Economic Insider – Small Business: A Year in Review
15 July 2016
The Australian economy faces numerous challenges early in the new financial year, although it does so from a much stronger base than many of its advanced economy peers. The biggest potential hurdle is the risk that China’s economy falters badly as it transitions to a consumer driven advanced economy. We don’t expect that to happen, but if it did, it would have significant implications for Australia. Apart from the risk of a hard landing in China, very low inflation and interest rates, coupled with falling national disposable income, confront businesses of all sizes as their customers spend and invest cautiously. Nevertheless, the lagged effect of the substantial depreciation of the Australian dollar since early 2013 continues to attract more tourists and students to our shores, and can only enhance the benefits of trade liberalisation agreements with key Asian economies, where literally hundreds of millions of new customers for Australia’s goods and services await.
Population growth is now just a touch above its 25-year average of 1.3 per cent, having eased from 2.2 per cent at the height of the construction phase of the resources boom.
Net overseas migration into Australia has fallen from a peak of almost 316,000 in 2008, to just 177,000 last year.
The Labour Market
The labour market is not as strong as the falling unemployment rate implies. Jobs growth is overwhelmingly part-time employment, so the underemployment rate is close to an all-time high, while the full-time employment ratio falls to new historical lows almost by the month.
The soft labour market and modest income growth will constrain growth in household consumption for some time yet.
As the construction phase of the resources boom has given way to the production phase, Australia is shipping commodities out in record volumes. But the value they are fetching is falling in line with commodity prices. In 2014-15 alone, iron ore export revenues fall to $54 billion, from $75 billion a year earlier, even though the volume of exports rose by 96 million tonnes, to a whopping 747 million tonnes.
While the big end of town is the most directly impacted by such a big drop in national income, it nevertheless percolates through the economy as a whole, from the lunch bar under one of the big mining company’s Perth CBD offices, to the 10 person specialised metal fabricator in Newcastle to the boutique 5 partner legal firm in Melbourne.
Contagion from the UK’s breakaway from the EU
The UK’s shock vote to leave the EU has limited direct implications for Australia, but its indirect knock-on effects could yet trigger a slowing in China’s economic growth, which undoubtedly would adversely impact Australia’s economy.
It might not take contagion from the EU to derail China’s transition to a consumption driven advanced economy. However, unless one or more of the risks overhanging the world’s second largest economy crystallise, Australia will only need to grab a one or two per cent market share of the action for it to be a big deal for an economy of just 24 million people.
The Australian dollar and inbound tourism/education
China is already the second largest source of inbound short-term visitors after New Zealand, and as long as the Australian dollar remains competitive, trips down under will remain attractive to foreigners who have to part with less of their own currency to visit or study.
The number of foreigners visiting Australia on short-term visits is still well short of the number of Australians leaving for overseas. Nevertheless, last year, when the Australian dollar averaged 75 US cents, it was almost 350,000 less than in 2013, when the currency averaged 97 US cents.
Even before the Australian dollar retreated from parity with the US dollar, Australia earned a net $13 billion per annum from foreign students. But that has jumped to almost $18 billion since 2013 alone.
The rural sector
Education and tourism aren’t the only sectors that benefit from a cheap Australian dollar. As trade liberalisation agreements with a number of key Asian economies, including China, Korea and Japan gradually take effect, agricultural exports will make an ever bigger contribution to economic growth.
Agriculture won’t turbocharge Australia’s economy like the iron ore and LNG booms did in the mid to late-2000s by any means, but the growth will be much more durable, if for no other reason than Australia will never be a big enough producer of any one or more rural commodities to oversupply the world market for them.
The ageing population
Australia is not alone among advanced economies - or for that matter China - in grappling with an ageing population, where an ever smaller proportion of the population aged between 15 and 65 are asked to pay the taxes that support an ever bigger proportion of the population that require assistance.
As the population ages, the health and social assistance industry grouping is all but certain to remain the largest employer in all states for the foreseeable future. And while a significant proportion of the output of that industry is provided by large and/or sophisticated businesses at the forefront of medical technology, small and medium-sized businesses have a crucial role to play in providing services to the aged and disabled.
Be careful what you wish for on interest rates
Very low interest rates in most advanced economies are good for borrowers for sure, but that very same ageing population means that ever more retirees rely on interest bearing assets to provide income. And if interest rates continue to fall either they will be forced to assign a higher proportion of their super nest egg to riskier assets such as shares, or they will be less able to spend on discretionary goods and services, including those provided by small business.
The RBA is mindful of the impact of even lower interest rates on retirees, but we still expect another one or two cash rate cuts before the end of the 2016 calendar year as other central banks lower interest rates even further.
If that helps to push the Australian dollar lower, that will give another boost to exports, for sure. In time it would also stop inflation from falling too far, but inflation is more likely to go even lower in 2016-17 than bounce back up.
Again, even lower interest rates are of course good for most small businesses, but it’s not all one way traffic like it used to be.
The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. To the extent permitted by law, Bankwest, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL/Australian credit licence 234945, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication. Based on Australian Bureau of Statistics data used pursuant to the Creative Commons Attribution 3.0 Australia license (available online at: http://creativecommons.org/licenses/by/3.0/au/)
Chief Economist, Bankwest