Wednesday, March 21, 2012

Recovery. Victoria is in danger of missing out

AUSTRALIA will slowly move into a broad-based economic recovery in 2012-13 but Victoria is in danger of missing out, leading forecaster Frank Gelber of BIS Shrapnel predicts.

Unveiling new forecasts in Melbourne yesterday, Dr Gelber predicted that Australia's growth rate would slowly accelerate from 2.2 per cent in 2011 to 3.5 per cent in the 2012-13 financial year. If realised, that would be its best performance for five years.

But there would be two downsides. Interest rates would start rising again, with the Reserve Bank likely to deliver seven rate rises in the next 15 months. And apart from New South Wales, the south-east of the country will continue to struggle.

"The Australian economy is expected to strengthen further on the back of improving consumer spending and continuing heavy investment in the mining sector," BIS Shrapnel said. "However, the recovery is expected to be slow to set in. We expect the increased activity to prompt businesses outside mining to start increasing investment from later this year, after an extended period of underinvestment.

"However, the high Australian dollar, relatively expensive business credit, negative news from abroad, fiscal restraint and political uncertainty domestically will continue to weigh heavily on many industries and regions."

Mining investment would continue to boom, while trade-exposed sectors such as manufacturing, education, tourism and agriculture would continue to shrink. Government would also shrink, while the great mass of other service industries would keep struggling. Victoria would be main casualty.

"We look out two or three years and it's difficult to see where Victoria's growth is going to come from," Dr Gelber told BusinessDay. "We see investment in Victoria falling."

BIS Shrapnel predicts building starts in Victoria will plunge 20 per cent in the two years to 2012-13, while all other states would grow by between 6 and 21 per cent. Housing starts would fall 28 per cent, bringing Victoria back to the pack after years of outperforming the rest, while non-residential building would shrink 10 per cent.

"Victoria has weakened considerably over the past six months. It's lost its drivers of growth," Dr Gelber said. BIS Shrapnel predicts that a big influx of mining construction workers will lift population growth nationally, but NSW and Queensland will overtake Victoria in growth, with even WA coming close.

"There will be a broadening of investment in Victoria, but what is really missing are infrastructure projects," he said. "Investment is the primary driver of growth and Victoria needs better infrastructure to lift its productivity.

"These are things [the Victorian government] could do. But we can't see the next round of infrastructure projects coming through. Victoria is just falling behind the pack."

Dr Gelber hit out at the federal government's pledge to deliver a budget surplus in 2012-13, but said the collapse of its revenue base would see it fail to get there. "Fortunately, they won't achieve it. But they shouldn't even try," he said.

He urged the federal government instead to invest in "soft infrastructure", such as the CSIRO and other forms of research and development, and to take an axe to the jungle of over-regulation that is clogging up business.