Corporate profits tipped to soar
By Tim Colebatch | smh.com.au | 15 May
Corporate Australia is heading for super-profits in 2008-09 on a scale never seen before, Treasury has forecast. Excluding the financial sector, corporate profits are tipped to soar by 18.75% in the coming year, largely due to the mining sector.
But the boom will not be felt everywhere. As Treasury sees it, the future of the Australian economy is about to become more complex. Nominal GDP is expected to grow by more than $100 billion in 2008-09, soaring 9.25% on the back of dramatically escalating mineral prices. Yet real GDP is tipped to grow just 2.75%, with unemployment rising and job growth nearly flat.
Treasury's 30-page overview of the Australian economy in 2008-09 barely mentions the states, yet its forecasts imply that the gap between the two Australias - the booming resource-rich states of Queensland and Western Australia, and the manufacturing states of the south-east, buffeted by high interest rates and the high dollar - is set to dominate the economic outlook.
It forecasts that the terms of trade - the ratio of export prices to import prices - will rise another 16% in 2008-09, almost four times its growth in 2007-08. That alone will add $35 billion to $40 billion to Australia's income next year, lifting nominal GDP from an estimated $1128 billion this financial year to $1232 billion.
Yet most of this growth will be in prices, not volume of output. While the farm sector will revive - assuming rains come - non-farm output is tipped to rise just 2.25% next year, barely half its growth in the past two years. Much of this would be in mining and mining-related construction, largely in Queensland and WA.
Treasury estimates that the volume of business investment would rise 8.5%, roughly matching its growth in the past year, with construction spending up 5.5%, and the volume of machinery and equipment purchased up 11%.
But things would be far less exuberant out in suburbia, where Treasury concedes that soaring household debt and rising interest rates are leading to increased financial stress. It predicts consumer spending will rise just 2.75%, its slowest growth in more than a decade. Housing investment would grow just 2%, with rents likely to keep rising rapidly.
The households who will be doing well are those with shareholders in mining companies. They will account for most of the 18.75% growth in non-financial corporate profits, whereas wages are tipped to remain steady, growing by 4.25%.
In the global context, Treasury sees Asia pulling the world economy along in 2008 and 2009, despite severe slowdowns in the US, Japan and Europe. It predicts that China's output will grow 10% this year and 9.5% in 2009, while India grows at 7.5 and 7.75% respectively.
The US would grow by just 0.75% this year - a more optimistic forecast than most, reflecting the better news of the past month - and in 2009 the US, Europe and Japan would all grow by 1.5% as they slowly picked themselves up. Overall world growth would be 4% in 2008 and 2009 alike.
Treasury does not try to guess when export prices will come off the boil, but that will clearly be the next risk Australia faces after the challenge in 2008-09 of coping with so much growth in income at a time of such sparse growth in output.
Part of it would spill over into imports, which are tipped to grow 9% in volume while exports grow just 6%.
Overall, Treasury estimates that the soaring terms of trade in recent years have lifted Australia's national income by 11%, including its second-round effects on output. Profits overall will be 20% higher in 2008-09 than they would have been without rising terms of trade, while employment is 2% higher and overall labour income 9% higher. But Treasury shies away from estimating the impact on different states.
Overall, its GDP is forecast is marginally stronger than the Reserve Bank's, which implies 2.5% growth in 2008-09, but is far weaker than Access Economics' forecast of 3.9% growth.
First published by Smh.com.au on May 15 2008
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