Surge in Qld youth employment over 2017

You have probably seen the media coverage of the strong jobs growth over 2017 for Australia. Queensland played a large part in this, with the highest employment growth rate among states and territories (4.6 percent through-the-year) and an increase in employed persons of 108,800. The monthly data for December, though, were a bit disappointing for Queensland, as covered by Pete Faulkner (Strong jobs numbers (again) but QLD disappoints (again)):

Unfortunately, despite a nation leading employment growth rate of 4.6% y/y, the picture in Queensland is less rosy. Employment rose just 3,600 in December which is the weakest growth since Nov 2016 and the Trend unemployment rate remains at 5.9% (after Nov was revised up from 5.8%).

The volatile seasonally-adjusted Queensland unemployment rate increased from 5.9 percent to 6.0 percent in December. Of course, as I’ve noted many times previously, we shouldn’t get too concerned or excited about month-to-month changes and we should consider movements in the data over longer periods.

Generally, I think recent labour market data are encouraging for Queensland, and I am especially encouraged by the surge in employment among young people aged 15 to 24 over 2017 (see chart below). With 431,000 young people employed in Queensland in December 2017, the level of employment was 42,500 people higher than in December 2016, with the increase split almost equally between full-time and part-time positions. I expect many of these additional jobs are in tourism and hospitality, and also in junior positions in health and aged care.

LF_Dec17_chart1

The strong employment growth over 2017 for young Queenslanders has resulted in a  decline in the youth unemployment rate (see chart below).

LF_Dec17_chart2

This is welcome news, as it has been difficult for young people to find employment, particularly full-time, in Queensland in recent years. I remain hopeful that the momentum in Queensland’s economy will continue through 2018, as discussed in my previous post:

Qld’s economic outlook for 2018

Also, see Queensland Treasury’s handy Labour Force brief summarising all the latest data. And note that, while Queensland had the highest employment growth rate, NSW created the most jobs in absolute terms, as noted by Pete Wargent: NSW jobs growth on steroids.

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Qld’s economic outlook for 2018

CCIQ’s Joseph Kelly has published a nice note titled Business 2018 examining the outlook for Queensland business in 2018, in which he suggests “2018 has all the elements to be the year for business.” Factors that will boost Queensland’s economy in 2018 include the Commonwealth Games in April and the resurgence in the resources sector. But energy costs will continue to weigh on businesses. Mr Kelly notes that overall “Queensland’s economy goes into 2018 with momentum”. My own view is that this momentum should continue through 2018. Queensland’s economic conditions will most likely remain “sound”, as the Queensland Treasury described them in the Mid Year Fiscal and Economic Review (MYFER) published in mid-December. Expect health, aged care and education to continue to perform well in 2018, as well as new mining and renewable energy investments to provide a boost in regional areas across Queensland (e.g. see this Townsville Bulletin report and this Queensland Government media release from last October).

Based on data published so far this year, such as the retail trade data for November, which were boosted by iPhone X sales but still show weaker growth in Queensland than for NSW and Victoria (see chart below), I wouldn’t yet adjust the MYFER forecasts Queensland Treasury made for Queensland economic growth: 2.75% in 2017-18 and 3% in 2018-19. Growth will continue to be respectable, but not extraordinary, so don’t get too excited about the Queensland economy just yet. The resources sector may be expanding its exports and boosting growth, but some other sectors (e.g. manufacturing, retail) remain lacklustre.

outlook_2018_chart1

The ABS job vacancies estimates for November released by the ABS on Wednesday showed a reasonable level of vacancies for Queensland, but I was disappointed the upward trend in vacancies has stopped and that vacancies have not continued to surge as in NSW and Victoria (see chart below and Pete Wargent’s post NSW jobs are absolutely booming).

outlook_2018_chart2

As such, the number of unemployed people per job vacancy has not fallen in Queensland by much over the last year compared with the falls in NSW and Victoria. In NSW, in November there were 2.2 unemployed people for every vacancy, compared with 3.9 unemployed people per vacancy in Queensland (Hat tip to Pete Wargent whose chart on the national unemployed to vacancies ratio prompted me to look at what has happened in Queensland).

outlook_2018_chart3

Unemployment is still a major issue in some regions, such as the Queensland outback and Wide Bay-Burnett (see chart below), but the labour markets in Townsville and Cairns especially have improved greatly over the last twelve months, as noted by Pete Faulkner in a recent post Regional Labour Force and Industry Jobs data (NB my chart below uses Queensland Treasury’s 12 month moving average estimates of regional unemployment rates, while Pete generates his own trend estimates using a seasonal adjustment routine).

Qld_Map

I would be more excited about Queensland’s economic outlook in 2018 were it not for the outlook for the building industry which is fair at best. Building approvals have settled down to more reasonable levels after the apartment construction boom of the last few years (chart below), and non-residential building approvals are suggesting only modest growth in non-residential building in 2018. Over the twelve months to November 2017, the value of non-residential building approvals was only 3.1 percent higher (in nominal dollar terms) than in the twelve months to November 2016.

outlook_2018_chart4

Upcoming events on the economic outlook

Finally, you may be interested in some events covering the economic outlook for Queensland and Australia in Brisbane in February:

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Holiday reading – Till Time’s Last Sand: A History of the Bank of England 1694-2013

Kynaston book cover

Over the Christmas and New Year break, I finishing reading Till Time’s Last Sand, British historian David Kynaston’s masterful history of the Bank of England, covering its first 320 years since its establishment in 1694, when incidentally it became the second central bank in the world, as Sweden’s was established over two decades earlier. Hat tip to Nicholas Gruen who tweeted on central banks recently: https://twitter.com/NGruen1/status/947352667512119296.

The book covers the bank’s origin as the banker to the British Government and its evolution into “a great engine of state”, as Adam Smith described it. During its long history, the bank has helped the British Government finance its budget in peace and wartime, and it also helped finance colonial development, including that of Queensland’s in the 19th century. The book tells the story of, among other pivotal events, the bank’s nationalisation in 1946, its experiments with monetarism in the 1970s and 1980s, its eventual independence to fight inflation on its on terms, and its controversial response to the financial crisis. It is a comprehensive history, with a wealth of fascinating information including, for example, the attempted shooting in 1903 of Bank Secretary Kenneth Grahame, who later wrote The Wind in the Willows.

The book contains a brief but interesting reference to Queensland. In the 19th century the Bank of England managed the Queensland Government’s borrowings from the London market, and in the late 1880s it became very concerned about Queensland’s rapidly growing public debt, which it was finding increasingly difficult to market. In 1888, the bank’s Governor Sir Mark Collett told the Queensland Government representative in London that he should advise the state government it needed to reduce its borrowing requirement. Certainly, Queensland’s public finances were in a parlous state at the time. In his biography of Sir Thomas McIlwraith, The Queensland Caesar, former Queensland Attorney-General Denver Beanland noted that, by 1890, Queensland had the highest public debt in the British Empire, at around £70 per capita, compared with Canada’s £12 per capita, for example.

The book contains many interesting stories about the bank’s employees, their day-to-day work, and how they came into the bank. For much of its history, the old boys network and family connections were relevant, and apparently proficiency in cricket was highly desirable. Kynaston is excellent when it comes to the human dimension, if not the economic dimension, which I’ll come to below. His description of the bank’s legendary governor of the first half of the twentieth century, Montagu Norman, is excellent. Norman is presented warts and all. With Norman, the facts speak for themselves. Norman’s extraordinarily poor judgment was demonstrated by his advocacy for Britain’s disastrous return to the gold standard in 1925, his unauthorised visit to Nazi Germany in early 1939, and the bank’s transfer of gold belonging to the Czechoslovak National Bank to the Reichsbank, after Nazi Germany’s invasion of Czechoslovakia in March 1939, just six months before the start of the war (see this BBC report).

As noted in a highly critical Guardian review of the book (Till Time’s Last Sand review – a bloodless history of the Bank of England), Kynaston tends not to include much of his own emotion or opinion in the book. This is most apparent in his discussion of recent bank history, and he could be accused of going soft on former Governor Mervyn King, who incidentally had requested the author to write the history. You may recall King was heavily criticised for the bank’s role prior to and in the early days of the financial crisis from many commentators, including a former member of the bank’s own Monetary Policy Committee David Blanchflower (see this BBC Report for example). The bank King led was accused of failing to understand the full magnitude of the risks to the financial system and the wider economy that started appearing in the second half of 2007. Kynaston notes the criticism that was made of King at the time, but his own opinion is unclear.

Perhaps Kyanston felt unqualified to offer opinions on economic issues, not being an economist. Robert Skidelsky made a similar comment in his review of Kynaston’s book. While I would have liked the book to discuss important contemporary issues in central banking, such as the debate over inflation versus nominal GDP targeting or the implications of cryptocurrencies such as Bitcoin, I can understand the author was not well placed to provide this commentary. Overall, this is an outstanding history of an incredibly important institution, and I can highly recommend it to readers interested in economics, banking or British history.

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Michael Knox on why the RBA won’t hike interest rates any time soon

In today’s Financial Review, economics correspondent Jacob Greber observed:

The RBA has gone more than seven years now without raising interest rates, the longest span since the official cash rate was introduced in the early 1990s.

Indeed, on Melbourne Cup day in 2010, the RBA Board surprised the market and decided to lift the bank’s cash rate target to 4.75 percent, but since then it has had to progressively cut the cash rate target, which is now at 1.5 percent. You can see how the cash rate target has changed over time at the RBA website.

According to one prominent Brisbane-based market economist, we may not see the wage and CPI inflation that would prompt the RBA to raise rates until at least the second half of 2019, when he projects the Australian unemployment rate will finally fall below its long-run natural rate of around 5 percent. Morgans Chief Economist Michael Knox has written an excellent note on Why the RBA won’t hike rates any time soon. He notes:

Why is it that the decline in Australian unemployment is so slow? One reason might be the high level of under-employment. The ABS tells us that when we include the number of people in part-time employment who want full-time jobs, then their estimate of underemployment in November 2017 rises to 8.3%. As employment grows, there is an additional source of supply of labour from this pool of under-employment. This acts to slow the decline in unemployment. It also acts to slow the increase in full time wages.

The national (seasonally adjusted) underemployment rate of 8.3 percent identified by Michael Knox adds to the unemployment rate of 5.4 percent to give a total labour underutilisation rate reported by the ABS of 13.7 percent. This underutilisation rate is significantly higher in Queensland at 14.5 percent (see charts below). Underutilisation of the labour force has been a persistent concern in Australia since the financial crisis, and it may indeed take some time yet for the economy to return to more normal rates of labour utilisation.

Underutilisation_charts_Nov17

 

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Critical Qld Gov’t debt metric still projected to worsen

Yesterday’s Mid Year Fiscal and Economic Review revealed Queensland Government debt forecasts marginally lower than they were at budget time in June, but total borrowings will still reach nearly $81 billion by mid-2021. As Steven Wardill notes in today’s Courier-Mail:

…the debt to revenue ratio – one of the Government’s key fiscal principles – is now deteriorating after being reined in through raids.

Yes, the critical debt-to-revenue ratios, both the Government’s preferred general government measure and the total (non-financial) public sector measure, which is what the ratings agencies really care about, are still forecast to worsen over the budget forward estimates to 2020-21 (see chart below).

borrowing_revenue_ratio_MYFER_17

It is the ratio of total borrowings to revenues (including borrowings and earnings by government-owned corporations) that is most relevant and should actually be targeted in the Government’s fiscal principles, rather than the general government measure. Ratings agencies are clever enough to figure out that governments can manipulate their general government borrowing-to-revenue ratio through shifting debt on to GOCs, as our state government has done previously. The Queensland Government needs to show the total borrowing-to-revenue ratio, which is forecast to reach 120 percent by mid-2021, is instead on a path back to around 100 percent or lower, if we are to regain our AAA credit rating.

Finally, Treasurer Trad has made some interesting comments to the Courier-Mail’s Steven Wardill about prospective future revenue write downs—up to $2.5 billion over four years—due to possible changes to the GST revenue distribution methodology and housing and education funding agreements with the Commonwealth. It’s worth picking up today’s Courier-Mail to read Wardill’s exclusive story Trad warns of $2.5bn budget carve up.

If the government were less ideologically committed to public ownership, I would interpret Trad’s comments as laying the groundwork for future asset sales or leases. Let us listen closely to Treasurer Trad’s future comments in this regard, because I wouldn’t be completely surprised if the Government eventually proposes some minor privatisations of what it could label “non-core” assets. The leasing out of Gladstone Port and Townsville Port (plus the rail line to Mt Isa) would be relatively uncontroversial with no regrets, in my view.

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Qld MYFER should factor in population growth pick up

Higher coal royalty revenue associated with higher coal prices will be the big story coming out of Queensland’s Mid Year Fiscal and Economic Review, to be released today, but there should be some other important variations to note. Population growth is one of the important parameters I expect the Queensland Treasury will have revised. At State Budget time in June, the Treasury forecast 1.5 percent population growth over 2017-18 and 2018-19, but 2016-17 data from the ABS suggest 1¾ percent is now probably a better forecast. The June 2017 ABS population estimates released last week revealed Queensland’s population growth rate has recovered slightly and is once again above that of the rest of Australia’s, and Queensland has regained third position in population growth rates among States and Territories, after Victoria in 1st place and ACT in 2nd (see charts below).

Pop_post_Jun17

Queensland’s current population growth rate is still relatively low in historical terms, but it is encouraging in that it suggests the state is rebounding from the post-mining investment boom slump better than previously expected. In the MYFER forecasts, higher population growth should be associated with slightly higher employment and economic growth. My colleague Nick Behrens observed last week that the pick up in net interstate migration, one of the contributors to higher population growth, is strongly related to Queensland’s much improved labour market over the last year and a half (Population flows towards employment opportunity).

The recovery in population growth has been due to a resurgence in both net interstate migration and overseas migration (see chart below). Net overseas migration (31,148) was the largest source of population growth for Queensland in 2016-17, just ahead of natural increase (31,006), and nearly 80 percent larger than net interstate migration (17,426).

Components_population_growth_Jun17

Net overseas migration should continue to exceed net interstate migration so long as Victorians continue to shun Queensland (see chart below).

NIM_by_State

As we have seen over the past year, the strong net overseas migration into Australia has prompted a debate on Australia’s immigration level, and I expect this to intensify over the next few years. While migration does expand the size of the economy, it also imposes costs, particularly for additional infrastructure. To illustrate, Queensland’s net overseas migration in 2016-17 of 31,148 was similar in magnitude to the current population of Gladstone (34,300, excl. Tannum Sands & Boyne Island), and exceeded the population of Maryborough (22,500) and many other Queensland regional centres.

The recent pick up in state population growth should prompt the Queensland Government to consider the sufficiency of current provisions for infrastructure investment over the forward estimates (currently in the 2-2.5 percent of GSP range, but this should shift slightly upward as election commitments are incorporated into the forward estimates in MYFER). We may not be at the high population growth rates we have seen in the past, but there is no reason for complacency. Historically, Queensland has had a poor record of planning for future population growth, and I remain concerned we will one day experience a re-run of the crisis-ridden 2000s.

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Des Houghton’s comments on Qld Government’s daily interest bill of $10 million

In an opinion piece published Monday, the Courier-Mail’s Des Houghton rightly highlighted the huge challenge new Queensland Treasurer Jackie Trad faces in reining in spending, particularly given the significant burden placed on the budget by the interest on general government debt:

With state debt forecast to top $81 billion in two years Queenslanders will be paying in excess of $10 million a day.

In fact, I’m told the daily interest rate bill may have already topped $10 million.

According to the latest Report on State Finances, in 2016-17, total Queensland Government interest expenses on borrowings were $3.637 billion. Note that this amount has fallen from its peak a few years ago as the Queensland Treasury Corporation has refinanced debt at lower interest rates (see chart below, noting the figures for 2017-18 and 2018-19 are Queensland Treasury forecasts). The total interest bill includes interest expenses by the general government sector and government-owned corporations. In daily terms, interest payments are indeed around $10 million. The daily interest bill would be even higher if the imputed interest on the government’s superannuation liability were added on. This was an estimated $510 million in 2016-17, and would bring the daily interest bill up to $11.4 million.

Interestpayments

On the distinction between general government and government-owned corporation debt, see my October post:

Comments on Qld State debt to the Courier-Mail

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