891 Mornings with Ian Henschke were joined by experts in the field of our State's economy to discuss South Australia's current balance sheet.
The Panelists
- * Jane Kittel, managing director of Bank SA.
* Hamilton Calder, the state director of the Committee for Economic Development Australia.
* Darryl Gobbett, chief economist of Prescott Securities.
* John Spoehr, executive director of the Australian Institute for Social Research and the Centre for Labour Research.
* Richard Blandy, adjunct professor of Economics at the School of Management, UniSA.
The economy
Jane Kittel: Score 7/10
The South Australian economy has been a strong performer in the wake of the Global Financial Crisis and although there are some tough times now, there is cause for real optimism about the future.
In the short-term it is taking longer for the global economy to recover from the GFC than was originally anticipated.
For Australia and for SA, the Government stimulus packages implemented at the height of the GFC have fully worked through the system, and it is taking time for sufficient momentum to be generated again.
The good savings habits of South Australians helped the State withstand the GFC.
Those lower debt levels per household than the eastern States gave the State improved flexibility.
The business sector in SA is also going through a period of de-leveraging and is taking a conservative approach, paying down debt and positioning itself for an upturn.
However, private business investment in SA is growing faster than the national average, and is expected to pick up later this year.
With the mining and defence sectors the main drivers, SA is primed for strong growth.
We are situated in an ideal position on the doorstep of Asia and the foundations are there to capitalise further on demand from China and India and other fast-growing economies in the region.
China is already SA's biggest export destination in dollar terms with $1.25 billion in exports during 2009-10.
This was followed by the United States with $955 million, Japan at $680 million, India at $599 million and the United Kingdom at $531 million.
Overall there are more than $80 billion of projects either underway or in the planning stage, much of it in mining and defence.
As those projects come to fruition, the spin-offs into the general economy will be substantial.
One of the elusive elements right now is confidence.
There is a renewed degree of caution triggered largely by a fresh round of concerns on global markets about the public sector debt levels in Greece and the risk of default.
There are some similarities between the fears about debt levels in Greece and other European countries, and the 1997 Asian crisis.
In 1997 Thailand and Indonesia needed large financial support packages from the International Monetary Fund and were able to work through their problems.
The building blocks are in position for South Australia to prosper.
One of the major catalysts for a step-up in SA's economic growth is the decision by BHP Billiton on whether to expand its Olympic Dam mine at Roxby Downs.
The BHP Billiton board has signalled it will make a decision in the March quarter of calendar 2012.
The go-ahead would result in a truly transformation event, with an economic pact to the State of up to $48 billion.
Another important element for the future is the decision by the Federal Government in May this year to allow exploration in the Woomera Prohibited Area (an area the size of Britain).
It is estimated to hold $35 billion of mineral wealth in the ground, including 62% of Australia's known copper reserves.
Housing (including affordability and lifestyle) 8.5 out of 10
Business Investment: 7 out of 10
Gross State Product: 6.5 out of 10
Labour Market: 7 out of 10
Inflation: 6 out of 10
Overall rating for SA Economy 7 out of 10 (the average of the 5 categories above)
Hamilton Calder: Score 6/10
South Australia's economy is heavily dependent on exports and as such, the State's performance over the short to medium term will be closely linked to global issues, particularly the cost of money and the value of the Australian dollar.
Key Industries
South Australia's industry landscape has changed significantly over the past ten years, with manufacturing falling from the main employing industry to third behind Health Care and Social Assistance and Retail Trade respectively, in terms of total employment.
In fact, during 2006/07 Health Care and Social Assistance replaced Manufacturing as the sector employing the most people in South Australia and Retail Trade followed soon after.
Combined, these three sectors accounted for around 20% of the State's employment growth over the past 10 years.
Manufacturing however still rates as the leading annual contributor to SA's Gross State Product (GSP), followed by Health Care and Social Assistance, Construction and Retail Trade.
Significantly, the value of Manufacturing and Retail to GSP are trending lower, whilst Health Care and Social Assistance and Construction are trending higher.
Significantly this year, Agriculture increased its contribution to the SA economy, while Mining, Exploration and Defence are important, but still only small contributors to SA's economic activity, with significant potential to increase.
Most recent figures on SA Exports indicated that Wheat, Copper and Wine were the three largest contributors to State exports.
December 2010 figures also highlight a significant widening of SA's Trade surplus to around $500million, with exports totalling around $1billion and merchandise imports of around $500million.
Global Risk Environment
Unfortunately, the global economic, political, social and natural environments are facing significant potential risks, just at a time when the world is still struggling to emerge from the effects of the GFC.
As South Australia's economy is highly export focussed and our national economy looks to China for continued strong growth, these global risks present significant challenges to our local economy.
These risks can be broken down into five themes:
• Sovereign Debt in Europe - Portugal, Ireland, Greece and Spain (the PIGS). Concerns that a default by Greece will lead to a crisis in confidence in world financial markets, with impacts being the higher cost of money and possible economic/social breakdown spreading.
• Geopolitical Issues in the Middle East/Africa - while to be celebrated, the popular uprisings seen across the region, including Egypt, Libya and into Syria, the ongoing impact of these conflicts on crude oil supply and in turn price is a significant risk .
• US Economy - with continued purchasing of bonds by the US Federal Reserve as part of their Quantitative Easing 2 program (ie printing money), high levels of un-employment and continued dependence on foreign oil, the US economy could still move into a 'double-dip' recession.
• Global Food/energy/water nexus - As highlighted by the World Economic Forum in their Davos meeting raises the key issues of how the world will provide food, water and energy to satisfy increasing population and urbanisations on countries (particularly developing countries). Add into this category, the real and increasing risk of climate change.
• China - will the bubble burst? Are growth rates of 8% and higher sustainable and is there a risk of an urban property bubble bursting, reducing growth and in turn impacting on Australia.
There is very little that SA can do to face these risks in the short-term, however in the medium to long term, maintaining a strong diversified economy will ensure we are as prepared a possible to deal with an uncertain global risk environment
Darryl Gobbett: Score 6/10
South Australia has come through the Global Financial Crisis as whole remarkably well, given the global uncertainties, the surge in the $Aus and the expectations of higher interest rates.
The State is having to deal with the impact of some of the adverse side effects of the global commodities boom without yet seeing the benefits of the employment and investment that WA and Qld in particular are seeing.
So many of our businesses are having to deal with the impact of the national labour shortages, higher wages than overseas, higher interest rates and the higher $A on costs, demand and international competition now.
This position is not being helped by the unwillingness or inability of the State Government to draw back from its position, in state per capita terms, as a high spending high taxing government with a quite poor productivity performance.
Despite this employment is at record levels and unemployment is heading back to the lowest seen since the 1970s.
SA now faces a quite unusual situation of whether it can meet the labour force requirements of businesses in sectors such as mining and mining services, defence, health care and construction that are likely to have decades of growth ahead of them.
Agriculture too seems likely to be a growth area, particularly in cereals.
The State's population continues to grow relatively strongly and is a lot larger than many in the 1990s would have expected.
We still lose too many of our young people permanently interstate because they do not see the opportunities available here.
House prices have held up very well but land prices are far too high.
The construction sector has done a very good job in limiting cost growth.
Adelaide continues an unsustainable sprawl for what is a relatively small population and in the face of higher energy, water and building costs.
Not enough is being done for urban infill and the mixing of commercial and residential activities.
The continued geographical growth of Adelaide is increasing the costs and effort of living here, particularly regarding tarnsport, and building more social problems.
The expected growth of the mining sector and recovery in agriculture, along with a more rapidly ageing population, provides a good mix of opportunities to grow many existing and new regional urban areas.
This should see public policy looking more at what services and people can be shifted to those towns and cities and what is the regional impact of policies such as the sales/leasing of forest logging rotations, hospital amalgamations etc.
The mark would be higher if I had more confidence about the ability of SA to capture the opportunities ahead.
We are seeing another great transformation of the global economy, with China and India regaining their places as the world's largest economies and in the process bringing billions of their own and other peoples out of poverty.
But in this process, that has decades to run, we will see a focus in those countries on education, research, development and innovation that will be both another source of transformation of their economies and societies and provide major sources of demand and competition for Australia and South Australia.
I am not sure that we are equipping our people for those changes, eg with language skills, or creating the flexibility and cost structures in the public and private sectors that will allow us to engage and compete effectively.
John Spoehr: Score 7/10
Australia is an island of relative stability in a sea of economic uncertainty.
South Australia's economic fortunes are tied a continuation of this.
The story so far is a good one with economic and employment growth rates forecast to make inroads into out relatively low unemployment rate over the next few years.
We might have escaped the worst impacts of the global financial crisis but the high Australian dollar is hurting South Australian non-defence manufacturing, tourism, agriculture and retail.
If the Australian dollars stays around $1.05 to the US dollar there is potential for long lasting damage to be done to our commodity exporters.
An obsession with running budget surpluses has been a hallmark of both Liberal and Labor State Governments since the State Bank crisis.
Two decades later we might just be witnessing a rethink of this approach.
With very low levels of government debt relative to the nation and most countries in the OECD we have much more room to move than most.
Running prudent deficits makes sense as does borrowing for major infrastructure projects like the Royal Adelaide Hospital - the point of having a AAA credit rating is to enable the State Government to borrow more cheaply than the private sector can to fund major projects.
The forecast operating deficits in the State Budget recognise constraints on the revenue side, predominantly a reduction in GST revenue flowing from the impact of the global financial crisis.
This is a short-term problem that will improve as national economic growth picks up over the next few years and South Australia's share of GST improves as a result of the Western Australian Government being penalised for its decision to increase royalties on the mining industry.
South Australia's revenue will grow for other reasons over the next few years as well.
The elephant in the economic room is the proposed expansion of Olympic Dam.
If the State Government gives BHP Billiton the green light over coming months the stimulus effect of this on the State economy will be substantial, boosting employment and budget revenues.
On the downside a persistently high Australian dollar threatens serious damage to our exports.
The longer term challenge for South Australia remains the same as it has for many years - industry diversification and knowledge/skill intensive industrial development to help dampen some of the worst effects of inevitable booms and slumps.
Mining booms can deliver great benefits but they must not be relied upon to deliver prosperity for all.
At the moment the WA and Queensland booms are generating great wealth but also great disparities in the distribution of wealth and income.
They are also underpinning the damaging rise in the Australian dollar.
Richard Blandy: Score 6/10
South Australia is in the middle of an economic slow-down relative to Australia as a whole.
The South Australian Government has clearly been forced to cut spending and sell assets because of straightened circumstances.
But, thanks to the likely 2012 start of the expansion of the huge Olympic Dam copper mine, the State and the Government's fortunes are likely to take a dramatic turn for the better next year and beyond.
The State is likely to match (or exceed) the national economic growth rate by 2012/13.
Thirteen indicators of South Australian economic activity (compared with Australia, New South Wales and Victoria) are presented in Table 1.
These indicators use the most recent available data in each case.
Looking at recent economic indicators, South Australia is not doing as well as usual.
Dwelling approvals are down by nearly a quarter; overall retail sales have fallen, unlike overall retail sales in Australia as a whole, in New South Wales and in Victoria.
Construction activity is down, contrary to the experience of Australia as a whole, New South Wales and Victoria.
Newspaper job advertisements are down heavily, far more so than for Australia as a whole, New South Wales and Victoria.
(Internet job advertisements are up strongly, nationally, so it is only the relative movement in newspaper advertisements that is relevant in assessing employment prospects.)
Confirming this picture, employment in South Australia is growing at three quarters of the rate nationally, in New South Wales and in Victoria.
The only really bright spot in these numbers is expenditure on mineral exploration which is continuing to grow at a strong rate, significantly exceeding the national growth rate.
Taken as a package, these data give a picture of a South Australia that has slowed down relatively to the rest of Australia.
The South Australian Government is right to cut its spending to maintain South Australia's AAA rating (rather than raise taxes or run a larger deficit).
The mainstay of South Australia's economy - small business - needs to be given a great deal more support (by a greater focus on internet-based interaction with business, by a reduction in red tape, by support for fast broadband and by reductions in business taxes and charges).
Greater cuts to South Australian government outlays may be needed to enable this
