State & territory economic performance report

• How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment; construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation, but only just, ahead of the Northern Territory and NSW. NSW has been the big improver, up from fifth to third.
• The ACT has been pushed back from the third-best performing economy to sixth, behind Queensland and Victoria. There is then a gap to South Australia and another gap to Tasmania with both states still under-performing other economies.
• Western Australia comes out on top on only two of the eight criteria – retail spending and housing finance.  Western Australia is now second on three indicators, third on two indicators and seventh on unemployment.
• The Northern Territory has consolidated second place with the main improvements occurring in business investment. NSW jumped from fifth to third-best performing economy due especially to top rankings on population growth and dwelling starts.

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Population – June Quarter 2013

• Australia’s population rose by 95.7k in QII to 23.13 million.  Over the past year it rose by 407k or 1.8% which is high by global standards.
• The natural increase (births less deaths) was a record 163k in the year to QII 2013.  There were 311.4k births and 148.8k deaths.
• Net overseas migration was 244k over the past year.
• Natural increase contributed to 40% (or 163k) of the population rise over the past year and net migration 60% (244k).
• For the States, WA had the strongest annual growth rate at 3.3%pa, followed by the ACT and Qld.
• New dwelling construction is 161k annually, well below population growth, putting upward pressure on house prices.

Analysis

Australia’s population up by 0.5%

Australia’s population rose by 95.7k (0.5%) over the June quarter 2013, taking the annual population increase to 407k, the highest since September 2009.  The increase means that Australia’s population was just over 23 million in June.  The major driver of population growth has been net migration which was 244k over the past year, the highest since December 2009. Natural population growth (births less deaths) was 163k over the year.

Across the States the annual growth rates were diverse. WA’s population rose by 3.3%, ACT 2.2%, Qld 2%, Vic 1.9%NT 1.8%, NSW 1.4%, SA 0.9% and Tas 0.2%. WA’s population growth should ease over the next few years as the investment and construction phases of the resources boom deflate and are replaced by the operational phase which includes a significant rise in export volumes of iron ore and LNG. The national population figures are still likely to stay in the 1.6% to 1.8% range as Australia’s relatively attractive economic position attracts migration.

The older age groups, those above 55 years of age, have had the fastest growth rates compared to other age groups over the past twenty years. The proportion of the population over 65 years is rising gradually and is now just over 14% compared to under 12% in 1993. It means that the median age of the population has risen from 33 to 37.3 years old from 1993 to 2013. The economic adjustment to an ageing population is already underway and presents a significant challenge to Federal and State Governments. The labour force participation rate is shifting lower, as the largest of the population age cohorts, the “baby boomers” retire. Health care demand will rise dramatically in the next ten years and stay high as the population ages. In a partial counter to the ageing forces, the Federal Government has allowed a much higher migration rate. It also introduced the “baby bonus” which produced a noticeable rise in births over the past seven years. It has also given rise to much higher demands for prams and baby wear, child care, primary school places and teachers.

There is a strong link between population growth and housing demand which is worth highlighting because of the debate around the level of, and current upswing in, Australia’s house prices. Australia’s relatively high annual population growth rate of 1.8% compares to the US growth rate of 0.8%, the UK’s 0.6%, Canada’s 1.0% and China’s 0.6%. It helps explain the strength of housing demand and rising national residential rents.

New housing supply is near 150k annually, and has been running well below our estimate of underlying housing demand of 170k, for the past few years. The current upswing in house prices reflects the interplay of population pressures, constrained new housing supply and low mortgage rates. National house prices have risen by around 8% over the past year while the number of loans is about 15% higher. In our view the underlying conditions still point to some more upside on national house prices.

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State & territory economic performance report

• How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation with no slippage in the ranking over the past three months. The ACT has maintained its position as the second-best performing economy. But the big changes have been below with now little to separate Northern Territory, Queensland, NSW and Victoria, although in that order. There is then a gap to South Australia and another gap to Tasmania with both states clearly under-performing other economies at present.
• Western Australia comes out on top now on only one of the eight criteria – retail spending.  Western Australia is still second on five of the eight indicators, third on unemployment and fourth on dwelling starts.
• The jump in the rankings of Queensland to equal fourth is due to improvements in business investment, unemployment, housing finance and dwelling starts. The Northern Territory has lost ground in dwelling starts, population growth and business investment.

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  Sate of the states, July 2013

  How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.

• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.
• Western Australia remains the top-performing economy in the nation with little slippage in the ranking over the past three months. However the big change has been the lift in the ranking of the ACT to second while the Northern Territory economy has slipped to third strongest. There has been little change in the ranking of other states with South Australia and Tasmania under-performing other economies at present.
• Western Australia comes out top on three of the eight criteria – housing finance, retail spending and equipment investment. Western Australia is still second on three of the eight indicators, third on dwelling starts and fifth on unemployment.
• The switching in the rankings of the Northern Territory and the ACT is largely due to weakening in the performance of the job market in the Northern Territory and improvement in the job market in the ACT. NSW is the fourth strongest economy from Victoria and Queensland. Then there is a gap to South Australia and then another gap to Tasmania.

Western Australia still on top; then the ACT and Northern Territory

• Western Australia remains Australia’s best performing economy, while ACT is now second strongest from the Northern Territory.
• Western Australia leads the way on retail trade, equipment investment and housing finance. It is second strongest on economic growth, construction work done and population growth; and finished third on dwelling starts and fifth on unemployment.
• The ACT economy is now the second strongest economy with the main strengths being housing finance, equipment investment and population growth. The ACT is now third strongest on unemployment, up from eighth in the past report.
  • The Northern Territory finished first on three indicators: economic growth; dwelling starts and construction work done and was second strongest on retail trade. But the job market has weakened over the past three months and it now ranks seventh on this indicator rather than first.
  • There is still little separating NSW, Victoria and Queensland in terms of relative economic performance. NSW is strongest on unemployment, and third strongest on population growth. Victoria is second strongest on housing finance and unemployment. And Queensland has high rankings on economic growth, equipment investment, construction work done and retail spending. But it lags on population growth and dwelling starts.
  • There is then a gap in the rankings to South Australia. While the state is middle ranking on unemployment and construction work, it lags on economic growth, retail spending and equipment investment.
  • Tasmania remains locked at the bottom of the Australian economic performance table. Tasmania lags all other economies on all of the eight indicators. The economy is still growing – economic growth and retail spending are growing faster than ‘normal’ or decade-average levels. But stagnant population growth is reducing activity in home building and home purchase, as well as commercial and engineering construction and business investment.

How was performance judged?

• Each of the states and territory economies were assessed on eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• The aim was to find how each economy was performing compared with “normal”. And just like the Reserve Bank does with interest rates, we used decade-averages to judge the “normal” state of affairs. For each economy, the latest level of the indicator – such as retail spending or economic growth – was compared with the decade average.
• While we also looked at the current pace of growth to look at economic momentum, it may yield perverse results to judge performance. For instance retail spending may be up sharply on a year ago but from depressed levels. Overall spending may still be well below “normal”. And clearly some states such as Queensland and Western Australia consistently have faster economic growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered ‘normal’ for that state or territory.
• For instance, the trend jobless rate in the ACT of 3.7 per cent is lower than all economies. But compared with its ‘normal’ or decade-average rate of 3.4 per cent, the jobless rate is actually higher in percentage terms than NSW and Victoria, thus restraining activity in the retail sector. Trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

Retail trade

• The measure used was real (inflation-adjusted) retail trade in trend terms with March quarter data the latest available. If monthly retail trade was assessed instead (May data available), there would be no change in the rankings. This provides added confidence about the overall results on consumer spending.
• Western Australia retains top spot on the retail rankings with spending in the March quarter 25.2 per cent above decade average levels. Solid population growth, a lift in home purchases and firm wage growth underpin the relative strength in consumer spending.
• Northern Territory was next strongest, again courtesy of low unemployment, with spending just under 19 per cent above decade-average levels.
• Queensland was next strongest, with spending 15 per cent above decade averages, followed by Victoria (up 11.5 per cent).
• Tasmania has the weakest result on retail spending, up just 2.7 per cent on the decade average (but up from 1.4 per cent in the December quarter), and below South Australia with growth of 6.6 per cent.
• In terms of the monthly retail trade series, Western Australian spending is 4.3 per cent higher than a year ago, just in front of Queensland with 4.2 per cent growth, the ACT with 3.4 per cent growth and NSW, up 3.2 per cent. At the other end of the scale, Tasmanian spending is 1.9 per cent down on a year ago and South Australian spending is lower by 1.0 per cent.

Equipment investment

• Western Australia continues to be well above other states and territories when it comes to equipment investment. Spending in the March quarter was almost 75 per cent above “normal” – or decade-average levels but down from 103.2 per cent in the December quarter. Next placed were the ACT (up 36.6 per cent) and Queensland (up 33.4 per cent) followed by NSW (up 15.7 per cent), Victoria (up 5.2 per cent) and Northern Territory (up 4.5 per cent).
• By contrast, new equipment spending in South Australia was in line with its decade-average while Tasmania had business investment 1.3 per cent below its longer-term average in the March quarter.
• On a shorter-run analysis, equipment investment in the March quarter was lower than a year ago in five of the state and territory economies. Currently equipment investment is down on a year ago in Tasmania (down 33.6 per cent), Northern Territory (down 26.9 per cent), South Australia (down 15.5 per cent), NSW (down 6.2 per cent) and Victoria (down 0.1 per cent). By contrast new equipment investment in the ACT is up 50.4 per cent on a tear earlier followed by Queensland (up 10.4 per cent) and Western Australia (up 0.1 per cent).

Unemployment

• NSW and the ACT arguably have the strongest job markets in the nation. While its trend unemployment rate of 5.5 per cent is not the lowest in the nation, the NSW jobless rate is just 5.1 per cent above the “normal” or decade average level.
• In the ACT, trend unemployment has fallen from 4.5 per cent to 3.7 per cent over the past four months but this is 9.3 per cent above its decade average rate of 3.4 per cent.
• In Victoria the 5.7 per cent jobless rate is 9.2 per cent above its decade average.At the other end of the scale Tasmania’s 8.1 per cent jobless rate is the highest in the nation and up 36 per cent on the decade average. The Northern Territory job market is next weakest – a significant turnaround over the last report. In the past six months the jobless rate has lifted from 4.0 per cent to 5.3 per cent and it is now 23 per cent above its decade average level of 4.3 per cent.

Construction work

• The measure used for analysis was the total amount of residential, commercial and engineering work actually completed in trend terms in the March quarter.
• In all states/territories except Tasmania construction work is higher than decade averages. And there remains a large gap between the strongest states (the resource states) and weakest states (Tasmania).
• In Tasmania, overall new construction work completed is 3.5 per cent below its decade average. By contrast construction work done in Northern Territory was almost 80 per cent above its decade average followed by Western Australia (up 66 per cent) and Queensland (up almost 53 per cent).
• Next weakest to Tasmania is Victoria where construction work is 15.8 per cent above decade averages, followed by NSW (up 19.4 per cent on the decade average).
• In terms of annual growth rates, Northern Territory construction work done in the March quarter was up 55.7 per cent on a year ago, followed by Queensland (up 7.7 per cent) and NSW (up 6.4 per cent). Four of the states and territories had weaker construction work than a year ago.

Population growth

• To assess population performance we looked at the current annual growth rate and compared it with each economy’s decade-average growth pace. And the good news is that population growth is above ‘normal’ in six states or territories while growth has also picked up in five jurisdictions over the past quarter.
• Western Australia is the clear leader in population growth. Not only is the annual growth rate of 3.47 per cent the strongest in the nation, it is also almost 46 per cent above the decade average. But the actual leader in the rankings is the ACT. Annual population growth of 2.31 per cent is the highest in 21 years and is almost 57 per cent above “normal’.
• In NSW current annual population growth of 1.25 per cent is 18 per cent above the decade average.
• At the other end of the leader-board is Tasmania where the annual population growth of 0.08 per cent is the weakest in over 11 years and a massive 90 per cent below the decade average rate of 0.77 per cent.

Housing finance

• The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory.
• Housing finance is not just a lead indicator for real estate activity and housing construction but also is a useful indicator of activity in the financial sector. It would be useful to compare figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.
• In all but three states and territories, trend housing finance commitments are below decade averages – an improvement on the previous report when all economies had activity below decade averages. And encouragingly commitments in May were above year-ago levels in all but the Northern Territory.
• In the strongest state of Western Australia, the number of housing finance commitments was 10 per cent above the decade-average level and commitments in May were 16.5 per cent higher than a year ago.
• Victoria was in second spot for housing finance, with the number of commitments 2.3 per cent above the long-term average. And importantly the market has momentum with home lending 5.7 per cent higher than a year ago in trend terms to a 42-month high.
• The ACT remains in third spot on housing finance, up 1.4 per cent on the decade average followed by NSW (down 4.4 per cent).
• Tasmania is the weakest economy for housing finance with trend commitments 27.7 per cent lower than its decade average, but encouragingly commitments were up 4.9 on a year ago. Next weakest was the Northern Territory with trend commitments down 23.8 per cent on the decade average.

Dwelling starts

• The measure used was the trend number of dwelling commencements (starts) with the comparison made with the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However any over-building or under-building in previous years can affect the current level of starts.
•  The outlook for housing construction has improved, underpinned by state government grants for new construction and low interest rates. Dwelling starts are above decade averages in five of the states and territories and again starts in five states and territories are above levels of a year ago.
• The Northern Territory is in the strongest position for new housing construction, with starts almost 54 per cent above decade averages. In addition in the March quarter the number of dwellings started was 27 per cent higher than a year earlier, although down from the 61.6 per cent annual growth in the December quarter.
• In second spot was NSW, with starts over 16 per cent above decade averages. And there is plenty of momentum with starts in the quarter up 33.4 per cent on a year ago – the best growth in three years. In Western Australia, dwelling starts in the March quarter were up 11.2 per cent on the ‘normal’ or “decade average” level with starts in Victoria up almost 6 per cent and ACT starts still 2.3 per cent above decade averages.
• At the other end of the scale, Tasmanian dwelling starts were 38.6 per cent below decade averages, while starts in the March quarter were 25 per cent down on a year earlier. Next weakest was Queensland (down 20.5 per cent), followed by South Australia (down 12.5 per cent). However encouragingly Queensland starts were higher than a year ago, albeit modestly, up just 2.3 per cent. And South Australian starts in the March quarter were up 14.4 per cent over the year.

Other indicators

• Real wages were positive in all economies in the March quarter except for the Northern Territory. Strongest growth occurred Tasmania at 2.2 percentage points, followed by Western Australia (1.3 percentage points) and the ACT (1.2 percentage points).
• Even using “underlying” inflation than “headline” inflation, real wages are growing on average by around 1.0 percentage points.
•  Home prices are now higher than a year ago in all but Hobart (down 1.8 per cent). Strongest growth in home prices was in Darwin (up 6.1 per cent) followed by Perth (up 6.0 per cent) and Sydney (up 5.6 per cent).

Implications and outlook

• The good news is that economic performance didn’t become more polarised in the past three months. While Western Australia is still the best performing economy, it has seen some slippage in indicators such as unemployment. The Northern Territory also lost ground but the ACT lifted in the performance rankings courtesy of strong population growth, driving housing activity and leading to a stronger job market.
• There has been little change in the performance rankings of the three largest states: NSW, Victoria and Queensland.
• Tasmania remains at the bottom of the relative economic performance rankings. The economy is growing in a number of key areas such as demand for home loans but there isn’t enough momentum to catch the other state and territory economies. Encouragingly real wage growth is strong and this could serve to lift retail spending and consumer spending, boosting prospects for the business sector.
• In South Australia, government infrastructure spending is providing valuable support for the economy. Encouragingly new home loans are up 9.5 per cent on a year earlier to the highest levels in 40 months.
• All economies should lift once the uncertainty of the Federal Election is finally out of the way later in 2013.
• While new investment in mining and engineering construction is easing, the housing sector is providing a source of new growth, especially in regions where population growth is strongest.

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The big picture

• One of the sleeper issues at present is population growth. The latest data showed that Australia’s population grew by 1.6 per cent in the year to September, the slowest growth rate in four years and well down from the peak growth (40-year high) of 2.2 per cent in December 2008. Slower immigration is the culprit here, not the number of babies being born, and largely due to Government policy.
• Now those in favour of a ‘small Australia’ would conclude that the slowdown in population growth is a favourable development. But they may not hold those views next time interest rates go up, especially if the Reserve Bank singles out the tight job market as one of the prime drivers behind the decision. Because the strong global demand for our resources and demographics both indicate that demand for labour will remain strong in coming years. The challenge for Australia is to ensure that labour supply lifts to meet that higher demand. If it doesn’t then the one thing that economics shows is that something has to give – and most likely that means higher wages, and potentially higher prices.
• As noted by Professor Peter McDonald, one of the best demographers in Australia, “barring a major downturn in the world economy, labour demand is likely to remain very strong into the future.” McDonald argues that there needs to be urgent action on skills development, the need for significant growth in public infrastructure, and a “planned, well-managed immigration program.”
• McDonald notes that the government’s permanent migration program and domestic sources of workers have been insufficient to meet the strong demand for labour so the gap has been filled by temporary migrants. The question is whether this is a desirable or sustainable situation. But whatever is eventually decided by policymakers, the simple fact is that the Government must ensure that an efficient, streamlined system is in place so that businesses can get the staff they need. Supply of labour has to lift to meet strong demand otherwise the consequences will be higher inflation, slower economic growth or both.
• The other point by McDonald is that “substantial future population growth” over the coming decade is embedded in the economy. The higher population growth must be planned for, especially in terms of infrastructure demands.

The week ahead

• A busy week lies ahead with a speech by the Reserve Bank Governor probably the stand-out. Meanwhile there is a bevy of ‘top-shelf’ economic indicators for release in the US and the latest monthly readings on the Chinese economy will be released on Friday.
• On Thursday morning Australian time (Wednesday lunch-time in New York) the Reserve Bank Governor will deliver a speech simply titled “Economic Conditions.” Clearly the RBA Governor will have a broad canvas to paint on, but it will be a timely update of the latest views on the economy. No doubt businesses have been giving RBA liaison officers fairly down-beat views on the economy. The question is whether the Governor will remain upbeat about 2011/12.
• In terms of economic data, most eyes will be on the NAB business survey on Tuesday and the consumer sentiment report on Wednesday. While the business sector is generally finding life difficult at present, it still is largely positive about the future. And consumer confidence may have improved a tad, but nothing too dramatic. People still haven’t got the sense that things are back to ‘normal’.
• In terms of the other economic indicators, data on lending finance kicks off the week on Monday. Consumers and businesses are more inclined to save, rather than spend, but there has been a modest pick-up in new lending in the past few months that deserves to be monitored.
• On Wednesday, the Bureau of Statistics and Federal Treasury will publish the quarterly data from Treasury’s TRYM economic model. At face value this seems exceedingly dull, but the data will contain the latest estimates on wealth – most likely at record highs.
• And on Thursday, the Bureau of Statistics will recast the latest industry figures on car sales to take account for seasonal factors. The industry data indicated that 93,984 vehicles were sold in March, just under 1 per cent lower than a year ago. However when seasonal factors are taken into account, we believe that car sales rose by 1 per cent in the month. Still, the broad trend is that car sales are going largely sideways.
• In the US, there is a bevy of ‘top shelf’ indicators due for release in the coming week. Data on retail sales is released on Wednesday with producer prices (business inflation) set down for Thursday while figures on consumer prices and industrial production are both issued on Friday.
• Overall the results should be reasonably healthy. Economists tip a 0.5 per cent lift in retail sales (up 0.6 per cent if car sales are excluded) while production is expected to have lifted by 0.5 per cent in March after a flat reading in February. The prices data should confirm that deflation is no longer a concern, but – at present anyway – inflation is not an issue either. Core rates of both producer and consumer prices probably rose by 0.2 per cent in March.
• Of the other data/events, on Tuesday, trade figures are released alongside import & export prices and the monthly Budget results. On Wednesday the latest Federal Reserve Beige Book is issued – covering conditions across Fed districts. And on Friday consumer sentiment, capital flows and the Empire State survey are other indicators to watch.
• The other event to keep on the radar screen is the usual monthly download of Chinese economic statistics. On Friday, figures on retail sales, production, investment and inflation are all issued. Interestingly the Chinese trade data is also issued – on April 10 – this Sunday.

Sharemarket

• The Australian sharemarket is a mere 10 per cent away from record highs. Sounds too good to be true? What we are tracking is the value of all shares – the amount of stock on issue multiplied by the share price. This accounts for the fact that companies raised equity capital in the global financial crisis as well as the fact that share prices have recovered post GFC. The value of all shares stands at $1,583 billion, down from the highs of $1,772 billion in late 2007. But some sectors have done even better. Market capitalisation of the ASX 200 Resources sector stands at $388 billion, just under 2 per cent below the record high of $395 billion set in May 2008. Notably 25 per cent of the entire sharemarket is accounted for by the top 200 resource stocks, a smidgen below the record high set in July 2008.

Interest rates, currencies & commodities

The Aussie dollar has had an amazing rebound in a short time period, lifting from US97.25c on March 17 to US104c on April 4 – a gain of around 7 per cent. Clearly sharemarkets across the globe similarly rebounded from lows, highlighting the fact that the Aussie is very much a ‘fair weather friend’. When there are concerns about the health of the global economy the Aussie dollar is one of the first to be sold, but it is quickly back in favour when sentiment improves. Consumers would expect that the strong Aussie translates into lower prices for gadgets and indeed that has proved correct. Australia is the fifth cheapest of 26 countries in the world to buy the new Apple iPad 2 device according to our new CommSec index. The CommSec iPad 2 index is a modern way of looking at purchasing power theory. That is, the theory that the same good should be sold for the same price across the globe once taking into account exchange rates. As it turns out there are still significant differences in prices across the globe.

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• Australia’s population grew by 345,500 people over the year to September. Population growth increased by 1.57 per cent over the past year – the weakest growth rate in four year and well below the 40-years highs reached in the year to March 2009.
• A total of 185,800 people migrated to Australia over the year to September – marking the weakest result in just shy of four year and a slide of 41 per cent on migration growth pre-GFC (December 2008).
• There were 301,500 babies born in the year to September – holding just shy of the highest reading since quarterly records began 28 years (303,500 – March 2010).
• Across the state and territories, it was the mining states of Western Australia and Queensland that recorded the fastest annual population growth rates – a trend that is likely to gain traction in coming years.

What does it all mean?

• Australia’s population growth rate continues to moderate, easing further away from the 40-years highs reached 18 months ago. And the blame can be placed squarely on slide in migration that has occurred in the past year. In fact, a record 102,200 less people called Australia home over the past year, robbing the economy of momentum at an important time and keeping job markets tight.
• It is understandable that migration levels came off the boil during the global financial crisis. A similar result took place in previous downturns, and has largely to do with the uncertainty surrounding job prospects during a downturn. However Federal policy makers need to also take some of the blame. Migration targets were cut and while they are being slowly reinstated the slide in migration is still being felt.
• Contrary to popular belief it isn’t just skills shortages in the mining sector that is driving the demand for additional workers. In fact the Department of Immigration’s occupational shortages list, highlights that a whole manner of workers are needed from Engineers, Accountants, IT experts, Pharmacists, Dentists, Nurses and Doctors. Interestingly the demand for medical related professions makes up a significant proportion of that list. And given that Australia’s population is still growing and at the same time it is an aging population the demand for medical related skills will continue to gain traction.

• The Reserve Bank believes that a pickup in skilled migration will be the key to ensuring that Australia continues to have a relatively balanced job market. But given the rebuilding that is currently underway in flood damaged towns, and the anticipated pickup in economic growth the risks are clearly around a sustained slide in unemployment over the coming year.
• The Federal government certainly has a role in controlling migrant inflows, however further liaisons with businesses will be important in judging the scope and depth of the labour shortage over the coming year. Proactively raising migration targets will also ensure that there isn’t exacerbating tightness in the job market in the years to come. And ensure that the Reserve Bank will have one less thing to worry about in terms of wage growth pushing up inflation and in turn adding further upward pressure to interest rates.
• It can’t be stressed enough that Australia’s strong migration levels is a big deal. Not just in boosting economic growth in the short-term but also in addressing the longer-term implications of Australia’s ageing population. Rising population growth hasn’t resulted in higher unemployment, rather it’s been instrumental in driving economic growth and contributing to firmer job markets.
• Overall population growth of 1.57 per cent is still healthy. Interestingly the result is being driven by the current baby boom that is taking place. Economic prosperity – low unemployment, rising incomes and greater prosperity have prompted more couples to start families. In fact in the past year more than 300,000 babies were born – holding near the highest reading in records going back 28 years.

What do the figures show?

Population Statistics:

• Australia’s population expanded by 345,500 people over the 12 months to 22,407,700 people. Overall, Australia’s population grew by 1.57 per cent over past year, easing further away from the 40 year record pace of 2.16 per cent recorded in the year to March 2009.
• A total of 185,800 people migrated to Australia over the year to September – falling further away from the biggest annual total since European settlement which was recorded in the year to December 2008 (315,700). An additional 509 people called Australia home each day over the past year.
• Over the year to September, 56,069 migrants settled in NSW, followed by Victoria (52,334), Queensland (33,827), Western Australia (25,475), South Australia (13,243), ACT (2,101), Tasmania (1,571), and Northern Territory (1,144).
• There were 301,500 babies born in the year to September – just shy of the year to March (303,500) which was the highest reading in records going back 28 years.
• Population growth eased in all states and territories. Over the past year population growth was fastest in Western Australia (2.09 per cent), followed by Queensland (1.85 per cent), ACT (1.70 per cent), Victoria (1.65 per cent), NSW (1.33 per cent), Northern Territory (1.27 per cent), South Australia (1.07 per cent), and Tasmania (0.81 per cent).

What is the importance of the economic data?

• Demographic Statistics are issued by the Bureau of Statistics each quarter. The figures include estimates of births, deaths, in-bound and out-bound migration movements and estimates of population change by State.

What are the implications for interest rates and investors?

• The solid pace of population growth will continue to underpin housing demand. While the sharp lift in the number of births will translate to an increased demand for childcare places over the next five years, and a greater demand for school places over the next 5-20 years.
• Not surprisingly population growth is strongest in the mining states, with Western Australia and Queensland leading the charge. No doubt as the global economic recovery gains traction and mining investment is increased a further demand on labour resources will be required.
• The Reserve Bank is likely to remain on the interest rate sidelines over the next few months, given the near term weakness of the economic data.

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• Wages rose by 1.0 per cent in the December quarter, slightly above market expectations. In annual terms wages are up 3.9 per cent on a year ago – exactly in line with the average growth over the past five years.
• Private sector wages rose 1.0 per cent in the quarter and 3.9 per cent over the year. Public sector wages rose 0.9 per cent in the quarter and 3.9 per cent over the year.
• In a speech today, the Reserve Bank Governor has reinforced expectations that rates are set to remain on hold. Glenn Stevens has stressed, “a careful response is needed” to the fact that the terms of trade gains are being saved rather than spent while the terms of trade is inducing major structural change in the economy.
• The Reserve Bank Governor has stressed the need for improved productivity, a fact borne out by the latest wage data.

What does it all mean?

• Wage growth across the economy is good, rather than being great. Workers in the fastest growing sectors like mining are achieving the highest wage growth while workers in transport, real estate, media and telecommunications are only achieving salary increases that are modestly above the rate of inflation. The main concern is that wages in the utilities – electricity, gas and water – remain lofty despite poor productivity in the sector and disappointing industry growth.
• In an economy-wide sense, the latest wage figures are encouraging. Wage growth near 4 per cent is sufficiently above the rate of inflation to boost consumer purchasing power. A year ago, wages weren’t covering price increases. And current growth of wages wouldn’t be taxing for businesses especially given solid profit growth over the past year.
• Looking ahead though, businesses will need to focus on extracting greater productivity from their workers rather than just putting more workers on payrolls. Wage growth near 4 per cent is fine when productivity growth is near the longer-term average of 1.5-2.0 per cent, but not when productivity is barely growing as it is currently.

• Productivity has been the missing element in the economic debate of the past few years. Federal Treasury has been successful with two of its three P’s – that is, increasing population growth and increasing workforce participation. But if Australia is to sustainably grow at a fast pace, productivity needs to lift.
• The Reserve Bank Governor is again a force of reason when it comes to discussing the terms of trade (ratio of export prices to import prices). Glenn Stevens knows the income boost from the terms of trade would be a worry if the income were being spent, not saved. But he believes the gains are being saved. In addition he is worried about the structural change induced by the terms of trade. In short, he argues for a “careful response”.
• Analysts should heed the Reserve Bank Governor’s advice. A higher terms of trade doesn’t mean that interest rates need to be jacked up – in fact it may turn out to be completely the wrong response.

What do the figures show?

Wage price index

• The wage price index rose by 1.0 per cent in the December quarter after lifting 1.1 per cent in the September quarter. Annual wage growth continued to move away from the decade low of 2.9 per cent set in the December quarter 2010, lifting from 3.5 per cent to 3.9 per cent. In original terms annual wage growth stands at 3.8 per cent.
• On average, wages have grown by 3.9 per cent over the past five years.
• Private sector wages rose by 1.0 per cent in the December quarter while public sector wages rose by 0.9 per cent. Compared with a year earlier, private and public sector wages rose by 3.9 per cent.
• Including bonuses, wages rose by 0.8 per cent in original terms in the quarter with annual growth of ordinary time hourly rates steady at 3.9 per cent in the December quarter.
• Industries with fastest annual wage growth: Electricity, gas, water & waste (up 4.7 per cent), Mining and Professional, scientific & technical services (both up 4.6 per cent), Education & training and Financial & insurance services (both up 4.4 per cent).
• Industries with slowest annual wage growth: Transport, postal & warehousing (up 2.9 per cent); and Rental, hiring & real estate services (up 3.0 per cent); Information media & telecommunications and Arts & Recreation services (both up 3.1 per cent); Other services (up 3.2 per cent),
• Annual wage growth across States & Territories: NSW, 3.8 per cent; Victoria, 3.6 per cent; Queensland, 4.2 per cent; South Australia, 3.9 per cent; Western Australia, 4.0 per cent; Tasmania, 3.3 per cent; Northern Territory, 3.8 per cent; and ACT, 3.7 per cent.

What is the importance of the economic data?

• The Labour Price Index has been compiled since September quarter 1997 and measures quarterly changes in wage and salary costs for employees. The index is based on a representative sample of employees, and includes measures of non-wage costs including superannuation, payroll tax, public holiday and workers compensation. The Labour Price Index is useful in measuring wage pressures in the economy. While strong growth in wages would boost domestic spending, it could also serve to lift employer costs and prices and add to economy-wide inflationary pressures. The labour price index is a measure of hourly pay rates (excluding bonuses).

What are the implications for interest rates and investors?

• The latest wage data represents a rare bit of good news for retailers and other consumer-focussed businesses. A situation where wages are outstripping inflation – but not excessively so – puts more spending power in consumer pockets.
• When you add all the factors up – a strong job market, real wage gains, stable interest rates and record wealth – it points to higher consumer spending ahead. Now you just have to convince consumers to spend.
• The weakness in wage growth over the past year has been a key reason why consumer spending has been depressed. A year ago wages were growing at the slowest pace in a decade – hardly the reason to start spending, especially on non-essential or discretionary items.
• No one at the Reserve Bank would bat an eyelid at the latest wage data – growth is not a threat to inflation. Interest rates are solidly on hold.

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• How are Australia’s states and territories performing? CommSec has attempted to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, indicators were compared with decade averages – that is, against the “normal”.
• It is clear that the ACT has the stand-out economy at present. In the ACT, unemployment is low, with housing activity, construction, population growth and economic growth all above average. The only blots on the copybook are retail spending and business investment.
• The Western Australian economy had also been an out-performer but it has slipped back to the pack. While construction work is the clear driver, population growth has slowed, dragging on the housing sector. Unemployment is low compared with other states but it has been drifting higher.
• There is little to separate Victoria, South Australia, Northern Territory, Tasmania and NSW. Certainly NSW has been a major improver over the last quarter led by above-average population growth and firmer business investment. But both the Queensland and NSW suffer from weak housing markets – the only two economies where dwelling starts are below decade averages.

Click here to download this document (pdf)

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The big picture

One of the biggest furphies in 2009 was the claim that Australia had a ‘bubble’ in the housing market. It didn’t and still doesn’t but to some extent you can understand where some commentators were coming from with the claims. In Europe and the US, home prices generally tanked in 2009 but Australian home prices softened, didn’t crash and then began to grow again. The view was that the day of reckoning had merely been delayed.

Where the commentators got it wrong was by glossing over a key fundamental determinant of housing demand – population. In most advanced nations population growth is very modest. In fact in many European economies population is barely growing or is flat. In Japan, the population is actually contracting and in the US, annual population growth is around 1 per cent.

But in Australia, population growth had been steadily lifting since the mid noughties. In June quarter 2004, annual population growth was just 1.2 per cent or an extra 230,000 people. And of that total, migration accounted for an extra 100,000 people.

But those migration levels began to lift markedly over the noughties in response to the PPP policy of Federal Treasury – productivity, participation and population. The PPP strategy is an attempt to soften the blow on the economy from the ageing of the population.

In the year to March 2007, over 200,000 extra migrants came to our shores. And by December 2008 annual migration numbers had lifted to over 300,000 people. Now given that the ‘normal’ number of homes built in Australia each year is around 150,000, a lift in annual migration numbers of around 200,000 would be expected to have a big impact.

And as always appears to be the case, the lift in migration numbers wasn’t universally understood by businesses, government departments and builders. Demand for homes has tended to outpace supply over the past 3-4 years. In late 2007/early 2008 there was double-digit growth in home prices. Demand for homes was temporaily choked off by higher interest rates but at the trough, home prices were down just 2.5 per cent on a year ago.

Home prices returned to double-digit levels in early 2010 in response to lower interest rates but a combination of increased home building (more supply), slower migration and higher interest rates again have caused home prices to soften with annual growth now around 6.5 per cent.

It’s important to note that, despite the ebbs and flows of interest rates and building over time, there is no evidence of a generalised over-supply of homes. In fact in the Sydney market the rental vacancy rate stands at just 1.2 per cent. And affordability? The RP Data/Rismark measure that is well accepted by the Reserve Bank has continued to go sideways over the past six years. Hopefully we will hear a lot less about ‘bubbles’ in 2011.

The week ahead

For those unlucky enough not to be on holidays, there is little economic data to digest in the coming week. In Australia the offerings are confined to population data on Tuesday accompanied on the same day by minutes of the last Reserve Bank Board meeting held a fortnight ago.

In the US there is a bit more to focus on, but all the indicators are congregated on just two days – Wednesday and Thursday.

Turning to Australia first, it is likely that the latest estimates will show a further slowing of population growth. In the March quarter of 2009 Australia’s population was growing at a 2.2 per cent annual rate – the fastest rate in 40 years with both migration and the birth rate boosting the result. But in the latest result for the March quarter of 2010, population growth has slowed to 1.84 per cent – still above the longer-term average but clearly a softer result.

The slowdown in population growth is due entirely to a reduction in migration. When the job market weakened over 2009, the Federal Government thought it would be appropriate to cut back migrant numbers. However the softer job market was very much a temporary situation. Now businesses are crying out for staff but the government has been slow to respond by allowing migration levels to rise. Clearly this is a situation that must be addressed over the next few months otherwise it risks a marked tightening in the job market, forcing up wages, prices and interest rates.

Hopefully the release of the June quarter population figures on Tuesday will revive the debate on migration and population growth rates. It is very much in Australia’s short and longer-term interest to have a well balanced labour market.

The other event of note in the coming week is the minutes of the December 7 Reserve Bank Board meeting. As widely expected, the Reserve Bank left rates on hold at that meeting. This was well flagged by the Reserve Bank Governor and he also provided guidance that the next move in rates wouldn’t occur any time soon. Clearly investors will be looking for further guidance in the Board minutes. Investors will also be seeking to identify the ‘hot button’ issues that bear watching. That is, those issues that are in the middle of the Reserve Bank’s radar screen and therefore may be triggers for the next move in rates.

In the US, the main focus is on the housing market. On Wednesday the FHFA home price index is released with data on existing home sales released the same day. Economists expect that home sales rose by more than 5 per cent in October to a 4.7 million annual rate. As always the amount of stock on hand and movement in home prices will also be watched closely.

And on Thursday, economists similarly expect that new home sales recorded a solid lift of almost 7 per cent. Again stock levels and prices will also be in focus. Overall there is evidence that the housing market has found a floor. But with unemployment still high and a significant amount of stock on the market, no one is expecting building activity to lift markedly any time soon.

Also in focus over the week is the final estimate of economic growth for the September quarter. Currently the economy is tracking at a 2.5 per cent annual pace but some economists believe that growth could accelerate to 3.5-4.0 per cent in 2011 given the amount of stimulus being applied to the economy.

The economic growth (GDP) data is due on Wednesday. And on Thursday, orders of durable goods, personal income & spending, weekly jobless claim and consumer sentiment data are all scheduled. Economists tip another solid result for spending, up another 0.4 per cent in November after a similar gain in October. But the measure of business investment – durable goods – may prove soft with most tipping a fall of just under 1 per cent in November.

Sharemarket

While there is still just over a fortnight until the end of the year, it is already clear that Autos & components has been the strongest sector this year (up 62 per cent) but it is dominated by one stock – Fleetwood Corp. Next best has been Pharmaceuticals and biotech’s (up 10.5 per cent), followed by Materials (up 10.1 per cent). However only six of the 21 sub sectors actually recorded gains over 2010. The weakest performing sector was Consumer durables and apparel (down 19.2 per cent) followed by Retailing and Telecom (both down 18.8 per cent). The insurance sector also took a hit losing 17.3 per cent.
Interest rates, currencies & commodities.

There is still plenty of data to be released over the next two months before the Reserve Bank next meets to decide interest rate settings. Financial market pricing suggests a rate hike in February is pretty much a non event. In fact the pricing for a 25 basis point rate hike is just 7 per cent – which is entirely appropriate. While parts of the economy like mining will do well in 2011, exporters and tourism will continue to do it tough. And then there is the added uncertainty in activity levels given the inherent conservatism being shown by consumers and weakness in business trading conditions. CommSec expects the next rate hike to take place in April with the cash rate lifting to around 5.25-5.50 per cent end of 2011.

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Australia’s immigrant population on a per capita basis is almost double that of the United States, and more than twice that of the United Kingdom.

England and New Zealand remain the two major source countries of migrants to Australia, attracting around 30 per cent of total migrants.  In the 10 years to 2006, China toppled Italy for third spot, accounting for 5 per cent of total migrants to Australia.

Against this backdrop, the AMP.NATSEM Income and Wealth Report: Calling Australia Home explores the characteristics and contributions of Australia’s overseas born population, examining aspects of the migrant experience including education, work, wealth and wellbeing.

AMP Financial Services Managing Director Craig Meller said Australia’s recent history and current landscape is very much one of migration, with generations of migrants having influenced the country’s economic wellbeing and cultural diversity.

“Modern Australia is a nation built from the labour, skills and traditions of migrants. Almost all of us has either experienced arriving here from elsewhere, or have heard the stories of our friends, colleagues, parents or grandparents who have made Australia their home,” Mr Meller said.

“The major shifts in Australia’s immigration policy over the years have resulted in a rich and culturally diverse nation and migrants have also made a significant contribution to the nation’s productivity,” Mr Meller added.

Key Report Findings:

The AMP.NATSEM report differentiates migrants into two groups. Migrants born in the main English speaking countries – Canada, New Zealand, Ireland, the United Kingdom, United States and South Africa – are referred to as “Born in MESC” and migrants born in non-main English speaking countries are referred to as “Born in non-MESC”.

According to the report, most migrants arrive in Australia when they are young, with 40 per cent of recent permanent adult migrants moving here aged 25-34 years, and 22 per cent aged 34-44 years.

Over the past decade, an increasing number of migrants have entered Australia under the skilled migration program – approximately 115,000 permanent migrants came to Australia in 2008 under this category, accounting for 62 per cent of total migrants.

Education levels among migrants tend to match or even exceed those of the Australian born population. 46 per cent of males born in non-MESC aged 25-34 years have a bachelor agree or above, compared with 20 per cent of Australian-born men in the same group.

Most migrants are urban dwellers. More than 60 per cent of migrants who were born in MESC live in Sydney, Melbourne, Brisbane and Perth, with an even higher figure of 79 per cent for non-MESC migrants, but only 49 per cent of the Australian-born population.

Asylum seekers make up a very small proportion of migrants. Australia’s humanitarian migration program, through which refugees are accepted, makes up around 7 per cent of Australia’s total migrant intake, and asylum seekers make up only around one-fifth or less of this group.

Overall, Australia has a ratio of 10 refugees per 10,000 head of population compared to 87 per 10,000 in Sweden and 50 per 10,000 in Canada.

NATSEM author and Research Fellow Riyana Miranti said migrant participation in the labour market is one indicator of the successful contribution of migrants to the economy. Around 50 per cent of migrants are in the prime working age population of 25-54 years, compared to only 39 per cent of Australian born.

“With most migrants arriving here during the prime working age, it is not surprising that they have a high level of participation in the labour market, which is a clear indicator of their successful contribution to the economy,” Dr Miranti said.

However in some cases the skills of many migrants have not been fully utilised with many highly educated non-MESC migrants working in low or medium skilled occupations. Only 19 per cent of Australian-born tertiary educated people aged 35-54 years are working in a low or medium skilled occupation, and 20 per cent of MESC migrants, compared with 38 per cent of non-MESC migrants. Similar differences are apparent in the 25-34 years age group.

“Labour market barriers may be experienced by this group of well-educated migrants, possibly including difficulties in having their qualifications recognised, or competing with those with native English-speaking backgrounds,” Dr Miranti said.

For the working age population of 25-64 year olds, migrants born in MESC have the highest earnings per week at $1,358, followed by Australian-born at $1,266.  Non-MESC migrants earn the least with average earnings of $1,145.

Overall, non-migrant households with an average net worth per adult of $387,200 are about 5 per cent wealthier than migrant households at $370,400.

Non-migrant households take the lead in superannuation savings and investments with $143,600 in total compared with $124,600 for non-migrant households.

While non-migrant households are wealthier than migrants in general, migrant households are ahead of their Australian-born counterparts in terms of property-related assets with $262,700 in property compared to $250,800 for non-migrant households.

“The report suggests that this difference could be due to migrants living in urban areas where property is more expensive,” Mr Meller said.

“Meanwhile non-migrant households may have been able to accumulate superannuation and investments over a longer period of time,” Mr Meller added.

The image of Australia as a land of opportunity is also captured in the data around job satisfaction, with a large majority of people being happy with their employment opportunities, especially in the younger age groups. Only a small minority of both Australian born and migrant individuals are ‘dissatisfied’ with their sense of being part of the local community.

“Migration is embedded in our history, has significantly contributed to the country’s economic wellbeing and culture, and will undoubtedly play a significant role in shaping Australia’s long-term future,” Mr Meller added.

Calling Australia Home is the 27th AMP.NATSEM Income and Wealth Report. Since 2001, AMP and NATSEM have produced a series of reports that open windows on Australian society, the way we live and work – and our financial and personal aspirations. AMP publishes these reports to help the community make informed financial and lifestyle decisions and to contribute to important social and economic policy debate.

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