State Update: Tasmania – September 2015 NAB Group Economics

more give, less take

Photo: Mai Thai

Content Key points 2

In Focus: Domestic tourism 3

Consumer and household sector 4

Business sector 5

Labour market 6

Demographics 7

Residential property 8

Economic structure 9

Fiscal outlook 10

Semi government bonds and credit outlook 11

2

Key points • The Tasmanian economic outlook has improved over the last year, thanks in

large part to a strong pick-up in business investment and domestic tourism renaissance. Public investment and net exports were the biggest detractors to growth, reflecting lower scheduled public spending and export volume of copper ore exports. The latter has been trending down due to the closure of a major mine and softer global demand for zinc and aluminium commodities.

• This trend is set to continue as the AUD falls, making domestic holidays more attractive for Australians. Meanwhile, a falling unemployment rate alongside a rising participation rate suggest that the fundamentals in the Tasmanian labour market are improving. This is further supported by a slowing rate of interstate migration which point to a stabilising labour force. Stronger activity in dwelling construction is also expected to contribute positively to growth. Nevertheless, growth remains below the national average. We forecast that GSP will grow 2¼% in 2015-16 and 2.0 % in 2016-17 (Chart 1).

• Tasmania’s annual GSP growth has mostly been below the national average since

the early 1990s, with the gap widening substantially in the post-GFC era (chart 2). A sustained structural decline in manufacturing sector, one of its traditional pillars, was further undermined by a strong AUD during the period, which weighed on its other main sectors of tourism and primary exports. Population growth has also been slow. These factors continue to weigh on the state’s output share in Australian production, which has gradually eroded over time.

• The timber industry continues to contract, generating a smaller exportable volume of woodchips. We expect native forest logging to remain under pressure as major purchasers shift to domestic plantations and offshore timber sources.

Chart 1: State GSP Growth Forecasts

Chart 2: State Final Demand and GSP Growth *(%) *Nab *NAB Estimate Source: ABS and NAB Group Economics

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101520

1989 1993 1997 2001 2005 2009 2013

TAS Australia

State Final Demand Growth

Gross State Product Growth*

% %

Contact Phin Ziebell, Economist Riki Polygenis, Head of Australian Economics Skye Masters, Head of Interest Rate Strategy

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NSW VIC QLD SA WA TAS NT ACT2013-14 2014-15 (e) 2015-16 (f) 2016-17 (f)

3 3

In Focus: Domestic tourism

Chart 3: Tasmanian interstate visitor numbers by state of origin

• Tasmania is enjoying a domestic tourism revival, with strong growth in visitor numbers. Total domestic visitor numbers were up 4.1% in the year ended March 2015 as strong growth from South Australia and Queensland pushed up total visitors (chart 3). Visitors are increasingly attracted by new destinations within Tasmania, such as MONA. Tourism Tasmania reports that 28% of visitors to Tasmania visited MONA last year, an increase of 3% on the previous year.

Chart 4: Tasmanian visitor spending by visitor type ($ million)

• Total visitor spending continues to outpace growth in the number of visitors (chart 4). Total spending was up 12% to $1.88 billion in the year ended March 2015. The strongest spending growth is holidays – up 20% to $1.26 billion. With the AUD set to fall further, Australians are more likely to take domestic holidays. Tasmania is well placed to capitalise on this trend, although the reliance on Victoria (over 40% of interstate visitors) exposes the state to any Victorian economic headwinds.

Source: Tasmanian Visitor Statistics database, Tourism Tasmania. *VFR: Visiting friends and relatives

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Consumers remain cautious on spending

Chart 5: Average Compensation of Employees and Household Consumption Growth ( y/y%) Source: ABS, NAB Group Economics

• A moderation in the unemployment rate corresponded with a notable household spending-driven improvement in economic activity, partly reflected in the robust growth in retail sales in late 2013 and early 2014 (charts 5 and 6). That said, wages growth remains anaemic (chart 5), although the slowdown appears to have stabilised and is expected to improve as employment growth picks up from a tentative recovery in the housing construction and tourism sectors.

Chart 7: Retail Turnover and House Price Growth (y/y%) Source: ABS, NAB Group Economics

Chart 6: NAB Consumer Anxiety Survey - Consumer Spending Preferences

• Consumer behaviour in Tasmania remains cautious. Similar to other states, survey respondents are more inclined towards spending on essential goods and services such as groceries, transport and utilities, while demonstrating more prudent intentions in longer-term financial management strategies to focus on savings, super and investment, as well as paying down debt (chart 6).

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Major HH itemsEntertainment

Use of credit

Eating out

Charitable donations

Personal goods

ChildrenHome improvementsSavings, super,

investments

Groceries

Paying off debt

Transport

Utilities

Travel

Medical expenses

Q2'15 Q3'15

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2005 2007 2009 2011 2013 2015

Hobart House Price Growth (y/y%) - RHS

Retail Turnover Growth (y/y%) - LHS

5 5

Business Sector and commercial property showing signs of life, despite structural changes

Chart 8: Non-residential Building Approvals ($ million) Source: ABS, NAB Group Economics

• Tasmania’s business sector has been under pressure in recent years due to a structural decline in the manufacturing sector, one of its traditional pillars, and was further undermined by a strong AUD, which weighed on its other main sectors of tourism and primary exports. A lower AUD since 2014 may not reverse the structural decline in manufacturing but should improve the tourism sector. Non-residential building approvals, while volatile, show a notable uptick in offies and other building (chart 8).

Chart 9: Value of monthly woodchip and timber exports ($ million)

• The timber industry continues to contract, generating a smaller exportable volume of woodchips (chart 9). The value of Tasmanian timber exports has steadily declined over the last several years, particularly for woodchips, for which purchasers have become increasingly concerned about environmental impacts. We expect native forest logging to remain under pressure as major purchasers shift to domestic plantations and offshore timber sources.

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Employment recovering in most sectors

Chart 10: Unemployment Rate by Region, %

Source: ABS, NAB Group Economics

• Slower economic growth saw the Tasmanian unemployment rate rise steadily in the aftermath of the GFC from 2008 to 2013 despite weak population growth over the period. It started trending downwards from its peak of 8.7% in June 2013 to be currently around 6.4% (Chart 10).

Chart 11: Change in employment by industry, last 12 months to Jun 2015, Tas, '000

• Over the 12 months to the June quarter 2015, hospitality, business services, health, education and finance saw the biggest employment gains. Retail suffered the largest number of job losses, despite stronger consumer spending, while employment in construction, mining and manufacturing also declined (Chart 11). Looking over the last three years, the biggest job losses have been in agriculture, utilities, manufacturing, finance, construction, retail services, wholesale and transport.

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Hospitality

Business services

Health

Education

Finance

Other services

Arts

Wholesale trade

Public admin

Communications

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Agriculture

Admin services

Utilities

Transport

Manufacturing

Mining

Construction

Retail trade

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Tasmania Greater Hobart Rest of TAS

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Population growth remains below the national average

Chart 12: Tasmania Population Growth Drivers (000s, over the year) Source: ABS, NAB Group Economics

• Weak GSP growth over the post-GFC period (except for 2013-14) saw a reversal in the tide of interstate migration from net positive to negative, with the net outflow of Tasmanian residents to other states peaking in September 2012 at around 2,800 people in the quarter. This has since moderated, while net overseas arrivals remains at a relatively stable level, resulting in a net positive migration flow (chart 12).

Chart 13: Tasmania Population Growth (Year-ended Growth)

• Similar to the trends in output, Tasmania’s share of the Australian population is falling over time. Its population is also older than the national average, with a notably smaller proportion of the population aged 20 to 40. Not only is the Tasmanian resident population ageing, the population is growing at a significantly slower rate than the national average (chart 13).

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1982 1987 1992 1997 2002 2007 2012

'000s

Natural increase

Net overseasmigrationNet interstatemigrationTotal populationgrowth

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Residential approvals improving

Chart 14: Tasmania Residential Approvals & Commencements Source: ABS, RP-Data, NAB Group Economics

• Unlike the mainland capital cities, Hobart house prices have been largely stagnant to mildly downward trending since 2008, with the median hedonic prices in Hobart now around half of the weighted average of all capital city prices. Continuous growth in housing supply over most of the 2000s combined with low population growth drove the dwelling to population ratio higher over time, limiting house price growth (chart 16).

Chart 15: Building Approvals relative to population (LRA = 100)

• A further pick-up in housing approvals since 2013 is expected to also be associated with looser supply fundamentals and thus expected to keep a lid on upward house price mobility in the near to medium term (chart 14). Tasmania is also noteworthy for the relatively low level of unit approvals compared to the rest of Australia (chart 15).

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Chart 16: Price growth by region (% change from previous qtr)

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Houses

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Approvals Commencements

9

Economic structure & trade

Chart 22 : Composition of employment & GVA, 2013-14 Source: ABS and NAB Group Economics

• Tasmania is an island state located south of the Australian mainland. It is Australia’s smallest state, having a population of just over 500,000. This combination of remoteness and low population presents a number of economic challenges. Health is the biggest employer, followed by retail, education, hospitality and public administration. This reflects Tasmania’s reliance on government services delivery employment and tourism. Manufacturing and construction are also major employers (chart 22).

• Tasmania’s external trade is focussed on East Asia and ASEAN countries are the biggest source of exports and imports, followed by China. The top six countries for Tasmanian exports are all located in East and South East Asia (chart 23).

Chart 23: Top Tasmania export destinations and import source countries, 12 months to July 2015

9 0% 2% 4% 6% 8% 10% 12% 14% 16%

Agriculture

Mining

Manufacturing

Utilities

Construction

Wholesale trade

Retail trade

Hospitality

Transport

Communications

Finance

Rental services

Business services

Admin services

Public admin

Education

Health

Arts

Other services

Employment

GVA

Value of exports ($m)

1 ASEAN 714

2 China 485

3 Taiwan 335

4 Japan 213

5 US 185

6 HK 151

7 Korea 126

8 New Zealand 93

9 India 75

10 Singapore 60

11 EU 58

12 UK 613 Germany 2

Value of imports ($m)

1 ASEAN 184

2 China 132

3 Singapore 126

4 EU 88

5 Korea 85

6 US 49

7 Germany 23

8 New Zealand 22

9 Japan 16

10 Taiwan 13

11 UK 9

12 HK 0

10 10

Fiscal outlook: return to surplus forecast but reliance on Commonwealth transfers remains

Chart 17: Net operating balance – Tasmanian general government sector ($ million) Source: Department Treasury and Finance, Tasmania; NAB Group Economics

• The Tasmanian government has consistently run budget deficits for several years, a result forecast to be repeated in 2015-16, with Tasmanian Treasury forecasting a net operating result of -$58.5 million for the year. However, Treasury forecasts a return to surplus in 2016-17 on lower expenditure, and predicts growing surpluses for the remainder of the forward estimates (chart 17).

Chart 18: Composition of state revenues 2015-16

• Tasmania is highly dependent on transfers from the Commonwealth. 42% of Tasmanian government revenue comes from GST allocations (compared to less than a quarter for Victoria) and a further 23% of revenue is from other grants from the Commonwealth (chart 18). Own source taxation revenue constitutes less than 20% of total revenue. This leaves Tasmania vulnerable to changes to the GST distribution and lower indexation of Commonwealth tied grants.

Taxation 19%

GST 42%

Other Grants 23%

Sales of Goods and

Services 7%

Other 9%

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Debt position improving; achieving low expense growth may be challenging

Chart 19: Tasmania Non-Financial Public Sector net debt

NFPS net debt is expected to remain steady. The focus is to continue to work on improving the financial position of the state and managing risks such as superannuation liabilities. The Government continues to meet the cash cost of defined benefit scheme (chart 19).

Chart 21: Tascorp bonds outstanding Source: Tascorp, Tasmanian Budget Papers, NAB

Tascorp has said that its borrowing programme for 2015-16 will total between AUD500-700m (chart 21).

Chart 20: S&P credit metric: Operating balance as % of revenues

Following the 2015-16 Budget S&P affirmed the state’s AA+ rating with stable outlook. The budget forecasts stronger performance than previously predicted but S&P believes it will be challenging to maintain wage and nonwage expense growth at a low rate (chart 20).

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