SA economic recovery to continue but reopening no guarantee of economic windfall

South Australia’s economic recovery is expected to continue well into the new year. Recent strong growth in business investment, a backlog of construction work, and reopening of borders will support the ongoing recovery. But the economic benefits of reopening will be diminished to the extent that it leads to fresh COVID outbreaks and voluntary social distancing.

These conclusions are contained in the latest Economic Briefing Report prepared by economists from the University of Adelaide’s SA Centre for Economic Studies (SACES). Their report highlights:

• Global economic recovery has continued strongly in 2021 and is expected to continue in 2022.
• The recovery is progressing best in advanced nations which generally have high vaccination rates.
• The combination of strong demand and disrupted supply has led to some sharp rises in the prices of commodities and other supply chain essentials.
• Australia’s recovery stumbled in the September quarter as extensive lockdowns in eastern states supressed household spending and construction activity, but this is likely to be reversed now that those lockdowns have lifted.
• The arrival of the Omicron variant of coronavirus adds a new layer of uncertainty to the health and economic outlook.
• South Australia enjoyed the fastest rate of growth within the nation last financial year thanks in part to bumper grain and grape harvests.
• Growth was also quite strong outside those sectors, aided by the very effective public health response to COVID in this State and consequently the limited need for lockdowns.
• The growth momentum has been carried forward into the September quarter with final spending in South Australia continuing to expand at a solid pace. Business investment has been growing strongly and investment expectations have picked up significantly, but household consumption has lost some momentum.
• Export volumes fell away through the middle of the year, but returns to exporters have actually grown in aggregate due to a substantial increase in prices received.
• Wine exports have fallen dramatically (down one-third year on year to October) since China imposed punitive tariffs on Australian wines. Local wine producers face a challenging readjustment.
• The SA labour market recovered strongly through the year to June 2021, but employment growth has slowed in the second half of the year. Forward indicators are quite encouraging for a resumption of growth through the summer and into 2022.
• There are reports of labour shortages in some industries but they appear not to be widespread. There is not much evidence of the upward wages pressure one would expect in the face of broad labour shortages.
• Despite a remarkable turnaround in net interstate migration flows, South Australia’s population growth has slowed sharply with the closure of the nation’s borders. This has negative implications for the size of the working age population, skills in demand and the ageing of the working age population.

“We expect the South Australian economy to have a moderate continuing recovery in 2021/22. The outlook for business and public investment is quite positive. We also expect that household spending growth will be moderately supportive, as activity restrictions phase out and as population growth recovers with the opening of Australia’s international borders.’, says Mr Jim Hancock, Deputy Director, South Australian Centre for Economic Studies, the University of Adelaide.

But there are some negative aspects to the outlook.

“Although the government has wound back many activity restrictions, households themselves are likely to remain quite cautious with regard to activities which have an actual or perceived infection risk. Moreover, positive influences on growth will be offset to a degree by recent weather damage to crops, a continuing reduction in overseas student enrolments and ongoing challenges with finding new markets for wine.”

The full Economic Briefing was delivered by SACES to South Australian business leaders during a webinar on Monday.