Beaten one day, perfect the next

Queensland has an optimistic attitude and a can-do government to lead it out of its natural crisis.

Natural disasters tested the emotions and stoicism of Queenslanders during 2011. They also played havoc with its economy, one that was already reeling from the global financial crisis.

But with challenge comes opportunity. Reconstruction has and will continue to foster demand. Again, economic growth in Queensland is forecast to exceed the national average. Apart from one quarter in the mid-’90s, this has consistently been achieved since the end of the 1982-83 recession.

Such optimism comes with a warning. Two of the traditional mainstays of the economy, tourism and property, remain anaemic. Tourism is weak because the high dollar and La NiƱa mock Queensland’s catchcry − “Beautiful one day, perfect the next.”  Property is suffering because the boom overhang is considerable thanks to supply still far exceeding demand. Residential housing remains subdued particularly in the major northern coastal and south-eastern centres.

Things could seriously go awry if that other mainstay of Queensland, resources, falters. There is a growing threat to commodity prices from a policy induced or cyclical fall in demand from China. That would threaten the national economy, and be particularly felt in Queensland’s mining hubs before spreading to the rest of the State.
These are the considerable challenges that confront the new Liberal National Party government led by Campbell Newman, elected on 24 March, 2012.

The summer of horrors

The human effect of the 2011 floods and cyclones was immediate. We saw it emblazoned across the mass media − 35 dead, 9 never found − a human and emotional toll that will remain forever.

The floods affected 70 per cent of Queensland and 60 per cent of its people. Cyclone Yasi damaged and in many parts destroyed the 400 kilometre coast between Cooktown and Townsville, and it wiped out the bulk of the nation’s banana crop.

The lag in obtaining statistics meant that the initial economic effects were more nebulous. When the numbers were revealed they were, quite simply, staggering.

The Queensland Treasury estimates that the disasters detracted 1.75 per cent from gross state product, approximately $4 billion in real terms.

Infrastructure damage across Queensland was between $5 billion and $6 billion. There was an inevitable impact on output as the floods led to mines being shut down or operated below capacity. Added to this, the cyclone caused week-long closures to important export coal terminals, including at Dalrymple. Both the floods and cyclone seriously damaged rail networks that service mining centres.

The loss to production in agriculture was approximately $1.4 billion. In addition to the decimation of Queensland’s banana crop, almost 20 per cent of Australia’s avocado and sugar crops were destroyed. The floods caused nearly $175 million worth of damage to the state’s cotton crop and delivered extensive destruction to the Lockyer Valley, a major food source.

The impact on tourism was expected to be around $400 million. While Yasi spared Cairns and its immediate surrounds, the industry there and across the State generally has more to worry about than inclement weather.

The impact was also felt by the national economy. The damage to food crops contributed a 0.5 per cent increase to inflation in each of the 2011 March and June quarters. Gross Domestic Product for the 2011 financial year decreased by 0.5 percent and tax revenues were down $1.75 billion during the same period.

The disasters also had nationwide regulatory consequences. A standard definition of flood is to be included in certain prescribed classes of insurance contracts. Insurers will be required to offer flood cover. States must now have minimum levels of their own insurance or reserve capital if they are to qualify for Federal Government disaster relief.

Reconstruction

While the physical and psychological scars are permanent, the economic ones will be less so. What was lost by the disasters will be made up in reconstruction.

More than 30,000 properties were damaged. Accordingly, a significant increase in dwelling construction activity has taken place as homes are rebuilt or repaired. Mining activity will also catch up to compensate for production losses caused by shut downs and transport disruptions.

During the recovery period, Queensland Treasury forecasts growth of 5 per cent, compared with 4.25 per cent in the absence of the disasters. Unemployment is at 5.25 per cent, compared with 5.5  per cent otherwise.

Let’s not forget Japan

Japan had its own annus horribilis after the Tokyo earthquake, ensuing tsunami and nuclear meltdown.

In the aftermath of our own disasters, the profound economic effects of Japan’s tragedy upon Queensland’s economy went somewhat unnoticed.

For many years Japan has been, by far, Queensland’s largest trading partner so the tsunami had its own local economic dimension. Coal exports to Japan from Queensland alone were expected to be down by $1 billion in the year following the tsunami. Other mainstays of bi-lateral outbound trade, tourism and beef, were also expected to be hit hard, with the full impact yet to be measured.

In the longer term, the disaster may yield opportunities for increased coal exports. That will be the case if Japan, like Germany, swears off nuclear power as an energy source. Lack of capacity in the Japanese power grid recently forced the restart of two nuclear reactors. However, popular opinion remains steadfast against nuclear power as an ongoing energy source.

The two speed economy exemplified

One-off reconstruction effects aside, Queensland probably best exemplifies the structural challenges facing the national economy.

The non-commodity export sectors of goods, tourism and education are particularly vulnerable because of the high Australian dollar. The impact on tourism is a double whammy as Australians head overseas and foreign tourists stay away. Subject to two qualifications, there is much to be said for the view that the Australian dollar is not currently overvalued. If that is the case, the outlook for these sectors will remain pessimistic.

The two qualifications are continued uncertainty around American and European sovereign debt and the threat of a downturn in commodity prices. Unless America and Europe get their public finances in order, quickly in the case of Europe, then weakening market confidence will cause a capital flight from Australia. Added to this is growing evidence of a not insubstantial downturn in China, threatening a consequent downturn in commodity prices. Either circumstance eventuality would weaken the Australian dollar.

Domestic demand is not picking up the slack in the non-commodity sectors. Credit remains tight due to a combination of market conditions and, until recently, relatively tight monetary policy. This has flown through to weaker household consumption and lower than forecast business investment. This is the same story we have seen in the non-mining south-eastern States. These matters are exacerbated by the recent tightening in fiscal policy by the Federal Government.

Queensland’s saving grace is the resources sector, which contributes 18.5 per cent of gross state product, approximately $50 billion, and employs a full time equivalent of 295,000 jobs. Even then, recent conditions have been their toughest in years.

A downward trend in commodity prices is apparent. This can be attributed to a weakening in demand in China and India due to soft global conditions, uncertainties resulting from the debt crises and inflation concerns in China leading to policy settings being directed at softening domestic demand. Compounding this are steps by China and India to diversify their supply base into emerging resource economies in Central Asia, Indonesia, Latin America and Africa.

On top of this, rising capital costs are creating significant challenges with the financing of new projects and with refinancing, while the impact of the carbon tax and minerals resource rent tax has yet to be felt.

Strength remains, however, in resources and is a reason for robust optimism. Although commodity prices have softened, they remain above historic levels and are forecast to remain there. The investment pipeline is substantial. Under a full-growth scenario, an important qualifier given the global uncertainty, the resources sector is forecast to spend $142 billion on 66 projects by 2020 and to create 40,000 direct new jobs. These forecasts, however, remain just that. BHP Billiton demonstrated recently with Olympic Dam in South Australia that the economic boon from planned projects cannot be taken to the bank just yet, given global economic and regulatory uncertainty.

If forecasts hold up, then the robust optimism will be well placed. Studies continue to show that prosperity from the resources sector is not confined to it or the mining hubs. Rather, the benefits flow throughout the Queensland economy to every region.

Insolvencies hit SME sector

From the outset of the global financial crisis Queensland has had the largest and most colourful insolvencies. It was like the 1980’s all over again, but not an oxygen mask or Mediterranean island was in sight. Mind you, this time round, the brains and vision were missing. In the 1980’s, you could safely say, no matter who you were dealing with, that one or both of those factors was present.

While the large insolvencies have gone, Queensland continues to exceed normal levels by State standards and national averages by current conditions. The focus is now on the SME sector and, if statistics are any guide, that will remain the case for some time. As a substantial number of Australia’s bad debts are located in Queensland, it will take a considerable time for institutional creditors to work through them.

Can-do Campbell’s Can-do Queensland

The election of Liberal National Party government in March was the fourth change of government at a State level since 2008.

With Australia’s four largest states now supporting conservative governments, future Council of Australian Government meetings will be as lonely for Julia Gillard as a caucus meeting is for State Labor MP’s in Queensland. What’s more, if current polling trends continue, Federal Labor will be wiped out nationally and Federal Labor in Queensland will retain only one or two of the 30 seats available.

Campbell Newman has rebuked co-operative federalism and publicly embraced competitive federalism. He has promulgated that Queensland will aggressively pursue its competitive advantage over those of the other States.

The Premier has set a bold agenda. His government has promised to reduce unemployment to four per cent within six years, reduce payroll tax and bring the State budget back to surplus by 2014-15. A Commission of Audit on State Finances chaired by Peter Costello has also been established, charged with presenting a plan to restore the State’s AAA credit rating.

Despite having set himself an ambitious task, Campbell Newman’s record as Lord Mayor of Brisbane suggests Queenslanders should have faith in him delivering. However, just as Queensland gives on a three-year electoral cycle, it can equally take away. Election results have a history of extremities in their verdict, much more so than other states. As former Premier Wayne Goss said so famously to Paul Keating: “Baseball bats, on the veranda, waiting.”

Are we optimistic?

Ask anyone if Australia is an optimistic country and the answer will invariably be, yes. Despite Donald Horne’s cringe-worthy lamentations in 1964, we are a lucky country. What’s more, it is by design not fortune.

Coastal beaches and areas aside, Australia has an unforgiving environment. It is only hard, arduous work that permits our survival. Do not discount good policy. For, whatever your political views, when it comes to institutions, public servants and even politicians, this country is blessed.

Ask any Australian if Queensland is an optimistic State and, absent New South Welshmen at Origin time, the answer likewise will invariably be, yes. Queenslanders deserve to be optimistic, more so than their compatriots. They are a formidable people, with an enviable and deserved reputation for rising to the challenge.