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©Baillieu Holst Ltd 1
Darryl GobbettChief Economist and [email protected]
How are things Looking for South Australia and What can be DoneWednesday 18 May 2016
Civil Contractors Federation (SA)South Australian Infrastructure Conference Adelaide Oval Adelaide SA
©Baillieu Holst Ltd 2
DisclaimerThis document has been prepared and issued by:Baillieu Holst LtdABN 74 006 519 393Australian Financial Service Licence No. 245421Participant of ASX GroupParticipant of NSX LtdDisclosure of Potential Interest and DisclaimerBaillieu Holst Ltd (Baillieu Holst) and/or its associates may receive commissions, calculated at normal client rates, from transactions involving securities of the companies mentioned herein and may hold interests in securities of the companies mentioned herein from time to time. Your adviser will earn a commission of up to 55% of any brokerage resulting from any transactions you may undertake as a result of this advice.When we provide advice to you, it is based on the information you have provided to us about your personal circumstances, financial objectives and needs. If you wish to rely on our advice, it is important that you inform us of any changes to your personal investment needs, objectives and financial circumstances.If you do not provide us with the relevant information (including updated information) regarding your investment needs, objectives and financial circumstances, our advice may be based on inaccurate information, and you will need to consider whether the advice is suitable to you given your personal investment needs, objectives and financial circumstances. Please do not hesitate to contact our offices if you need to update your information held with us. Please be assured that we keep your information strictly confidential.No representation, warranty or undertaking is given or made in relation to the accuracy of information contained in this advice, such advice being based solely on public information which has not been verified by Baillieu Holst Ltd.Save for any statutory liability that cannot be excluded, Baillieu Holst Ltd and its employees and agents shall not be liable (whether in negligence or otherwise) for any error or inaccuracy in, or omission from, this advice or any resulting loss suffered by the recipient or any other person.Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment at its original date of publication and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments.Baillieu Holst Ltd assumes no obligation to update this advice or correct any inaccuracy which may become apparent after it is given.
©Baillieu Holst Ltd 3
Economic and Financial Background: Low Growth, Slower Productivity gains, Private Sector deflation
Output Growth, Inflation Adjusted, % pa
Cons Price Inflation %pa
Interest Rates %pa 29 April 2016
Structural Central Govt Budget
% of GDP1997
- 2006
2014 2015E 2016F 2017F 2017F 3 moInterbank
10 year Govt Bonds 2017F
United States 3.3 +2.4 +2.4 +2.4 +2.5 +1.5 0.64 1.82 -3.4Japan 0.9 0.0 +0.5 +0.5 -0.1 +1.2 -0.02 -0.12 -3.5
Euro Area 2.3 +0.9 +1.6 +1.5 +1.6 +1.1 -0.22 0.27(Germany)
-0.9
United Kingdom 3.1 +2.9 +2.2 +1.9 +2.2 +1.9 0.59 1.60 -2.2
China 9.4 +7.3 +6.9 +6.5 +6.2 +2.0 3.3 2.90 -2.6India 6.6 +7.2 +7.3 +7.5 +7.5 +5.3 7.27 7.44 -6.6Indonesia 2.5 +5.0 +4.8 +4.9 +5.3 +4.5 6.55 7.72 -2.8ASEAN 5 na +4.6 +4.7 +4.8 +5.1 +3.8 na na naBrazil 2.7 +0.1 -3.8 -3.8 0.0 +6.5 14.25 12.74 -7.0
Russia 5.0 +0.6 -3.7 -1.8 +0.8 +6.5 11.72 8.88 -3.0 Australia 3.6 +2.6 +2.5 +2.5 +2.5 +2.4 2.5 2.52 -0.9
World +3.4 +3.1 +3.2 +3.5 Group of 7, 1.7New & Emerg, 5.9
Source: IMF World Economic Outlook, April 2016; www.tradingeconomics.com
©Baillieu Holst Ltd 4
2016/17 Federal Budget Forecasts
• Economic growth very slow• Falling Mining Investment being offset by increased housing investment, exports, • Govt growth forecasts revised down from December 2015 MYEFO
• Mining investment falling faster than expected• Non Mining Investment not growing as fast as expected • Private dwelling investment growth to slow more sharply• Public Final Demand growth is lifting with Infrastructure spending
% change, inflation adjusted
(Italicised are BH forecasts)
13/14 14/15 15/16e 16/17f 17/18f
Household Consumption 2.5 2.7 3.0 3.0 3.0
New Motor Vehicle Sales, m* 1.12 1.2 1.35 1.40 1.43Private Investment - Dwellings 5.1 7.9 8 2 1
No. of Private Dwellings Started (‘000)* 178 200 215 220 222 Business Investment – Mining
Business Investment – Non Mining
-7.0
-3.7
-17.3
1.2
-27.5
-2
-25.5
3.5
-14
4.5Private Final Demand 0.9 1 0.5 1.5 2.5
Public Final Demand 1.6 0 2.25 2.25 2.0
Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1
*BH forecasts
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• Employment and Wage Growth slow and slowing• Forecast fall in Household savings ratio to support retail spending growth• Labour force participation lower for 19 – 65 year old males, rising for baby boomers• Population and Working age population growth slower than earlier estimated• Inflation staying lower for longer, Private Sector deflation as part of global phenomenon
13/14 14/15 15/16e 16/17f 17/18fEmployment, % change to June qtr 0.7 1.6 2 1.75 1.75
Wage Price Index, % change to June qtr 2.6 2.3 2.25 2.5 2.75
Unemployment Rate, % June qtr 5.9 6.1 5.75 5.5 5.5
Labour Force Participation Rate, % June qtr 64.6 64.8 65 65 65
Household Savings Ratio, % June qtr, trend 10 9 8 7 7
Consumer Prices, % change to June qtr 3.0 1.5 1.25 2 2.25
Source: Australian Government 2016/17 Budget Strategy and Outlook Budget Paper No. 1
2016/17 Federal Budget Forecasts
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Reserve Bank Forecasts
• Inflation now forecast to be below 2-3% pa policy range• Economic growth below reduced potential growth rates
• Slower population growth• Low productivity gains
• Cash rate to 1.25% by end 2016
Source: RBA Statement on Monetary Policy May 2016
©Baillieu Holst Ltd 7
Non Mining Investment Expectations not Offsetting Lower Mining Investment
Gross Investment by Major Industry Sector, $b, Current $ 10/11 11/12 12/13 13/14 14/15 15/16
4th Est16/171st Est
Mining 46.9 82.0 94.7 90.4 76.1 56.8 32.8Manufacturing 12.3 13.2 9.5 9.2 8.6 8.3 7.4Electricity, Gas & Water 6.2 5.4 5.5 5.8 5.1 5.4 6.6Construction 5.4 4.7 5.0 4.7 6.3 3.4 2.3Wholesale & Retail Trade 7.4 7.5 7.4 8.1 9.1 8.9 9.2Transport, Post & Warehousing
11.6 13.7 11.1 11.2 12.5 9.9 10.6
Rental, Hiring & Real Estate
11.9 10.5 9.8 9.6 12.2 11.4 10.0
Other 17.6 17.9 17.7 19.0 20.8 19.9 19.2Total 119.3 154.8 160.5 158.0 150.7 124.0 98.1
Source: ABS 5625.0 Private New Capital Expenditure and Expected Expenditure December Quarter, Australia, February 2016. Average of last 5 year realisation ratios applied to 2015/16 4th estimates and 2016/17 1st Estimates.
©Baillieu Holst Ltd 8
Global and National Trends: Implications for SA
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The South Australian OutlookSmall, Regional Economy: 1.7 million people
•Smaller than Western Sydney or Brisbane, Irrelevant nationally•Population older & ageing faster, sicker, more obese, less educated and lower skilled•Driving policy decisions but are these also outcomes of past policies?•Impacts on Housing, retail, tax base, attitudes, national representation
No Exports means No economic or Population growth
Industry structure & policy makers still adapting from 1960s, not 21stC challenges•No private sector employment growth since 2010 •Manufacturing employment soon to be 30,000, or 30%, lower than mid 2000s peak
• Traditional motor vehicle and metal fabrication industries are disappearing• Growth is in Food processing• Losses in SA in most Manufacturing has been faster than in NSW or Victoria
•Growth is principally in aged care, the public sector and associated social support
More international competition and More opportunities
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Sources of SA Employment Change by Sector
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The South Australian Outlook
Public finances rely on Federal Support
• Lower per capita income, slower & slowing population growth, higher costs• Large & growing Public Sector, Higher taxes and poor Budgetary outlook
• Increased GST and Asset Sales currently reasons for low deficits
• Large & Low Productivity Public Sector, High Deficits, Increasing Tax Burden & Debt• ALP sees big public sector and high taxes as politically acceptable• Liberals not a small government party
• Likely less support from Federal Govt and Other States• Tax Reform expected to reduce income taxes, increase GST• Likely impacts on GST relativities, Special Grants, States’ own taxes
• Don’t criticise the SA Government but it is starting to recognize change is needed• Transparency on Regulatory Impact Statements is poor• Focus is on more efficient regulation, not less regulation • ICAC, Royal Commission on Nuclear Fuel Cycle are beginnings
©Baillieu Holst Ltd 12Please read the disclaimer at the beginning of this report.
Economic Forecasts: South Australia
Retail Turnover % (Nominal, year total) 7.9 1.7 0.6 1 -0.4 3 4.4 3 3
New Motor Vehicle Sales (000) 59,400 66,080 62,836 65,340 70,268 70,074 69,262 68,000 70,000
Business Investment, %, Current Prices
- Plant & Equipment 1.1 0.2 -1.3 6 -12.9 0.7 7.8 -8 0
- Non Residential Construction 18.7 -6.8 17.3 18.2 11 -1.5 -0.4 0 -15
- Cultivated Bio Resources & Intel Property -7.4 -2.7 12.4 6.8 5.1 0.6 -3 4 4
Public Investment 34.6 55.6 -12 -5.1 -1.8 -8.5 -17 15 10
Unemployment Rate % (June, Trend), 5.6 5.4 5.2 5.5 6.2 6.7 7.7 8 8
Actuals ABS; forecasts DG
0.7
3
10,798 10,091
10,000 9,750
10,250 10,000
0.5
0.8 0.7
-2 3
0.2 -0.4 0.1 0
8,433 8,447
8,096 8,653
2016/17f
0.8 1.6 1 1
2013/14 2014/15 2015/16f
10,819 10,147
2008/09 2009/10 2010/11 2011/12 2012/13
Employment Growth % (Year to June, Trend) 0.6 1.3 1.6 -0.7
1.7GSP(Total Output) % (Real) 2.7 1.6 2.4 0.6
Private Dwelling Approvals Private Dwelling Commencements
11,777 11,676
11,480 11,061
10,952 10,058
4.6 6.7
Population Growth % (Yr to June) 1.3 1.1 0.8 1 0.9 0.9
Private Avg Weekly Earn % (FTAOT, (Yr to May) 7.4 0.7 4.5 3.2
©Baillieu Holst Ltd 13
Recent trends suggest SA’s population growth will be lower than projected:•Running below Projection B assumptions on net overseas migration; and•At or above Projection B assumptions on net interstate migration.19 – 55 age groups therefore likely to be smaller than Projection B.
Net Natural Increase
Net Overseas Migration
Net Interstate Migration
2010 7143 10894 -30382011 7501 10044 -24012012 7369 10915 -30382013 7082 11336 -39442014 7249 10481 -2744
Dec 2014-Sep 2015 6266 10255 -4125
Population Outlook
Please read the disclaimer at the beginning of this report.
©Baillieu Holst Ltd 14
By 2030 those over 60 will exceed those 0 – 19, or 20 – 39, or 40 – 59•Likely bigger market for Last Home Buyers than First Home buyers•Land, Staffing, Training, Investment and Cost issues for institutional aged care•Health care issues for Baby Boomers wanting to stay mobile longer•Education, Entertainment, Employment, Politics, Tax, Travel
More expected of the public sector but Boomers not willing to pay•Adverse Impact on income taxes and spending taxes of combination of:
• Reduced employment growth and increased part time employment• Low/no productivity growth meaning low/no real per capita income growth
Points to need now for more efficient and effective decisions on and implementation of•Taxation•Spending•Investment
Some Implications of Ageing Population
Please read the disclaimer at the beginning of this report.
©Baillieu Holst Ltd 15
Metropolitan Home Prices Rising, Activity Should Lift
Auction clearance rates (REISA)Dec 2015 63%Sept 2015 71%June 2015 66%March 2015 61%Dec 2014 59%Sept 2014 66%June 2014 63%March 2014 61%March 2013 55%March 2012 41%March 2011 48%March 2010 64%For 2016/17•Employment flat to lower, population growing •Interest Rates on hold •Vacancy rates should steady•High land costs continue•Funding constraints on investment housing•Dominance of the big banks impacting competition •First Home Buyer Affordability and overall confidence are the big issues
Adelaide House Prices
Please read the disclaimer at the beginning of this report.
©Baillieu Holst Ltd 16
Housing Construction Activity
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Units and Retirement Homes Main Drivers
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Food Turnover
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Eating Out
©Baillieu Holst Ltd 20
Household Goods
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Clothing Etc
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The Other
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SA New Motor Vehicle Sales
©Baillieu Holst Ltd 24
Sensis Small and Medium Business Index, March Qtr 2016 (released 7 April 2016, Interviews 18 Jan 2016 to 15 Feb 2016)
Please read the disclaimer at the beginning of this report.
Business Confidence in SA
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Sensis Small and Medium Business Index, March Qtr 2016 (released 7 April 2016, Interviews 18 Jan 2016 to 15 Feb 2016)
Please read the disclaimer at the beginning of this report.
Business Confidence in SA
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Sensis Small and Medium Business Index, March Qtr 2016 (released 7 April 2016, Interviews 18 Jan 2016 to 15 Feb 2016)
Business Confidence in SA
“The SA Government, which has really struggled on this measure for over two years was criticised for high taxation, (19%), payroll tax (11%), poor economic management (17%) and excessive wasteful spending (12%).” (December Qtr 2015 Report)
“The major criticisms of the SA Government, which has been the least popular for over two years, were a lack of incentives or support for small business (14%), poor economic management (13%) and payroll tax (12%).” (March Qtr 2016 Report)
Please read the disclaimer at the beginning of this report.
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SA Govt Investment Spending ($m)Source: SA Govt Budget Statement Budget Paper No.3 2015/16
$10.8 billion to be invested over next 4 years:•$3.3b in health – mainly buying the new RAH•$1.4b on roads: mainly North-South Road corridor•$353m on public transport•$216m on education facilities•$197m on Festival Centre precinct•$1.7b on water infrastructure
• This seems to be SA Water’s normal capital spend
•Pre Fed Election promises
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Private Investment Flat, Public Investment Falling
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South Australian Growth: Where from and to?Gross Value Added, ABS Cat 5220.0
1989/90 - 1999/00
1999/00 - 2005/06
2005/06 - 2013/14
2013/14 Share of State Gross Value Added
excluding Dwellings,
Current Prices
Health care and social assistance 3.1% 3.9% 3.2% 10.1% Supportive DemographicsManufacturing 1.7% -1.3% -0.1% 9.1% Tough, shrinking, changingFinancial and insurance services 3.7% 3.2% 5.0% 8.4% Oligopoly, funds managementConstruction 2.9% 5.1% 4.7% 8.4% Housing, public infrastructurePublic administration and safety 3.6% 3.2% 1.8% 7.1% Slowing further on Budget restraintsAgriculture, forestry and fishing -0.5% 7.2% 7.2% 6.1% Overseas demand lifting furtherProfessional, scientific and technical services 2.9% 4.0% 4.5% 5.9% Change, Outsourcing, RegulationEducation and training 1.9% 1.4% 1.8% 5.9% Should lift on overseas demand with lower $ARetail trade 3.3% 4.5% 2.4% 5.7% Growing but changingTransport, postal and warehousing 3.0% 2.6% 2.6% 5.6% Growth with online buying, inbound tourismWholesale trade 2.8% 3.4% 3.1% 4.8% As per Retail Trade but slowerElectricity, gas, water and waste services -1.3% 4.4% 0.8% 4.4% Waste services main growth areaMining 1.8% 1.0% 6.5% 4.1% Increasing exports. Investment to rise in 3-4 years
Average of Annual Rates, inflation adjusted
Please read the disclaimer at the beginning of this report.
Economic and Financial Update
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Investment that leads to lower Costs and increased Output and Exports– Increased real per capita incomes– Stronger population growth through less population loss interstate
» Increased retail spending and new home buyer activity» Better public sector finances and possibility of tax cuts
– Growing sustainable workforce provides better support for ageing population Focus on regional SA, not urban commuters
– Eyre Peninsula rail, energy and water and ports– Sealing of Strzelecki Track– SE Drainage Scheme– Kangaroo Island water transport links– Nuclear Waste repository– Base Load electricity and micro grids– Water for agriculture not urban consumption– Rail/Road Bypass of Adelaide
Establish a SA Productivity Commission to determine priorities– Get more innovative on funding infrastructure– Look at tax mix– Regulation load
Need for More Investment, Private and Public What and Where?
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Move to a broad based Land Tax• Residential transfer costs becoming a substantial drag on turnover
• Increased turnover and consolidation to lift new developments and civil construction
SA Government asset sales•Set time and price targets for public sector land release as part of City boundary implementation•Review local zoning issues
Reduce “gold plating” and “future proofing” requirementsReduce Size and Cost of SA Public Sector to save $800m pa•Cut number of Ministers to 10 or less•Reduced regulation should result in cost savings•Bring SA Public pay relativities to average of 115% of Private Sector (now 120%)•Reduce SA Govt Full Time Equivalent (FTE) staff numbers to 2007 levels
How to Fund this
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Focus on SA’s strengths and advantages• Agriculture, Mining, Health and Medical research, Defence; and associated
manufacturing: - Ingham’s announcement is a good announcement
• Tertiary Education and Speciality Tourism, eg wine, Kangaroo Island• Intellectual capital: NGOs, Water industry, Land titles, Waste management,
Ageing population eg.• Size of Adelaide: Private and Public Decision makers very close together• SME focus, and recognise importance of local procurement • What part of the value chain is most profitable and sustainable?
- Design- Financing- Logistics- Making- Management- ?
Some other Issues
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