22 Jul 2013
Words Tim Admin

What Lies Ahead? Predictions for our economic future

At the dawn of a new financial year, shouldn’t we feel a sense of renewed purpose, an enthusiasm for what might be achieved? Yet, with all the pre-election political upheaval in Canberra, we seem to have entered a kind of holding pattern. Unsure of the future, we crave confidence and certainty. On the face of it, Australia has performed well, a bright spot in a world of economic casualties. Yet consumer and business confidence have continued to seesaw. Electioneering politicians talk up a “budget emergency”, and the GFC has turned our country of spenders into a nation of savers. So just what are our economic prospects? What should we expect in the tourism and property sectors over the short to medium term? The latest Tourism and Hotel Market Outlook (Q1 2013) by Deloitte Access Economics was cautiously optimistic. “Overall, global economic prospects are beginning to look more favourable,” it noted. While output in the Eurozone would remain essentially flat this year, growth in the US was forecast to be 2.2% and China was expected to grow by a solid 8.2% in 2013. “The main impetus for growth over the next year will be interest rates, which are at historically low levels and should help lift housing construction, retail spending and capital expenditure,” the report said. Australian GDP growth was expected to be “a moderate 2.7% in 2012-13 and 2013-14 before improving gradually from 2014-15.” International visitor nights, Deloitte predicted, would grow at an average annual rate of 4.7% over the next three years, while the outlook for domestic visitor nights growth was “moderate but encouraging” at an average of 1.3% p.a. 2012 saw national occupancy rates hit a record 66.1%. This was forecast to increase further to 68.2% by the end of 2015. Room rates, which grew by 3.3% over the course of 2012, were predicted to grow by an average of 3.7% p.a. to reach $167 in 2015. Average yield per room (RevPAR) was expected to increase by 4.8% p.a. over the next three years from $99 per room in 2012 to $114 per room in 2015. Of course Deloitte Access Economics takes a very analytical approach. They don’t measure such intangibles as confidence levels and political impacts. For a more subjective view, we asked a panel of respected tourism and property industry experts to gaze into their crystal balls and give us their informed predictions. It was a tough challenge, especially as the political landscape was thrown into such a state of flux. It is fair to say, most were expecting a change of government, given the polls had long favoured the Coalition. But then came the dramatic prime ministerial switch. While expectations of a Liberal-National win remained strong, despite Kevin Rudd’s resurrection, it was suddenly a brave move to forecast anything with certainty on the political front. The great hope expressed by all was that the Federal election would deliver one thing – certainty, leading to a significant lift in business and consumer confidence. Several consistent themes emerged in our pundits’ views. Increasing Asian affluence, low interest rates, and a weaker Australian dollar are repeatedly cited as critical economic growth drivers. Most agreed there is an urgent need to improve labour market flexibility and for capital investment in new tourism infrastructure. Universally, our forecasters believe it is tourism’s time to shine. OUR INDUSTRY ‘FORTUNE-TELLERS’ Andrew McEvoy Managing Director of Tourism Australia since 2010. Andrew has had more than 20 years of tourism and media experience, including as CEO of the South Australian Tourism Commission. Rodger Powell Managing Director of Tourism Accommodation Australia (TAA, a division of the AHA). Rodger has a 25-year history in senior roles in the accommodation and tourism industry, including as CEO of regional tourism authorities, and directorships of sporting, tourism and marketing organisations. Ian Crooks Founder and Managing Director of Resort Brokers Australia, the nation’s first and largest agency to focus solely on accommodation business and property sales. Ian launched the business in 1985 after achieving success in both motel operation and real estate. Owen Barbeler Brisbane-based Associate Director of independent property valuations and advisory firm, m3property. Owen has worked in the valuation industry for more than a decade, and specialises in going concerns, in particular accommodation properties. What will be the important economic drivers in Australia in 2013-14? Andrew McEvoy: The continued growth of the Asian middle class and the return to confidence of the USA. This alongside some solid but low growth from the UK and Europe and the emergence of new travelling economies such as Brazil will be great for the Australian visitor economy - the country's largest services export. Rodger Powell: Business confidence that leads to capital investment and increased employment is the most important. This can be stimulated by Government moves to improve the regulatory environment where it affects productivity, and by Government investment in much needed infrastructure – again where the Infrastructure improves productivity and creates jobs. Ian Crooks: Mining has been an incredibly important economic driver. The heat may have come out it as the very high prices being paid for coal and iron ore have eased back. But I believe the positive impact of mining will still be strong. There are a lot of coal-fired power stations in China and India that need to be fed and, as the middle classes grow in those countries, demand will be even greater. With a change of government, which I still expect, I also hope to see the cattle industry rebound strongly. One of the biggest drivers of our economy over the next five years will be food sales to Asia – beef and grain. Owen Barbeler: If I were to pick three, it would still be the mining/resources sector (although, investment in this sector is slowing), low interest rates, which are supporting the economy and expected to be cut further this year, and the political certainty and policies of the government that will follow the election result. What sectors are vital to strengthen and grow the economy in 2013-14 and ahead? Andrew McEvoy: Health care, tourism, education and other services sectors will continue to be shining lights, and are the perfect addition to the strength of the energy and resources sector. Tourism and education are labour-intensive. Almost one million Australians are employed in our tourism sector, many regionally. And Australia is good at this sector. Apart from our unsurpassed natural beauty, we have great cosmopolitan cities, a fresh, clean and welcoming environment, and phenomenal food and wine. Rodger Powell: Tourism in particular should be front and centre of Government policy. Tourism has a high component of export sales and a high local labour content. Funding for essential tourism infrastructure and for the marketing of Australia should be significantly increased. Queensland and New Zealand have very clearly recognised the importance of tourism as a national economic platform. Australia must do the same. Ian Crooks: Tourism, definitely. The growth of the middle classes in Asia will see more and more visitors coming from China, Korea and India. And the lower Australian dollar will keep more people at home, boosting domestic tourism. As our economy picks up, more people will take holidays. We are already seeing emerging interest in places like Cairns. I believe tourism in FNQ will flourish, and the Gold Coast and Sunshine Coast will pick up. These are still the top tourist destinations in Australia. Owen Barbeler: Although mining investment is widely considered to be at or nearing its peak, the resources sector remains a major component of economic growth. Tourism and property/construction are also important contributors to economic activity, employment and wealth. This is particularly so in Queensland where, in an effort to stimulate these sectors, some incentives have been provided in the state budget for 2013-14. What will have the biggest economic impact in 2013-14 and how?. Andrew McEvoy: Growth and growth of Asia. Not just China, but also Malaysia, India and Indonesia. Also the continued strength of the Australian domestic economy, as it affects our growing domestic visitor market. Rodger Powell: The drop in the Australian dollar will help tourism competitiveness. Labour market productivity must change however, particularly in regards to flexibility and the availability of workers, if tourism is to compete for investment based on performance. A return of the US economy will help Australia due to the impact it will have on Japan and China. Ian Crooks: Again, I would have to say growth in Asia, a lower Australian dollar, and rising confidence when the world’s longest election campaign is over and we can get back to business without the constant cloud of political uncertainty. Owen Barbeler: In the property and tourist accommodation sectors, low interest rates have been very important in stimulating interest in existing property as well as new development. I believe the other key factor is confidence (both consumer and business confidence), which is going to be heavily influenced by government policy at both state and federal levels. How do you see the ‘spend’ versus ‘save’ situation playing out in the year ahead? Andrew McEvoy: Travel has never gone away. We’ve had three years of inbound tourism growth, 18 months of domestic tourism growth and continued outbound growth. For Australians, travel has taken a bigger share of people's annual expenditure. Rodger Powell: There will not be any short-term change to the propensity of Australians towards savings. Tourism will continue to have to compete hard with other components of the disposable ‘wallet’. As the US and European economies improve, Australian consumer confidence and spending will follow. Ian Crooks: I think people will be prepared to spend on holidays and leisure. But, otherwise, spending patterns will not change that much. So many people were hurt by the GFC. The lessons run deep. Saving will remain a priority as people are still cautious. Owen Barbeler: Households are spending less and saving more. Pre-GFC household savings were around 4.2% of income, but have been around 10% each year since. A real change to this is only likely after a sustained period of growth in the economy and consumer confidence. However, some upside in spending patterns might be experienced for tourist accommodation in Australia if a weaker $AUD is sustained and more Australians shift their holiday spending home. What are the greatest risks or challenges in the year ahead? Andrew McEvoy: Any major adjustment in China would have an impact. The sector is also worried about the rising cost of labour affecting their ability to be profitable or, in some cases, remain open during weekends and public holidays. Rodger Powell: Failure by the next Government to address labour market flexibility and productivity issues, failure to reign-in Government spending, and failure to adequately and competitively resource Australia’s tourism marketing efforts in a highly competitive global market place. The best social program that a Government can deliver is good jobs. Ian Crooks: The greatest risk is that the economy doesn’t gain traction and unemployment grows. Also, if wages issues aren’t addressed, we will see people not being employed because it is too expensive, and not viable for business. Tourism businesses are putting staff off because they can’t afford weekend and penalty rates. This is killing off activity and productivity. Owen Barbeler: Apart from 'external shocks' (an ever-present risk for the tourism sector), I see government spending and taxation, and its impact on consumer and business confidence, as being a great challenge. A contraction of spending and increased costs to households (as indicated in both the federal and Queensland state budgets) could impact on the propensity for households to spend on discretionary travel. What new business opportunities will present in the year ahead? Andrew McEvoy: Opportunity is endless. It's picking the right things to invest in that will be the measure of success. Rodger Powell: Continued growth in China, India and the USA, as well as the return of Japan, will provide key inbound growth opportunity if we have the competitive resources to take it. The falling Australian dollar, combined with the satisfaction of pent-up demand, will create new opportunities to stimulate the domestic travel market. Opportunities to renew and replace aging tourism infrastructure, particularly in regional destinations, abound. Government incentives for capital investment in tourism product would assist. Ian Crooks: In our business, the biggest opportunity lies in the availability of new modular construction systems that make hotel and motel development affordable again. I see the biggest growth in the potential for new motels and hotels to be built by developers, and we have a queue of buyers for the resulting businesses and investments. I stand by the view I’ve often expressed, that we need at least 100 more motels across Australia. Owen Barbeler: Low interest rates, stronger tourism trading conditions, and government support are attracting developers to the accommodation sector. In our business, we have had an increase in clients seeking advice for new hotel and motel developments, which we see continuing over the next 12 months. Trend-spotting: Nominate a key trend you believe will be important in the year ahead - a tip, insight or important market influence? Andrew McEvoy: Back to basics family time. The return to some old-fashioned values and time spent together. It will be good for the domestic leisure market. Rodger Powell: Rapid growth in take-up of smart mobile devices and the willingness of consumers to purchase online will provide great opportunities. Turning Australia into one huge ‘wireless hotspot’ would give us significant competitive advantage in markets where consumers rely on mobile devices (USA, China, Gen X and Gen Y). Ian Crooks: The accommodation industry will rely less and less on the STAR Rating Scheme that has long been the official accreditation system run by Australia’s auto clubs. The vast majority of bookings are now made on line, and guests take notice of the recommendations of other consumers. Many properties self-rate already, ignoring the official scheme, and the trend will be more to describe properties according to location and price – luxury, mid-scale, or economy. Owen Barbeler: For some of Queensland’s leisure tourism destinations, 2012 was the strongest year in five years. We have a state government spending money marketing our tourist destinations, good growth in international visitor numbers (6% increase in international holiday visitors to March 2013), and a lower $AUD. Some major hotel owners in leisure markets are investing in refurbishments (for example, in Gold Coast, Sunshine Coast and North Queensland). If these trends continue over the next 12 months, leisure markets in Queensland might perform more strongly than expected.