Two key sets of economic data this week point to a question that should be central to the current election campaign and today’s treasurer’s debate: where is growth coming from next for Australia? Neither side has convincing answers.
The government’s “national economic plan” is a slogan — “jobs and growth” — in search of a strategy, with lots of talk about “transition” and assertions about innovation and tax cuts, but no hard answers about what is going to take the place of the mining boom other than a continued high level of government spending: it will still be higher than the average of the Labor years — GFC and all — at the end of the forward estimates.
Labor at least understands that a switch to renewable energy will be a big investment driver, in addition to curbing our carbon emissions, but its primary focus is on education and health, both of which are crucial long-term drivers of economic growth, rather than infrastructure.
This week we saw data on the value of construction work done in the March quarter and the private investment figures for the same three-month period. Both were rotten sets of figures but, as always, there was some good news buried in the detail; both showed yet again the decline of mining investment continuing to drag down the economy, so, in that sense, they weren’t “new news”.
Capital expenditure fell 5.2%, seasonally adjusted in the March quarter, to be down 15.4% over the year; in trend terms, it was down 2.8% in the quarter and 15.4% over the year. As the RBA has pointed out on several occasions, these figures understate investment spending because they tend to focus on plant, buildings, machinery and other big ticket items rather than spending intentions in the service sector and among small and medium enterprises.
The March survey included the second estimate for projected spending in the 2016-17 financial year. This was better than expected, up 6.3% on the previous estimate, to $89.2 billion — but still nearly 15% down on the same estimate this time last year. However, the ABS said that for manufacturing, Estimate 2 for 2016-17 was 13.9% higher than the comparable Estimate 2 for 2015-16 and 11.3% higher than Estimate 1 for 2016-17 — i.e. manufacturing businesses are expecting to investment more than they were when last surveyed, and more than in the comparable period 12 months ago.
In addition to manufacturing, buildings and structures and equipment, plant and machinery are both higher as well. What is important is the latest forecasts for 2016-17 are higher than a year ago, indicating that investment in manufacturing and other sectors is rising — perhaps driven by the positive influence of the lower dollar, weak wages and employment trends and, who knows, maybe the dumping of Tony Abbott.
It’s not much, and it doesn’t offset bigger falls elsewhere, but it is a small positive, and raises the prospect that, in a year’s time, the impact of investment will finally turn from the deeply negative to a small plus for growth.
But Wednesday’s data on the value of construction work done contains more problems for the economy. The ABS reported that the total value of construction completed in Australia, including building and engineering work, fell 2.6% in the three months to March from the December quarter, the third consecutive quarter of falling activity. That reflects the ongoing pullback in the resources sector, of course, still large enough to overwhelm spending in the housing sector.
The value of building work completed fell 1.0% in the first quarter from the previous quarter, while engineering construction fell 4.2% over the quarter. Housing construction activity was strong, with the trend estimate rising 2.2% while non-residential building work done fell 1.6%. So, at the moment we’ve got housing to prop up the economy while we wait for another source of growth to arrive.
Next week we’ll see how the economy fared in the first quarter of the year overall. But there’s a sense that business confidence hasn’t picked up as much as we all hoped — even Labor people — when Malcolm Turnbull replaced Tony Abbott, and that we’re getting to the limit of the workers’ capacity to sacrifice wages growth for jobs, which has been central to the continuing strong employment growth of recent quarters despite tepid economic growth.
Then there’s weak inflation as well, which the Reserve Bank sees continuing well into 2018. And of course, having an epically long election campaign won’t help any of this.
Perhaps at lunchtime today we’ll find out where exactly Scott Morrison and Chris Bowen think the next stage of growth is going to come from — unless their plan is to keep spending at 25%-plus of GDP and building houses forever.