South Australia is facing further job losses across its manufacturing sector, a major economic report says.

With unemployment trending upwards in recent months, jobs now loom as a key State election issue.

Deloitte Access Economics Quarterly Business Outlook sees South Australia as the State that never quite made it into the fast lane of the two-speed economy, missing out on the mining boom.

“That means the pain being felt by the State’s families at the moment is very real: that can be seen in the labour market where job losses are starting to mount – employee headcount has fallen across the State over the past year – with the unemployment rate continuing to rise sharply in recent months,” the Deloitte report, released today, says.

“But it can also be seen elsewhere, with hotel occupancy rates in the State falling and small business confidence weak.”

Deloitte says the current economic data “tells an essentially sombre story in the short term.”

“Yet although the drivers of growth are shifting, that shift may have come too late to stave off further job losses in SA’s manufacturing sector.”

There may be some good news, however, with traditional markets in agribusiness and emerging markets in education.

“So South Australia missed many of the benefits of the resources boom, but the State looks set to capitalize on the State’s strengths across a new set of developing opportunities, particularly in agribusiness and education.

“For example, foreign students in South Australia are already a billion dollar business, and the State – with its world class universities and education institutes – has been generating a rising share of the earnings of the Australian international education sector.

“Similarly, the State’s “wine lake” came of age when the $A was riding high. But the latter is already off its peaks, and probably has further left to fall. At the same time Asia’s rapidly growing middle classes will be increasingly able to afford the good things in life – and that includes SA’s food and wine.”
On a broader note the Outlook sees positive signs in global growth and string signals in many parts of the national economy.

“Ignore US budget shutdown and debt ceiling woes: global growth continues to improve.

“China appears to be through the worst of its slowdown, US recovery is becoming ever more solid, Japan’s juggle hasn’t come a cropper, and Europe’s core is growing again.

“But Australia’s outlook remains below trend.”

Deloitte’s analysts see the strength in China as good news for Australia.

“There are many more reasons to be happy than most Australians have realised, with some ‘big guns of growth’ pointing in a positive direction.”

The analysts forecast that while Australia adjusts from the mining construction boom, growth will be slow, but steady.

“The spending on mega mining construction projects which generated most of the growth in Australia’s economy in recent years has already peaked, and the fall from that peak will strip the better part of a year’s growth out of the next three years.

“Even so, there are so many other positives – especially higher exports, but also lower imports and a dose of better news on retail and homebuilding – that the overall pace of economic growth won’t be much below trend.”

Among the States and Territories, it’s a case of strong States coming back to the field, rather than weaker ones catching up.

“States still show a ‘two speed split’, but that split is already narrowing, and we see further narrowing in the next couple of years as the ‘construction cliff’ saps strength from the likes of Western Australia and Queensland, whereas lower interest rates and exchange rates generate some better news for the likes of NSW and Victoria.
“To be clear, this is a narrowing of the split, rather than its abolition for all time – WA and Queensland have grown faster than the rest of Australia for a decade, and that’s still likely to be true over the coming decade
too.

“However, the super-charged gains of the Sunbelt States in recent times are on borrowed time.

“History is moving NSW’s way. The Premier State wasn’t a big beneficiary of the resources boom, but it is lapping up lower interest rates and a more moderate $A, while NSW’s portfolio of industries also looks better suited to the sectoral growth drivers of the next two decades.

“Victoria still has the lead of a high $A in its saddlebags, but it has less to fear from the coming ‘construction cliff’ than do other States (such as WA and Queensland), while the abolition of the carbon tax would be good news for Victoria – a State with a bunch of heavy emitters.

“Queensland is through the worst of its cocktail of coal-and-State-sector cutbacks, leaving gas development as its key driver of the moment. Yet this too shall pass and, despite a big export dividend, it will be vital for interest rates to get some action going in retail and homebuilding.

“Western Australia’s growth is still magnificent. Yet that can’t last. Although the current spend on construction is huge, there simply isn’t further growth in those dollars waiting in the wings. Costs are still too high for the State to be particularly competitive in landing big new projects.

“Tasmania has been on the wrong side of Australia’s ‘two speed economy’ in recent years, but the $A is already off its peaks, and it could fall further, while interest rates are at historic lows. Even so, the State’s growth looks likely to stay stuck in the slow lane for a while longer yet.

“Relative to the size of its economy, the value of engineering construction work underway in the Northern Territory is simply massive: it is larger than that for Queensland and Western Australia. Even better, today’s construction surge will last longer than in those other States.

“Canberra is ‘one big mortgage belt’, and that’s been great news for the ACT’s economy. Yet it is even more true to characterize Canberra as a ‘one company town’.”

South Australia: Deloitte Access Economics full report

South Australia spent much of the past decade on the wrong side of a sharp two speed split in Australia’s economy. The resources boom boosted mineral development, but that was rather better news for the likes of Western Australia, Queensland and the Northern Territory than it has been for South Australia. The State’s main potential in resource development – the expansion of Olympic Dam – ended up remaining merely a possibility rather than a done deal.
However, the two speed economy that has bedevilled prospects in South Australia for so long is starting to become less of a drag on its prospects. Indeed the starter’s pistol has fired on new growth opportunities for South Australia – the shift to lower interest rates and a lower $A makes life easier for many of the State’s businesses, and will allow some to go on the front foot, moving from ‘defence’ to ‘offence’ for the first time in years.
Lower exchange rates are great for manufacturers, the tourism sector, prospects for lifting numbers of foreign students studying here, as well as for the State’s farmers (who already look set to enjoy a better year this year anyway thanks to some more favourable weather). Similarly, lower interest rates are excellent news for both retail (where latest data show notably better news out of South Australia) and for housing construction.
At the same time some of the State’s traditional export markets – such as the United Kingdom and the United States – are registering better news on the economic growth front than they have done for some time. Hence shorter term prospects are improving.
Yet, even so, the shorter term still remains an issue. ‘Improving’ doesn’t yet mean ‘solid’. The change in gears in sectoral prospects may have come too late to save the core of the State’s car-making and car parts sector. The flagged end to production in Victoria (and Australia) by Ford in 2016 has knock on implications for this State as well. And although yet another round of Federal and State subsidies may help – topping up the assistance already on offer from a lower $A – they may still be more in the nature of delaying the inevitable rather than kick-starting a recovery.

Or, in other words, although the drivers of growth are shifting, that shift may have come too late to stave off further job losses in South Australia’s manufacturing sector – a sector whose growth has already underperformed all the other industries in the State over the past decade.
That means the pain being felt by the State’s families at the moment is very real: that can be seen in the labour market where job losses are starting to mount – employee headcount has fallen across the State over the past year – with the unemployment rate continuing to rise sharply in recent months. But it can also be seen elsewhere, with hotel occupancy rates in the State falling and small business confidence weak.
So South Australia missed many of the benefits of the resources boom, but the State looks set to capitalise on the State’s strengths across a new set of developing opportunities, particularly in agribusiness and education. For example, foreign students in South Australia are already a billion dollar business, and the State – with its world class universities and education institutes – has been generating a rising share of the earnings of the Australian international education sector. Similarly, the State’s “wine lake” came of age when the $A was riding high. But the latter is already off its peaks, and probably has further left to fall. At the same time Asia’s rapidly growing middle classes will be increasingly able to afford the good things in life – and that includes SA’s food and wine.
Finally, although the expansion at Olympic Dam hasn’t yet got the go ahead, it will at some stage. This is a world class asset, and demand for its potential production will continue to rise over time. Moreover, initial exploration completed in the Arckaringa Basin suggests that there may be an enormous shale oil gas opportunity in the area surrounding Cooper Pedy.
Hence the State’s longer term prospects are improving. Or, more broadly, the transition that Australia’s economy is commencing should suit South Australia. The State didn’t make hay from the initial phase of the resources boom, but that also means it is less at risk from factors such as ‘the construction cliff’ – as there was no enormous increase in resource development, equally, there can’t be a subsequent collapse in it.

A few years ago the outlook for South Australia was far more assured than it is now, and the State’s housing sector was contributing close to 10% of the new building in the country – a share well above the State’s share of the national economy.
However, the growth in the good days may explain why the State’s fortunes turned. It may just have gone a bit too close to the sun for its own good, building up unrealistic expectations that the State’s fundamentals – particularly population growth – really cannot deliver on. So homebuilding in the State not so much fell away as returned to normal.

More recent news bears this out somewhat: a number of key variables (construction indicators and building levels, as well as broader measures) have largely stabilised at rates that are likely to be sustainable in the longer term, population growth is off its lows, vacancy rates are easing and house prices are moving marginally higher. That leaves our medium term outlook for housing construction in South Australia much the same as it has been for a while – sober and reassuringly predictable.

With a collection of proposed resource related projects still on the drawing board, other sectors are doing the heavy lifting in South Australia’s engineering construction sector. Indeed, Deloitte Access Economics’ Investment Monitor shows very little in the way of resource-related projects now underway in South Australia, despite showing a project pipeline valued in the order of $14 billion.
Rather than resource projects, a series of large rail and road projects account for much of the value of engineering work that is underway in the State. Those projects are led by the $842 million South Road Superway project to upgrade a 4.8 kilometre stretch of road between the Port River Expressway and Regency Road, while rail projects are led by a revitalisation of the Noarlunga Line for electrification and to upgrade stations, signalling and communication infrastructure at a cost of $468 million. Other major road and rail projects underway include the $443 million upgrade to the Goodwood and Torrens rail junctions, as well as a $408 million expansion of the Southern Expressway, with work due for completion in mid-2015.

Elsewhere, upgrades of the Christies Beach Waste water treatment plant are slated for completion by late 2013, while an expansion of the stadium seating at the Adelaide Oval is scheduled to be open to the public by the start of 2014.

With a manufacturing sector still suffering under a high $A, SA’s commercial construction sector has had a hard time attracting private investment of late. As a result its commercial construction sector has been supported in recent times by large publicly funded health projects. The largest entertainment and recreation project in the State, the $400 million redevelopment of the Adelaide Festival Centre, is also State-funded, while the government is also contributing to the construction of an advanced manufacturing hub at the redeveloped Tonsley Park site, with final works expected to cost $1 billion.