Services the key to post-election growth – Christopher Findlay

As we move into the post-Federal-election period, there is continuing debate about where growth will come from and what voters thought of the pitches on this question made by the various parties. Data always helps these debates and here’s an example. This is a story about exports – and services exports in particular.

An article on the Adelaide Economic Policy Forum on June 30 (available here) provided a link to the recent presentation that Steve Whetton, Deputy Director of the SA Centre for Economic Studies (SACES), gave on the SA economy to the corporate members of SACES. One remarkable feature of that presentation was the growth in exports at both the national and state levels – and their contribution to overall economic growth.

Australia’s exports of goods and services contributed 1.7 percentage points of the total national GDP growth figure of 3.2% in the 12 months to March 2016. At the same time a decline in imports contributed 0.2 points to overall GDP growth. Therefore, net exports growth of 1.9 percentage points contributed nearly 60% of Australia’s overall GDP growth.

This occurred during a period in which we were bemoaning the end of the resources price boom – but in fact, exchange rate changes were working really well to drive shifts in our economy.

So which sectors have responded? Or in other words, where is the structural change going on?  In the case of SA, in the year to March 31 this year, goods exports grew by a healthy 8.5% – but services exports grew by more than double that: 17.4%.

These are big numbers.

For goods exports from SA, the SACES team point to agricultural exports – in particular meat, but also wheat, fruit and vegetables. Copper and food and beverage manufactured exports are also up. Export growth in these sectors has more than compensating for the collapse in iron ore exports.

But for me the big story is services. The growth rate of services exports has also been accelerating since early last year (services exports in the March 2016 quarter were 25% higher than in the March 2015 quarter). Here the SACES team point to tourism and travel, including travel related to education, but business travel services have also rocketed up.  But the team also points out that this result is not just about travel – also growing is income from research and development, income from sales of IP and from sales of information services.

The services story is important for South Australia.  It suggests we have a positive and interesting future.

Yet some seem concerned that services are somehow not “real” and/or they cannot be a substitute for manufacturing. In fact, services outputs are the results of value-adding processes that yield income for the suppliers of labour and capital, so the production processes for services generate the basis of well-being.  They are “real” just like the numbers I quoted about on their contribution to our economic growth.

Services also support other sectors of the economy. Our strong performance in food exports, for instance, depends on access to global quality services as inputs, such as transport. Services are the ‘oil’ of the global value chains in manufacturing.

So our recent strong growth in exports is promising.  It says that we can be competitive in many sectors. But can we do more?  Services by their nature are often highly regulated and the challenge is to make sure our performance in this area is not impeded by our regulatory system.  We have to check that our systems work well with those in our trading partners, so that our international services business are not impeded.  This is the new priority in our negotiation of international trade agreements.

And these data say that SA is a player in services and has a big interest in the design of those agreements as they apply to services.

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