Centre Warns of Delicate Balancing Act Ahead

Thursday, 13 November 2003

The South Australian Centre for Economic Studies today released its latest report on the state of the South Australian economy.

The report finds that the economy has performed strongly over the past twelve months on all fronts except exports. The report warns, however, that outcomes for the South Australian economy over the next twelve months are currently finely balanced.

"The strong performance of the South Australian economy over the past twelve months has confirmed it has well and truly emerged from the shadows of the challenges that it faced through the 1980s and early 1990s", said Associate Professor Owen Covick in officially releasing the report.

"Through the 1980s and 1990s the South Australian economy faced major challenges in the form of significant structural and financial adjustments. These challenges were the result not only of the financial disasters of the early 1990s, such as the collapse of State Bank, but also reflected the need to create a more internationally competitive economy in order to promote growth of living standards."

The report states:

"... business investment has been strong for several years now and this is indicative of confident views about South Australia's ongoing competitiveness as an investment location. This evidence supports the conclusion that South Australia faces a more favourable medium to long-term outlook than it did during the difficult adjustments of the 1980s and early 1990s ..."

The report also notes that unemployment in South Australia has fallen to its lowest level in almost three decades, business investment has surged over the past twelve months, household spending remains strong, consumer and business confidence is very buoyant, and household wealth has grown markedly as house prices have soared.

"All of these factors point to an underlying strength to the South Australian economy that was not present for much of the 1990s", said Associate Professor Owen Covick.

"Nevertheless, despite all this good news, the immediate outlook for the South Australian economy remains delicately balanced", he went on to warn.

He suggests that the next twelve months could be a period of continued strong growth, but that it could also be a period in which we see the beginnings of a significant slowdown.

"The Reserve Bank of Australia has cautiously started to raise interest rates, in the belief that there is a need to offset to some degree the further stimulus to household spending expected to come from a recovery in Australian exports in 2004. The fear of the Reserve Bank is that the additional boost provided by higher export income to already strong domestic demand could lead to a significant increase in inflation pressures.

"But there are a lot of uncertainties in this equation", warns Associate Professor Owen Covick.

"First, the fact that household debt in Australia is already at record levels poses a significant risk to continued growth in household spending in any event. Household spending is likely to slow in 2004 even without further increases in interest rates", suggested Associate Professor Owen Covick. see Figure 4.4

"Second, the household sector, because of its record debt levels, is now much more sensitive to increases in interest rates than in the past. This suggests that the Reserve Bank needs to exercise even greater caution than normal in tightening monetary policy. At the current time it may well not take much of an increase in interest rates to put household finances under considerable stress."

"Third, there is the issue of whether the residential property bubble might burst. Were it to do so, the consequences for households and, in turn, the economy as a whole, may be substantial."

"Fourth, there remains considerable doubt about the degree to which Australian exports will recover in 2004. Better seasonal conditions will certainly improve rural exports, but the Reserve Bank's recent action to increase interest rates was also based on an expectation of the world economy continuing to strengthen in 2004, leading to an increase in demand for Australian exports. However, in our view, there remains considerable uncertainty over the future path of the world economy and it is for this reason that we would be very surprised if the Reserve Bank were to again move on interest rates before the end of 2003", said Associate Professor Owen Covick.

"It seems to us to be more likely that the Reserve Bank will delay any further tightening of monetary policy until a sufficient amount of additional information is available for it to be able to better assess the pace of recovery of the world economy. This may not be until February next year."

Selected Data

Final demand - up 6.5% in real terms in South Australia over the year to June 2003; compared to 5.0% growth for Australia as a whole.

Employment Growth - 12 months to October 2003

2.2% for South Australia
2.6% for Australia as a whole

Unemployment rate - as at October 2003 (seasonally adjusted)

South Australia 6.1%
Australia 5.6%

Residential building approvals
Change in value of new residential building approved in the 12 months to September 2003 compared to that approved in the previous 12 months:

For South Australia : up 17.8%
For Australia: up 13.9%

Total new capital expenditure (i.e. business investment)
Change in real terms in value of total new capital expenditure in the 12 months to June 2003 compared to that in the previous 12 months:

In South Australia: up 33.5%
Across Australia as a whole: up 18.8%

Figure 4.4
Total Household Financial Liabilities as a Proportion of Household Disposable Income(a)
Australia



Source: ABS, Financial Accounts (5232.0) and AusStats, National Accounts.

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