Westpac Senior Economist, Elliot Clarke, returned to the Drinks Association’s Network Breakfast at the Kirribilli Club in Sydney this morning. Clarke last presented to the drinks industry in 2019 when he explored Australia’s service exports, such as tourism, education and business, as our nation’s best opportunity for economic growth.
At the time, consumer discretionary spending was down and Clarke predicted that “people are likely to consume alcohol with friends and family at home, rather than at bars and restaurants”. He could not have realised just how on the money he was.
As much as the Australian economy has steadied after its contraction of 7 percentage points in the March quarter of last year, the GDP still sits around 1.5 per cent beneath where it would be if we had not been stopped in our tracks by COVID.
For the next two years, there remains much to be done. Clarke said that public and private investment, iron ore exports to China and the support of central banks are key to continued and steady economic growth.
During lockdown, household savings increased with spending concentrated in goods consumption and huge growth in e-commerce. Expectations are that consumption will shift to service industries which are re-opening at pace as well as real estate purchases. If new housing is unaffordable, consumers will continue to turn to home renovation with builders and tradies currently enjoying a boom period.
Parallels can also be seen in Europe and the United States where there has now been a "bounce in consumption and household spending" and governments endeavour to keep wealth and investments within home borders.
Like Australia, the US government is investing in businesses to build jobs and stimulate household spending. The US still needs to find jobs for the 8 million people who are out of work since the pandemic.
Australia is in a far better position than this with low levels of debt and unemployment expected to continue to decline over the next twelve months. It has already returned to pre-pandemic levels.
Clarke predicts that ongoing public investment by state governments in infrastructure such as roads, rail and trams will continue to improve the local economy and said that consumer sentiment remains positive. Increased business investment will be needed for further economic growth but Clarke does not forecast this happening in today's climate of uncertainty. This is likely to come into play in the next 12-18 months.
Central banks continue to be supportive. He said, “The RBA is unmoved by the global surge in inflation and inflation expectations; it is instead remaining focused on encouraging job creation in pursuit of ‘full employment’. We expect their extraordinary monetary support to persist till late-2022.”
For Australia, trade with China remains strong with iron ore at “$208 a tonne is a never before seen”. Clarke expects that demand will remain strong, even while the price may waiver, and that there are opportunities for copper and lithium, although not to the same demand nor volumes of iron ore quite yet.
Clarke said that Australia’s geopolitical tensions with China will not be remedied without dialogue and that China’s tariffs are retaliation for the way Australia has treated its brand champions, such as Huawei. The falling away of Australian wine and barley from China does not have a huge impact on China’s GDP and is in fact beneficial for the China’s drive for consumption of domestic goods.
Of the tariffs, Clarke said, “They have picked particular areas of our economy which mean a lot to us, in terms of our national identity and politically, but in terms of GDP don’t actually mean that much. Even while you get significant hits to the industry…you still have iron ore running at a very high pace.”
Wages growth will stay flat and as life’s essentials and housing affordability continues to grow, consumers are likely to feel the financial pressure in the next 18-24 months. He suggests businesses can address this issue by upskilling to improve wage outcomes.
He said that Australia needs to create conditions for positive population growth such as opening borders to international and students and international tourism to advance the economy. While regional areas are performing well, big city tourism and the conference markets are currently non-existent.
Australia has lost traction with the falling away of international students and with the borders opening in the UK and Canada due to a faster vaccine rollout, Clarke remains uncertain of whether the opportunity for international student education will return. The opportunity for recovery is likely to be hindered not only due to the locked borders but also with predictions that the Australian dollar will reach USD$0.85 cents by 2022, making for a far more expensive education experience.
A stagnation in population growth is also a concern for continued economic growth and while expats returning has been high, this should flatten out now. This will have the greatest impact in Sydney and Melbourne with population growth in regional areas continuing to rise as people seek more affordable lifestyles.
There was a hum in the room this morning, even at such an early hour, with 130 industry people glad to be back at an in-person event. Chair of the Drinks Association, Ralph Dunning acknowledged how fortunate we were to be there, sparing a thought for our colleagues, families and friends in Victoria enduring what is now their fourth lockdown.