State Update: Queensland – September 2015 NAB Group Economics

more give, less take

Photo: Amy Li

Content

Key points 2

In Focus: Transition from mining investment 3

Consumer and household sector 4

Business sector 5

Labour market 6

Demographics 7

Residential property 8

Tourism 10

Fiscal outlook 11

Semi government bonds and credit outlook 12

Economic structure and trade 13

Chart 2: State Growth, %

Chart 1: State GSP Growth Forecasts (%)

Key points • Queensland’s economic landscape remains challenging as the economy shifts

from mining investment led growth to one driven by resource exports, tourism and the household sector. The economic transition will be supported by the depreciation of the AUD and low interest rates, while sharply lower commodity prices (particularly for coal and oil/LNG) will be a significant drag on incomes. Gross state product is forecast to be stronger than the national average at 3½% in 2015-16 and 4.2% in 2016-17. This will be primarily driven by a large contribution from LNG export volumes, while the outlook for domestic demand is weak.

• The unemployment rate is forecast to creep up towards 6½% in 2015-16 before falling slightly in 2016-17. Job losses will remain concentrated in mining and related industries (eg. construction, transport), while employment is moving towards services industries including tourism, health and business services. The Queensland Government has announced a range of initiatives to support jobs.

• Population growth has fallen to a record low amidst weak labour market conditions. Both overseas and interstate migration have declined. Traditionally strong net interstate migration has weakened significantly, especially as young people (25-29 year olds) leave for the southern states for better job prospects.

• On the flipside, the depreciating currency has created a favourable environment for Queensland’s tourism industry. In particular, the state is proving more affordable for domestic travellers. International visitors and foreign students to Australia have also increased significantly, although Queensland has not captured its fair share. Going forward, we do expect international tourist exports to grow at a pace more comparable to the national average, with tourists increasingly attracted to destinations like the Gold Coast and Cairns rather than Sydney. With Hong Kong airlines to begin flights to Cairns and the Gold Coast in 2016, joining other Asian airlines, more Chinese travellers are likely to visit the sunshine state.

• Better housing affordability and a higher rental yield in Brisbane are also likely to attract interstate and overseas investors as Sydney and Melbourne property prices reach record levels. Rising dwelling approvals (mostly in medium-to-high density dwelling in Brisbane), suggest that dwelling construction will provide some support to economic growth. House price growth remains modest and varies significantly across the state, with coastal locations clearly outperforming.

• While the retail sector should benefit from tourism, low interest rates and rising household wealth in some areas, the combination of low population growth, and weak labour market outcomes will remain a headwind for consumer spending.

• Amidst a sharp decline in mining investments as LNG projects are completed, a pick up in non-mining investment is necessary to generate a more substantive pick up in domestic demand. Expectations for non-mining capital expenditure are mixed, and investment in accommodation is likely to remain subdued given low bed occupancy rates. Commercial property developers however are optimistic about prospects in the next 2 years, particularly in retail property, and retail commercial property approvals have started to creep up.

Contact Amy Li, Economist Riki Polygenis, Head of Australian Economics Skye Masters, Head of Interest Rate Strategy

Source: ABS, NAB Economics

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Economy transitions as mining investment falls

Queensland’s economic growth has been boosted by unprecedented levels of LNG investment. Three large LNG projects with combined capital expenditure of over $60 billion have contributed to the state’s economic and employment growth. However the operation of these projects will require less labour compared to the earlier construction phase. As a result, unemployment rate has risen across the state, especially in mining concentrated regions. Household consumption growth is also subdued in the midst of weak income growth.

Chart 4: Engineering construction work yet to be done, heavy industry ($bn) Source: ABS, NAB, BITRE, Queensland Budget

Amongst all the gloom of the mining downturn, Queensland’s tourism industry is showing promising signs. With a depreciating AUD, domestic travel has improved. At present, Queensland does not appear to be receiving its fair share of rising international visitors, although this should improve going forward. Resources and tourism exports will continue to drive economic growth while household consumption slowly recovers. Higher rental yields and greater affordability compared to Sydney and Melbourne should also support residential property prices and construction.

Chart 3: QLD real GSP growth (% annual)

Chart 5: Domestic travel to Cairns, passenger numbers, seasonally adjusted Chart 6 : Rental yields and affordability

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Consumers remain cautious in the face of weak income growth despite rising household wealth The weak labour market and lower terms of trade have kept income growth subdued, resulting in slower household consumption growth. Retail turnover has been very mixed in recent months. This is despite the low interest rate environment and rising asset prices.

Chart 8: Brisbane House Price and Australian Share Market Performance Source: ABS, RBA, Datastream, NAB Consumer Anxiety Index

Consumer sentiment has remained below average for several years in Queensland . This has kept retail sales growth sluggish as well. NAB’s Consumer Anxiety Index shows Queensland consumers remain cautious with their spending. In Q2 2015, they plan to increase spending only on essentials including transport, medical expenses and paying off debt, while cutting back on discretionary spending such as eating out and entertainment.

Chart 7: Average Compensation and Household Consumption Growth (YoY %)

Chart 9: Retail turnover growth and consumer sentiment

Chart 10: Changes in Spending Behaviour, net balance

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Business conditions improving modestly, but below the national average

Business conditions in QLD has been lagging behind since the GFC. It was negatively affected in 2011 by the floods, then recovered somewhat thanks to the CSG/LNG investments, but fell again in a time of falling commodity prices and a weak labour market. Business investment was boosted by three large LNG projects. Growth has since fallen as their construction finishes and low commodity prices are limiting new mining investment.

Source: ABS, NAB Business Survey

Non-mining capex is improving but has been slow to fill the gap, with expectations for a dip down again in 2015-16. The main bright spot is a pick up in confidence and approvals for retail property. The NAB Business Survey shows capacity utilisation in Queensland remains low, both compared to long-run average and national level. However there are tentative signs of a pickup as its economy transitions from mining led growth to non-mining growth. Chart 11: Business Conditions (net balance) & spread

Chart 13: Queensland capital expenditure, actual & expected based on previous realisation ratio Chart 14: NAB Business Survey - Capacity Utilisation (%)

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Chart 12: NAB Commercial Property Index

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Labour market is weak while transitioning from mining & construction towards services industries

The ending of the mining construction boom has seen jobs disappear in mining and related industries. Jobs growth in labour-intensive services industries such as retail trade is also constrained by weak household income growth, although should pick up with greater tourism flows. The unemployment rate in Queensland has risen to 6.5% and is even higher in regions more exposed to mining.

Chart 16: Change in employment by industry, last 12 months to Jun-15, Queensland, '000 Source: ABS

Employment growth in Queensland slowed to 0.5% per annum in June 2015, below the long-term average of 2.7% and the national average of 1.8%. In the past three years, agricultural employment was severely affected by prolonged drought conditions. On the other hand, most employment gains were in services industries. Hospitality employment has been particularly strong.

Chart 17: Employed persons, YoY % growth, seasonally adjusted

Chart 15: Unemployment rate, selected regions, 12-month moving average, %

Chart 18: Change in employment by industry, last 3 years to Jun-15, Queensland, '000

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Population growth slowing down, with both interstate and international migration slowing

Historically Queensland has enjoyed superior population growth compared to the rest of the nation thanks to its warmer climate and relatively low cost of living. However with the ending of the mining boom and the weakening of the labour market, population growth slowed to its lowest rate in 15 years, and even fell below national average in 2015.

Chart 20: Net interstate migration, 000s, over the year Source: ABS

Net interstate migration was previously the largest contributor to population growth. Since 2005-06 however, it has made the smallest contribution. Net overseas migration has added significantly to population growth since that time, but has now slowed. The biggest outflow of interstate migrants by age group has been for 25-29 year olds, as they move to the southern states for better job opportunities.

Chart 19: Population growth, Queensland and Australia, %, year on year

Chart 21: Queensland population growth (000s, over the year)

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Residential property prices strengthen in Southeast Queensland but weaken in mining regions

The low interest rate environment, together with increased investor appetite, is supporting strong house price growth in South East Queensland, especially inner Brisbane. On the other hand, the mining regions are suffering house price declines as resource projects finish construction and local labour markets weaken.

Chart 23: Regional Queensland – Median house price growth, % (year to Q1 2015) Source: ABS, RP Data, NAB. *Mining regions are Fitzroy, Mackay, Townsville and Queensland Outback

Dwelling investment in Queensland continues to grow. The slowdown in mining regions was more than offset by strong growth in medium-to-high density dwelling in Brisbane and to a lesser extent the Gold Coast. Foreign demand seems to be driving the growth in many inner city Brisbane apartments, according to the NAB Residential Property Survey. Despite the strong increase, Queensland’s dwelling approvals relative to population are still below the national average.

Chart 24: Value of building approvals, by region

Chart 22: Brisbane – Median property price growth, % (year to Q1 2015)

Chart 25: Building Approvals relative to population (Long-run average = 100)

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Residential investment expected to improve further as affordability and higher yield attract investors

Looking ahead, the declining dwellings to resident population ratio and the relative affordability of Brisbane housing compared to Sydney and Melbourne will continue to attract investor interest and support further price growth. Rental yields for both houses and units are higher in Brisbane compared to national average while price-to-income ratio remains lower. NAB’s survey of real estate professionals, fund managers and investors shows improving house price expectations in Queensland for the next two years.

Chart 27: NAB Residential Property Survey - House Price Expectations (%)

Source: ABS, RP Data, NAB Residential & Commercial Property Survey

Conditions in the non-residential market are also improving, especially in retail/wholesale property. Office approvals remain subdued but may recover given the Brisbane office vacancy rates have started declining.

Chart 26: Queensland dwellings to population and Brisbane dwelling prices

Chart 28: Non-residential Building Approvals ($ millions)

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Chart 29: Queensland office market conditions

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Depreciating dollar provides favourable environment for Queensland tourism

Nationally, tourism exports have been increasing as the AUD depreciates. The number of short-term visitors coming to Australia is increasing at a rapid pace. However Queensland seems to be failing to capture much of that increase. While visitor numbers to New South Wales and Victoria have increased rapidly, those to Queensland remains relatively constant.

Chart 31: Short-term international visitors, state where spent most time Source: ABS, RBA, BITRE, NAB, Macrobond

On the domestic front, things are more positive. Travel to the tropical centre of Cairns from major domestic capitals has been steadily increasing. We continue to expect increased domestic tourism to Queensland as the depreciating AUD makes international travel more expensive and Queensland remains attractive with its tropical weather and beaches. This will hopefully offset the decline in mining-related travel, which saw bed occupancy rates fall, especially for motels and apartments .

Chart 30: National tourism exports and the Australian dollar

Chart 32: Tourist accommodation, total bed spaces and bed occupancy rate

Chart 33: Domestic travel to Cairns, passenger numbers, seasonally adjusted

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Queensland Treasury forecasts operating surpluses in each year of the forward estimates. Their royalty income forecasts may be overly optimistic given its high coal price assumptions. Despite having been revised down, they remain above NAB and consensus forecasts. Coal royalties represent around 70% of Queensland’s total royalty income.

Chart 35: Forecast royalties (total and coal) and coal price assumptions Source: Queensland 2015-16 Budget

In 2015-16, general government revenue is estimated to be $51.186 billion. It is 3.2% more than the 2014-15 revenue, driven by increased Australian Government grants, including an increase of $1.174 billion in GST revenue. The 2015-16 Budget estimates total capital purchases by general government to be $5,374 million, of which $2,709 million by Transport and communications and $1,159 million by Health.

Chart 34: Net operating balance, $ million

Chart 36: Queensland government revenue by source, 2015-16

Chart 37: General government capital purchases, value and % of GSP

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Net debt forecast to rise but not a threat to credit rating; new borrowings remain low

While the Government is implementing several measures to contain net debt these are not expected to have a material impact on Non Financial Public Sector net debt which is forecast to rise over the forward estimates. QTC plans to borrow AUD6.5bn of term debt in 2015-16. There is AUD7.5bn of refinancing and –AUD1bn of new money. The borrowing programme for the forward estimates is expected to average AUD10bn with new money averaging AUD1.4bn.

Chart 39: QTC borrowing programme Source: Queensland budget papers, QTC, NAB

S&P confirmed Queensland’s AA+ credit rating was not immediately impacted by the 2015-16 budget. It notes however that the state’s debt remains elevated and above 120% of operating revenue over the forward estimates. Benchmark bonds remain the principle source of funding with issuance targeted to smooth maturity profile. QTC may look to issue new term debt in 2015-16.

Chart 38: Queensland Non-Financial Public Sector net debt

Chart 40: S&P credit metric: mild improvement in debt burden

Chart 41: QTC term bonds outstanding as at early August 2015

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Construction and Mining contributed the most to economy but Health and Retail the biggest employer

In 2013-14, construction contributed the most to Queensland's economy (11%) while providing 10% of the state's total jobs. While mining made significant economic contribution (9.6%), it was a small employer (3.4% of total jobs).

Chart 44: Queensland beef production and price

Coal is still Queensland’s biggest export item. Its top export destinations (China, Japan, India and Korea) are also the biggest buyers of its coal. Favourable beef prices have boosted Queensland’s beef export. The drought in the US has meant exports to the US remain strong. However, slaughter rate has now started to decline, reflecting a scarcity of stock after a prolonged period of high slaughter. This will likely keep prices high, but export volumes will come under pressure.

Chart 42: Share of industry GVA & Employment, Queensland, 2013-14

Chart 43: Top ten Queensland export and import destinations, 12 months to July 2015

Source: ABS, Meat and Livestock Australia

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Group Economics Alan Oster Group Chief Economist +61 3 8634 2927 Jacqui Brand Personal Assistant +61 3 8634 2181 Australian Economics and Commodities Riki Polygenis Head of Australian Economics +(61 3) 8697 9534 James Glenn Senior Economist – Australia +(61 3) 9208 8129 Vyanne Lai Economist – Australia +(61 3) 8634 0198 Amy Li Economist – Australia +(61 3) 8634 1563 Phin Ziebell Economist – Agribusiness +(61 4) 75 940 662 Industry Analysis Dean Pearson Head of Industry Analysis +(61 3) 8634 2331 Robert De Iure Senior Economist – Industry Analysis +(61 3) 8634 4611 Brien McDonald Senior Economist – Industry Analysis +(61 3) 8634 3837 Karla Bulauan Economist – Industry Analysis +(61 3) 86414028

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