Encouraging signs as South Australia faces challenging future
Despite media reports of doom and gloom recessional speculation, politicians’ pointless blame games, a South Australian unemployment rate persistently the highest of the mainland States, and a disappointing 0.7% population increase -- about half most other States for the past 12 months – there are encouraging signs for the State’s future.
While SMEs are understandably frustrated as they battle to make headway in a State economy that’s achieving a mere 1% annual growth, they tend to lose sight also of encouraging national indicators.
Nationally GDP rose 3.3% last financial year, -- 0.5% in the final quarter – which means Australia’s 100 successive recession-free quarters since 1991, is bettered among the G10 countries only by the Netherlands’ 103 achieved between 1982 and 2008.
It’s understandable too that many operators of SMEs are also depressed by media insistence that it’s getting too difficult and too expensive to do business in SA. But fact is the value of the State’s 64 listed companies increased by $1.73bn over the last quarter of the financial year 2015-16, some large industrials performing well for the whole 12 months.
Concurrently the Deloitte South Australian (SA) Index increased by 3.8% to outperform the ASX 200’s rise of 3%.
Since July stock markets have declined somewhat as investors seem nervous about central banks’ tendency to step back from stimulus programs. Nevertheless, Australians’ confidence in their economy was 8% higher by mid September than at the corresponding time last year, and a survey of 240 SA SMEs shortly before the State was blacked out by storms, mirrors this positive out look.
Profits expected to rise
It shows more SA firms expect their profits to be higher this year than last year, and believe the State’s economy is in better shape now than it was then.
Key findings of the wide-ranging survey that covered profit expectations, hiring intentions, IT readiness, exposure to major forthcoming SA events, and business sentiments, included:
- Fifty two percent of companies expect to increase profits this year compared with 36% last year.
- Half rated the State’s economy “stagnant” compared with 78% at the same time last year.
- Twenty percent of businesses plan to recruit up to three staff this year.
- Sixty percent support nuclear waste storage but only if there was demonstrable economic benefit.
However the survey also found that while SMEs were adapting to new technologies a “significant number” were lagging in preparedness for use of the latest available IT.
Nonetheless earlier confident and expansive comments on the State’s prospects came from a highly significant and authoritative source with no axe to grind on the issue, a man having no need whatsoever to talk up the State’s economy, namely US Ambassador to Australia John Berry.
SA can be a “leading light”
Addressing a 7 September Adelaide business breakfast organised by the American Chamber of Commerce in Australia, Mr Berry said: “The future is what SA is about, as it diversifies from a hub for traditional manufacturing to a leading light in the knowledge economy.”
That future, he said, would by no means depend solely on more than $90bn in submarine and naval shipbuilding deals, and jobs likely to be created because of them and other defence projects.
According to Mr Berry health research and emerging technologies, advanced manufacturing and innovative science would all give birth to new industries and new jobs, not just in SA but “across Australia and across the US”.
Deloitte Financial Advisory’s SA lead partner, Stephens Adams, is correspondingly upbeat, predicting there will be no slowing in the trend of companies switching out of resources into sectors such as food and technology, via reverse takeovers.
He expects these takeovers to proceed as viable options for aspiring ASX companies while “relevant pools of capital continue providing strong valuation support for companies exposed to forthcoming waves of growth in agribusiness, tourism and international education”.
Mr Adams says he expects SA’s “current economic composition will reflect the State’s relative competitive advantage in the next and future waves of growth, offsetting declines in manufacturing to provide an environment from which innovative SA companies can attract capital for expansion”.
Meanwhile unprecedented numbers of visitors to SA have contributed a record $5.95 billion to the economy in the past 12months, almost a billion dollars more than during the previous 12 months.
Other States investing in SA
CBRE’s industrial and logistical director David Reid notes that Adelaide is benefiting from an inflow of eastern seaboard investors looking to capitalise on increasingly attractive yields yet another indicator of widespread confidence in SA’s future.
He says there’s an increasing tendency to inject capital into low-risk assets such as real estate, and there’s been a jump in the number of leasing inquiries for space over 5000 sq m.
Across the nation international investors’ enthusiasm for urban and regional land and businesses has reached a point where the Federal Government has had to consider changes to laws governing purchases and partnerships.
Nonetheless it has to be said Australia’s economy, though performing better than most developed countries, is relying substantially on public investment which rose 15.5% in the final quarter of 2015-16, supported largely by a wave of spending by state and local governments.
Further contributions to tentative economic growth come from increased health insurance premiums, better-than-expected retail sales and industrial production numbers, and Australians’ increasing inclination to be out and about, eating and drinking.
Economists’ main concern for the economy is failure to exploit the latent power of its workforce, and a still elusive, much-needed boost to inflation – a source for which they apparently can’t determine.
Wage growth is slow because of intense market competition, so that even should the Reserve Bank of Australia further lower interest rates, Macks Advisory suspects diminishing benefits from rate cuts’ are now close to negligible.
Challenges ahead in summary
Urgent need for budgetary restraint makes it unlikely, according to Capital Economics chief economist Paul Dales, that government spending can continue at 2015-16 levels as the nation faces the final years of the decade where all indicators point to a soft economy.
However, the good news from senior economists is their expressed belief that although other resources-exporting countries have gone into recession, there now appears to be minimal risk that Australia will follow them.
Most expect that for the next three financial years overall GDP growth will vary across regions, cities and towns to average a below-trend 2.5%.
A recent survey of 14 leading economists revealed these factors they believe may influence the economy until the end of the decade:
- Interest rates that could go even lower should the dollar again rise significantly or the economy weaken. Although it’s not expected Australia will follow increases in US cash rates, our bond rates, although staying lower longer, are in the medium term expected to follow US rises.
- Employment growth will be weak and unemployment will rise as another three years of falling mine construction takes total decline of the mining sector to 74% below its peak. Residential building that’s been a key driver of growth in the past three years is also declining.
- Investment in rebuilding non-mining growth will be agonisingly slow but it’s unlikely to be impeded this decade by inflation in prices and wages.
- There will be major regional and industry shifts with a recovery in finance and business services, as non-mining growth and investment gradually build momentum and budget reform allows governments to return to infrastructure spending.
For more information, contact Macks Advisory on 08 8231 3323 or visit our office at Level 8 West Wing, 50 Grenfell Street, Adelaide SA 5000.
