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7.1
ECONOMIC CONDITIONS
Overview
Economic growth in the ACT as measured by State Final Demand (SFD) is forecast to
moderate in 2010-11.
Economic circumstances have changed since the time of the 2009-10 Budget. The extent of
the economic slowdown both nationally and locally was not as severe as envisaged at that
time. This was in part due to the fiscal stimulus measures of the Commonwealth Government
to support the economy and local initiatives by the ACT Government.
The forecast for SFD in 2009-10 has improved considerably to 3¾ per cent compared to the
original budget forecast of 2 per cent. The forecast for Gross State Product (GSP) for
2009-10 now is growth of 1 per cent, compared to the budget forecast of ½ per cent.
While the outlook for activity remains uncertain, the global and national economic recoveries
have been earlier than previously expected. The ACT economy is expected to benefit from
the improved economic outlook that has contributed to a recovery in household wealth, as
well as in consumer and business confidence. Combined with solid population growth in the
ACT, this will help to sustain the economy’s growth.
Commonwealth Government consumption expenditure plays a key role in the Territory’s
economic performance. In 2010-11, as the Commonwealth starts to restore its budget
position, moderation in SFD growth is expected. This effect will be partly offset by
strengthening private demand in the ACT, but not enough to lift economic growth close to its
long-run average level.
The Outlook for the ACT Economy
The prospects for the ACT economy in 2010-11 are positive, but uncertainties remain around
the extent of fiscal consolidation by the Commonwealth Government and the associated
impact on the ACT.
Economic growth in the ACT, as measured by State Final Demand (SFD) is forecast to
moderate in 2010-11. The key economic aggregates for the ACT are summarised in
Table 7.1.1.
2010-11 Budget Paper No. 3
227
Economic Conditions
Table 7.1.1
Economic Forecasts, Year-Average Percentage Change
Actual
2008-09
ACT
Gross State Product
Employment
State Final Demand
Consumer Price Index
Wage Price Index
Population3
Australia
Gross Domestic Product4
Forecasts1
2009-10
2010-11
Projections 1, 2
2011-12
2012-13
2013-14
1.4
0.7
0.7
3.4
3.9
1.8
1
-¼
3¾
2¼
3¼
1¾
2
1
1
2½
3½
1¾
3¼
1¾
5¼
2½
4
1¼
3¼
1¾
5¼
2½
4
1¼
3¼
1¾
5¼
2½
4
1¼
1.1
1½
2¾
4
4
4
Notes:
1.
2.
3.
4.
Forecasts and projections are rounded to a ¼ of a percentage point to reflect the relative level of accuracy used in forecasting economic
parameters. This is standard forecasting practice used by governments throughout Australia.
Projections are based on long-run averages and are provided for planning purposes only. They do not reflect an expectation (forecast)
of actual outcomes. Projections have been updated to reflect changes in the long-run trends.
For population forecasts, the 31 December estimate is used to represent the average population for the financial year. As such, the
forecast growth is based on the growth from one December to the next, rather than ‘year average’ as with all other forecasts.
Commonwealth Government forecasts are provided in the 2009-10 Mid-Year Economic and Fiscal Outlook published in
November 2009.
In 2010-11, the ACT is likely to be influenced by Commonwealth spending restraint,
potentially offset by stronger national growth and associated tax receipts. Higher interest
rates may adversely impact on economy wide activity. However the residential property
market is expected to remain strong overall, contributing to growth, with some moderation
compared to 2009-10.
Changes in Commonwealth Government outlays pose a significant risk to the ACT’s
economic forecasts. Uncertainty remains around the extent and timing of the planned
Commonwealth fiscal consolidation and the associated impact on the ACT.
Gross State Product (GSP), the Australian Bureau of Statistics’ headline measure of the
ACT economy, is forecast to grow by 2 per cent in 2010-11. On the expenditure side, the
growth in GSP will be primarily supported by private consumption.
2010-11 Budget Paper No. 3
228
Economic Conditions
Figure 7.1.1
Share of Gross State Product 2008-09 Current Price Industry Value Added
Construction
6.1%
Electricity, gas, water
and waste services
2.4%
Retail trade
3.8%
Accommodation and
food services
2.4%
Transport, postal and
warehousing
2.2%
Other(1)
12.9%
Information media and
telecommunications
2.7%
Ownership of dwellings
6.3%
Other services
2.1%
Financial and insurance
services
4.0%
Arts and recreation
services
1.6%
Rental, hiring and real
estate services
2.8%
Health care and social
assistance
5.1%
Education and training
5.5%
Professional, scientific
and technical services
5.7%
Public administration
and safety
32.0%
Administrative and
support services
2.4%
Source: ABS Cat No. 5220.0 ‘Other’ includes Agriculture, forestry and fishing industry, Mining industry, Manufacturing industry,
Wholesale trade industry and Taxes less subsidies on products.
State Final Demand (SFD) growth is forecast to moderate to 1 per cent in 2010-11. The
forecast growth mainly reflects the contribution from growth in household consumption.
Constrained Commonwealth Government expenditure and moderate investment growth are
expected to contribute to below trend forecasts for SFD. Contributions to SFD from the
various components are shown in Figure 7.1.2.
Figure 7.1.2
Contributions to Growth in ACT State Final Demand
4.5
4.0
3.5
Percentage Points
3.0
2008-09 Outcome
2009-10 Forecast
2010-11 Forecast
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
Government
Consumption
Household
Consumption
Total Investment
State Final Demand
Source: ABS Cat No. 5206.0 and ACT Treasury estimates.
2010-11 Budget Paper No. 3
229
Economic Conditions
Government consumption expenditure growth is forecast to decline in 2010-11. The
contribution from Government consumption expenditure in the ACT is expected to be much
lower than 2009-10.
Household consumption expenditure growth is expected to moderate in 2010-11 as interest
rates return to normal levels and stimulus funding is withdrawn. However, the ACT’s
improved labour market, relative job security and strong population growth will continue to
support consumer spending.
There was strong growth in dwelling investment in 2009-10, led by an increase in first home
buyers and supported by low interest rates.
While additional demand for housing put pressure on prices and vacancy rates, the ACT
Government continued to implement policies to improve housing affordability in the
Territory. In 2009-10, the government released over 4,000 dwelling sites, with an additional
1,000 sites from private sector developments.
The outlook for dwelling investment in 2010-11 remains positive, underpinned by the
momentum in the housing market and strong population growth. However, further increases
in interest rates could place downward pressure on housing market activity in 2011. It is
anticipated that in 2010-11, the number of dwelling sites released will exceed 5,000 for both
government and private sector activity.
Non-dwelling construction activity is expected to ease in 2010-11 as activity returns to more
sustainable levels. In 2010-11, a number of major projects underway, including an upgrade
of the Canberra Airport, expansion of the Belconnen Shopping Centre, redevelopment of the
Belconnen bus interchange, and developments at the Australian National University (ANU)
and the ANU Exchange.
Public investment growth is expected to taper off in 2010-11. Expenditure in 2009-10 was
high due to Commonwealth Government measures to stimulate economic activity and the
ACT Government’s infrastructure program.
ACT labour market conditions are forecast to improve in 2010-11 due to strong economic
activity, high business and consumer confidence in 2009-10. Employment growth is
expected to increase compared to 2009-10, but will remain below its long-run average rate.
Population growth is forecast at 1¾ per cent in 2009-10 and 2010-11. This is stronger than
the long-run average of 1¼ per cent. The ACT’s population growth will be influenced by a
natural increase and net overseas migration. Net interstate migration is expected to have a
negative effect on overall population growth.
Labour Market
The unemployment rate is expected to remain relatively high in comparison with rates
recorded in recent years. Employment, particularly for full-time work, is expected to remain
at high levels.
2010-11 Budget Paper No. 3
230
Economic Conditions
Employment
Employment growth in the ACT is forecast to increase from -¼ per cent in 2009-10 to
1 per cent in 2010-11. The recovery in employment growth in 2010-11 is a result of stronger
growth in SFD in 2009-10. However, tightening of monetary and fiscal policy is expected to
place downward pressure on the labour market and, as a result, employment growth is likely
to be below its long-run growth rate.
Compared with other jurisdictions, the ACT labour market is well positioned, with the
participation rate and full-time employment expected to remain high throughout 2010-11.
The ACT continues to record the second lowest unemployment rate of all jurisdictions. The
unemployment rate is expected to rise moderately in 2010-11, as population growth is
forecast to exceed employment growth.
Nationally, the unemployment rate appears to have peaked at 5.8 per cent and is likely to be
lower than the Commonwealth’s forecast in its 2009-10 Mid-Year Economic and Fiscal
Outlook of 6¾ per cent by the June quarter 2010.
Figure 7.1.3
Trend Unemployment Rate, ACT and Australia (Monthly Data)
9
8
ACT
Australia
Per cent
7
6
5
4
3
ar
-1
0
M
ar
-0
9
M
ar
-0
8
M
ar
-0
7
M
ar
-0
6
M
ar
-0
5
M
ar
-0
4
M
ar
-0
3
M
ar
-0
2
M
ar
-0
1
M
ar
-0
0
M
ar
-9
9
M
ar
-9
8
M
ar
-9
7
M
ar
-9
6
M
M
ar
-9
5
2
Source: ABS Cat No. 6220.0
Labour Costs
Wages growth, as measured by the Wage Price Index (WPI), is forecast to grow at
3½ per cent in 2010-11. This is slightly higher than the forecast growth of 3¼ per cent in
2009-10, but lower than the long-run average growth rate of 4 per cent.
Over the year to the December quarter 2009, growth was 3.7 per cent, higher than the
2.9 per cent growth rate recorded nationally. Taking inflation into account, growth in real
wages over this period in the Territory was somewhat higher than that recorded nationally.
2010-11 Budget Paper No. 3
231
Economic Conditions
Investment
Housing Market
The ACT housing market continued to grow throughout the 2009-10 economic downturn and
is forecast to grow further in 2010-11, as demand for housing remains strong.
The ACT housing industry benefited from a combination of the low interest rate
environment, the Commonwealth Government’s fiscal stimulus measures and the relative job
security in the ACT. First home buyers played an important role in supporting the ACT’s
housing market in 2009-10 in response to low interest rates and the First Home Owners Boost
(see Figure 7.1.4).
Figure 7.1.4
Number of First Home Buyer Housing Finance Commitments and the Cash Rate,
Monthly Trend Data, ACT
8
400
Number of First Home Buyer Commitments
100
1
50
0
0
Ap
r- 1
0
2
Ap
r- 0
9
150
Ap
r- 0
8
3
Ap
r- 0
7
200
Ap
r- 0
6
4
Ap
r- 0
5
250
Ap
r- 0
4
5
Ap
r- 0
3
300
Ap
r- 0
2
6
Ap
r- 0
1
350
Ap
r- 0
0
7
No. of commitments
Per cent
RBA Cash Rate (LHS)
Source: ABS Cat No 5609.0 and RBA
Note: The First Home Owner’s Boost was introduced in October 2008.
Property turnover is forecast to level off in 2010-11, following the high turnover levels
experienced in 2009-10. House prices are forecast to trend upwards, although at a slower rate
in 2010-11.
During 2010-11 investors are expected to return to the housing market as rental returns and
capital appreciation improve relative to other investments.
2010-11 Budget Paper No. 3
232
Economic Conditions
Turnover of New and Established Dwellings
Demand for residential property has been very strong during 2009-10 (see Figure 7.1.5) and
is likely to continue given anticipated strong population growth.
While the number of first home buyers is expected to be lower in 2010-11, demand for
residential property is expected to remain strong from non-first home buyers and investors.
The number of first home buyer finance commitments reached their highest level in more
than a decade to November 2009, reflecting the combined effects of the First Home Owner’s
Boost and the historically low interest rate environment. The level of first home buyer
commitments is considered to be unsustainable and is expected to return to normal levels.
The first home owners segment of the market is particularly sensitive to interest rate
movements. The ACT Government’s housing affordability initiatives and accelerated land
release program will provide assistance for those seeking access to affordable housing
options.
Figure 7.1.5
ACT Residential Turnover, 12 Month Moving Average,
Monthly Original Data
1,000
No. of Properties
900
800
700
600
Fe
b9
N 5
ov
-9
A 5
ug
-9
M 6
ay
-9
Fe 7
b9
N 8
ov
-9
A 8
ug
-9
M 9
ay
-0
Fe 0
b0
N 1
ov
-0
A 1
ug
-0
M 2
ay
-0
Fe 3
b0
N 4
ov
-0
A 4
ug
-0
M 5
ay
-0
Fe 6
b0
N 7
ov
-0
A 7
ug
-0
M 8
ay
-0
Fe 9
b10
500
Source: ACT Planning and Land Authority.
Price Movements
Growth in house prices accelerated in 2009-10 in response to the combination of low interest
rates and Commonwealth fiscal stimulus measures, as well as the economic recovery from
the global financial crisis which impacted confidence and therefore demand
(see Figure 7.1.6). As confidence has returned to the housing market, higher demand from
faster-than-average population growth, has led to rising house prices in 2009-10. This trend
is expected to continue in 2010-11.
2010-11 Budget Paper No. 3
233
Economic Conditions
Upward pressure on house prices is expected to continue while there remains unmet demand
for housing. This pressure could be further exacerbated by a rise in input costs, or delays in
the planning or construction phases. Rising interest rates could also impact on housing
demand and prices.
Figure 7.1.6
ACT Residential Property Average Price, 12 Month Moving Average, Monthly Original Data
550
500
450
400
$'000
350
300
250
200
150
Fe
b9
No 5
v9
Au 5
g9
M 6
ay
-9
Fe 7
b9
No 8
v9
Au 8
g9
M 9
ay
-0
Fe 0
b0
No 1
v0
Au 1
g0
M 2
ay
-0
Fe 3
b0
No 4
v0
Au 4
g0
M 5
ay
-0
Fe 6
b0
No 7
v0
Au 7
g0
M 8
ay
-0
Fe 9
b10
100
Source: ACT Planning and Land Authority.
Rental Market
The weekly rent for a three-bedroom house in Canberra in the year to December 2009 rose by
6.3 per cent, the fourth lowest annual increase of all jurisdictions. The rental vacancy rate in
the ACT, at 1 per cent in December 2009 was the lowest in the country.
Accelerated land supply is expected to ameliorate pressure on housing stock in the
medium-term.
Non-Dwelling Construction
The volume of ACT non-dwelling construction work done in 2009 was almost $1.2 billion, in
price adjusted terms (see Figure 7.1.7), the fourth highest calendar year level recorded in the
ACT. While easing for the second consecutive calendar year, the volume of non-dwelling
construction remains high by historical standards and is still expected to account for a
significant share of overall investment in 2009-10 and 2010-11.
The global financial crisis led to a significant tightening in credit conditions for commercial
property developments which, combined with increasing office vacancy rates, affected the
willingness and capacity of developers to commence new projects. While there are still some
downside risks, improved global economic expectations for 2010 combined with improving
access to capital, should lead to a more positive environment for non-dwelling construction
activity.
2010-11 Budget Paper No. 3
234
Economic Conditions
Figure 7.1.7
Volume of ACT Non-Dwelling Construction
Annual Original Data
1,800
1,600
1,400
$ Million
1,200
1,000
800
600
400
200
De
cDe 8 6
cDe 8 7
cDe 8 8
cDe 8 9
cDe 9 0
cDe 9 1
cDe 9 2
cDe 9 3
cDe 9 4
cDe 9 5
cDe 9 6
cDe 9 7
cDe 9 8
cDe 9 9
cDe 0 0
cDe 0 1
cDe 0 2
cDe 0 3
cDe 0 4
cDe 0 5
cDe 0 6
cDe 0 7
cDe 0 8
c09
0
Source: ABS Cat No. 5206.0
Consumer Prices and Interest Rates
Consumer Prices
After peaking in the September quarter 2008, Australia’s annual (through-the-year)
Consumer Price Inflation (CPI) rate moderated during the last quarter of 2008 and the first
three quarters of 2009.
In the September quarter 2009, the national annual inflation rate fell to the lowest level
recorded since the June quarter 1999. The moderation in national inflation reflected the
slowdown in economic activity, which reduced pressure on prices and private-sector wages.
In addition, the fall in commodity prices in late 2008 and the appreciation of the exchange
rate exerted downward pressure on consumer prices. The national annual inflation rate began
to pick-up in the December quarter 2009.
The RBA has recently indicated that it expects CPI and underlying inflation to return to
trends consistent with the medium-term target by late 2010.
The CPI is expected to moderate to 2¼ per cent in 2009-10, before accelerating slightly to
2½ per cent in 2010-11.
Interest Rates
The cash rate reached a 49-year low of 3 per cent in April 2009. The RBA commenced
tightening monetary policy in October 2009 and indicated that interest rates will return to
more normal rates during 2010-11.
2010-11 Budget Paper No. 3
235
Economic Conditions
The Budget forecasts assume that the RBA will continue gradually raising interest rates
throughout 2010.
Annual growth in national housing and other personal credit growth fell throughout most of
2008 and the first half of 2009 (see Figure 7.1.8). Annual growth in other personal credit
decelerated sharply throughout 2008 becoming negative late in the year. The moderation of
annual growth in national housing finance was also significant but not as steep.
This was a period of increased uncertainty and falling consumer confidence in response to the
global financial crisis, as well as large falls in household wealth resulting from the collapse in
equity markets and the fall in house prices. As a result, households became more risk averse
which led to reduced demand for credit and the diversion of a greater share of household
income to debt reduction and savings.
As the economic outlook improved and the housing market recovered throughout the second
half of 2009, there was a turnaround in credit growth and the national savings ratio fell,
although remaining above pre-crisis levels. Annual growth in housing finance gradually
strengthened in the second half of 2009, while the contraction in annual growth in other
personal credit moderated and returned to modest positive growth in January 2010.
Similarly, annual growth in national business credit decelerated quickly throughout 2008 and
began to contract from mid-2009. Annual growth remains negative although the monthly rate
of contraction has moderated somewhat. The fall of growth in business credit can be
attributed to a combination of factors. The downturn in economic activity led to a fall in
private sector investment activity and reduced overall demand for funds. In addition,
tightened lending criteria by banks made access to credit more difficult and led to many
businesses resorting to equity raising to fund their operations and retire debt. The RBA
recently reported that there was a considerable improvement in credit market conditions in
the second half of 2009 and a greater willingness by banks to lend to businesses. This may
lead to an improvement in annual growth in national business credit in 2010.
Figure 7.1.8
Australian Annual Growth in Credit
% Annual Average Australian Credit Growth
25
20
15
10
5
0
Annual Housing Credit Grow th
Annual 'Other Personal' Credit Grow th
Annual Business Credit Grow th
-5
No
v04
Fe
b0
M 5
ay
-0
5
Au
g05
No
v0
Fe 5
b0
M 6
ay
-0
6
Au
g06
No
v06
Fe
b0
M 7
ay
-0
7
Au
g07
No
v07
Fe
b0
M 8
ay
-0
8
Au
g08
No
v0
Fe 8
b0
M 9
ay
-0
9
Au
g09
No
v09
Fe
b10
-10
Source: RBA
2010-11 Budget Paper No. 3
236
Economic Conditions
Debt servicing costs by Australian and ACT households fell throughout 2008-09
(Figure 7.1.9). This largely reflected the fall in interest rates over the period, with the RBA
cutting the official cash rate target by a total of 4.25 percentage points over the period from
September 2008 to April 2009. However, the data does not take into account the rises in
official interest rates, any unofficial additional mortgage rate increases imposed by banks or
income growth since October 2009 which combined would be expected to increase the
interest payable to income ratio for both Australia and the ACT. As ACT households possess
higher income levels than the rest of the nation, ACT households should be in a better
position to service rising interest costs compared to Australian households overall.
Figure 7.1.9
Interest to Income Ratios
11
10
ACT Interest Payable to Income Ratio
National Interest Payable to Income Ratio
9
Per cent
8
7
6
5
4
9
8
n0
Ju
7
n0
Ju
6
n0
Ju
5
n0
Ju
4
n0
Ju
3
n0
Ju
2
n0
Ju
1
n0
Ju
0
n0
Ju
9
Ju
n0
8
n9
Ju
7
n9
Ju
6
n9
Ju
5
n9
Ju
4
n9
Ju
3
Ju
n9
2
n9
Ju
1
n9
Ju
n9
Ju
Ju
n9
0
3
Source: ABS Cat No. 5220.
2010-11 Budget Paper No. 3
237
Economic Conditions
2010-11 Budget Paper No. 3
238
Economic Conditions