Key points
In Focus: Population growth and Housing
Market
Consumer and household sector
Business sector
Commercial property
Residential property
Services and commodity exports
Labour market
Demographics
Economic structure
Fiscal outlook
Semi government bonds and credit outlook
10
11
8
9
12
13
6
7
4
5
2
3
Photo: Greg Rinder, CSIRO

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•
•
•
•
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SA’s economic performance continues to be at the bottom of the pack, challenged by unfavourable demographic factors, weak commodity prices, as well as the long-term structural decline of its manufacturing base. It also lacks the industry mix and job opportunities to draw workers back to the state as the national economy rebalances towards non-mining activity, although the lower AUD is supporting tourism arrivals and expenditure. Below-average population growth, combined with high unemployment, is in turn creating very limited demand and price impetus for residential property. The imminent end to car manufacturing activity in 2017, a challenging outlook for the defence and mining sectors, as well as the upcoming closure of the Port Augusta power stations and Leigh Creek coal mine, also constitute headwinds to the state’s industrial activity. As a result, business conditions remain tepid, with the retail sector the rare bright spot.
We expect the SA economy to grow by 1.7% in 15-16 before rising to 1.8% 16-17, with unemployment rate expected to gradually fall from 7.6% in 15-16 to 7.4% in 16-17.
The Federal Government has announced plans to build $40 billion worth of new surface ships for the navy in South Australia from 2018 onwards. It is also highly likely that at least 8 out of 12 submarines from the navy’s next fleet will be built there although the timing remains uncertain. The scheduled completion of the Royal
Adelaide Hospital late this year suggests that there could still be a public spending gap next year before the commencement of the former project. Meanwhile, the services and construction industries have grown in importance in terms of their contribution to SA’s economic activity and employment since the mid 2000s.
Residential property prices in Adelaide and regional SA have largely flat-lined and are increasingly falling behind the national average. The average regional house price for
2015 looks set to dip below the level seen in the previous year. A gradually rising dwellings to population ratio also suggests limited support for house prices going forward.
Supported by surprisingly resilient wages growth, household consumption is a standout contributor to SA’s recent economic performance, with retail spending and household expenditure growth maintaining strong momentum. Consumers are also seemingly more optimistic, demonstrated by their increased propensity towards discretionary spending. This is despite generally weak labour market conditions as SA continues to experience the highest unemployment rate across the states and territories.
Business conditions continue to be unremarkable in SA, characterised by lower capacity utilisation, weak business investment and an elevated office vacancy rate.
That said, capital expenditure expectations for buildings and structures do suggest an uplift in 2015-16.
In terms of goods exports, the value of SA’s mineral shipments in 2015 were dealt a significant blow by the sharp retreats in commodity prices since late 2014. This was only partially offset by stronger wine exports. Meanwhile, a lower AUD is delivering dividends to the state’s services sectors through higher international student enrolments and overall tourism expenditure, although a more pronounced global slowdown than currently forecast is a downside risk. 2
Vyanne Lai, Economist
Riki Polygenis, Head of Australian Economics
Skye Masters, Head of Interest Rate Strategy
Chart 1: State GSP Growth Forecasts
12
Annual Growth
10
6
8
4
2
0
NSW VIC
2013-14
QLD
2014-15
SA WA
2015-16 (f)
TAS NT
2016-17 (f)
ACT
Chart 1: State Final Demand and GSP Growth* (y/y%)
% State Final Demand Growth %
12 SA Australia
8
24 8
4
0
-4
-8 8
-12 4
Gross State Product Growth
4
20
0
16
12
8
4
1991 1995 1999 2003 2007
*NAB Estimate Sources: ABS; NAB Economics
2011 2015
0
-4

•
South Australian population growth has moderated notably since late
2009, largely driven by lower net overseas migration and continuous net outflow of interstate migration. The SA population as a share of the
Australian population has continued its structural decline (Chart 3).
•
More importantly, SA population continues to age relative to the national average (Chart 4).
Chart 3: SA Share of Aus Population and Growth in Migration
Persons
6,000
5,000
Share of Aus population (RHS)
Net overseas migration (LHS)
8.0%
7.8%
4,000
3,000
2,000
1,000
0
7.6%
7.4%
7.2%
7.0%
6.8%
-1,000
-2,000
2001
Net interstate migration (LHS)
2003 2005 2007 2009 2011 2013 2015
6.6%
•
SA manufacturing employment enjoyed a revival in 2013 and 2014, supported largely by a increase in food and beverage manufacturing jobs.
However, the revival proved to be short-lived (Chart 5).
•
Slowing population is one of the main factors weighing on the Adelaide housing market. Combined with more dwellings being constructed in
2015, the dwellings to resident population ratio has resumed an upward trend, which could be a detractor to price growth in the near-term (Chart
6).
Chart 4: Age distribution of South Australian population
16%
14%
South Australia Australia
12%
10%
8%
6%
4%
2%
0%
Chart 5: Manufacturing Employment
'000 Persons
120
110
100
90
80 Manufacturing (% share of total employment, rhs)
70
Total No. of People Employed in
Manufacturing(lhs)
60
1991 1995 1999
Source: ABS, NAB Group Economics
2003 2007 2011 2015
8
%
20
18
16
14
12
10
3
Chart 6: Adelaide House Prices and Dwellings to Population Ratio
$000
800
700
600
500
400
300
RP Data-Rismark hedonic prices; ratio of dwelling to population
Capital City
Dwelling Prices
SA - Dwellings to resident population (rhs)
(lhs)
Ratio
104
103
102
101
100
99
98
200
100
0
2001 2003 2005 2007 2009
Adelaide Dwelling
Prices (lhs)
2011 2013 2015
97
96
95

•
Wages growth in SA has been relatively resilient, which has flowed into stronger household consumption (Chart 7).
•
As a result, retail spending growth remains resilient. Meanwhile SA house price growth has also gained traction in recent months, albeit from low levels still (Chart 9).
•
On the back of sustained wages growth, there is evidence that SA consumers have gradually become more optimistic. Based on our survey, consumers are showing increasing inclination to spend on discretionary items such as home improvements, major household items and travel, although they continue to place a strong priority on long-term financial objectives of savings, super and investments; children; medical expenses; as well as paying down debt. (Chart 8).
Chart 7: Average Compensation of Employees and Household
Consumption Growth (y/y%)
14.0%
12.0%
10.0%
8.0%
6.0%
Total Compensation of Employees
Household Consumption
4.0%
2.0%
0.0%
-2.0%
-4.0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Chart 9: Retail Turnover and House Price Growth
24.0%
20.0%
16.0%
12.0%
Adelaide House Price
Growth (y/y %) - RHS
Retail Turnover Growth
(y/y%) - LHS
8.0%
4.0%
0.0%
-4.0%
2011 2013 2015
20.0%
16.0%
12.0%
8.0%
4.0%
0.0%
-4.0%
-8.0%
4
Chart 8: NAB Consumer Anxiety Survey - Consumer Spending
Preferences
(net balance)
Transport
Utilities
Paying off debt
Medical expenses
Entertainment
30
20
10
0
-10
-20
-30
Charitable donations
Eating out
Use of credit
Personal goods
Children
Savings, super, investments
Groceries
Q3'15
Major HH items
Home improvements
Q4'15
Travel

•
According to the monthly NAB Business Survey, capacity utilisation of businesses in SA has been on a downward trajectory since 2011 to be notably below national average (Chart 10). This trend is consistent with lower business conditions in the state, which had been the weakest across all mainland states since late 2014 (Chart 11).
•
Business investment growth in SA remains subdued, with weaker capex expectations for the next 12 months suggesting little upside impetus for
2016. This is likely to reflect a shrinking manufacturing base and weakness in commodity prices (Chart 12).
•
Services and traditional business sectors alike are plagued by weak business conditions, with the construction industry faring the worst (Chart
13).
Chart 10: NAB Business Survey – Capacity Utilisation
%
86
84
82
80
78
76
74
2001 2003
SA
2005
Total
2007 2009 2011 2013 2015
Chart 12: NAB Survey Capex Expectations & Private Business
Investment Growth
Net balance
60
SA Capex Expectations
(12-month) - LHS
SA Business Investment
Growth (y/y%) -RHS 45
30
15
0
-15
-30
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Source: ABS, NAB Group Economics
%
60
40
20
0
-20
-40
-60
5
Chart 11: Spread in NAB Business Conditions ( net balance , 3-monthmoving average)
40 40
30
20
Spread
South Australia
Total
30
20
10 10
0 0
-10 -10
-20 -20
-30
2007 2008 2009 2010 2011 2012 2013 2014 2015
-30
Chart 13: SA Business Conditions & Confidence by Industry
Net Balance (%). Sep quarter 2015
40
20
0
-20
-40
-60
Conditions Confidence
-80
-100

•
Reflecting the soft appetite for business investment, non-residential building approvals have been tracking at low levels, except for
“Retail/Wholesale” which benefits from a surge in consumer activity
(Chart 14).
•
Rising office vacancy rates and low levels of office building approvals signal a substantial amount of spare capacity in the sector (Chart 15).
•
That said, expected capital expenditure (capex) is higher for buildings and structures in 2015-16, while planned spending on machinery and equipment is expected to remain at similar levels to previous years (Chart
16).
Chart 14: Non-residential Building Approvals ($ millions)
70
60
50
40
30
20
10
0
2000
Retail/Wholesale -LHS
Warehouses-LHS
2002 2004 2006
Offices - LHS
Other-RHS
2008 2010 2012
Factories- LHS
2014
Chart 16: SA Capital Expenditure & Expectations
$b
4.5
4.0
Actual & expected based on previous realisation ratio
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Building & Structures
2012-13 2013-14
Source: ABS, NAB Group Economics
Machinery & Equipment
2014-15 2015-16 (e)
490
420
350
280
210
140
70
0
6
Chart 15: Office Approvals and Vacancy Rates
$m
56
48
40
Office Approvals (lhs)
Office Vacancy Rates (inverse, rhs)
32
24
16
8
0
2005 2007 2009 2011 2013 2015
7
9
11
%
3
5
13
15
17

•
The SA residential property sector remains subdued, characterised by low levels of approvals and commencements (Chart 22), as well as modest residential property growth price growth in the last five years. Regional house prices have started to contract since the start of this year (Chart 23).
•
SA residential property price growth by sub-region in Adelaide suggests that eastern Adelaide leads in capital growth for houses while southern
Adelaide dominates in the unit segment (Chart 24).
•
Results from the latest NAB Property Survey reveal expectations by industry participants that SA/NT house prices will continue to contract in the short and medium term (Chart 25) .
Chart 22: SA Residential Approvals & Commencements
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1987 1991 1995
Approvals
1999 2003
Commencements
2007 2011 2015
Chart 24: Adelaide - Median Property Price Growth (year to Q3 2015)
Western Adelaide
Southern Adelaide
Northern Adelaide
Eastern Adelaide
0.0
2.0
4.0
House Prices
Unit Prices
6.0
8.0
Source: RP Data, ABS, NAB Group Economics 7
Chart 23: SA Residential Property Price Growth (y/y%)
%
30
25
20
Adelaide Houses
Adelaide Units
Regional Houses
15
10
5
0
-5
-10
2001 2003 2005 2007 2009 2011 2013 2015
Chart 25: NAB Property Survey – House Price Expectations (%)
%
4.0
NAB Property Survey - House Price Expectations (%)
2.0
0.0
-2.0
-4.0
Estimated price growth in relevant survey period...
Australia
Source: ABS, NAB Group Economics
SA/NT
Expectatio ns

•
The SA tourism sector have shown signs of picking up since 2013, with accommodation takings turning the corner and bed vacancy rate relatively stable around the 37% mark. A lower AUD is expected to be see a higher level of inbound tourism into SA from international and domestic sources.
•
International student enrolments in SA, an indicator for foreign student numbers, have picked since 2014, but our estimate for 2015 suggests that enrolments will still be below the peak recorded for 2010 (Chart 32).
Education is the largest services export category for SA (Chart 34).
Chart 31: SA Accommodation Takings and Bed Vacancy (4 qtr-rolling average)
$ '000
120,000
%
39
38
100,000
80,000
60,000
40,000
20,000
Total Accomdation Takings ($'000) -
LHS
Total Establishments Bed Vacancy
Rate (%) - RHS
37
36
35
34
33
32
31
30
0 29
1999 2001 2003 2005 2007 2009 2011 2013 2015
Chart 33: Value of South Australian Goods Exports by Industry
$m
5,000
4,500
Agriculture Mining Manufacturing Wholesale
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14
Source: ABS, Australian Education International, NAB Group Economics
Chart 32: International Student Enrolments
Persons
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2003 2005 2007 2009 2011
Chart 34: Value of SA Services Exports by Sector in 2014
Education
Other travel
Transport
Other buiness services
Business
Telecommunications
Personal, cultural and recreational
Charges for the use of intellectual property
Government goods and services n.i.e.
Insurance and pension
Mantenance and repair
Construction
8
•
Weaker global commodity prices have dented the value of SA agricultural and mining exports in 2013-14, despite relatively robust production volumes (Chart 33). More recent anecdotal data suggests that SA agricultural exports, especially wines, have picked up this year on the back of Australia’s Free Trade Agreements with Japan and Korea and a depreciation in the AUD.
2013 2015 (e)
$m
-100 100 300 500 700 900 1,100 1,300

•
Labour market conditions in SA have experienced a broad-based deterioration since 2012 and are among the weakest across states (Chart
17).
•
The state has overtaken Tasmania to record the highest unemployment rate among all states and territories since the start of this year. However, a rising SA unemployment rate has been accompanied by a higher participation rate which potentially signifies a turnaround in labour market conditions (Chart 18).
Chart 17: Unemployment Rate by Region
•
In the 12 months to May 2015, most of the jobs created were in services sectors, while the more traditional sectors of manufacturing, wholesale and mining continued to experience job losses (Chart 18).
10
9
8
7
6
5
4
3
2
2001 2003
SA
2005
Greater Adelaide
2007 2009 2011
Rest of SA
2013
Chart 19: SA Unemployment & Participation Rates
14
%
12
10
8
6
4
2
Unemployment rate (trend) (LHS)
Participation rate (trend) (RHS)
0
2001 2003 2005 2007
Source: ABS, NAB Group Economics
2009 2011 2013
2015
2015
63
62
61
60
59
58
57
56
%
65
64
9
Chart 18: Change in employment by industry, last 12 months to
November 2015, SA, '000s
Manufacturing
Mining
Agriculture
Construction
Rental services
Wholesale trade
-6.8
-4.575
-4.025
-2.825
-2.475
-2.075
Education
Other services
Utilities
Arts
Transport
Hospitality
Communications
Retail trade
-1.35
-0.575
0.6
1.125
1.4
2.125
2.25
2.25
Admin services
Finance
Public admin
Business services
Health
2.25
2.725
3.7
4.025
6.225
-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8

•
Since peaking in 2009, SA population growth has slowed notably on the back of lower net overseas migration and a sustained outflow of interstate migrants (Chart 20).
•
SA population growth continues to track significantly below national average levels (Chart 21), which entrenches the sliding trend in its share of the Australian population, currently at around 7.2% from just under 9% in the early 1990s.
Chart 20: SA Population Growth Drivers (000s, over the year)
'000s
25
20
15
10
5
0
-5
-10
2001
Natural increase
Net interstate migration
2003 2005 2007 2009
Net overseas migration
Total population growth
2011 2013 2015
Chart 21: SA Population Growth (y/y%)
%
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2001 2003 2005
SA
2007 2009
AUS
2011 2013 2015
Source: ABS, NAB Group Economics
10

•
The top three sectors in SA by output share are health services, manufacturing and finance & insurance services. The former overtook manufacturing as the largest industry by gross value added in 2008-09 and the largest employer in 2006-07 (Chart 26).
•
By employment share, manufacturing (9%) is ranked third behind health and social services (15%) and retail trade (11%).
Chart 26 : Composition of employment & GVA
Other services
Arts
Health
Education
Public admin
Admin services
Business services
Rental services
Finance
Communications
Transport
Hospitality
Retail trade
Wholesale trade
Construction
Utilities
Manufacturing
Mining
Agriculture
Employment
GVA
0% 2% 4% 6% 8% 10% 12% 14% 16%
•
China and the ASEAN bloc are the main trading partners for SA (Chart 27
&28).
•
SA’s top commodity exports include iron ore and concentrates ($1.6bn), wheat ($1.4bn) and alcoholic beverages ($1.2bn). Meanwhile, SA imports mainly refined petroleum ($0.9bn), vehicle parts and accessories ($0.6bn) and goods vehicles ($0.4bn) from other countries (Chart 29 & 30).
Tables 27 & 28: Top SA export destinations and import source countries,2014-15
Value of exports ($m) Value of imports ($m)
2248 1 ASEAN 1909 1 China
2 ASEAN
3 US
4 EU
5 India
6 Japan
7 UK
8 New Zealand
9 HK
2027
1669
1331
762
475
447
424
240
2 China
3 EU
4 US
5 Singapore
6 Japan
7 Korea
8 Germany
1598
1334
815
730
550
484
263
10 HK 240 9 New Zealand 209
11 Taiwan 224 10 UK 193
12 Singapore
13 Germany
129
63
11 Taiwan
12 HK
119
31
Tables 29 & 30: Major SA export and import goods, 2013-14
Major exports, goods, 2013-14
Iron ores & concentrates
Wheat
Copper
Alcoholic beverages
Copper ores & concentrates
A$m
1,596
1,370
1,171
1,154
830
Major imports, goods, 2013-14
Refined petroleum
Passenger motor vehicles
Vehicle parts & accessories
A$m
902
643
420
Goods vehicles
Power generating machinery & parts
282
257
Source: ABS, NAB Group Economics 11

•
The SA general government has significantly revised its forecast net debt for 2015-16 downwards by $652m from the 2015-16 Budget estimate of
$4.2b. This primarily reflects higher dividends from MAC to the Highways
Fund due to stronger-than-expected investment returns in 2014-15 (Chart
34). Despite consistent downgrades across the forward estimates period, net debt is still expected to peak in 2016–17 due to the commercial acceptance of the new Royal Adelaide Hospital.
Relative to Budget, total taxation revenues have been revised down in all years, mainly due to revisions to payroll tax, gambling tax and insurance duty. Meanwhile, GST grants have been revised up for the forward estimates period reflecting changes to SA’s expected share of the GST pool. GST is the single largest source of revenue for the state at 32%(Chart 35).
4500
4000
3500
3000
2500
2000
Chart 34: SA Net Operating Balance
$m
7000
6500
6000
5500
5000
Net Debt Level (LHS)
Net Debt as a Share of GSP (RHS)
2015-16 (f) 2016-17 (f) 2017-18 (p) 2018-19 (p)
Note: f= forecast; p= projection
5
4.5
4
3.5
3
2.5
2
7
%
6.5
6
5.5
Chart 35: SA Composition of State Revenue
Sales of
Goods and
Services
14%
Other Grants
24%
Royalty
Income
0%
Other
5%
Taxation
25%
GST
32%
Source: SA Department of Treasury Finance 12

12.0
11.0
•
The improvement in the net debt position in 2015-16 is largely due to the dividend payment from MAC to the Highways Fund. This has been driven by stronger than expected investment returns in 2014-15. Net debt is expected to peak in 2016-17 (due to the commercial acceptance of the new Royal Adelaide Hospital) (Chart 36).
•
Feeding the new budget forecasts into the credit matrix shows only minor changes to the outlook for the states budget performance (Chart 37).
Chart 36: South Australia Non-Financial Public Sector net debt
14.0
13.0
AUDbn
FY15 MYBR
FY16
10.0
9.0
8.0
2014-15 2015-16 2016-17
Chart 38: SAFA borrowing programme
2017-18
Source: South Australian Budget Papers, SAFA, NAB
FY16 MYBR
2018-19
•
SAFA updated its funding program for 2015-16 following the release of the MYBR. Given the dividend payment from the Motor Accident
Commission, client funding has been revised from AUD0.4m to AUD-0.1m, and reducing the overall funding program from AUD4.2bn to AUD3.7bn.
Fiscal year to date SAFA has issued AUD1bn of its revised AUD1.5bn of term funding (or 67%) (Chart 38). The remaining AUD500m of term funding will go across a variety of maturities. The maximum amount of outstanding in each bond line will be capped at AUD2bn. As at the end of
2015 SAFA’s bonds outstanding stood at AUD14.97bn which is AUD0.75bn above levels as at end June 2015 (Chart 39).
13
Chart 37: S&P credit metric: Budget Performance
Chart 39: SAFA term bonds outstanding as at July 2015

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