South Australia's Economic Flexibility to be Tested

Thursday, 29 April 2004

The South Australian Centre for Economic Studies has warned that South Australian businesses should expect the overall growth rate of local spending to weaken during the year ahead.

Hence, if business activity is to remain buoyant and employment growth to be maintained, South Australian businesses will have to work harder on selling exports, and on winning back market share from imports, suggests the Centre.

The warning is contained in the Centre's latest Economic Briefing Report, which is being released today and which provides a regular update on the state of the Australian and South Australian economies.

Speaking on the release of the Report, Associate Professor Owen Covick, a Research Associate of the Centre (a jointly owned research and advisory body of Adelaide and Flinders Universities), observed that "... now that the drought is behind us and the world economy is showing stronger growth the Australian dollar has returned to a level closer to its average over the period since the currency was floated in 1983".

"Despite this appreciation of the $A, the strengthening world economic recovery suggests that there will be opportunities for South Australian businesses to grow their exports over the next twelve months."

"The ending of the drought and the gradual dissipation of its effects will also be positive for increased exports over the next twelve months", said Associate Professor Covick.

"The positive aspect of the appreciation of the Australian dollar is that it has been good news for Australian consumers, who have benefited from the lower prices of imported goods."

"The surge in imports over the past twelve months, however, detracted from the extent to which the very strong spending growth of Australian households of the past year fed through into growth in Australian production", noted Associate Professor Covick.

"Importantly, there is also a favourable aspect of the higher Australian dollar for local producers, in that it has meant that they can import new up-to-date capital equipment at better prices."

"Hence, the challenge for local producers in the year ahead is to show flexibility in the market sectors they target and to pursue further productivity gains, so that they increase exports and win back market share from imports."

"Local businesses cannot expect sustained strong growth in domestic demand to continue to underwrite their on-going prosperity. Indeed, there are two main reasons for expecting domestic demand to weaken over the year ahead", said Associate Professor Covick.

"First, a fall in residential building activity is likely to be evident within the next twelve months, since new home construction during the past couple of years has been well above underlying demand for new homes and such a situation is not sustainable over any extended period of time", said Associate Professor Owen Covick.

"Second, and perhaps more significantly, it is also likely that there will be slower growth in spending by households in this period."

"The strong growth in household spending over the past couple of years has been the main factor behind the strength of the South Australian economy through this period", noted Associate Professor Covick. "But this higher expenditure has been financed in large part by record levels of borrowing, to the extent that in aggregate households are likely to be close to debt saturation. If so, that would mean that the household sector will not be able to continue to borrow to the extent that it has been and, as a consequence, growth in household spending will slow."

In line with these predictions, the report notes that in recent months there has been a downturn in new dwelling approvals in South Australia and early signs of an easing in retail sales growth. The number of new dwellings approved for construction in the three months to February was 7.6 per cent less than in the previous three months, while retail sales fell 0.6 per cent in February, the first decline since the middle of 2003 when the negative impacts of the drought caused a temporary slowing in what had previously been a very strong rate of growth in consumer spending.

"The real danger to the outlook, however," cautioned Associate Professor Covick "is if interest rates were to increase significantly in coming months or if house prices were to fall back substantially across the board. Either event would likely put the finances of many households under severe pressures, leading to an even more dramatic downturn in household spending than currently predicted."

"Thankfully, in our view, the probability of either occurring is quite low. Although, this is not to say that there will not be a further rise in interest rates before the end of the current cycle, or that there will not be falls in house prices. To the contrary, we believe that there will be some decline in house prices within the next twelve months, because of growing supply-demand imbalances. But we are hopeful that the more dramatic declines in prices will be restricted to a relatively small number of markets, such as the inner city apartment markets of Sydney and Melbourne, where downwards pressures on prices are already evident."

"The decline in house prices in other markets is likely to be more modest and more gradual", suggested Associate Professor Covick.

"Overall, we expect growth in South Australia's Gross Domestic Product will slow from around a forecast 3.5 per cent this year, to around 2.0 per cent in 2004-05", said Associate Professor Covick.

Report Presentation
The formal release of the April 2004 Economic Briefing Report will be at a Luncheon for Corporate Members of the SA Centre for Economic Studies, from 12.10 pm on Thursday 29th April, at the Radisson Playford Hotel, North Terrace. Associate Professor Owen Covick will provide an overview of the report to Corporate Members from around 12.10pm. Representatives of the media are invited to attend this presentation. Associate Professor Covick will be available for questions from the media immediately following the presentation (approx 12.40 pm). Copies of the report will also be available.

Guest Speaker - Mr Gary Banks, Chairman, Productivity Commission
In addition to the above presentation, the luncheon will also feature a presentation by Mr Gary Banks, Chairman of the Productivity Commission. Again, members of the media are welcomed to sit in on this presentation.


Contact Details

Associate Professor Owen Covick
Flinders University
Business: +61 8 8201 2476

Mr Kevin Kirchner
Flinders University
Editor of the report
Business: +61 8 8201 2473
Mobile: 0410 347 615

South Australian Centre for Economic Studies
Business: +61 8 8313 5555

Media Team
The University of Adelaide
Business: +61 8 8313 0814

Mr David Ellis
Deputy Director, Media and Corporate Relations
External Relations
The University of Adelaide
Business: +61 8 8313 5414
Mobile: +61 (0)421 612 762