Economy

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GUEST OBSERVER
A long-term plan to cut the company tax rate from 30 percent to 25 percent is the centrepiece of the Coalition’s economic plan for jobs and growth.
The Coalition maintains the change will boost GDP by more than 1 percent in the long-term, at a budgetary cost of $48.2 billion over the next 10 years.
But the very Treasury research papers relied on by the Coalition tell a more modest story than the headlines. Using these papers, we show that the net benefit to Australians in the real world will be only about half of the headline benefit, and it will be a long time before we are any better off at all.
<h2>The short story</h2>
The Government has made two claims about the economic impacts of its plan to cut the company tax rate.
On Budget night Treasurer Scott Morrison said that the tax cuts would:
“… mean higher living standards for Australians and an expected permanent increase in the size of the economy of just over one percent in the long term.”
Later last week, Prime Minister Malcolm Turnbull said:
“The Treasury estimated last year…that for every dollar of company tax cut, there was four dollars of additional value created in the overall economy.”
<h2>Sound in theory, but there’s a back story</h2>
In theory, cutting the company tax rate boosts the economy in the long term. All taxes distort choices, and thereby drag on economic activity. Taxes on capital often have especially large economic costs because they discourage investment, which is mobile across borders. By some estimates, roughly half of the economic costs of Australian company tax ultimately fall on workers, as lower company profitability leads to lower investment, and therefore lower wages and higher unemployment.
But while the theoretical argument for company tax cuts is straightforward, the real story is more complicated.
<h2>The twist: a tax cut for foreign investors</h2>
The twist in the tale comes from Australia’s system of dividend imputation, or franking credits. The effect of this system is to make the company tax rate for Australian resident shareholders effectively close to zero. In nearly every other country, company profits are taxed twice: companies pay tax, and then individuals also pay income tax on the dividends, albeit often at a discount to full rates of personal income tax.
But in Australia, the shares of Australian residents in company profits are effectively only taxed once. Investors get franking credits for whatever tax a company has paid, and these credits reduce their personal income tax. Consequently, for Australian investors, the company tax rate doesn’t matter much: they effectively pay tax on corporate profits at their personal rate of income tax.
As a result, although Australia has a relatively high headline corporate tax rate compared to our peers, in practice the comparable tax rate is lower – at least for local investors. As a result, many of the international studies about the impact of cutting corporate tax rates are not readily applicable to Australia.
Local shareholders do get one small benefit from cutting corporate tax rates. If companies pay less tax, then they have more to reinvest, so long as the profits are not paid out to shareholders. Yet in practice, most profits are paid out. Therefore a company tax cut will generate little change in domestic investment.
By contrast, foreign investors do not benefit from franking credits. They pay tax on corporate profits twice: first at the company tax rate, and then as income tax on the dividends. This means that a cut to the company tax rate provides big benefits to them.
This week The Australia Institute pointed out that foreign investors from the United States and other countries that have tax treaties with Australia may not benefit from the company tax cut, because their home governments will collect the gains from any cut to Australia company tax as additional company tax. Yet this would only occur when foreign firms repatriate profits earned in Australia to the home country.
The big reductions in net tax revenue – and therefore the large benefits to companies – are expected when the corporate tax rate is cut from 30% to 25% between 2022 and 2027 for larger companies, including the bulk of businesses that are foreign-owned.
The headline from the Treasury modelling for the 2016-17 Budget is that this cut will ultimately increase GDP by up to 1.2% meaning larger foreign companies are attracted to invest more in Australia. The finding is based on work contained in a Treasury research paper that modelled the long-term impact of a company tax cut.
<h2>Activity is not income</h2>
However, it is a mistake to assume that all the increase in economic activity will make Australians better off. We often use Gross Domestic Product – the sum of all economic activity – as a short-hand measure for prosperity. But when the benefits disproportionately flow to non-residents, GDP can be misleading. It’s much better to look at Gross National Income (GNI), which measures the increase in the resources available to resident Australians.
Treasury expects that cutting corporate tax rates to 25% will only increase the incomes of Australians – GNI – by 0.8%. In other words, about a third of the increase in GDP flows out of the country to foreigners as they pay less tax in Australia. And because most of the additional economic activity is financed by foreigners, the profits on much of the additional activity will also tend to flow out of Australia.
<h2>You don’t get something for nothing</h2>
Yet even this increase in GNI of 0.8% is not the best estimate of the improvement in living standards Australians can expect from the Government’s company tax plan. If company taxes are lower, other taxes have to be higher, all other things being equal. In the modelling discussed so far, Treasury first assumes that these revenues can be collected by a fantasy tax that imposes no costs on the economy.
But that’s not what happens in the real world. So the Treasury research paper also models the scenario in which personal income taxes rise to offset the reduced company tax revenue. On this more realistic assumption, Treasury estimates that GNI will increase by just 0.6% in the long term, or roughly $10 billion a year in today’s dollars.
<a href="https://62e528761d0685343e1c-f3d1b99a743ffa4142d9d7f1978d9686.ssl.cf2.rackcdn.com/files/122984/width754/image-20160518-13455-yxfw6e.jpg" target="_blank">Click to enlarge</a>
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<h2>Other wrinkles in the story</h2>
Even this more modest Treasury figure may well over-estimate the long-term boost to GNI. In the real world, progressive income taxes impose higher costs than the hike to a hypothetical flat-rate personal income tax that Treasury modelled. Companies may also not increase investment as much as Treasury expects, and those firms that are part of oligopolies in Australia may not increase wages by as much as Treasury assumes.
While these are reasons to expect that the Treasury modelling overestimates the economic benefits of a company tax cut, they are offset by some more conservative assumptions. Treasury believes that tax cuts modestly change how much firms shift profits overseas; it may overstate how much tax cuts flow into additional profits rather than higher wages in those industries that it does recognise as oligopolies; and it may discount the benefits of investors making less distorted choices between debt and equity funding.
<h2>The verdict on the first claim</h2>
The bottom line is that, on Treasury’s own modelling, a corporate tax cut will increase Australian incomes in the long term by up to 0.6%. The Treasury research paper doesn’t commit itself to a timeframe, but it cites other work that expects the economic benefits of company tax cuts to take 20 years to bear fruit, with half the benefit in 10 years. Given that the important (and expensive) part of the corporate tax cuts only starts to take effect from 2022, Australia will be waiting 25 years for a 0.6% increase in incomes.
This economic benefit needs to be seen in context. If Australian per capita GDP and GNI increase at 1.5% a year (as the budget papers routinely assume), then over 25 years, incomes will rise by 45.1%. Corporate tax cuts mean that instead, incomes will rise by 45.7% – or perhaps a bit less. It may still be worth doing, but it’s not a plot twist that dramatically changes Australia’s story.
Others claim that in the past, company tax cuts have had no measurable effect on the economy. This is disputed – there may well be a link between corporate tax cuts and economic growth. But it’s inevitably hard to see in practice because on Treasury’s own modelling the economic effect of company tax cuts is small relative to other changes.
<h2>Not four-to-one, more like dollar for dollar</h2>
This brings us to the Government’s second claim. Late last week, Mr. Turnbull said that each dollar in company tax revenue cut would deliver an extra four dollars in GDP.
His claim appears to be drawn from an earlier 2015 Treasury research paper that modelled the economic impact of major Australian taxes, including company tax. The more <a href="https://www.treasury.gov.au/PublicationsAndMedia/Publications/2016/working-paper-2016-02">recent</a> Treasury working paper, released in Budget week, implies a slightly larger $4.30 increase to GDP from each $1 in revenue cut.
But again this misses a big part of the story.
First, this claim is about GDP, and therefore includes the disproportionate increase in the income of foreigners. Our analysis of the Treasury modelling shows that the increase to Australian incomes, or GNI, is only $2.80 per dollar of revenue lost from a corporate tax cut.
Second, when corporate tax is replaced by a still hypothetical but marginally more realistic flat rate income tax – rather than a complete fantasy tax that has no impact on the economy – the increase to Australian incomes is less again: only $1.80 per dollar of revenue lost.
Third, the Prime Minister has framed the boost to the economy in terms of the long-term increase to GDP per dollar of company tax cut. Treasury calculates the revenue “dollar” lost after considering the additional tax revenue that the government hopes to collect from all taxes in twenty years time as incomes rise because of greater investment.
<a href="https://www.theaustralian.com.au/federal-election-2016/federal-election-2016-pm-bolstered-by-160bn-reform-promise/news-story/e5fe769c97a196959b6e34e14bcc273d?nk=21bd5293c6c9bf91e73e578611f79538-1463363505&amp;login=1">Many people</a> would interpret the Prime Minister’s statement to compare the ultimate benefit per dollar of tax revenue given up in the shorter term. On this basis, the increase to Australian incomes in the long term is only $1.20 for every dollar given up in the short term as a result of corporate tax cuts.
This story ends the same way. Corporate tax cuts may be worth doing, but the outcome is unlikely to set pulses racing.
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<h2>The journey matters</h2>
So far, as the Treasury research paper does, we’ve focused on the long-term economic boost from a company tax cut once the economy has fully adjusted. But the journey to get there also matters.
For a decade, a cut to corporate taxes will reduce national income. Foreigners will pay less tax on the profits from their existing investments in Australia, reducing Australian incomes. Foreigners own about 20% of all capital in the economy, so it’s a big windfall gain for them. We estimate that when a 5 percentage point tax cut for big business is first implemented, national incomes will be reduced by about 0.5%, as a result of the immediate loss in company tax revenues formerly paid by foreign investors.
The benefits to Australians from a corporate tax cut only accumulate slowly as foreigners make additional investments. Treasury cites a paper that estimates that the benefits of corporate tax cuts take 20 years to flow through. Assuming that these benefits increase at a constant rate, Australian income will only be larger than otherwise after about 10 years.
Of course, the upfront costs of a company tax cut over the first decade must be offset against the long-term gains. On our estimates, the loss of income incurred over the first decade will only be offset by higher incomes after about 19 years. If Australians want the modest economic benefits of a corporate tax cut, they will be waiting a long time.
<h2>The moral of the story</h2>
Company tax cuts are not a knight in shining armour to save the Australian economy. On the basis of the modelling that the government uses to support its case, corporate tax cuts can make a modest contribution, and then over the very long term. That story won’t sell as many copies. Truth, on this occasion, is duller than fiction.
John Daley<a href="https://theconversation.com/profiles/john-daley-1870" rel="author" style="line-height: 1.3em;"> </a>is chief executive officer, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">here</a>.
Brendan Coates is fellow, Grattan Institute and can be contacted <a href="https://theconversation.com/profiles/brendan-coates-154644" target="_blank">here</a>.
Both are authors for The Conversation
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jchancellor-FAypfDUnLy

The full story on company tax cuts and your hip pocket

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GUEST OBSERVER
The Department of Finance released the February monthly financial statements on March 24, just prior to the Easter holiday period. This note examines the latest data.
Budget improves: In the twelve months to February 2016, the budget deficit stood at $36.1 billion (around 2.2 percent of GDP), down from $44.7 billion in the year to January and the lowest rolling annual deficit in almost two years (since April 2014).
Lower-than-expected spending: The Department of Finance says the underlying deficit for February was $743 million lower than the ‘profile’ forecast and “primarily relates to lower than expected cash payments and net future fund earnings, partially offset by lower than expected cash receipts.”
The monthly Budget figures can provide insights on the broader economy and policy settings. If fiscal settings are tight, the Reserve Bank may allow easier monetary settings.
What does it all mean?
While figures can bounce around from month to month, all analytics suggest that the Federal Budget is on track to meet Government forecasts. Not only are rolling annual aggregates showing improvement, so are the so-called ‘profile’ positions estimated by the Department of Finance.
Revenue remains hard to come by with annual growth rates hovering around 2 percent. Meanwhile growth of expenses or spending is well contained, with expenses barely growing over the year. The Government was projecting a budget deficit near $37 billion and that expectation remains on target.
Looking ahead, if nominal annual growth of the economy continues to hold around 2-3 percent, then the current Government – and the next Government later this year – will find it increasingly difficult to keep spending static and thus chip away at the budget deficit. Aussies want spending maintained on schools, hospitals, defence and public services but at the same time aren’t keen to pay any more in tax. Same for all levels of Government. The hard decisions on tax will become increasingly more difficult the longer that the major parties put off reaching some form of agreement.
GST revenues continue to lift, but for state governments the difficulty – as it is for all businesses – is the absence of inflation to drive revenues.
What do the figures show?
The underlying budget deficit for the twelve months to February 2016 stood at $36.1 billion, down from $44.4 billion in the year to January. This was the lowest rolling annual deficit since April 2014.
Smoothed revenues (twelve months to December) were up 5.9 percent on a year ago, above the average growth of 2.6 percent over the past year. Expenses rose by 0.3 percent over the same period, down on the 1.7 percent growth over the past year.
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The Department of Finance noted: “The underlying cash balance for the year to 29 February 2016 was a deficit of $38,719 million, compared to the 2015-16 Mid-Year Economic and Fiscal Outlook (MYEFO) profile deficit of $39,462 million. The difference of $743 million primarily relates to lower than expected cash payments and net future fund earnings, partially offset by lower than expected cash receipts.”
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In terms of the fiscal balance, the Department of Finance noted: “The fiscal balance for the year to 29 February 2016 was a deficit of $35,292 million, compared to the MYEFO profile deficit of $36,719 million. The difference of $1,427 million primarily relates to lower than expected expenses, partially offset by lower than expected revenue.”
“Revenues: Total revenue was $1,223 million lower than the MYEFO profile, primarily due to lower than expected taxation revenue and dividend income.
Expenses: Total expenses were $2,831 million lower than the MYEFO profile, primarily due to lower than expected supply of goods and services, wages and salaries and grants expenses.”
The Government currently expects an underlying deficit of $37.4 billion for 2015/16 (around 2.3 percent of GDP).
Receipts from the Goods and Services Tax stood at $59.6 billion in the twelve months to February, up 7.0 percent on a year ago but affected by the one extra day in the month. The Government has forecast GST receipts of $59.79 billion for the entire 2015/16 year.
Actual GST receipts for the eight months to February stood at $41.367 billion, above the Budget ‘profile’ of $40.734 billion.
What is the importance of the economic data?
The Department of Finance releases the Government Financial Statements (Niemeyer Statement) almost every month. The statement allows investors to track the current budget position and provides insights into the  effectiveness of fiscal policy.
What are the implications for interest rates and investors?
The Federal Budget is on track to meet forecasts. Spending restraint including low public service wage growth (similar trend in private sector) is driving the improvement. The Federal Government and Opposition parties will eventually have to agree on tax reform to address medium term challenges for the economy.
The Government is showing restraint on spending at present, but this is actually constraining stimulus to the economy.
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<img src="/images/2016/04/6/Screen%20Shot%202016-04-06%20at%203.04.17%20PM.png" alt="" width="731" height="535">
 
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
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Federal Budget is on track to meet forecasts: CommSec's Craig James 

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GUEST OBSERVER
The Fair Work Commission is considering whether to increase Australia’s minimum wage.
The Australian Council of Trade Unions is arguing for a A$45-a-week rise. Industry, arguing that currently business has limited ability to afford wages increases, wants the increase capped at 1.5 percent (closer to $10 a week).
While I suspect most people immediately focus on wages as a cost of production for business, it’s worth clarifying precisely what economic roles wages play. There is more than one.
Indeed, wages are certainly a cost. More precisely, their significance for business as a cost is as one component of something economists call “real unit labour cost”.
This is the cost of employing a person in terms of the value of the goods and services a business would produce. Crudely put, this means the proportion of the value of a day’s production that would be needed to pay for a day’s labour. This depends on two things.
Two key influences: productivity and real wages
The first is the real wage – the purchasing power of the worker’s pay packet, which brings into play prices of goods and services. The second is the productivity of the worker – how much the worker produces over a given time.
The real cost of employing a person over time depends on how these two things change. If productivity is growing, then the real wage can grow without an increase in the real cost of labour for business.
But a couple of other economic considerations are relevant when assessing the economic impact of changes in the worker’s wage. The first is that productivity also depends on investment. Changes in technology that allow for greater productivity are often embodied in the new plant and equipment that firms invest in.
Yet what governs investment? This is an age-old question in economics, and perhaps one of the least agreed areas within the profession. But any stab at this question would conceivably point to the expected rate of return on the investment relative to the so-called cost of capital. An economist would typically measure the cost of capital by reference to interest rates, among other things.
However, the rate of return is critically dependent on how much demand there is for the goods and services produced by the new plant and equipment the business invests in.
There is also a competitive imperative which links demand growth and investment. Maintaining market share requires a business to be able to respond to growing demand. Optimally, this requires increasing capacity and thus undertaking investment.
Wages growth and investment
But demand growth varies with spending power and the income that flows to the population, a significant portion of which comes from wages. In other words, wages have a flipside. They’re not just a cost of production; they’re also a source of spending and thus of revenue and profit for business.
This is an important point in economics, specifically about how what we see at the micro level does not automatically replicate itself for the economy as a whole. Looked at from the perspective of a single business, wages appear as a cost. But to only look at things this way is inadequate if you are interested in the impact of changes in wages on the overall economy. For that you also have to consider wages as income and a source of demand.
Expectations about future demand growth are presumably as critical to the investment decision for firms as are expectations about factors such as taxes on business income.
A reduction in business taxation may well increase prospective after-tax rates of return on investment. But, as already mentioned, this assumes people with income to spend are ready to buy the output produced with newly installed plant and equipment.
Looked at from this angle, one could argue that growth in demand and in turn wages growth will be required to warrant producers undertaking investment and in turn the kind of changes to production that underpin productivity growth.
One can go a little further. Assuming a government’s intention is to wind back its contribution to demand in the economy (via government spending) through what is euphemistically termed “fiscal consolidation”, and assuming our trade is not significantly changing, a certain real wage growth is required to generate sufficient growth in demand to warrant sustained investment and productivity growth.
It’s the flipside to this scenario that is worrying. To the extent that increasing profitability through increased productivity is not shared in the form of increased real wages, the economy faces the danger of its productive capacity growing faster than demand. This kind of danger was highlighted long ago by the noted Italian economist Luigi Pasinetti.
In this scenario the profit of each unit of output may increase initially as productivity grows, but demand does not keep pace, in which case the increase in profitability is likely to be short-lived. More worrying in this case is that employment growth suffers and consequently the unemployment rate is likely to rise.
Some economists would counter that real wages would fall in order to absorb any increased unemployment, though this claim has always been contentious.
It supposes that unfettered markets will always provide demand for whatever amounts of goods and services are produced – in itself a controversial position in economics.
Of course, none of this deals with the moral or ethical imperative of a minimum wage which ensures a liveable real wage. Rather, the point here is that, quite aside from the moral or ethical case, there are economic arguments to be had for ensuring an appropriate rate of growth of real wages.
Graham White, associate professor, School of Economics, University of Sydney and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/graham-white-8139" target="_blank">here</a>.
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How wage growth contributes to the economy

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GUEST OBSERVER
The 2016/17 financial year is now complete and it is an opportune time to see how investments, financial markets and economies have performed over the past year.
Overall, the year was remarkable for being unremarkable. At least as far as the economy and financial markets performed. The year started with the fall-out from Brexit.
There was a domestic election and the US Presidential election. In 2017 there has been a raft of elections in Europe. And there was the OPEC production agreement.
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<img src="https://www.urban.com.au/images/2017/07/03/Screen%20Shot%202017-07-04%20at%208.16.09%20AM.png" alt="">
But despite the challenges, returns on shares and residential property lifted over the past year while interest rates are lower and the Aussie dollar is little changed from a year ago. In fact the Aussie dollar has tracked a range of US6.25 cents – the least volatile year in 27 years. The sharemarket has had the least volatile year in 16 years. And the record (and world-leading) Australian economic expansion continues.
The economy has grown by around 1.75-2.00 per cent in 2016/17 and we expect growth of around 3.0 per cent in 2017/18. Infrastructure will be a key driver of growth in 2017/18 alongside exports, while home building continues, especially in Sydney, Melbourne &amp; Brisbane. Underlying inflation may lift from 1.7 per cent to 2.0 per cent over the coming financial year while unemployment may ease modestly from 4-year lows of 5.5 per cent currently to the 5.0-5.5 per cent range. Official interest rates may remain on hold for another year.
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It is clear that Australia is well placed. Inflation is under control; interest rates are at record lows, the Aussie dollar is supportive and the record expansion continues 
What does the data show?
Interest rates
The cash rate stands at a record low of 1.50 per cent, down from 1.75 per cent in June 2016, and courtesy of a quarter per cent rate cut in August 2016.
The market-determined 90-day bank bill rate has fallen from 1.97 per cent to 1.72 per cent over 2016/17. Yields on the long bond – 10-year government bonds – have held between 1.85 per cent and 2.99 per cent. Long-bond yields hit record lows on August 11 2016 and now stand at 2.39 per cent.
Currencies
The Aussie dollar has risen around 3.6 per cent over 2016/17. The Aussie started the year around US74.26 cents and ended the year at US76.92 cents. We have calculated that the Aussie is 22nd strongest against the US dollar of 117 currencies tracked. The strongest currencies have been the Icelandic króna (up 17 per cent), Swazilabnd lilangeni (up 11.3 per cent), South African rand (up 11.1 per cent), and Israeli shekel (up almost 10 per cent). Weakest currencies have been Syrian pound (down 138 per cent), Egyptian pound (down 104 per cent) and Turkish lira (down 22 per cent).
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In the six months of 2017, the Aussie dollar is rose just over 6 per cent against the US dollar, making it the 25th strongest of 117 currencies tracked. The strongest currencies have been the Mozambique metical (up 16 per cent), Mexican peso (up 13 per cent), and Poland zloty (up 11 per cent). Weakest currencies have been the Tunisian dinar (down 5 per cent), Ethiopian birr (down 4 percent) and Agentinian lec (down 3.9 per cent).
The high for the Aussie dollar in 2016/17 was US77.77 cents in November 2016 and the low was US71.52 cents in December 2016. The US6.25 cent range for the Aussie dollar is the smallest in 27 years.
Commodities
Commodity prices have been decidedly mixed over 2016/17. The Commodity Research Bureau futures index has fallen 9 per cent over the year, under-performing the Aussie dollar (up 3.6 per cent)
The price of oil is down almost 5 per cent, gold is down 6 per cent and sugar is lower by 32 per cent. But iron ore prices have lifted 15 per cent, thermal coal has risen by 36 per cent, beef is up 10 per cent and base metal prices have generally firmed over the period with lead, zinc and copper up between 22-31 per cent.
Sharemarket
The Australian sharemarket started 2016/17 with the All Ordinaries at 5,327.0 and the ASX200 at 5,246.6. The All Ords ended the financial year at 5,764.0 points (up 8.5 per cent) with the ASX200 at 5,721.5 (up 9.3 per cent). We estimate that Australia is 55th of 73 global bourses and only five bourses recorded declines in 2016/17. The best performer has been hyperinflation-affected Venezuela (up 860 per cent) but notably Greece is up 52 per cent and Austria is up 48 per cent. The worst performers have been West Africa, Oman, Qatar and South Africa. 
In the six months of 2017, the All Ordinaries has risen by 0.8 per cent, ranking Australia 61st of 73 nations. Commodity producers have recorded the weakest performances such as Qatar, Canada, South Africa, Saudi Arabia and Brazil. Best performers include Greece, Austria, Argentina, Nigeria and Turkey.
Investment returns
Total returns on Australian shares (All Ordinaries Accumulation index) rose 13.1 per cent over 2016/17. Returns on dwellings are up 13.2 per cent while returns on government bonds have fallen by 0.8 per cent. The returns on bonds, was the weakest result in 23 years.
Sectors &amp; size groupings
 Of the 21 identified industry sub-sectors, only five recorded declines in 2016/17.
Leading the gains has been Consumer Durables &amp; Apparel (up by over 40 per cent) followed by Food, Beverages &amp; Tobacco (up 29.1 per cent) and Capital Goods (up 26.3 per cent)
At the other end of the scale, Telecom has fallen by over 26 per cent, followed by the Real estate sector (down almost 9 per cent) and Autos &amp; Components (down 6 per cent).
Of the size categories, the MidCap 50 index has again out- performed, (up 14.2 per cent), from the ASX100 (up 9.7 per cent), ASX 50 (up 9.1 per cent) and Small Ordinaries (up 3.7 per cent).
What are the implications for investors?
Returns on shares are set to record the best gain in three years. And that means that sharemarket returns have only fallen once in the past seven years. So an investor that has employed a diversified strategy across asset classes would be well pleased with the performance over the past year.
The economic and financial metrics remain encouraging. Australia has underlying inflation below the Reserve Bank’s 2- 3 per cent target band at 1.7 per cent. Economic growth is low at 1.7 per cent but that reflects a raft of elections in 2016/17 as well as bad weather. Business conditions are near 9-year highs. The cash rate is at record lows. And unemployment is at a 4-year low of 5.5 per cent,
Housing is providing the momentum for the economy with home building and purchase especially driving the NSW, Victorian and ACT economies. Over the coming year, infrastructure will be a key driver of economic activity. 
Over the coming year more and more apartments will be completed with more stock hitting the market. It has taken a little longer than expected, but supply and demand for homes are likely to prove more balanced in 2017/18, restraining growth in home prices.
Last year we noted: “CommSec expects the All Ordinaries index to be near 5,500-5,700 points at end-December 2016 and 5,700- 5,900 points in June 2017.” The December forecasts was realised and similarly the June forecast should has been realised.
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<img src="https://www.urban.com.au/images/2017/07/03/Screen%20Shot%202017-07-04%20at%208.19.50%20AM.png" alt="">
Over the coming year CommSec expects the All Ordinaries index to be near 5,900-6,100 points at end-December 2017 and 6,000-6,200 points in June 2018.
Home prices nationally are likely to grow by 5-7 per cent in 2017/18 with inflation around 2.0 per cent. The Aussie dollar is expected to remain in the mid 70s against the US dollar over most of the coming year.
The low inflation/low interest rate environment is entrenched, meaning that lower nominal investment returns are also here to stay. So investors will need to remain flexible and alert to the returns achieved across sharemarket sectors and across asset classes to ensure that their savings are keeping pace with the cost of living.
The issues to watch over the coming year include Donald Trump; Oil prices; Australian home prices; Wages &amp; Jobs; and Geopolitics.
US President Trump was elected vowing to cut taxes, repeal the Obamacare health reforms and spend more on infrastructure. Global sharemarkets have rallied on the expectation that extra stimulus in the US will boost revenues and profits.
 But we are still waiting for the tax cuts. Infrastructure spending has been announced – now it is a case of gauging the impact on the economy. The Federal Reserve will take its time lifting interest rates back to more “normal” levels for the simple fact that inflation is well contained.
A soft landing for Australian housing is possible. But there is also the risk of indigestion if too much supply comes onto the market at one time. Overall, regulators and banks have done well in restraining buyer effervescence.
We assume that Aussie households will gradually get used to the new reality of 2 per cent wage growth, especially as wages are still out-pacing prices and the job market is lifting in line with strong business conditions.
There are all manner of geopolitical risks. But these can never be adequately factored into forecasts. As always investors need to be alert, not alarmed.
Craig James is the chief economist at <a href="https://www.comsec.com.au/default.aspx" target="_blank">CommSec</a>.
Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>. 
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Remarkable for being unremarkable: CommSec

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<img src="https://counter.theconversation.edu.au/content/78830/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
With the release of the March quarter national accounts, there have been reports the Australian economy could break the Netherlands’ “world record” for continuous growth. But there are three problems with this assertion.
It’s now been 103 quarters (25 years and 9 months) since Australia last had consecutive quarters of negative growth in real gross domestic product (GDP), in the March and June quarters of 1991. 
Contrary to much-repeated claims, the Netherlands didn’t experience more than a quarter-century of economic growth without consecutive quarters of negative real GDP growth between the early 1980s and the global financial crisis.
<a href="https://www.propertyobserver.com.au/images/2017/06/06/Screen%20Shot%202017-06-07%20at%208.04.52%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/06/06/Screen%20Shot%202017-06-07%20at%208.04.52%20AM.png" alt="">
The Netherlands’ real GDP declined by 0.3 percent in the June quarter of 2003, and by 0.01 percent in the September quarter of that year, according to data published by Statistics Netherlands and, separately, by the OECD. So, at best, the Netherlands went for only 22 years without experiencing a recession. Australia surpassed that benchmark in 2013.
Yes, that second quarterly decline in 2003 was almost imperceptible. But sporting records are delineated by margins as small as one one-hundredth of a second, so we can’t blithely discount a -0.01 percent fall in real GDP as “not relevant”.
Even if you blinked and missed that tiny second successive decline in real GDP in the September quarter of 2003, the Netherlands still wouldn’t hold the record for the longest run of continuous economic growth. That belongs to Japan – which, according to OECD data, went from the March quarter of 1960 to the March quarter of 1993 without ever registering two or more consecutive quarters of negative growth in real GDP. That’s 133 quarters, or more than 33 years. 
Indeed, if Japanese GDP data were available on a quarterly basis earlier than 1960 it’s likely that this run of continuous economic growth would have been even longer, perhaps as long as 38 years, inferring from annual data available back to 1955. So Australia would need to avoid consecutive quarters of negative real GDP growth until at least 2024 if it is truly to be able to claim this “world record” as its own.
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<img src="https://www.urban.com.au/images/2017/06/06/Screen%20Shot%202017-06-07%20at%208.06.30%20AM.png" alt="">
Even more importantly, the definition of a technical recession as (two or more consecutive quarters of negative growth in real GDP) is, as former RBA Governor Glenn Stevens said, “not very useful”. It was originally proposed in December 1974 by Julius Shishkin, who at that time was the head of the Economic Research and Analysis Division of the US Census Bureau (now the Bureau of Economic Analysis, which publishes the US national accounts). 
It’s not used to identify recessions in the US. It takes no account of differences over time, or as between countries, in the rates of growth of either population or productivity – which are the key determinants of whether a given rate of economic growth is sufficient to prevent a sharp rise in unemployment. This is something which most people (other than economists) would use to delineate a recession.
While Australia has avoided consecutive quarterly contractions in real GDP since the first half of 1991, we’ve had two periods of consecutive quarterly declines in real per capita GDP (in 2000 and 2006). We’ve also had two periods of consecutive quarterly declines in real gross domestic income or GDI, which takes account of income gains or losses accruing from movements in Australia’s terms of trade (in 2008-09, and in 2014). Perhaps most meaningfully of all, Australia has had two episodes where the unemployment rate has risen by one percentage point or more in 12 months or less (in 2001 and 2009).
That’s still a better track record than almost any other advanced economy during the past quarter-century or so – and it reflects well on the quality of economic management (and the nature of our luck) over this period. Nonetheless, we shouldn’t be in the business of awarding ourselves prizes to which we’re not entitled.
Saul Eslake is vice-chancellor’s Fellow, University of Tasmania and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/saul-eslake-665" target="_blank">here</a>.
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There’ll be no records set this week by Australian economic growth figures: Saul Eslake

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A quick overview of the latest trends in key Australian economic data.
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Andrew Hanlan is senior economist for Westpac and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/andrew-hanlan/3/222/430" target="_blank">here</a>. 
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Australian data summary table 26 September: Westpac's Andrew Hanlan

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GUEST OBSERVER
Employment rose by 13,00 in December after rising by 37,100 in November (previously reported as a rise of 39,100 jobs).
Full-time jobs rose by 9,300 while part-time jobs rose by 4,200. Economists had tipped a 10,000 increase in jobs.
Fulltime employment lifted by 95,000 in the December quarter – best result since the September quarter 2010. Over the calendar year 2016 a total of 91,500 jobs were added – the weakest result since 2013.
Hours worked rose by 0.4 percent in December to be up 0.7 percent over the year.
The unemployment rate rose from 5.7 percent to 5.8 percent in December.
Unemployment across states in December: NSW 5.2 per ent (November 4.9 percent); Victoria 6.0 percent (6.0 percent); Queensland 6.2 percent (6.0 percent); South Australia 6.8 percent (7.0 percent); Western Australia 6.6 percent (6.9 percent); Tasmania 6.4 percent (6.3 percent). In trend terms unemployment in the Northern Territory was steady at 3.6 percent; ACT unemployment was steady at 3.7 percent.
A raft of companies is affected by the employment data but especially those dependent on consumer spending. Amongst stocks affected are Fairfax, West Australian Newspapers, Seek Limited, McMillan Shakespeare and Skilled Group.
What does it all mean?
Employment rose by marginally more than forecast with 13,400 new jobs created in December. For the 2016 calendar year a total of 91,500 jobs were added – the weakest result since 2013. From the perspective of the labour market, 2016 could be classified as a mixed year. One that also confused policymakers - with employment growth was soft over the year but the unemployment rate kept sliding, eventually falling to three-year lows. It was clearly a year, where employers were managing their workforce (cost base) very closely due to a subdued economic environment. In effect, the labour market was largely marking time over the majority of 2016 but there are initial signs of a shift coming.
The modest jobs growth in December, may not sound like much, but couple it with the solid job gains in October and November and it clearly shows a shift in trend. Over the last three months of 2016, more than 67,000 new jobs were created and more importantly all of that was in full-time employment. Full time jobs surged by 95,000 in the December quarter – marking the strongest quarterly growth in more than six years. The shift in the employment landscape is even more evident when you consider that the first nine months of 2016 saw paltry jobs growth of just over 24,000 with full-time jobs going backwards.
Looking forward, the outlook is certainly more encouraging. Job vacancies are holding near 5-year highs, in addition anecdotal evidence suggest activity levels amongst the business sector is lifting. The strength in commodity prices is also a positive and should support an improvement in employment across the resource states in coming months. It is still early days, but the last three months are certainly more upbeat.
The Reserve Bank is likely to look through the latest result and wait on timelier forward looking data. Reserve Bank commentary towards the end of 2016, suggests policymakers are relatively optimistic about Australia’s medium-term growth prospects. Over the next few months the Reserve Bank would be looking to see the impact of the lift in commodity prices - on growth as well as inflation. However the key would be a lift in non-mining business investment. CommSec expects interest rates to remain on hold over 2017.
 Savanth Sebastian is an economist for <a href="https://www.commsec.com.au/" target="_blank">CommSec</a>
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Full-time jobs post best quarterly growth in six years: CommSec's Savanth Sebastian

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<img src="https://counter.theconversation.edu.au/content/70581/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Rural and regional Australia have had a hard time of late. The economies of Sydney and Melbourne are growing, but much of the rest of their states are not. The population of regional areas is stagnating and agriculture is struggling. 
Perhaps worst of all there is a feeling that no-one in Canberra or in the booming coastal periphery cares about this. The people of Orange have apparently spoken.
Outside Sydney, behind what seems like an impervious sandstone curtain, not all is well. Even the largest towns in regional New South Wales are struggling to retain their populations and have faced difficult economic times through the present decade, although the drought years have faded away.
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Outside the big cities, many populations in regional and rural Australia are declining or static. ABS, Regional Population Growth, Australia, 2014-15, CC BY
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Agriculture still matters, for employment and exports, but mechanisation has cost jobs. Farming is still how people see rural and regional Australia, but it is certainly not the only thing.
There is more to rural Australia than agriculture, and most places have shifted away from the mass production of agricultural commodities – move over the wheat-sheep belt – towards the marketing of rural lifestyles and landscapes. Farming becomes valuable as scenery.
City people can be tempted for weekends away and old-fashioned farm stays have evolved. But that works most easily for NSW coastal towns – like Berry and Kiama – that are within striking distances of capital cities. More distant inland places have had to work a little harder to diversify.
Ironically, Orange is one of the towns that have led the way in terms of change. An enormously successful FOOD (Food of Orange District) festival has drawn in city crowds and tempted some to remain. At the other end of the state, the Tamworth Country Music Festival has grown every year and been a massive boost to regional income.
<h2>Jumpsuiting on the bandwagon</h2>
But it is probably even smaller towns that have benefited most from festivals. Most successful of all has been Parkes, otherwise simply a transport centre on the wheat and sheep plains. This week it celebrates the 25th anniversary of the Elvis Festival. 
The whim of a handful of townsfolk, one of whom later changed his name to Elvis Lennox, the festival began in a tiny way in 1993. Parkes citizens were doubtful – what had Elvis to do with rural Australia? But the local newspaper, the tourism office and the rugby club – in jumpsuited style – got on board, and the festival boomed.
Once it lasted barely a weekend. Now it lasts five days. Two hundred people came to the first festival – now there are 20,000, almost twice the town’s population. Accommodation is booked five years in advance, home hosting extends to nearby towns like Forbes and even Orange, and tents overflow on Graceland on the Green. 
The festival brings in more than A$10 million, employs many people, and has enabled even improbable local businesses to prosper. The local vet offers “Elvis costumes for the smaller dog”. The two tattoo parlours bring in new seasonal Elvis designs. Only the funeral directors appear to have failed to gain any trickle-down effects.
Certainly luck helps, but inspiration, patience and creativity – which are not only metropolitan traits – really work. Parkes now has its King’s Castle, an Elvis museum that ensures that Elvis and his famous gold lamé suit never leave town.
Where Parkes has succeeded, its neighbours have sought to follow. Trundle, once famous for having the widest main street in the country, is now more famous for its ABBA festival. Kandos, not much further from Parkes, is working hard to develop its Bob Marley Festival. 
Who will claim Leonard Cohen? Unlike Elvis, he at least had visited Australia.
<h2>Musters and other big celebrations</h2>
There is music in the air in NSW and that music is creating employment, placing and keeping some small towns on the map and simply being a source of enjoyment when, as in the drought years of earlier this century, times were particularly tough.
The annual Deni Ute Muster has spurred revival in Deniliquin. The more static Utes in the Paddock – an open-air gallery of utes mounted in a parody of Stonehenge – breathed new life into tiny Ootha. Glen Innes remembered its Celtic ancestry and constructed an impressive circle of standing stones. 
Meanwhile, the citizens of Nyngan, at the centre of Bogan Shire, are trusting that the statue of the Big Bogan (“who stands proud with his mullet, stubbies singlet and Southern Cross tattoo”) will breathe some new life into the town in the wake of the success of the Big Banana in Coffs Harbour. And who could resist Priscilla Queen of the Desert’s birthday bash at Broken Hill’s Broken Heel Festival?
But it is not only festivals. Mountain-biking trails may work just as well. Silverton has protected its heritage buildings and become a centre for the visual arts. Bowral can thank Don Bradman for growing up there. Hill End has set the pace in reviving gold panning.
None of these activities can ever effectively replace agriculture, but all have a part to play in making regional Australia a richer and more vibrant place.
Regional Australia cannot be written off. Services, tourism and the creative industries have become a vital part of the regional mix. And the smartest regions are those that have recognised this, sought diversity and flexibility, and become creative. 
On January 12, the Elvis Express will roll into town, and Parkes will celebrate 25 years of a festival that has created employment, generated income, provided a degree of pleasure in the drought years and given one town more than a reason to hope.
John Connell is professor of Human Geography, University of Sydney and can be contacted <a href="https://theconversation.com/profiles/john-connell-94439" target="_blank">here</a>.
Chris Gibson is director, UOW Global Challenges Program &amp; Professor of Human Geography, University of Wollongong and can be contacted <a href="https://theconversation.com/profiles/chris-gibson-9277" target="_blank">here</a>.
Both are authors for The Conversation.
 
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Wheat, sheep or Elvis Presley? Rural Australia has had to change its tune

Housing finance above decade averages in six states and territories: CommSec's Craig James

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GUEST OBSERVER
Australian consumer price data for Q3 2016 indicates that while inflation remains below the Reserve Bank of Australia’s (RBA) target band, there are signs of stronger price growth, indicating we may be near the inflation low for this cycle. This provides mixed signals for Australian commercial property.  For the retail sector, the data indicate both tradeable and non-tradeable goods inflation appears to have stabilised, suggesting improved pricing may support retail sales growth. However, this is likely to be limited by soft wages growth and ongoing competition in the supermarket and apparel sectors. Stronger inflation may also put upward pressure on bond yields, limiting demand for Australian commercial real estate and A-REITs. However, thecommercial real estate bond yield spread remains very large andAustralian commercial real estate continues to look attractive compared to many overseas markets, suggesting investment demand should remain solid.
<a href="/images/2016/10/27/unnamed.jpg" target="_blank">Click to enlarge</a>
<img src="/images/2016/10/27/unnamed.jpg" alt="">
 
What happened?
Consumer price data for Q3 2016 was released today by the Australian Bureau of Statistics (ABS). Theheadline inflation data show annual growth of 1.3%, up from 1.0% in June and price growth over the quarter rose to 0.7% from 0.4% in June. The growth was stronger than expected with the consensus estimates at 0.5% quarter on quarter (QoQ) and 1.1% year on year (YoY)
The headline figure includes some items with volatile pricing, so the RBA tends to keep a closer eye on measures of ‘core’ inflation such as the Trimmed Mean and Weighted Median. These rose by an average of 1.5% over the year. At 1.5%, the figure remains below the RBA’s target range of 2%-3%, the low price pressure being a factor in the RBA’s decision to cut the cash rate to 1.5% in August. The market, as indicated by ASX 30 Day Interbank Cash Rate Futures, was yesterday pricing in the chance of another rate cut at next Tuesday’s RBA meeting at just 16%. The low core inflation data may increase the odds of another rate cut, however, emerging signs of price growth in some areas may temper this.
Unlike previous quarters in 2016, price growth across the various categories was generally positive (Figure 1). 
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<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.28.08%20AM.png" alt="">
While most price growth continues to appear in non-discretionary categories such as health andeducation there was also growth in a number of ‘retail’ categories including appliances, furnishings andapparel. The strongest price growth was in the alcohol and tobacco category and was largely due to tobacco tax increases. Food price growth picked up on a surge in fruit and vegetable prices, up 11.6% QoQ. Falling utility prices had been dampening overall CPI increases, however in Q3 utility costs had their strongest increase since the end of carbon pricing with electricity costs rising 5.4% QoQ (Figure 2).
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Tradeable and non-tradeable goods price growth appears to have stabilised after several quarters of slowing growth (Figure 3).
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Tradeable goods price growth was 0.7% over the year. Still low, though it had averaged zero growth over the previous six quarters. Tradeable goods inflation is usually correlated with changes in the Australian dollar (AUD), however, this relationship has broken down recently (Figure 4). 
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The break appears correlated to the relatively soft petrol prices, which now appear to be stabilising (Figure 5). 
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Weak apparel price growth also contributed to low tradeable goods inflation. While apparel price pressure is still soft, the 1.2% YoY growth recorded this quarter is the strongest since March 2012. The soft growth is likely due to increased price competition from new international retailers such as H&amp;M, UNIQLO and Zara as well as increased use of mobile technology for price comparison.
What does it mean?
Retail
Areas of increased competition such as apparel and supermarkets have contributed to weaker retail price growth though there are signs prices are stabilising. Sectors with stronger price growth, such as household goods, are continuing to benefit from the strong east coast housing market and small business tax deductions. This suggests the downward pressure on moving annual turnover growth will begin to dissipate and sales growth improve (Figure 6).  
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<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.33.45%20AM.png" alt="">
That said, the upside is likely to be limited by factors such as weak income growth. Employment data, released last week, show a spike in part-time employment.  This is part of a continuing trend associated with the end of the mining boom and is correlated with relatively weak wages growth (Figure 7).
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<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.34.42%20AM.png" alt="">
Investment demand
A low inflation, soft economic growth environment has resulted in very low interest rates across the globe. This led to a global hunt for yield and relatively strong demand for Australian commercial property. Therelatively wide property income – bond yield spread has supported the demand for Australian commercialproperty. Whilst today’s data suggest we may be near the low point for inflation in this cycle and put upward pressure on bond yields, they would need to increase significantly before Australian commercial real estate begins to look relatively expensive (Figure 8).
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<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.35.42%20AM.png" alt="">
In addition, Australian commercial real estate appears relatively attractive compared to many overseas markets, which should also support ongoing demand from international investors. 
A-REIT performance has been linked to changes in bond yields. Figure 9 indicates the increase in theS&amp;P/ASX 200 A-REIT index has been correlated with the fall in bond yields since 2011. If bond yields continue to increase from their recent lows, this is likely to limit A-REIT stock price growth.
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<img src="/images/2016/10/27/Screen%20Shot%202016-10-27%20at%208.36.43%20AM.png" alt="">
John Sears is national director, research, Cushman and Wakefield and can be contacted <a href="https://www.cushmanwakefield.com.au/en-gb/" target="_blank">here</a>.
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