Australia’s growth to be curbed by skills shortage, rates: Access Economics

Looming skills shortages in the engineering and mining sectors will be exacerbated due to strict migration laws, which will result in higher turnover rates and wages for businesses, according to the latest Access Economics Business Outlook report.

The report also states that although the rest of the developed world is waiting to raise interest rates until their economies start recovering, an inflation threat caused in part by higher wages is only months away and will force the RBA to raise interest rates soon.

Access research director Chris Richardson says Australia’s biggest problems will be caused by a lack of workers rather than a lack of jobs – leading him to believe unemployment will drop to nearly 4% by the end of the year.

“The consensus shift to a smaller Australia guarantees the next few years will see rising skill shortages,” he says.

Richardson points to the huge amount of engineering work piling up, specifically in Western Australia, naming the $43 billion Gorgon project, the Northlink Ranking project and the Rapid Growth iron ore project as just some of the schemes that will attract hundreds of new workers.

But issues including stricter migration laws, rising costs for visas and the rise of the Australian dollar mean that despite seeing 280,000 new migrants in the last boom, the number of new workers will be a lower-than-expected.

“About the only thing holding back the boom in key parts of the economy will be a lack of workers, materials and finance – not any unwillingness to spend,” he says.

”Australia had the people to help satisfy the last jobs boom. The boom has returned but working age population numbers are set to crawl when they should be sprinting,” it says.

Such low growth in migration levels will lead to higher interest rates, Access says. Capacity is too tight and incomes are growing quickly, import prices are also rising and the lower number of international students will take a toll.

The current situation differs from that of previous skills shortages, Richardson says, because this time we don’t have the capacity to bring in more workers to curb inflation.

Richardson says Access expects variable mortgage rates to rise by one percentage point by the end of this year or in early 2012, at the same time that several other world economies may be starting to think about raising rates for the first time since the financial crisis.

Each state will be affected differently. Victoria will fare well, with families and businesses spending, retail at a healthy level and a growing population spurring activity in the housing and construction sectors.

However, the lower number of international students entering the country will have an impact in the medium-term, Access says.

“Victoria is not only on the wrong side of Australia’s two speed economy divide, but it’s better than expected performance on population is at risk as student numbers dive,” the report states.
But it is Western Australian that Richardson expects to see the worst hit due to a lack of capacity. The state will see “a swag of wage and price increases as skills shortages and delivery delays proliferate”, according to Access.

“Western Australia’s burgeoning boom will be smaller and more dangerous. Starved of the labour needed to do a quarter of a trillion dollars of project work, WA will see a swag of wage and price increases as skill shortages and delivery delays proliferate.”

The floods in Queensland will naturally have an effect on the state’s already stretched finances, while the tourism, housing and commercial construction sectors are also suffering. The inevitable skills shortage in the resources industries will also hurt.

New South Wales will be hit hard by interest and exchange rates, which will affect the housing, retail and construction industries, although Access expects the state’s recovery to continue at a “modest pace” over the next 12-18 months due to limited strength in the resources sector.

South Australia’s manufacturing industry is hurting, with exports falling due to the high value of the dollar, while Tasmania has “little room for better growth in the short-term”, Access says.

However, lower household income-to-debt ratios will keep consumers protected from interest rate rises.

Unfortunately, the bad news doesn’t end there. Access says the Australian dollar will continue to pound the retail industry this year, and the utilities sector is also facing a hard time due to the uncertainty looming over carbon pricing.

The international education sector will be hit hard by the slowdown in migration, and the public sector is also hurting due to the lack of federal stimulus.

This continued hardship means consumer confidence will remain subdued this year, especially as interest rates begin to rise.

Yet while an unwillingness to spend isn’t a problem for business, it is for families, with consumers showing caution, spooked by interest rate rises from the Reserve Bank (and top ups from the big banks), plus the risk of more to come.

And the upswing in home building is also running into heavy weather: Australia may have more families than it has homes (with average household size increasing for the first time in a century), but rate rises and a lack of land release are strangling the recovery.

As a result, Access says, the overall growth outlook for Austral is “good but lopsided”, with growth dependent on business becoming more confident to spend over the next 12 months.

However, there are several sectors that are continuing to perform well. Access says this year has been the best for the farming community in years, and that the mining, manufacturing and recreational services industries will perform well this year due to the Australian dollar.

“Global news is still more good than bad for Australia thanks to continuing emerging economy strength – the key global influence for us. That is underpinning commodity prices and stoking up an investment boom in engineering work which looks set to surpass anything we’ve ever seen before.”