Crystal ball shows productivity gains must top the agenda in the “new normal” Australian economy

Companies will have to adjust to the “new normal” of high commodity prices and a strong $A despite subtle economic rebalancing away from mining, business leaders have been told at the inaugural CEDA Crystal Ball event run by CEDA with PwC.

Companies will have to adjust to the "new normal" of high commodity prices and a strong $A despite subtle economic rebalancing away from mining, business leaders have been told at the inaugural CEDA Crystal Ball event run by CEDA with PwC.

HSBC, Chief Economist (Australia and New Zealand), Paul Bloxham told the forum that future global growth would be driven by developing countries rather than the services sectors of the US and Europe. And he said there were early signs of the Chinese economy accelerating after a slight slowdown in 2012.

"If you think, as we do, that the emerging economies are going to be the drivers of growth across the coming years, you might also think that commodity prices won't fall back to the sorts of levels they were at in the 1980s and 1990s," Mr Bloxham said.

Mr Bloxham, together with SA Economic Development Board, Chair, Raymond Spencer, PwC, Managing Partner, Scott Bryant, and Network 10, National Affairs Editor, Paul Bongiorno, told the forum that the political narrative of Australia's economic doom and gloom was not supported by the data. But they warned policy makers and businesses must grasp the nettle of productivity improvements to sustain future growth.

The forum heard that:

  • Australia's Gross Domestic Product (GDP) grew 3.4 per cent and South Australia's Gross State Product (GSP) grew 2.1 per cent in 2012 when many other economies contracted. GDP was likely to be slightly lower in 2013 - around 2.9 per cent.
  • Australia's mining sector was still "alive and kicking" although growth would continue at a slower rate.
  • Economic indicators showed that last year's "soft patch in the Australian economy" might be over and the economy was rebalancing towards "business as usual".
  • Housing and retail sales, manufacturing employment and housing construction were all "showing signs of life" as mining investment had come off last year's high of 40 per cent.
  • Federal Treasurer Wayne Swan might "pull a rabbit out of the hat" with a surplus in the May budget but South Australia's extremely tight budget meant it must consider new financial models to fund infrastructure.
  • While SA had significant potential in sectors including mining, agriculture, defence, higher education, cleantech and advanced manufacturing, the state must reform its taxation and regulatory systems to be more competitive.

Mr Bloxham said a 100-year perspective on commodity prices and the $A showed that Australian commodity prices and the value of the $A were exceptionally low in the 1980s and 1990s - not exceptionally high in the 2000s.

While the $A might edge down toward US90c by the end of the year as the US economy picked up, firms would have to accept that the long run level of the $A was around parity with the US$, he said.

The forum heard that productivity growth, slowing from around two per cent in the early 2000s to 1.2 per cent in the past six years, was a key challenge for Australian businesses.

Mr Spencer said SA, which had a mixed economic report card in 2012, had lost its competitive advantage in low cost labour and housing over the past decade and needed to make some significant policy changes "to make SA the most competitive state in which to do business".

Mr Spencer proposed a bipartisan public-private taskforce to review the State's taxation structure which compared poorly to those in the eastern states. This would complement the public sector review which aimed to streamline and modernise the public service.

And as the State budget was "under enormous pressure", the Government needed to creatively explore new financial models to attract private sector investment in transport infrastructure including user pays systems, Mr Spencer said.

 "In 2013 I see us needing to continue investing in critical new infrastructure - especially ports and other transport systems to expedite growth in mining and agriculture and I think we need to create incentives to attract private sector funding for such initiatives," he said.

Local businesses must also work aggressively to use mining as a platform to build high-value add, knowledge intensive industries, he told the forum.

"Quite frankly our businesses are going to have to become far more aggressive and proactive, needing to innovate, take risks, perhaps joint venture or merge with other businesses so that they have the scale and balance sheet strength necessary for capturing these kinds of business opportunities," Mr Spencer said.

The forum heard that failing to address the potential skills shortage and to manage the ageing population could be the greatest impediment to realising the State's potential.

Mr Bryant said policy makers needed to focus on how to implement flexible working arrangements, engage the senior population and women to address workforce shortages and to improve productivity.

"We haven't cracked that by any stretch of the imagination...let alone when we get down to the hard edge of who does what, why they do it and how it has to be done a particular way... there's still too much process and bureaucracy and it's a very fine line between that and the safety net to make sure that the disadvantaged members of our workforce are not preyed upon," Mr Bryant said.