro regions – apartments, especially multi-story complexes located in central cities, role of investors

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Population growth focussed on Albury-Wodonga and different migration pattern – helps support housing demand

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Still waiting to see big impact outside metro regions on property prices

RBA cuts cash rate to record low 2%, retail lending rates fall to 4 ½%-6½% range

Lower interest rates starting to work – borrowing picking up as people start new projects

Sydney house prices the standout, regions softer. Albury market picked up, many other towns flat

Housing investors trading existing stock driving much of the housing market rather than new builds

Surge in dwelling approvals in apartments, rivals house approval numbers in Victoria

Multi-story apartments account for big share of dwelling upturn in NSW and Victoria

Seen upturn in NSW retail sales of discretionary (non-food) lines since early 2013

Jump in NSW retail sales of housing-related products – to put into all those new dwellings

Three quarters of NSW/Victorian building activity concentrated in two State capitals

And the growth is also concentrated in the two capitals

Concentration of apartments in central Melbourne, new house building more regionally dispersed

Concentration of commercial building in central Melbourne

But Albury-Wodonga better position that most places to generage an upturn in building

Albury different migration to other Border regions – retains people to age 25, then loses them

But there has been growth in Albury-Wodonga region too for housing approvals

As well as growth in commercial property sector on the Border

(3) Importance of Albury-Wodonga as regional service centre set to keep growing – 5000+ staff

Albury Wodonga health over 2000 staff, wage bill of $116 million, staff costs of $220 million, revenue of $230 million – a major local business

Rise in government spending as people age – especially on health care – demand rises

Incidence of chronic disease by age group in Australia 2011/12

Age Cardio-disease Heart disease Stroke Diabetes Chronic kidney disease 18-44 45-54 55-64 65-74 6.6

20.6

33.7

50.6

0.4

1.8

4.9

9.9

0.2

0.9

2.2

5 1.4

5.3

8.7

15.6

5.5

5.6

7.9

20.9

75+ 85+ 64.2

17.2

11.1

15.2

12.7

42.1

Health care costs rise faster than CPI Health costs rise as population ages

Ageing profiles already evident in many Border sub-regions – Alpine and Indigo

And Towong Shire has same forecast population ageing pattern but Wodonga Shire differs a bit

More ageing forecast across region – heading towards 20% aged 70+, 10% are 80+, 5% are 85+

NE Victoria

Population ageing forecast to continue in NSW Border Shires

Southern NSW

Border region needs the boost from lower $ and rates plus healthcare jobs – badly needs more jobs •

Policy interest rates cut to historic low of 2% in May – as RBA seeks to lift growth to offset headwind of fading mining boom

•

We see rates staying down for a long time as little inflation pressure, first rate rise probably not until the very end of 2016

•

Retail business and mortgage lending rates down too

•

Triggers upturn in housing lending, house prices, construction and retail sales of household goods

•

Upturn in dwelling construction concentrated in metro regions – apartments, especially multi-story complexes located in central cities, role of investors

•

Population growth focussed on Albury-Wodonga and different migration pattern – helps support housing demand

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Lift in Border NSW employment after flat period, has high jobless rate

Slowdown in job creation hits Border Region after mid-2000s, especially full time males

Employment solid in NE Victoria, Border NSW starting to lift after a long weak patch

Lift in jobs in Murray concentrated in full time male jobs, highest earning group – spending power

Albury accounts for over half of the Murray region – so figures should represent region trends

Very important to see this job growth in Border NSW as region has high jobless rate

Albury jobless rate usually region’s highest but has surged recently to double digit levels

Conclusion •

Australian economy re-balancing away from mining States and back to SE metro States as 1. lower $A boosts farm export incomes and restores some of the competitiveness lost in manufacturing and tourism during the mining boom 2. lower interest rates boost property values, building and retail sales of household goods

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3. Growth in health care and education continues and most people live in the SE Albury-Wodonga centrally located in SE States and well placed to benefit from this 1. Big diverse regional farm sector gets higher incomes, boost regional sending power

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2. Help local industry export and compete vs imports (eg overseas holidays cost more)

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3. Regional centre for service provision – hospitals, university, arts Most of boost to property and building focused on metro centres, waiting to see more spillover into regional property prices and building activity Border needs the lift – high jobless rate and poor record of job creation in Murray region, finally seeing job recovery

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