The Commonwealth Treasury


Economic Roundup Autumn 2004

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Key themes from the Treasury Business Liaison Program — February 2004

The following article is a summary of findings from the Treasury Business Liaison Program conducted in February 2004.1 Treasury greatly appreciates the commitment of time and effort made by the Australian businesses and industry associations that participate in this program.2

Overview

The February business liaison round comprised meetings with contacts in Sydney, Melbourne and Canberra, along with a number of phone interviews. Contacts in this round were primarily industry associations across a range of sectors.

Overall, most contacts reported sound business conditions and a solid outlook for the coming year. In particular, mining industry contacts were very positive, along with those in the retail and finance sectors. In contrast, manufacturing sector contacts tended to expect flat business conditions while contacts in dwelling construction were generally expecting a moderate slowdown in activity over the next 12 months.

A number of contacts noted that it was becoming more difficult to attract and retain skilled labour in some sectors. Several contacts also indicated that these difficulties could become more marked in the medium term; as a result of a shortage of new apprentices.

General business conditions and outlook

As in previous recent liaison rounds, most contacts reported relatively strong trading conditions and were generally optimistic about the future.

Mining sector contacts were particularly positive noting the existence of strong international demand and high mineral commodity prices. Further information on this sector is provided below.

Retail sector contacts reported that the mood of retailers remains positive. While profit margins are tight in some business areas, high sales volumes mean that profitability remains strong across the board.

Financial sector contacts noted that equity markets appear to be gathering strength. The development of more sophisticated financial products was fuelling this growth as investors could use financial instruments to cover risk more easily than in the past. In addition, the growth in the size of superannuation funds means that they are playing an increasingly important role in the market.

Agriculture contacts noted that some parts areas of the country are still recovering from the drought whereas others are growing strongly. Industries providing goods and services to the agriculture sector reported sound business conditions and solid levels of profitability.

Tourism contacts reported that both international and domestic tourism activity are currently solid with ongoing growth expected over the next year.

In contrast, manufacturing sector contacts were generally expecting relatively flatter business conditions than most other sectors of the economy. This outlook reflected strong international competition due to both the appreciation of the Australian dollar and increased efficiency by manufacturers in the Asia-Pacific region. Nonetheless, some manufacturing firms were still anticipating strong business conditions over the next year.

Many contacts in the dwelling construction sector were expecting a downturn over the next year, albeit a moderate one. However, contacts involved in other areas of the construction sector were expecting continued strong conditions. Further views from contacts in this sector are discussed below.

Labour market

Although not a universal perspective, a number of contacts noted that there was some evidence of labour market tightness. In particular, contacts in the manufacturing, mining and machinery servicing components of the agricultural sector indicated that it was becoming more difficult to attract and retain skilled labour.

In the short term, some firms were looking to address this issue by employing staff from overseas or by ‘poaching’ staff from other firms or from interstate. While contacts generally reported that this was currently not impacting significantly on wages, there was concern that it did have the potential to put pressure on wage costs in certain sectors in the future.

The issue of skilled labour shortages was also raised as a longer-term issue with a number of contacts indicating that there were not currently enough apprentices coming through the system. While this situation was seen as manageable at present, contacts thought it would have an impact when existing employees retired leaving a large shortfall in skilled labour.

Mining

Mining sector contacts noted that the sector as a whole was performing strongly at present. Most contacts noted that high commodity prices were providing a ‘natural hedge’ against the appreciation of the Australian dollar and were helping to retain profitability.

Looking ahead, contacts thought that the industry was faced with ‘fantastic opportunities’ based on strong international demand and high mineral prices. Reflecting this, investment levels were currently high and were expected to increase further.

Contacts noted, however, a number of potential impediments to growth in the sector. In particular, a number of contacts noted that rail infrastructure was limiting the amount of minerals that could be delivered to ships, especially in New South Wales. Freight costs had also risen extremely rapidly from the combination of an increased global demand and the retirement of a number of bulk commodity carrying ships. Mining contacts also indicated the existence of skilled labour shortages for some jobs.

Housing and construction

The majority of contacts stated that the housing market has slowed with a number of contacts noting that the slowdown had begun prior to the recent interest rate rises. The majority of contacts also expected further slowing, albeit moderate, through 2004.

Most contacts noted that house and unit prices were either static or had fallen. Almost all contacts also mentioned a significant increase in costs of construction. The main rises were in prices charged by sub-contractors along with the price of materials.

Contacts involved with non-residential construction typically expect continued strong levels of activity. Many indicated that investment in public infrastructure (particularly in partnership with the private sector) continued to provide work. Construction linked to investment in the mining sector was also noted as a source of ongoing activity.

1 A detailed explanation of the Treasury Business Liaison Program is provided in the Treasury Economic Roundup Spring 2001.

2 Summary reports of Treasury’s business liaison reflect the views and opinions of contacts. A summary of business conditions reported by liaison contacts is provided for the information of readers. While Treasury’s evaluation of the economic outlook is informed by findings from business liaison, a much wider range of information and data is utilised to ensure a rigorous assessment of the Australian economy.

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