Qld economy surviving, but not thriving

In his latest column, Stormy times for an economy in the doldrums, Ross Gittins refers to Queensland’s “below-par” growth in State Final Demand, one of the statistics released by the ABS last Wednesday as part of the March quarter National Accounts. Certainly, the domestic drivers of growth in Queensland, such as consumption and investment expenditures, which are measured in State Final Demand, are growing well below average. My old friend and former Treasury colleague Joe Branigan, now Senior Associate at Cadence Economics, alerted me to this the other day, and provided the handy chart below, which shows just how below-par State Final Demand growth has been in Queensland.

SFD_chart_Mar17_JB

Joe observed:

  • State Final Demand growth is well below the long-run average (1.77% v 4.04%)
  • The only sectors that are materially beating the long-run average are:
    • Electricity, gas and other fuel; i.e. power bills (Year to March 2017 growth = 6.5%, long-run average = 3.2%)
    • Commonwealth public corporations; presumably the NBN (Year to March 2017 growth = 28.5%, long-run average = 1.0%)

I should note State Final Demand is the sum of the domestic sources of demand in a State economy. It does not include exports or subtract imports, and is hence not a true measure of State economic performance. The Queensland economy has been performing better than State Final Demand data have suggested recently, due to growing exports, particularly of LNG. But, even so, it is clear from the chart in my last post that GSP growth has been running at below its long-run average, too:

Upcoming Qld Treasury post-Budget briefing on Qld’s economic outlook

Queensland’s stellar export performance has helped our economy immensely, but given weaknesses in domestic drivers, arguably the economy has merely survived, rather than thrived.

Also see Pete Faulkner’s commentary on the latest National Accounts:

GDP slows (as expected) while QLD grinds to a halt

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Upcoming Qld Treasury post-Budget briefing on Qld’s economic outlook

Today is National Accounts day, one of those four glorious days each year on which we receive the latest quarterly GDP figures for the national economy, this time for the March quarter. Alas, based on the partial indicators such as construction activity and net exports, economists are expecting a pretty discouraging result today (e.g. see ABC News coverage). This will add to growing concerns about the outlook for the Australian economy over the next twelve months. Given our booming tourism sector and strong resources sector exports, Queensland’s economic outlook is much better than the rest of Australia’s at the moment, in my view. Certainly the last set of Queensland State Accounts data for December quarter 2016 had the Queensland economy overall now growing at a healthy rate and faster than the rest of Australia’s (see chart below).

Qld_v_ROA_Dec16

But will the Queensland economy continue to grow at a healthy rate over 2017-18? Someone well placed to offer a view is Greg Uptin, who is in charge of forecasting the State economy at Queensland Treasury, and who will be presenting to the Economic Society of Australia (Qld), of which I am the Secretary, on Wednesday 21 June:

2017 Post-Budget Briefing on the Economic Forecasts by Queensland Treasury

If you’re interested in the outlook for the Queensland economy, then I highly recommend you attend this lunchtime event, which is being held at ShineWing Australia at their Riparian Plaza offices on Eagle St, Brisbane.

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Qld Solar Bonus Scheme shows how bad government policy can cost taxpayers for a long time

The Queensland Government yesterday directed its electricity network business Energy Queensland to remove the cost of the Solar Bonus Scheme from its charges until 2020, which will reduce Energy Queensland’s earnings and hence adversely impact the State Budget (see the media release). So, for the next three years, the huge cost of the Solar Bonus Scheme, introduced in 2008, will now be paid for by taxpayers, rather than being cross-subsidised by other electricity consumers without solar. Average electricity bills will be lower than otherwise, but, of course, there is a large overlap between taxpayers and electricity consumers, so there is a large degree of smoke and mirrors here.

The Government’s decision is expected to adversely affect the State Budget and hence taxpayers by $770 million over three years, as reported in the Brisbane Times:

Government steps in to reverse decision on power price hike

While electricity bills will be lower than otherwise, the adverse budgetary impact means Queenslanders will need to endure higher taxes and charges, either now or in the future, than otherwise.

The Solar Bonus Scheme’s overly generous 44 cent/kWh feed-in tariff, available to households which installed solar PV cells before July 2012, will last until 2028. This is much longer than households will have needed to recoup their investment in solar PV cells, delivering a “financial windfall” to many households, as the Queensland Productivity Commission found last year (as reported by Mark Ludlow in the AFR in February 2016).

Unfortunately, the Queensland Government rejected the QPC’s recommendation to abolish the Solar Bonus Scheme. This was disappointing. It is a highly inequitable policy adversely affecting lower-income households. Even though its impact has now been removed from electricity bills, meaning average annual regional electricity bills will go up only by $50 rather than $100, households without solar will still end up paying somehow, through higher taxes and charges, now or in the future, than otherwise, as noted earlier. The Bligh Government’s Solar Bonus Scheme, introduced nine years ago in 2008, is just another example of how poor policy decisions can have long-lasting adverse impacts.

Hat tip to Joe Branigan who alerted me to this announcement and prodded me to comment.

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Better policies would help Qld win the Economic State of Origin

At times during the last mining boom, Queensland was winning the economic State of Origin against NSW, with higher employment growth, a lower unemployment rate and a higher gross state product (GSP) per capita. But those glorious days are behind us, and we have started to fall behind NSW again in recent years (see charts below). While Queensland’s recent pick up in employment growth is encouraging, there are concerns regarding how sustainable it is, particularly given the large contribution of public service jobs to the recorded increase. To win the Economic State of Origin, I would recommend policies designed to reduce costs to business and to reduce constraints on their operations, e.g. by cutting payroll tax or deregulating retail trading hours. I would also consider, as NSW has done, privatisation of state assets, and using part of the proceeds to fund new infrastructure—so-called “asset recycling.”

ESOG_chart1ESOG_chart2ESOG_chart3

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Impressive list of speakers at IAQ Qld Infrastructure Summit on 29 August

I am honoured to be a presenter at IAQ’s upcoming Queensland Infrastructure Summit on 29 August in Brisbane, alongside our Deputy Premier Jackie Trad, Treasurer Curtis Pitt, Deputy Opposition Leader Deb Frecklington, and other luminaries including my old UQ economics classmate Damian Gould, CEO of Building Queensland (see speaker list snipped from website below). This is a must attend event for anyone involved in the planning, design or construction of infrastructure in Queensland. My presentation will explore the pros and cons of state development or infrastructure banks.

IAQ_Summit_speakers

The summit is well timed in the lead up to the next State election, and I expect the Deputy Premier and Treasurer will be promoting their plan for Cross River Rail, which I expect a major announcement on soon, either at Budget time (13 June) or not long after. Cross River Rail is a must-deliver project for the Government, so it can rebut the Opposition’s claim it is a do-nothing government, so expect the Government to do whatever it can to make it happen. If there is no action on Cross River Rail, the Deputy Opposition Leader Deb Frecklington will get a free kick at the Government at the Summit. I have previously posted on the Government’s options regarding Cross River Rail:

Cross River Rail Budget snub unsurprising given weak business case – will QIC now step in?

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More details needed, but royalties deal better than the one before Trad’s intervention

We still have scant details on the new Adani mega mine royalties deal, particularly the exact royalty rates and the deferral terms (interest rate and collateral/financial security required), but at least it appears the Government has pulled back from its original overly-generous royalty holiday. The Courier-Mail reports:

It is understood the deal involves a royalty escalation – paying smaller amounts at the start and the full rate and interest as production increases. The deal is expected to include a substantial reduction to the royalty rate in the first five years, but payments would then revert to the full rate from the sixth year.

Interest on any deferred royalties would also be paid from the sixth year onwards.

Adani will be required to provide a financial security to the State Government to ensure the company can get the reduced rate in the first five years of production.

Over the last week, Deputy Premier Jackie Trad has received a lot of criticism for kyboshing the original royalties deal proposed by the Treasury to Adani, but I think she deserves credit for taking what should have been the standard Treasury line against tax concessions (most eloquently put by Nick Behrens in his post earlier this week), even if her motivation was primarily political. Her intervention has likely resulted in a better outcome for Queenslanders, and for that we should be thankful.

I hope the project now proceeds, so that Queenslanders can benefit from the royalties income and from the jobs and economic opportunities provided by the mine. I should note, however, that many observers are skeptical about whether the mine will proceed or ever pay the State Government a reasonable amount of royalties. UQ Professor John Quiggin thinks Adani has been going through the motions, doing the minimum to keep the project going, so it can delay a huge write off and to strengthen its case for compensation, and it has not intended to proceed with the mine for a while now:

My guess is that, before anything of substance happens in the Galilee Basin, Adani will be back with more demands (maybe a Danzig corridor). Sooner or later, they’ll make an offer that can be refused, at which point they’ll pull up stumps and send in the lawyers asking for compensation. (from John’s post More Adani Asterisks)

And, at MacroBusiness (QLD fights a losing battle with Adani), Houses and Holes is skeptical about whether the Queensland Government will receive any significant royalties if they are deferred:

Given thermal coal remains in a huge global gut that will get worse not better, if it were to go ahead Adani won’t be paying anything back. It’ll get another holiday later.

It has been an extraordinary week in Queensland politics and business, and any rational observer would significantly write down their estimates of the probability the mega mine will actually proceed and the net benefits to Queensland it would provide. I await further details of the new royalties plan.

Finally, I should note there are a lot of different figures being quoted regarding the jobs impact of the mega mine. Apparently the project will result in up to 5,000 jobs while under construction and over 4,500 jobs when operating at peak capacity. However, regarding the ultimate impact on the economy, we need to take into account crowding out effects, given much of the labour would be sourced from alternative employment. Only a fraction of the jobs (directly and indirectly created) would go to otherwise unemployed people. ACIL Allen’s Carmichael Coal and Rail Project Economic Assessment, prepared for McCullough Robertson acting on behalf of Adani, found that the project would result in around 1,500 additional jobs relative to the baseline (see pp. 15-16 of the report). This is not insignificant, but not as substantial as some figures (e.g. 10,000 jobs) I have heard quoted recently.

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Nervous times for construction industry with downswing underway

Last week I forecast a continuing downswing in construction activity (Trouble in Qld construction industry & worse may be to come) and the March quarter construction data released by the ABS on Wednesday have confirmed this (see chart below), as well as a national downswing, as reported by ABC News:

Construction data hints at GDP slowdown: ABS

Building_Mar17_Chart1

So expectations of national economic growth in the March quarter have been cut significantly, and the downswing in Queensland should prompt Queensland Treasury to consider its own economic forecasts leading into the Budget. While I still expect the Queensland economy to grow over the rest of 2017, due to strong tourism, international education and export sectors, the construction downswing will certainly lower the growth rate.

On the same day the new construction data were released, we learned that another Brisbane builder has failed in tough market conditions:

Brisbane builder AKS Homes calls in administrators

In Queensland, the downswing in the building construction sector was offset partially by what may be the start of a recovery in engineering construction (see chart below).

Building_Mar17_Chart2

As one of my regular readers Glen noted in a comment last week, this suggests it may not be a good time to introduce the new Project Bank Accounts (see this media release) which are of great concern to industry peak bodies. Glen commented:

…what is of most concern is the proposed sub-contractor legislation. Whilst the legislation is required its timing couldn’t be worse, the industry just isn’t prepared. Many currently don’t have the cash flow to be able to comply with the new laws and rely on revolving credit to contractors and suppliers to survive. Many suppliers to the industry that I talk to have already acknowledged they will be last on the list now as sub-contractors will be paid before suppliers. Accordingly many suppliers have begun to enforce their credit conditions more rigorously. It is all starting to point to a nasty conclusion.

An ominous forecast from an informed source. I will continue to keep a close watch on the industry.

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