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STATE HANDBOOK: TASMANIA MARCH 2017

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CONTACTS

Phin Ziebell Riki Polygenis Skye Masters Economist Head of Australian Head of Interest Rate Strategy +61 (0) 475 940 662 Economics +61 2 9295 1196 phin.ziebell@nab.com.au +61 3 8697 9534 skye.masters@nab.com.au +61 475 986 285 riki.polygenis@nab.com.au

CONTENTS 2 | Key points 3 | In Focus: dairy industry 4 | Tourism 5 | Consumer & household sector 6 | NAB consumer spending behaviours 7 | Business sector 8 | Residential property 9 | Labour market 10 | Demographics 11 | Fiscal outlook & semi market 12 | Economic structure and trade 13 | Forecasts

CHART 1: STATE GSP GROWTH FORECASTS Annual growth, per cent

CHART 2: STATE FINAL DEMAND GROWTH Per cent

Source: ABS and NAB Group Economics

KEY POINTS Since the mining investment boom, there has been much discussion of Australia’s ‘two speed’ economy. During the boom, Western Australia and Queensland outperformed, whereas more recently New South Wales and Victoria have enjoyed stronger growth as construction surged and mining investment lagged. While Tasmania has been largely left out of this national discussion, somewhat similar dynamics are at play within the state itself.

On one hand, Hobart has enjoyed the fruits of a tourism boom, reflecting a diversity of high quality attractions such as MONA. Likewise, agricultural and fisheries industries have capitalised on Tasmania’s very strong reputation for quality and food safety, as well as the advantages of a cool climate (notwithstanding setbacks from climatic extremes in 2016) and expanding irrigation schemes.

On the other hand, parts of the state face high unemployment, low income growth, low educational attainment and living conditions well below the national average. Areas highly dependent on native forestry have struggled with a structural downturn in the sector and mining continues to face challenges.

Reconciling these competing forces will be a major challenge, given the geographic concentration of growth industries and Tasmania’s demographics, reflecting a much older population than the mainland.

Strength in the Hobart housing market coincides with reasonably solid economic conditions in Tasmania for much of the past couple of years, with unemployment trending lower and household consumption increasing. However, some economic indicators appear to have lost momentum in H2 2016, including a notable moderation in business conditions (from the NAB Monthly Business Survey), although State Final Demand improved in Q4 2016.

We forecast that GSP will grow 1% in 2016-17 and 2% in 2017-18, noting downgrades to agricultural production in 2016. The unemployment rate will remain elevated near 6½%, which combined with slow income growth is a risk for consumption.

2

-6

-2

2

6

10

14

18

1990 1995 2000 2005 2010 2015

Tasmania Australia

0

1

2

3

4

5

6

7

NSW VIC QLD SA WA TAS NT ACT

2013-14 2014-15 2015-16 2016-17 (f) 2017-18 (f)

0

2

4

6

8

0

2000

4000

6000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

AUD Index (LHS) USD index (LHS)

Murray Goulburn milk price (RHS) Fonterra NAB forecast

IN FOCUS The dairy industry faced a tumultuous 2016; prices are recovering

Australian milk production plunged last year, with Tasmania seeing among the steepest falls. The season so far is tracking 8% below last season.

In the longer term, it is likely that Tasmania will continue to boost its share of Australia’s dairy industry. Agriculture accounts for nearly 10% of Tasmania’s GDP, compared to less than 2% nationally. The dairy industry is the largest agricultural industry in Tasmania.

Source: Global Dairy Trade, ABARES, Dairy Australia, ABS and NAB Group Economics

Tasmania’s dairy industry has been expanding at a time when the industry has been flat or contracting nationally, with a favourable climate and expanding irrigation schemes boosting the state’s dairy sector. However, 2016 was a very tough year for many Tasmanian producers, with farmers beginning the year amid extremely dry conditions in key dairy regions and steep cuts to farmgate prices, followed by damaging floods. However, since the middle of 2016, we have seen steady improvements in export prices, with NAB’s weighted dairy export price indicator now showing AUD dairy prices at their highest level since March 2014 (chart 3)

CHART 3: NAB WEIGHTED DAIRY EXPORT PRICE INDICATOR $/tonne (export price, LHS) AUD/kg milk solids (farm gate price RHS)

CHART 4: TASMANIA’S SHARE OF AUSTRALIAN WHOLEMILK PRODUCTION % share

CHART 5: NAB RURAL COMMODITIES INDEX, NATIONAL AND TASMANIA Index

3

0%

2%

4%

6%

8%

10%

1970–71 1980–81 1990–91 2000–01 2010–11

90

100

110

120

130

140

150

160

170

2010 2011 2012 2013 2014 2015 2016 2017

National TAS

TOURISM Continues to grow strongly

The lower Australian dollar since 2014 has been a great boost to Tasmania’s tourism industry. This has made domestic holidays relatively cheaper, reflected in the greater diversity of state of origin for domestic visitors. Victoria continues to the biggest single source of domestic tourism, which is unsurprising given it is the closest state to Tasmania. It is less clear whether the appreciation in the AUD throughout 2016 was damaging to Tasmanian tourism. November airport arrival data was up 3.7% y/y for Hobart but off 1.1% for Launceston.

Source: Tourism Tasmania, Austrade and NAB Group Economics

Tasmania is undoubtedly an exceedingly appealing destination for tourists and features attractions aplenty. The state is the most tourism dependent in Australia, with direct tourism GVA reaching 4.4% of total state GVA in 2014-15.

In the year ended September 2016, total visitor numbers were up 4% to 1.19 million while interstate visitors were up 3%. International visitors to Tasmania were up 14.8% in the year ended September 2016, the highest for any state in Australia.

CHART 6: INTERSTATE VISITORS TO TASMANIA Number, annual to September 2016, by state of origin

CHART 8: TOURISM SPENDING BY TYPE $ million, annual to September 2016

4

CHART 7: INTERNATIONAL VISITORS TO AUSTRALIA BY STATE y/y % 12 months to September 2016

02468

10121416

NSW VIC QLD SA WA TAS NT ACT

0

100000

200000

300000

400000

500000

VIC NSW QLD SA WA ACT NT

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

Holiday VFR Business Other

CONSUMER SPENDING Tasmanians remain cautious, but conditions continue to improve

Consumer behaviour in Tasmania remains cautious and Q4 2016 data from the NAB Consumer Survey shows a renewed focus on the basics. Survey respondents continue to spend on essential goods and services such as transport and utilities, while continuing a very strong focus on paying down debt (which was the first consumer spending preference in Q4). Home improvements, savings and medical expenses also featured prominently in Q3.

Source: ABS and NAB Group Economics

Wage growth and household consumption remain positive, continuing a trend that began in 2014 although national wage growth remains very very sluggish. Improvement in the unemployment rate (especially in Hobart, although the trend in the rest of the state is also encouraging) may present some further upside.

Retail sales remain solid, although look to have lost some momentum of late. The solid performance is perhaps due to tourism expenditure, although the improving Hobart property market is also a compelling explanation.

CHART 9: COMPENSATION OF EMPLOYEES AND H-HOLD CONSUMPTION Growth, y/y %, nominal

CHART 11: NAB CONSUMER ANXIETY SURVEY - CONSUMER SPENDING PREFERENCES Points

CHART 10: RETAIL TURNOVER AND HOUSE PRICE GROWTH y/y %

5

-30-25-20-15-10

-505

1015

EntertainmentEating out

Major HH items

Groceries

Use of credit

Charitable donations

Personal goods

TravelMedical expenses

Savings, super,investments

Home improvements

Children

Transport

Utilities

Paying off debt

Q3'16 Q4'16

-10%

-5%

0%

5%

10%

15%

-10%

-5%

0%

5%

10%

15%

1997 2000 2003 2006 2009 2012 2015

Total compensation per employee as proxy for householdincomeHousehold Consumption

-8.0%-4.0%0.0%4.0%8.0%12.0%16.0%20.0%

-8.0%

-2.0%

4.0%

10.0%

16.0%

22.0%

28.0%

2005 2007 2009 2011 2013 2015 2017

Hobart House Price Growth (y/y%) - RHSRetail Turnover Growth (y/y%) - LHS

NAB CUSTOMER SPENDING BEHAVIOURS: Spending growth highest in the south and east

Source: ABS, NAB Group Economics 6

NAB customer spending behaviour data shows that southern and eastern Tasmania is consistently outperforming the north and the west. This is reflected across a number of indicators, including much stronger airport traffic growth in Hobart than Launceston.

CHART 12: TASMANIA STATE Year-ended growth to Q4 2016

CHART 13: TOP 10 GROWING POSTCODES FOR SPENDING

Overall Growth

3.2%

Average Monthly

Spend (Q4) $1,840

74.7

%

27.7

%

26.8

%

16.5

%

13.0

%

12.7

%

12.1

%

11.7

%

11.7

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

SOU

TH A

RM

CURR

IE

CYGN

ET

CREM

ORN

E

EVAN

DAL

E

GEEV

ESTO

N

PEN

GUIN

BRID

GEW

ATER

HUO

NVI

LLE

7022 7256 7112 7024 7212 7116 7316 7030 7109

Top 10 Postcodes by Spend Growth: TAS(Q4 2016 spend value on Q4 2015 spend value)

BUSINESS CONDITIONS Divergence between manufacturing and tourism, agriculture

Agriculture, forestry and fishing accounts for almost 10% of Tasmania’s GSP (compared to around 2% nationally) and is the state’s largest sector. The dairy sector is the biggest agricultural sector and has seen considerable growth. The state’s share of national milk production has been steadily increasing over the last decade. Also prominent are beef and vegetables. We expect Tasmania’s wine industry to grow more rapidly than the mainland as the state’s cool climate becomes increasingly appreciated.

Source: ABS, ABARES and NAB Group Economics

Divergence continues across Tasmania’s major industries. Hobart has enjoyed the fruits of a tourism boom, reflecting a diversity of high quality attractions such as MONA. Likewise, agricultural and fisheries industries have capitalised on Tasmania’s very strong reputation for quality and food safety. On the other hand, structural decline continues unabated in Tasmania’s native logging industry and manufacturing remains weak.

Non-residential building approvals, while volatile, continue to show a slowdown.

CHART 14: NAB BUSINESS CONDITIONS AND SFD GROWTH Index and % change

CHART 16: GROSS VALUE OF TASMANIAN AGRICULTURAL PRODUCTION 2014-15, $ millions

7

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012 2014 2016Retail/wholesale Offices Factories Warehouses Other

$m

- 100 200 300 400 500

CHART 17: NAB BUSINESS SURVEY FORWARD ORDERS (LAGGED 1 QTR) Index and % change (SFD)

CHART 15: NON-RESIDENTIAL BUILDING APPROVALS $ million

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

-40

-25

-10

5

20

35

50

Jun-

90

Jun-

92

Jun-

94

Jun-

96

Jun-

98

Jun-

00

Jun-

02

Jun-

04

Jun-

06

Jun-

08

Jun-

10

Jun-

12

Jun-

14NAB TAS BCOND lagged (LHS) TAS YoY SFD Growth (RHS)

-5.0%-3.5%-2.0%-0.5%1.0%2.5%4.0%5.5%7.0%8.5%10.0%

-50-40-30-20-10

01020304050

Jun-

06

Dec

-06

Jun-

07

Dec

-07

Jun-

08

Dec

-08

Jun-

09

Dec

-09

Jun-

10

Dec

-10

Jun-

11

Dec

-11

Jun-

12

Dec

-12

Jun-

13

Dec

-13

Jun-

14

Dec

-14

Jun-

15

TAS FO lagged 1 qtr (LHS) TAS YoY SFD Growth (RHS)

RESIDENTIAL SECTOR Approvals and commencements are falling but prices are improving

The limited supply response is helping to offset subdued population growth to keep vacancy rates very low relative to most other capital cities – resulting in a positive trend for rents that is stronger than in any other capital city. Despite signs of an undersupplied market, the relative affordability of properties in Tasmania makes it an enticing destination for some buyers. Hobart in particular continues to enjoy the highest rental yields of all the major capital cities, which would be attractive to investors – especially given the added incentive from the recent strength in capital gains. We forecast that Hobart house prices will rise 3.5% in 2017.

The Hobart property market experienced a strong year in 2016, posting double digit price growth (11.2%) for the first time in over a decade in December. Strength in the housing market coincides with reasonably solid economic conditions in Tasmania for much of the past couple of years, while market fundamentals have generally been supportive.

On the supply side, despite solid price growth during most of 2016, housing approvals and commencements in Tasmania have slowed.

CHART 18: RESIDENTIAL APPROVALS AND COMMENCEMENTS Tasmania

CHART 20: HOBART MEDIAN DETACHED HOUSE PRICE $ ‘000 unstratified

CHART 19: PRICE GROWTH BY REGION % change from previous quarter

Source: ABS and NAB Group Economics

8

-8 -6 -4 -2 0 2 4 6

Greater Hobart

Mersey-Lyell

Northern

Southern

UnitsHouses

2013 2014 2015 2016 2017 Sydney 15.2 13.4 11.5 16.7 4.5

Melbourne 8.5 8.4 11.7 15.1 5.6

Brisbane 5.3 5.2 4.3 4.0 1.7

Adelaide 3.0 4.5 -0.3 4.5 1.5

Perth 10.2 2.1 -3.8 -4.4 -2.7

Hobart 2.9 3.3 -1.6 11.7 3.5

Cap City Avg 9.9 8.4 7.8 11.6 3.4

CHART 21: NAB HOUSE PRICE FORECASTS Q4 2016

0

100

200

300

400

0

200

400

600

800

1000

1200

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Approvals

LABOUR MARKET Unemployment is falling, especially in Hobart

Over the 12 months to the December quarter 2016, construction, transport and health enjoyed the biggest employment gains. Mining, utilities and wholesale trade suffered the largest number of job losses. The recent fall in residential building approvals bodes somewhat ill for the construction industry, despite strong gains in the last 12 months. Tasmania reflects the trend seen nationally, with employment growth coming largely in the form of part time rather than full time employment.

Slower economic growth saw the Tasmanian unemployment rate rise steadily in the aftermath of the GFC from 2008 to 2013 despite weak population growth over the period. Unemployment peaked in mid-2013 and has tended downward, standing at 5.9% (trend) in January, down from 6.1% from the previous month. Seasonally adjusted data shows a bigger fall from 6.3% to 5.6%, although we note that the data is rather volatile. Hobart outperforms the rest of the state, although the sample size for the regional data is small.

CHART 22: UNEMPLOYMENT RATE BY REGION %

CHART 24: CHANGE IN EMPLOYMENT BY INDUSTRY 12 months to December 2016, Tasmania, ‘000

Source: ABS and NAB Group Economics

9

-3 -2.5 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4

Construction

Transport

Health

Admin services

Communications

Hospitality

Rental services

Finance

Other services

Arts

Retail trade

Education

Manufacturing

Public admin

Agriculture

Business services

Wholesale trade

Utilities

Mining

CHART 23: UNDEREMPLOYMENT %

0

5

10

15

20

2014 2015 2016

Unemployment Underutilisation

2

4

6

8

10

12

2000 2005 2010 2015

Tasmania Greater Hobart Rest of TAS

DEMOGRAPHIC TRENDS Population growth remains below the national average

Tasmania’s population is older than the national average, with a notably smaller proportion of the population aged 20 to 40. This has clear implications for government revenue and health spending. Tasmania’s share of the Australian population is also falling over time. Not only is the Tasmanian resident population ageing, the population is growing at a significantly slower rate than the national average.

Population growth – albeit still very subdued – has steadily improved over recent years, largely driven by net interstate migration, which has recovered from a substantial deficit in the wake of the GFC. Net overseas migration has also picked up. This has not, however, contributed to employment growth, which actually declined over the year to November 2016. But despite the drop in employment, the unemployment rate has improved from the peaks of recent years, suggesting much of the state’s inward migration is of people not actively participating in the labour market.

CHART 25: POPULATION GROWTH DRIVERS ’000 over the year

CHART 27: POPULATION SHARE BY AGE Share of Tasmania’s estimated resident population

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1975 1980 1985 1990 1995 2000 2005 2010 2015

80 plus

71 to 80

61 to 70

51 to 60

41 to 50

31 to 40

21 to 30

11 to 20

0 to 10

CHART 26: TASMANIA POPULATION GROWTH Year ended growth

Source: ABS and NAB Group Economics

10

-6

-4

-2

0

2

4

6

8

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

'000s Natural increaseNet overseas migrationNet interstate migrationTotal population growth

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

TAS AUS

FISCAL OUTLOOK The Government remains focused on its Strategic Action Plan of ensuring that annual servicing costs on general government debt and defined super liabilities will be less than six per cent of General Government cash receipts. In September 2016 S&P released a Ratings Direct report confirming Tasmania’s AA+, stable outlook credit rating. Tasmania’s low debt and fiscal discipline are seen to support the rating. Post the FY17 Budget Tascorp said its borrowing would total $900m. It has issued a new Feb 26 bond line and including taps into existing lines is estimated to have met its funding programme for the year.

Source: Tasmanian budget papers, Tascorp, Bloomberg, NAB

The 2016-17 Revised Estimates Report (RER) forecasts a smaller surplus in 2016-17 than the 2016-17 budget, but larger surpluses over the forward estimates period. Major changes since budget include an improved revenue position (from Commonwealth grants and own source revenue), partly offset by costs associated with floods and bushfires in 2016. The RER shows a significant improvement in the non-financial public sector net debt position. This reflects a significant improvement in the net debt position as at June 30 2016 and an improvement in the operating position.

CHART 28: NET OPERATING BALANCE General government sector, $ million

CHART 30: TASCORP BONDS OUTSTANDING AS AT END JUNE 2016 $ million

CHART 29: TASMANIA NON-FINANCIAL PUBLIC SECTOR DEBT $ billion

11

-100

-50

0

50

100

150

200

2016-17 2017-18 2018-19 2019-20

2016-17 Budget RER

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2015-16 2016-17 2017-18 2018-19 2019-20

AUDbn

FY 17FY 16 MYBR

FY 16

FY 17 MYBR0

200

400

600

800

1000

1200

Sep-17 Jun-20 Mar-22 Jun-24 Feb-26

AUDmn

Outstanding as at Jun 30 16

Issuance FYTD

ECONOMIC STRUCTURE AND TRADE Tasmania’s external trade is focussed on East Asia. ASEAN is the biggest export destination at present, although other nations in the East and South East Asian region feature prominently, particularly China. Outside Asia, The United States and New Zealand feature among the state’s major trading partners.

Tasmania is an island located south of the Australian mainland. It is Australia’s least populous state, having a population of just over 500,000. This combination of remoteness and low population presents a number of economic challenges. The public sector has an outsize role in the economy.

Health is the biggest employer, and retail, education, hospitality, manufacturing and public administration are also major employers. This reflects the importance of government services as well as industries associated with tourism.

CHART 31: COMPOSITION OF EMPLOYMENT & GVA 2015-16

CHART 32: TOP TASMANIA EXPORT DESTINATIONS AND IMPORT SOURCE COUNTRIES 12 month average

Source: ABS and NAB Group Economics

12

0% 2% 4% 6% 8% 10% 12% 14% 16%

Agriculture

Mining

Manufacturing

Utilities

Construction

Wholesale trade

Retail trade

Hospitality

Transport

Communications

Finance

Rental services

Business services

Admin services

Public admin

Education

Health

Arts

Other services

Employment

GVA

Value of exports ($m)

1 ASEAN 716

2 China 693

3 Taiwan 252

4 Japan 212

5 Korea 133

6 HK 128

7 US 119

8 New Zealand 114

9 India 104

10 EU 52

11 Singapore 43

12 UK 6

13 Germany 5

Value of imports ($m)

1 EU 139

2 China 124

3 ASEAN 111

4 Korea 72

5 US 61

6 UK 53

7 Singapore 49

8 Germany 22

9 New Zealand 20

10 Japan 12

11 Taiwan 3

12 HK 0

FORECASTS BY STATE AND TERRITORY: Tasmania underperforming national average, but picking up in 2017-18

Source: ABS, CoreLogicNAB Economics

NAB’s economic forecasts by state and territory are below. For a summary of the outlook by state, please see the States Handbook – Overview which contains links to the detailed handbook for each state and territory.

REAL GROSS STATE PRODUCT AND UNEMPLOYMENT RATE FORECASTS Annual average

13

HEDONIC HOUSE PRICE FORECASTS* Through the year growth to Q4

HEDONIC UNIT/APARTMENT PRICE FORECASTS * Through the year growth to Q4

NAB growth and unemployment rate forecasts for the states

14-15 15-16 16-17f 17-18f 14-15 15-16 16-17f 17-18fNSW 2.6 3.5 2.7 2.9 5.9 5.4 5.1 5.3VIC 2.6 3.3 2.7 2.9 6.4 5.9 5.7 5.7QLD 1.2 2.0 3.5 3.5 6.5 6.2 6.2 5.8SA 2.0 1.9 0.8 2.0 6.9 7.3 7.0 7.0WA 3.6 1.9 0.5 2.8 5.4 6.0 6.5 6.3TAS 1.3 1.3 1.0 2.0 6.9 6.5 6.5 6.5NT 2.0 2.7 1.5 5.0 4.2 4.2 4.0 4.8ACT 1.3 3.4 2.3 2.5 4.5 4.5 4.3 4.3Australia 2.4 2.7 2.1 3.0 6.2 5.9 5.7 5.7

Unemployment RateGross State Product YoY