ECONOMIC DRIVERS

The Queensland economy is traditionally one of the stronger state performers in Australia, but has been impacted in recent years by weak investment growth.

While one of Australia’s key ‘resources’ states – and one of the largest exporters of coal (and now gas) – the state economy is actually highly diversified and increasingly linked into global trade networks through tourism, agriculture and education industries. Overall, Queensland economic growth (as measured by GSP) is expected to slow below 3% over the next two years, before stronger growth in investment and consumer spending pushes GSP higher in the early 2020s.

KEY POINTS

ECONOMIC GROWTH TO SLOW FROM WEAKER PUBLIC AND PRIVATE INVESTMENT

Queensland’s economic growth (as measured by Gross State Product or GSP) rose from 2.0% in 2016/17 to 3.4% in 2017/18, after averaging just 2.1% growth since 2012/13. The pick-up in 2017/18 has been underpinned strong growth in private non-dwelling construction. Economic growth is expected to slow below 3% this financial year however given weaker stimulus from public and private investment.

QUEENSLAND ECONOMY RECOVERING BUT SUSTAINABLE GROWTH STILL YEARS AWAY

Queensland State Final Demand (SFD) grew to 3.6% in 2017/18. SFD growth in 2017/18 has been driven by strong increases in private investment (up 5.2%) – in turn led by private non-dwelling construction (up 16%) and investment in plant and equipment (up 7.6%) – as well as government consumption expenditure (up 5.6%). Unlike private investment, however, public investment fell 0.9% in 2017/18, presenting a drag on state economic growth.

QUEENSLAND ECONOMIC PERFORMANCE SYNCHRONISING WITH OTHER STATES

Queensland’s economic growth is gradually syncing back in line with other states following the large boom and bust in public and private investment. While economic growth (GSP) will be supported by growth in net exports, SFD is expected to slow this financial year as weaker growth in investment, wages and consumer spending take their toll, despite higher population growth.

GLOBAL ECONOMY HAS BEEN POSITIVE TO QUEENSLAND BUT IS SET TO SLOW

Global economic growth is estimated to have peaked in calendar 2018, but will likely moderate in coming years, presenting risks and challenges to the Queensland economy. World Gross Domestic Product (GDP) growth accelerated to 3.7% in calendar 2018. From here, the world economy will begin to slow, with growth forecast to average 3.5% over the next five years, with significant downside risks emerging.

KEY POINTS – FURTHER ANALYSIS

ECONOMIC GROWTH TO SLOW FROM WEAKER PUBLIC AND PRIVATE INVESTMENT

Private residential investment fell 4.1% in 2017/18, following a four year upswing, and further modest falls in new dwelling building activity are likely over the next two years due to oversupply (particularly in the unit segment), with higher population growth helping to limit the housing decline. The falls in new dwelling buildings work will be partially offset by higher alterations and additions activity. The reduced drag from falling mining investment has helped the turnaround in state economic growth. Mining investment is now rising, led by increases in mining equipment purchases and exploration, with a recovery in mining-related engineering construction expected to get underway from 2020/21. However, after resource exports made a significant contribution to GSP over recent years (and helped keep economic growth positive), export growth has stalled as the Gladstone LNG plants have finished ramping up and as some export gas has been diverted back to the domestic market. There have also been some disruptions to coal and other resource exports.

Non-mining business investment is now recovering, particularly in the trade-exposed sectors (which are being boosted by the more competitive Australian dollar). Equipment and intellectual property products investment is expected to rise further over the next two years, before strengthening again through the early 2020s. Private non-residential building rebounded in 2017/18 and is forecast to exhibit robust increases over the next two years, before easing.

Private infrastructure construction (non-mining engineering construction) has also lifted recently, boosted almost entirely by a near 7-fold increase in electricity generation (mostly renewables) construction activity. However, this “renewables boom” is at risk of reversing this financial year and next as work on a range of renewables projects winds down.

The trend decline in new public investment in Queensland has stabilised somewhat over the past two years, after falling by a third over the previous six years, although new public investment did fall slightly again in 2017/18. Publicly funded engineering construction actually rose in 2017/18 – led by roads and water projects – as did public non-residential building, but was offset by lower public investment in equipment and intangibles. Public investment is expected to edge higher this financial year and next, led by roads, rail, water and sewerage, electricity and non-dwelling building projects, although the completion of the NBN will mute the overall improvement.

After strong export growth over the four years to 2016/17, export growth stalled in 2017/18. However, the Australian dollar is expected to remain in a competitive band, boosting the tradeable sectors of agriculture, tourism (including parts of retail trade), manufacturing and mining, with export growth expected to recover over the medium term.

BRISBANE AIRPORT – INTERNATIONAL TERMINAL

STATE FINAL DEMAND (SFD) IS EXPECTED TO SLOW THIS FINANCIAL YEAR AS WEAKER GROWTH IN INVESTMENT, WAGES AND CONSUMER SPENDING TAKE THEIR TOLL, DESPITE HIGHER POPULATION GROWTH

QUEENSLAND ECONOMY RECOVERING BUT SUSTAINABLE GROWTH STILL YEARS AWAY

The Queensland economy, as measured by State Final Demand (SFD), has staged a recovery over the last two years, turning from contraction in 2014/15 and 2015/16 to solid growth of 3.6% in 2017/18. That’s ahead of the pace of domestic demand growth for Australia of 3.3%. Gross State Product (GSP) growth also rose to 3.4%, bettering national GDP growth of 2.9%, albeit Queensland’s growth was coming off a low base.

Reflecting the economic improvement, employment growth in Queensland strengthened through 2017/18. However, much of the growth came through the first six months of 2017/18, with employment growth falling back near zero in the first half of calendar 2018, and well below the national pace of growth. At 6.4% Queensland’s unemployment rate remains well above the national average (5.1%) at the end of 2018.

While the Queensland economy is now improving, it will still be another 3 years before stronger, sustained growth returns. Indeed, growth in SFD is forecast to slow to an average of 2.6% over the next two years.

As in other states, investment cycles are not synchronised across the different sectors, while there will be a mixture of drivers and drags on growth over the next 2 years.

Population growth is now reaccelerating toward 1.8%, after slower population growth over recent years (with a low of 1.2% in 2014/15) limited spending growth. Accelerating population growth is being driven by higher interstate and international migration inflows (see Figure 29 on page opposite). The rising population will provide some support to aggregate household spending, although weak wages and slower employment growth will continue to constrain consumer spending over the next two years.

FIGURE 28: QUEENSLAND ECONOMY – COMPONENTS OF STATE FINAL DEMAND

FIGURE 29: QUEENSLAND ANNUAL POPULATION INCREASE BY SOURCE, THOUSANDS OF PERSONS

FIGURE 30: GROWTH IN STATE FINAL DEMAND (STATES) AND GROSS NATIONAL EXPENDITURE (AUSTRALIA), 2001-2021, ANNUAL PERCENT CHANGE

Private residential investment fell 4.1% in 2017/18, following a four year upswing, and further modest falls in new dwelling building activity are likely over the next two years due to oversupply (particularly in the unit segment), with higher population growth helping to limit the housing decline. The falls in new dwelling buildings work will be partially offset by higher alterations and additions activity. The reduced drag from falling mining investment has helped the turnaround in state economic growth. Mining investment is now rising, led by increases in mining equipment purchases and exploration, with a recovery in mining-related engineering construction expected to get underway from 2020/21. However, after resource exports made a significant contribution to GSP over recent years (and helped keep economic growth positive), export growth has stalled as the Gladstone LNG plants have finished ramping up and as some export gas has been diverted back to the domestic market. There have also been some disruptions to coal and other resource exports. Non-mining business investment is now recovering, particularly in the tradeexposed sectors (which are being boosted by the more competitive Australian dollar). Equipment and intellectual property products investment is expected to rise further over the next two years, before strengthening again through the early 2020s. Private nonresidential building rebounded in 2017/18 and is forecast to exhibit robust increases over the next two years, before easing

Private infrastructure construction (non-mining engineering construction) has also lifted recently, boosted almost entirely by a near 7-fold increase in electricity generation (mostly renewables) construction activity. However, this “renewables boom” is at risk of reversing this financial year and next as work on a range of renewables projects winds down.

The trend decline in new public investment in Queensland has stabilised somewhat over the past two years, after falling by a third over the previous six years, although new public investment did fall slightly again in 2017/18. Publicly funded engineering construction actually rose in 2017/18 – led by roads and water projects – as did public non-residential building, but was offset by lower public investment in equipment and intangibles. Public investment is expected to edge higher this financial year and next, led by roads, rail, water and sewerage, electricity and nondwelling building projects, although the completion of the NBN will mute the overall improvement.

After strong export growth over the four years to 2016/17, export growth stalled in 2017/18. However, the Australian dollar is expected to remain in a competitive band, boosting the tradeable sectors of agriculture, tourism (including parts of retail trade), manufacturing and mining, with export growth expected to recover over the medium term.

QUEENSLAND ECONOMIC PERFORMANCE SYNCHRONISING WITH OTHER STATES

The economic performance of Australia’s states is becoming increasingly synchronised. The mining states – Queensland and Western Australia – have borne the worst of the investment downturn, and all states are benefitting from the lower Australian dollar (via trade exposed service and goods industries) and the improvement in the broader domestic non-mining sector.

Western Australia will be propped up by the ramp up in LNG production, while growth in South Australia is expected to remain modest. Momentum is also set to moderate slightly in the Australian Capital Territory after their recent strong performance.

Figure 30 shows how regional economic performance shifted to service the mining-resource rich states of Western Australia and Queensland during the two phases of the resources investment boom (2003-08, and again in 2010-13), and allowed these states to capitalise on any latent construction capacity from other jurisdictions.

Growth in New South Wales and Victoria has been underpinned by strong levels of migration and continued buoyancy in construction. But these drivers will ease back in coming years, and growth is expected to decelerate from 2017/18 levels. Queensland’s economy is also expected to decelerate in line with investment growth, despite rising migration and net exports.

Victoria was the strongest performing large state in 2017/18, benefiting from strong population growth and dwelling construction, as well as strength in a range of services and construction related to public infrastructure investment. However, the state’s economic performance will moderate as migration and construction fall back.

Similarly, New South Wales was an outperforming state, but momentum has slowed recently – the state lagged the national average in 2017/18. Growth will continue to decelerate in line with the downturn in residential construction and lower levels of migration.

FIGURE 31: MAJOR TRANSPORT PROJECTS OVER $2BN, AUSTRALIA, VALUE OF WORK DONE

On top of the east coast building boom, however, the state governments in Victoria and New South Wales were already planning for “catchup” infrastructure investment that had been delayed through the resources boom years – including port and electricity long term asset leases that would provide critical finance for large, generational infrastructure investments.

As population growth and housing activity returned to these states post resources boom, the resultant surge in property revenues augmented the finance from the asset leases, turbo-charging a long – and likely sustained – infrastructure cycle.

Overall, Australian Gross National Expenditure (or GNE, the national corollary of SFD) accelerated to 3.3% in 2017/18, led mainly by a pickup in private investment (particularly non-dwelling construction and purchases of plant and equipment).

However, slowing dwelling building and consumer spending, along with generally weaker investment growth is expected to see GNE growth weaken in coming years.

However, over the last few years, this situation has reversed. Resources and skills have progressively flowed into the New South Wales and Victorian economies to service the growing infrastructure and building boom taking place there.

LAKE MANCHESTER DAM UPGRADE

TRANSPORT INFRASTRUCTURE

New South Wales

Transport infrastructure construction surged to $11.3bn in 2017/18, already up 70% from the 2014/15 trough. Given new projects such as Inland Rail, Western Sydney Airport, Sydney Metro Stage 2 City and Southwest, Sydney Metro West and the Western Harbour Tunnel and Beaches Link, BIS Oxford Economics is forecasting New South Wales transport infrastructure investment to surpass $14bn in 2022/23 alone.

Victoria

The situation is similar with transport infrastructure construction already having risen 107% since the 2013/14 trough (to $7.3bn) and, with new investments in the Melbourne Metro as well as major road projects such as the North East Link, activity will be sustained at a high level, before edging higher again in the early 2020s.

Queensland

Transport infrastructure construction has risen only 37% from $4.1bn in 2015/16 to $5.6bn in 2017/18. However, with further large projects taking place across the Bruce Highway, Pacific Motorway, Inland Rail and Cross River Rail projects, this figure is expected to rise above $7bn, albeit not until the early 2020s.

FIGURE 32: NET ANNUAL CHANGE IN INVESTMENT AND STATE FINAL DEMAND, QUEENSLAND

FIGURE C6: WORLD ECONOMIC GROWTH, ANNUAL PERCENT CHANGE

The most significant infrastructure investments undertaken by New South Wales and Victoria have focused on urban solutions to unlock greater efficiencies and productivity in Sydney and Melbourne, mirroring concerns from Infrastructure Australia that more investment here was required to avoid an emerging infrastructure gap. Combined with the Commonwealth Government’s own large Infrastructure Investment Program (IIP) and its interest in revolutionising east coast freight links (through the $10bn+ Inland Rail project) as well as another direct equity investment in building the Western Sydney Airport, the infrastructure construction boom along Australia’s east coast is unlikely to subside anytime soon, and dominates the outlook for major transport project construction nationally as highlighted in Figure 31 (previous page). Indeed, the peak of the “major projects” transport investment cycle across road and rail infrastructure is not expected until the early to mid-2020s based on current projections, and the perceived ‘slump’ in investment post 2023/24 once current projects run their course may not eventuate if these states continue to use asset recycling strategies, debt finance, or private public partnerships to extend infrastructure investment further. Figure 31, for instance, does not include potential rail links to the Western Sydney Airport, nor Victoria’s recent announcements of a potential $30bn+ development of an outer suburban rail network.

With stronger state finances, much of the infrastructure investment boom in New South Wales and Victoria is being publicly funded, albeit with plans to ‘recycle’ funds from long term asset leases. By contrast, Queensland public investment has actually fallen in real terms for 7 of the past 8 years, with only a 2.6% increase in 2016/17 breaking a sequence of falls since 2010/11. A 0.9% fall in public investment in 2017/18 sees activity a cumulative $7.2bn (or 31%) below the very high 2009/10 peak, but still well above the levels of (likely under) investment during the 1990s and early 2000s.

GLOBAL ECONOMY HAS BEEN POSITIVE TO QUEENSLAND BUT IS SET TO SLOW

The Australian and Queensland economies have been supported by a relatively positive global economy in calendar 2017 and 2018. Despite a number of risk factors, global economic growth over calendar 2018 will likely have been the strongest since 2010. However, recent quarters of growth have been less spectacular and growth is expected to slow further in coming years, presenting challenges for resources-heavy trade-exposed economies such as Queensland.

Global economic growth is estimated to have peaked at 3.7% in calendar 2018 (GDP, US$ prices, PPP exchange rate), as developed economies move towards full employment and China continues its steady transition to a slower, more sustainable growth trajectory. Concerns over protectionism, a weak Chinese yuan, rising US interest rates, economic instability in emerging markets as monetary settings revert to more ‘normal’ levels, and the growing risk of a hard Brexit present key economic risks in the short to medium term.

The US economy is currently growing at its fastest pace in four years, but with capacity constraints starting to bite, growth is expected to slow as the fiscal boost from tax cuts dissipates and US interest rates rise. Chinese growth will continue to decelerate as the economy proceeds with its own structural transformation toward domestic led growth. Momentum is also expected to ease in Japan and Europe as they return to full employment.

On the other hand, solid growth is expected to continue in India and most of east Asia (excluding China and Japan), which augers well for Queensland exports. Nevertheless, rising US interest rates will pose a risk for a number of emerging economies given their high levels of foreign debt and the depreciating impact of US rate rises on their currencies.

Of more concern is rising protectionism in the form of tariffs imposed by the US and reciprocal responses from China and Europe. Although our current view is that the trade war itself will have a relatively small impact on overall global growth, downside risks have increased. Much of the risks relate to uncertainty and their effects on business and consumer confidence. Already there has been a correction to commodity prices, and we expect trade uncertainties to weigh on prices for the next 1-2 years. However, by the early 2020s, the tightening supply-demand balance in a number of commodity markets is expected to initiate a recovery in prices, which will likely fuel the next round of mining investment.

THE RISK OF A SHARPER SLOWDOWN IN CHINESE GROWTH (AND DEMAND FOR QUEENSLAND COMMODITIES) WOULD PUT THE STATE IN A MORE VULNERABLE POSITION

SWING STAGE GANTRY

WHILE THE QUEENSLAND ECONOMY IS NOW IMPROVING, IT WILL STILL BE ANOTHER 3 YEARS BEFORE STRONGER, SUSTAINED GROWTH RETURNS

swing 2

KEY RISKS TO THE ECONOMIC OUTLOOK

The authorities are committed to maintaining growth around 6% per annum over the near term. Over the medium term, we expect the government to continue to gradually liberalise the financial system and broader economy, which will allow balance sheets to adjust and for financial risks to ease back.

Escalation of the current trade war

The most obvious external downside risk to Queensland’s economic outlook relates to a further escalation of the current trade war between the US and China and Europe (and some other countries that run a trade surplus with the US). So far the US has imposed punitive tariffs of 10% to 25% on a wide range of items, with some higher tariffs on specific items.

These actions have been followed by retaliatory measures from China and Europe. With US President Donald Trump threatening to impose tariffs on more Chinese imports into the US, the downside risks have certainly increased. Analysis by Oxford Economics suggests that while the direct impact on growth is relatively small the indirect effects can be material. There is a risk that uncertainty around how far the shift in US tariff policy will go will weigh on business and consumer confidence and spending plans.

Australia has been a major beneficiary of the significant growth in trade between China and the US, and indeed, China and the rest of the world. If Trump significantly upped the ante (including one of his earlier threats to impose 45% tariffs on China), the resulting retaliatory action would lead to an all-out trade war, with BIS Oxford Economics modelling estimating this would cut between 0.5% and 1% off Australia’s economic growth, with potentially even worse outcomes for Queensland, given its close trade links with the Asian region.

The risk of a sharper slowdown in Chinese growth (and demand for Queensland commodities) would put the state in a more vulnerable position – China accounts for over 30% of Australia’s exports, and sits at the heart of East Asian supply chains.

The most likely trigger for a downturn is a correction in financial and/or property markets on the mainland, which could be set off by an aggressive tightening of credit lending by the authorities. However, this scenario is unlikely.

Property markets nonmining investment and upcoming election key domestic risks

Domestic risks are centred on property markets, the pace of growth in nonmining investment and the consequences of the next Federal election (due during or before May 2019).

While house prices are expected to achieve a soft landing, there is increasing risk of a more substantial adjustment. BIS Oxford Economics and the RBA still regards this risk as being low, because in aggregate, household debt repayments as a proportion of household income are not at critically high levels. Indeed, many households are ahead in terms of mortgage repayments.

THE ECONOMIC PERFORMANCE OF AUSTRALIA’S STATES IS BECOMING INCREASINGLY SYNCHRONISED

Nevertheless, the housing market was due for a correction and if, as expected, this correction is ‘mild’, it reduces the risk of high debt in the medium term. Queensland overall remains better placed than New South Wales or Victoria given it has already seen a substantial correction in dwelling building activity (particularly in the inner-city units segment) and, with stronger population growth, will likely outperform other east coast states in terms of house price growth.

There is also an upside risk that non-mining investment comes through sooner and stronger than anticipated, possibly via the tradeables sectors ramping up investment faster than we expect, which may then flow quickly onto other industries. Upside growth potential could also come from a marked acceleration in wages growth, which would underpin stronger household consumption expenditure.

Longer term, the main risk to Queensland – and Australia’s growth prospects – relate to the fundamental drivers of growth – lower trend population growth and declining labour productivity growth.

However, we expect relatively high income levels to continue to attract migrants. Furthermore, as the positive benefits of the terms of trade and increased labour supply of the past decade or two start to wane, we expect both governments and businesses to make a more concerted effort to invest to sustain growth in productivity in the long run.

Inconsistent energy and climate change policy

A lack of clarity and consistency in Australia’s energy and climate change policies represents both a major short term risk and longer term threat to the Queensland economy, but this may become clearer after the next Federal election, given very different policy stances held by both major parties. Policy failures in energy have seen substantial rises in gas and electricity prices over the past two years, which have stopped energy-intensive investments proceeding and hampered the competitiveness of manufacturers – with some major businesses threatened with closure and/or relocation overseas. Once lost, these industries are unlikely to return.

Meanwhile, the related abandonment of a coherent, market-based carbonreduction scheme in 2014, and replacement with an inferior scheme, is hampering efforts to reduce Australia’s greenhouse gas emissions and target larger reductions – with Australia’s current target of 26-28% below 2005 levels by 2030 unlikely to be achieved. This means the economy will – at some stage over the medium to longer term – need to undertake some harder structural adjustments with larger negative economic impacts on potential growth, in order to reduce emissions.

The beneficial flipside to the development of a coherent energy and climate change policy – as well as further funding for clean energy – is that it would likely provide the certainty needed to stimulate further investment in renewable energy generation projects. As outlined in this Report, renewable energy generation and transmission works has been a major driver of growth in privately funded engineering construction in Queensland recently, with electricity engineering construction activity rising five-fold to $1.85bn in 2017/18.

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