STATE UPDATE: TASMANIA

STATE UPDATE: TASMANIA

JULY 2016

Important Notice

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CONTACTS

Phin Ziebell

Riki Polygenis

Skye Masters

Economist

Head of Australian

Head of Interest Rate Strategy

+61 (0) 475 940 662

Economics

+61 2 9295 1196

[email protected]

+61 3 8697 9534

[email protected]

[email protected]

CONTENTS

2 | Key points

3 | In Focus: electricity in Tasmania

4 | Tourism

5 | Consumer & household sector

6 | Business sector

7 | Residential property

8 | Labour market

9 | Demographics

10 | Economic structure and trade

11 | Fiscal outlook & semi market

CHART 1: STATE GSP GROWTH FORECASTS

Annual growth, per cent

CHART 2: STATE FINAL DEMAND GROWTH

Per cent

Source: ABS and NAB Group Economics

KEY POINTS

The outlook for the Tasmanian economy has improved over the past

year, although there is some divergence in key indicators

: while

unemployment has fallen, particularly in Hobart, housing approvals and

commencements have taken a hit. Likewise, there will be divergence

across major industries: tourism continues to perform well while

farmgate price cuts will continue to put pressure on the state’s hitherto

burgeoning dairy industry.

Agriculture, forestry and fishing accounts for almost 10% of Tasmania’s

GSP (compared to around 2% nationally) and is the state’s largest sector.

While forestry continues its structural decline, agriculture has become

more important thanks to a cool climate and expanding irrigation

schemes (particularly for dairy).

Tasmania’s strong reputation for quality

and food safety is a key export advantage for food products.

Likewise, Tourism Tasmania reports that Tasmania is more dependent on

tourism than any other state in Australia. The lower AUD, combined with

a diversity of high quality holiday attractions (such as MONA), has made

Tasmania a more attractive destination for Australian and international

tourists. While Victoria remains the biggest single source of domestic

tourists (owing to proximity), tourism from other states are growing

strongly.

Tourists spent $2.01b in Tasmania in the year ended March

2016, up 7%.

This will be a positive for investment and retail, although

commercial building approvals present a mixed picture.

Tasmania’s annual GSP growth has mostly been below the national

average since the early 1990s, with the gap widening substantially in the

post-GFC era (chart 2). Unemployment has fallen recently but the outlook

for construction is mixed. Population growth has also been slow, but

looks to be picking up. Nevertheless, growth remains below the national

average.

We forecast that GSP will grow 2.2% in 2016-17 and

2.1 % in 2017-18.

TAS

Australia

NSW VIC QLD SA WA TAS NT ACT

IN FOCUS

Electricity in Tasmania

The late 2015 failure came after Tasmania sold higher priced hydro power into

Victoria in the run-up to summer, which alongside drought, left storage levels around 25-30%. Without Victorian-sourced electricity, Tasmania was forced to set up

expensive diesel generators and run the hydro to precipitous levels, with storage levels falling to just over 13% in April. EnergyQuest estimates that the cable failure has cost as least $560m. While recent rains have replenished storages, the experience will likely limit Hydro Tasmania’s ability to sell electricity to the mainland over future summer peak periods.

Source: Hydro Tasmania, AEMO, AER, EnergyQuest and NAB Group Economics

Tasmania’s electricity sector – dominated by hydro-electric generation – has come under intense scrutiny this year, driven by extreme drought over the summer and early autumn combined with the failure of the Basslink interconnector with Victoria in December 2015. Basslink, opened in 2006, connects Tasmania to eastern

Australia’s National Electricity Market, an interconnected grid covering all states except Western Australia and the Northern Territory. This allows Tasmania to export hydro power to the mainland when prices are high and import brown coal fired power from Victoria when prices are low.

CHART 3: HYDRO TASMANIA SYSTEM STORAGE LEVEL

% of system capacity

CHART 4: TASMANIAN WHOLESALE ELECTRICITY SPOT PRICE

CHART 5: ANNUAL BASSLINK NET INTERCONNECTOR FLOW

GWh/annum, negative number = net import from mainland

0% 10% 20% 30% 40% 50% 60% 70% 2010 2011 2012 2013 2014 2015 2016

Basslink

failure

TOURISM

Continues to grow strongly

A key driver of Tasmania’s tourism renaissance (beyond the appeal of attractions) is the fall in the value of the Australian dollar over the past few years. This has made domestic holidays relatively cheaper, reflected in the greater diversity of state of origin for domestic visitors. Victoria continues to the biggest single source of domestic tourism, reflecting the state’s close proximity to Tasmania. However, Victoria’s share has fallen from 46% of visitors four years ago to 43% today. Tourists spent $2.01b in Tasmania in the year ended March 2016, up 7%.

Source: Tourism Tasmania, Austrade and NAB Group Economics

Tasmania ranks as one of Australia’s most appealing tourist destinations, ranking second in appeal after Queensland according to the most recent data from Tourism Tasmania. The state is highly dependent on tourism, with tourism accounting (directly and indirectly) for over 9% of Tasmanian GSP, the highest in Australia. Tasmania is enjoying a domestic tourism revival thanks to new and popular attractions such as MONA. Total domestic visitor numbers were up 6% in the year ended March 2016, surpassing the 1,000,000 mark for the year. Meanwhile, international visitor numbers were up 9.1% to 216,000.

CHART 6: INTERSTATE VISITORS TO TASMANIA

Number, annual to March, by state of origin

CHART 8: TOURISM SPENDING BY TYPE

0 200,000 400,000 600,000 800,000 1,000,000 1,200,000 Apr 2012 - Mar

2013 Apr 2013 - Mar2014 Apr 2014 - Mar2015 Apr 2015 - Mar2016

NT ACT WA SA QLD NSW VIC 0 500 1000 1500 2000 2500 Apr 2012 - Mar

2013 Apr 2013 - Mar2014 Apr 2014 - Mar2015 Apr 2015 - Mar2016 Other items Accommodation Transport

CHART 7: INTERNATIONAL VISITORS TO AUSTRALIA BY STATE

y/y % 12 months to March 2016

-5% 0% 5% 10% 15%

CONSUMER SPENDING

Tasmanians remain cautious, but conditions are improving

Consumer behaviour in Tasmania remains reasonably cautious although the NAB Consumer Survey showed a pick-up in Q2 2016 in an number of areas. Survey respondents continue to spend on essential goods and services such as groceries, transport and utilities, while demonstrating more prudent intentions in longer-term financial management strategies to focus on savings, super and investment, as well as paying down debt.

Source: ABS and NAB Group Economics

Wage growth and household consumption remain positive, although national conditions. The recent fall in unemployment in Hobart may present some upside, although the volatility of labour force data gives some pause in reaching this conclusion.

Retail sales remain robust, perhaps due to tourism expenditure.

CHART 9: COMPENSATION OF EMPLOYEES AND H-HOLD CONSUMPTION

Growth, y/y %, nominal

CHART 11: NAB CONSUMER ANXIETY SURVEY - CONSUMER SPENDING

_PREFERENCES

CHART 10: RETAIL TURNOVER AND HOUSE PRICE GROWTH

y/y %

-50

-40

-30

-20

-10

0

10

20

Entertainment

Charitable donations

Travel

Major HH items

Home improvements

Use of credit

Eating out

Personal goods

Utilities

Children

Transport

Savings, super,

investments

Medical expenses

Groceries

Paying off debt

Q1'16 Q2'16 -8.0% -4.0% 0.0% 4.0% 8.0% 12.0% 16.0% 20.0% -8.0% -2.0% 4.0% 10.0% 16.0% 22.0% 28.0% 2005 2007 2009 2011 2013 2015

Hobart House Price Growth (y/y%) - RHS Retail Turnover Growth (y/y%) - LHS

-10% -5% 0% 5% 10% 15% -10% -5% 0% 5% 10% 15% 1997 2000 2003 2006 2009 2012 2015

Total compensation per employee as proxy for household income Household Consumption

BUSINESS CONDITIONS

Divergence between manufacturing and tourism, agriculture

Agriculture, forestry and fishing accounts for almost 10% of Tasmania’s GSP

(compared to around 2% nationally) and is the state’s largest sector. The dairy sector has seen considerable growth and the state’s share of national milk production has been steadily increasing over the last decade. Farm gate milk prices have come under considerable pressure this year, reflecting a steep decline in international dairy prices since 2014. Murray Goulburn, the nation’s largest dairy producer, recently released its opening price for 2016-17. It forecasts a farm gate price of $4.80/kg milk solids, which could be as low as $4.31 for some producers.

Source: ABS, ABARES and NAB Group Economics

In previous years, investment has been undermined by a strong AUD, which

weighed on tourism and primary exports. A structural decline in the manufacturing sector has further weighed on sentiment. However, while a lower AUD since 2014 may not reverse the structural decline in manufacturing, it should improve the tourism sector. Non-residential building approvals, while volatile, continue to show a slowdown in all categories except ‘other’.

CHART 12: NON-RESIDENTIAL BUILDING APPROVALS

$ million

CHART 13: TASMANIA’S SHARE OF AUSTRALIAN WHOLEMILK PRODUCTION

0 5 10 15 20 25 30 2000 2002 2004 2006 2008 2010 2012 2014

Retail/wholesale Offices Factories Warehouses Other

$m 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1970–71 1980–81 1990–91 2000–01 2010–11

RESIDENTIAL SECTOR

Approvals and commencements are falling

The pick-up in housing approvals since 2013, associated with looser supply

fundamentals, kept a lid on house price growth but looks to have come to an end. Recent data show a downturn in approvals as well as commencements. Tasmania’s unit approvals remain well below the national average, although house approvals remain much closer to the national average data.

Tasmania’s housing market is very different from the mainland, with relatively few units and generally much lower prices – the median hedonic price in Hobart is now around half of the weighted average of all capital city prices.

House prices have been kept low by low population growth combined with continuous growth in housing supply over most of the 2000s, driving the dwelling to population ratio higher over time.

CHART 14: RESIDENTIAL APPROVALS AND COMMENCEMENTS

Tasmania

CHART 16: BUILDING APPROVALS RELATIVE TO POPULATION

CHART 15: PRICE GROWTH BY REGION

% change from previous quarter 0 200 400 600 800 1000 1200 1985 1990 1995 2000 2005 2010 2015 Approvals Commencements -8 -6 -4 -2 0 2 4 6 8 Greater Hobart Mersey-Lyell Northern Southern Units Houses

Source: ABS and NAB Group Economics

0 50 100 150 200 250 300 19 85 19 88 19 92 19 96 20 00 20 03 20 07 20 11 20 15 20 18 19 88 19 92 19 96 19 99 20 03 20 07 20 11 20 14 20 18

TAS House App to pop TAS Unit App to pop Aust House App to pop Aust Unit App to pop

LABOUR MARKET

Unemployment is falling, especially in Hobart

Over the 12 months to the June quarter 2016, health, education, transport and finance saw the biggest employment gains. Hospitality, followed by closely by construction and mining, suffered the largest number of job losses. The recent fall in residential building approvals bodes somewhat ill for the construction industry. Looking over the last three years, the biggest job losses have been in hospitality and construction despite these sectors contributing considerably to GSP growth.

Slower economic growth saw the Tasmanian unemployment rate rise steadily in the aftermath of the GFC from 2008 to 2013 despite weak population growth over the period. It started trending downwards from its peak of 8.7% in June 2013 to a low of 5.8% in September 2015. While we note volatility in the data (including a slight increase in the latest reading), an upward trend since September last year has now been reversed, particularly in Hobart.

CHART 17: UNEMPLOYMENT RATE BY REGION

%

CHART 18: CHANGE IN EMPLOYMENT BY INDUSTRY

Source: ABS and NAB Group Economics 2 3 4 5 6 7 8 9 10 11 12 2000 2005 2010 2015

Tasmania Greater Hobart Rest of TAS

-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 Health Education Transport Finance Agriculture Admin services Retail trade Manufacturing Communications Rental services Arts Other services Utilities Wholesale trade Public admin Business services Mining Construction Hospitality

DEMOGRAPHIC TRENDS

Population growth remains below the national average

Tasmania’s population is older than the national average, with a notably smaller proportion of the population aged 20 to 40. This has clear implications for government revenue and health spending. Tasmania’s share of the Australian population is also falling over time. Not only is the Tasmanian resident population ageing, the population is growing at a significantly slower rate than the national average.

Weak GSP growth in the wake of the global financial crisis (except for 2013-14) saw a reversal in the tide of interstate migration from net positive to negative, with the net outflow of Tasmanian residents to other states peaking in September 2012 at around 2,800 people in the quarter. This has since moved closer to neutral and with natural increases and net overseas migration, Tasmania’s population growth is in positive territory.

CHART 19: POPULATION GROWTH DRIVERS

’000 over the year

CHART 21: POPULATION SHARE BY AGE

-6 -4 -2 0 2 4 6 8 1985 1990 1995 2000 2005 2010 2015

'000s _{Natural increase Net overseas migration}

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1975 1980 1985 1990 1995 2000 2005 2010 2015 80 plus 71 to 80 61 to 70 51 to 60 41 to 50 31 to 40 21 to 30 11 to 20 0 to 10

CHART 20: TASMANIA POPULATION GROWTH

Year ended growth

-0.5 0.0 0.5 1.0 1.5 2.0 2.5 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 TAS AUS

ECONOMIC STRUCTURE AND TRADE

Tasmania’s external trade is focussed on East Asia. China is the biggest export

destination presently, although other nations in the East and South East Asian region feature prominently. The United States and New Zealand also feature in the state’s major trading partners.

Tasmania is an island located south of the Australian mainland. It is Australia’s least populous state, having a population of just over 500,000. This combination of remoteness and low population presents a number of economic challenges. Health is the biggest employer, and retail, education, hospitality, manufacturing and public administration are also major employers. This reflects Tasmania’s reliance on government services delivery employment and tourism.

CHART 22: COMPOSITION OF EMPLOYMENT & GVA

2014-15

CHART 23: TOP TASMANIA EXPORT DESTINATIONS AND IMPORT SOURCE

_COUNTRIES

12 month average 0% 2% 4% 6% 8% 10% 12% 14% 16% Agriculture Mining Manufacturing Utilities Construction Wholesale trade Retail trade Hospitality Transport Communications Finance Rental services Business services Admin services Public admin Education Health Arts Other services Employment GVA

Source: ABS and NAB Group Economics

Value of imports ($m) 1 Korea 154 2 China 131 3 EU 120 4 ASEAN 101 5 US 52 6 Singapore 46 7 UK 29 8 Germany 23 9 New Zealand 19 10 Japan 16 11 Taiwan 5 12 HK 0 Value of exports ($m) 1 China 867 2 ASEAN 688 3 Taiwan 274 4 US 210 5 Japan 208 6 Korea 125 7 HK 110 8 New Zealand 107 9 India 84 10 EU 62 11 Singapore 58 12 UK 9 13 Germany 5

FISCAL OUTLOOK

S&P is yet to confirm Tasmania’s credit rating post the budget but we do not see the budget causing any changes to the rating.

Non-financial public sector net debt is expected to remain steady through the forward estimates. The Governments focus is to work on improving the financial position of the state and managing the risks such as superannuation liabilities. As to the later the Government continues to meet the cash cost of defined benefit scheme but liabilities remain sensitive to discount rate movements.

Source: Tasmanian budget papers, Tascorp, Bloomberg, NAB

The 2016-17 Budget forecasts a net operating balance of $77.3 million for 2016-17, a return to surplus three years earlier than expected. A small surplus is forecast in 2017-18 and a deficit in 2018-19 before another return to surplus in 2019-20. Tascorp has said that its borrowing program for 2016-17 will total $900m which is slightly higher than the 2015-16 program. Tascorp will issue a new Feb 2028 fixed rate line with the remainder of the programme likely to be raised via existing Hotstock lines.

CHART 24: NET OPERATING BALANCE

General government sector, $ million

CHART 26: TASCORP BONDS OUTSTANDING AS AT END JUNE 2016

CHART 25: TASMANIA NON-FINANCIAL PUBLIC SECTOR DEBT

$ billion 0 200 400 600 800 1000 1200

Nov-16 Sep-17 Jun-20 Mar-22 Jun-24 Feb-26 AUDmn 0.0 0.5 1.0 1.5 2.0 2.5 3.0 2014-15 2015-16 2016-17 2017-18 2018-19 AUDbn FY 17 FY 16 MYBR FY 16 -100 -50 0 50 100 2015-16 2016-17 2017-18 2018-19 2019-20