Positive signs in SA economy offset by drop in farm output

University of Adelaide economists say the outlook for the South Australian economy in 2018 is for a modest improvement in growth outside of the farm sector as a result of stronger conditions in the national and international economies. But this will be offset to a significant extent by a fall in farm production.

There have been positive signs for the SA economy in 2017 with business investment recovering, a marked improvement in labour market conditions, a lift in residential building, and strong public sector infrastructure activity. However, in the short-term there are headwinds in the form of a decrease in farm production down from above-average output in 2016/17, and the closure of GM-Holden, which will lead to more subdued growth in 2017/18.

“In 2016/17 growth in the South Australian economy appeared quite strong but it’s now clear that much of the growth came from the farm sector,” says Mr Steve Whetton, Deputy Director of the South Australian Centre for Economic Studies (SACES), in the last Economic Briefing Report for 2017.

“Buoyant farm conditions in 2016/17 masked ongoing subdued conditions in the non-farm sector.

“On the positive side, business investment and labour market conditions have shown encouraging signs of recovery during 2017. In addition, activity in the construction sector should remain at a robust level in the first half of 2018.

“While major public transport infrastructure projects are underpinning construction activity, a recovery in private business investment is also providing a lift.

“Meanwhile, house prices in South Australia have not blown out, unlike in eastern capitals, which means that the state continues to be an affordable place to buy.

“These signs are encouraging, but they need to be sustained and in particular the recovery in business investment needs to gather more strength if we are to see a return to stronger rates of output and employment growth rates over the longer term.

On the jobs front the report predicts that employment will grow by ¾ per cent in both the 2017/18 and 2018/19 financial years. However, this broadly mirrors population growth so it will not improve the unemployment rate. Job losses due to the closure of GM-Holden at Elizabeth will hold back short-term jobs growth but as many of the job losses have already occurred the remaining impact is not likely to be large enough to cause a fall in total employment.

“A subdued job market flows through to household spending and confidence and household incomes remain a significant area of uncertainty,” Mr Whetton says.

“Although incomes have shown some signs of improvement recently, growth in wages remains sluggish, which is holding back household spending, leaving investment spending from business and government as the main driver of growth.”

The Economic Briefing Report has been launched today at a presentation to leaders of the South Australian business community.

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