Retail and manufacturing sectors to improve, as construction and mining slows: Deloitte Access Economics

The slower sectors of Australia’s two speed economy are set to have a boost from the lower Australian dollar and rising wealth thanks to a strengthening property market and strong share price growth, according to a new report.

Despite 2013 being the worst year since the global financial crisis for retailers, tourism businesses, utilities companies and manufacturing firms, the Deloitte Access Economics December quarter Business Outlook report suggests these sectors will start to rebound in 2014.

But while some businesses are set to improve, a possible “construction cliff” and general market caution are predicted to threaten economic growth this year.

“Resource-related construction has peaked, and its fall from heady heights will hurt an Australian economy where businesses are already facing soft revenues and stagnant profits,” the report says.

“Add in continuing caution from corporates and families and the potential for modest Federal Government cutbacks to address a Budget black hole, and that backdrop for business should keep overall Australian economic growth a bit below trend through to late 2015.”

The budget deficit made headlines in 2013 and this is unlikely to change in 2014, with Deloitte Access Economics saying both sides of politics have contributed to the problem.

“A budget crisis? What a surprise. After all, both sides of politics promised they could sign on to vast new spending at the same time as they carried out a rapid surge back to surplus,” the report says.

“But don’t get lost in ‘who’s to blame?’ arguments. Both sides are, having spent a temporary boom on permanent promises. The focus needs to be on sensible repair. More effort should be on expenses, where the bulk of Canberra’s bodies are buried.”

Spending cuts of $25 billion a year are required to return the budget to surplus, according to the report.

“At around $25 billion a year, the new federal government doesn’t have a mandate for the scale of cuts required to return the budget to health and the opposition (like the current government before it) is already succumbing to the temptation to oppose even sensible savings,” it says.

Deloitte Access Economics says it’s likely to take at least five years to reach surplus, while economic growth won’t return to above its trend rate of 3% until 2016.

The official interest rate is tipped to stay low in 2014, as jobs growth remains weak, but in 2015 it will start to climb higher.

“The global crisis led to an extraordinary response, with central banks opening the taps on cheap money. But 2014 will be the year in which money becomes less cheap, first with less money being ‘printed’, and then in 2015 as interest rates rise,” the report says.

Jobs growth in Australia is said to be “crawling” thanks to the weak economy and rapid pace of baby boomer retirement.

In 2014 this is expected to remain the same, as the construction cliff and Australian dollar remains at “job killing levels”.

Unemployment rates are expected to be limited though, as the retirement of baby boomers will keep unemployment from rising much above 6%.

Over the next five years the major source of economic growth is predicted to be resource exports, as liquefied natural gas, iron ore and coal projects are completed. But the decline in business investment will continue to slow economic growth.