Australia / Spotlight Reports
Industries Expected To Excel Amid Australia's Weakening Economy
by Tom Youl
Jul 11 2019

Industry research firm IBISWorld anticipates that households will see little benefit over 2019-20, despite an expected uptick in Australian economic growth. Over the coming financial year

  • Wages and household consumption are expected to report modest gains.
  • Productivity growth, the key driver of higher wages, is anticipated to be limited.
  • Households are unlikely to get any significant relief from increasing financial pressures.

While the recently approved income tax cuts and lower interest rates will likely provide a boost to household incomes, government policies are unlikely to be sufficient in rousing meaningful economic growth. As a result, the weakening economic landscape is expected to benefit the following industries:

“Underinvestment in productivity-boosting policy and packages, and chasing budget surplus when fiscal stimulus is needed, are anticipated to drag on the economy over the coming year. In addition, signs of slowdown in the global economy, which has been reporting strong growth, pose a threat to export-oriented firms,” said IBISWorld Senior Industry Analyst Tom Youl.

Household consumption, which accounts for 55.8% of the Australian economy, is the primary driver of GDP growth. However, household consumption as a share of GDP has been in sharp decline since 2015-16, when consumption represented 58.9% of GDP, coinciding with a stagnation in real wage growth.

“Although Australian GDP has been growing, the corporate profit share of GDP has been rising strongly. In other words, most of Australia’s economic growth over the past five years has been reported on corporate income statements rather than employee payslips. This trend is expected to continue in 2019-20, limiting household consumption and economic growth. Furthermore, wage growth is anticipated to remain low as productivity remains mostly stagnant,” said Mr Youl.

Increases in productivity are the main driver of wage growth, with real non-farm productivity only rising modestly over the past five years. This trend partially explains the sluggish wage growth recorded over the period. According to the Australian Treasury, from 2001-02 to 2013-14, the top 10% of productive businesses reported annual real wage growth of 2.8%, compared with 1.7% at other firms.

“Unfortunately, the government investment planned over the coming financial year is insufficient to stimulate productivity. Additional infrastructure expenditure would be particularly beneficial in this regard, with the added benefit of addressing the excess labour capacity currently dragging on economic growth. Most existing projects are planned on roads, which deliver inferior long-term economic benefits and productivity growth compared with rail projects,” said Mr Youl.

In addition, chasing a budget surplus when fiscal stimulus is needed will likely limit the Australian economy’s prospects in 2019-20. The private sector has also been underwhelming in its efforts to increase productivity. In particular, Australia has lagged behind other advanced economies in high-tech capital investment.

“Consumers are anticipated to be somewhat buoyed by the incoming income tax cuts in 2019-20. These tax cuts aim to stimulate household expenditure and kickstart the domestic economy. However, poor wage growth over the past five years has caused many households to reduce savings to make ends meet,” said Mr Youl.

Consequently, IBISWorld expects many households will use the rise in net income to bolster their savings, particularly if pessimism reigns throughout the coming year. Consumer sentiment is anticipated to be reliant on residential house prices, as rising house prices tend to make consumers more confident regarding their economic position. Although residential housing prices are expected to increase in 2019-20, the effect of interest rate cuts may not be as beneficial to the overall economy as anticipated. After the successive June and July 2019 interest rate cuts, consumer sentiment fell sharply. Consumers felt more pessimistic about Australia’s economy but reported greater optimism regarding their personal finances.

According to the Reserve Bank of Australia, the nation’s economic growth was remarkably sluggish in 2018-19. The central bank’s figures state that GDP growth slowed to 1.75% over the year ending June 2019, a downward revision from the expected 2.5% growth. While the Reserve Bank forecasts more robust growth of 2.75% for 2019-20, IBISWorld anticipates that conditions for Australian households will remain underwhelming.

 

The top five industries set to defy the slowing economy

Slowing economic conditions negatively affect most industries due to a combination of lower consumption expenditure, reduced investment in capital growth, and weaker consumer and business sentiment. However, some industries are likely to excel during an economic contraction, with demand for their goods and services remaining strong or increasing.

Debt Collection

Firms in the Debt Collection industry retrieve debt payments from individuals and businesses that have failed to meet their loan obligations. Debt collectors act as an agent on behalf of a creditor, for which the firm receives a fee or percentage of the total amount collected.

“A significant opportunity for debt collectors may arise if economic growth stalls. Household debt as a share of disposable income rose to a record high of 190% in 2018 (latest available data). At the same time, the national household savings ratio is expected to decline to a record low of 2% in 2020,” said Mr Youl.

Households have maintained consumption over the past five years through reducing savings and increasing debt, to offset sluggish wage growth. In the first quarter of 2019, Australian home loan arrears rose to the highest level since March 2012. Revenue for the Debt Collection industry is expected to increase by 3.0% in 2019-20.

Temporary Staff Services

“Businesses typically desire greater flexibility in their workforces when economic uncertainty rises. As businesses may need to quickly downsize their labour forces to remain profitable, short-term contractors become a more attractive option than permanent employees,” said Mr Youl.

This trend provides a significant opportunity to firms in the Temporary Staff Services industry, which supply short-term staff to clients on a fee or contract basis. Temporary staff provided by industry firms work for clients at their respective work sites, but remain legally employed by the temporary staff provider.

In August 2018, contractors accounted for 8.1% of the total Australian workforce. Revenue for the Temporary Staff Services industry is expected to increase by 4.1% in 2019-20.

Antique and Used Goods Retailing

Used goods retailers, such as Cash Converters or the Salvation Army, typically excel during economic downturns. When economic growth declined in 2013 due to the end of the mining boom, Cash Converters posted the highest revenue growth of any retailer with over $100 million in sales.

“As consumers sentiment weakens, households divert spending to cheaper used items rather than purchasing more expensive new products. In addition, as unemployment rises, consumers are more likely to sell off assets to cover their expenses, increasing the supply of goods for firms in the Antique and Used Goods Retailing industry,” said Mr Youl.

Slowing economic conditions are anticipated to support strong revenue growth for the Antique and Used Goods Retailing industry in the current year. Industry revenue is expected to grow by 2.7% in 2019-20.

Furniture, Appliance and Equipment Rental

Firms in the Furniture, Appliance and Equipment Rental industry provide basic household goods, such as fridges and washing machines. The industry is counter-cyclical, as rental firms generally benefit from increased demand when economic conditions are uncertain or weak.

“As economic uncertainty rises, consumers become more hesitant to commit to large purchases such as appliances and furniture. In order to retain wealth, households tend to rent basic amenities until economic conditions improve,” said Mr Youl.

ASIC has cracked down on several appliance rental provider that have breached responsible lending obligations over the past year. These providers have included Thorn Australia, The Rental Guys, Rent to Own and Local Appliance Rentals. The Coalition Government announced intentions to introduce stricter payday lending laws in October 2017 but has yet to do so.

Revenue for the Furniture, Appliance and Equipment Rental industry is expected to grow by 1.9% in 2019-20.

University and Other Higher Education

Unemployment typically increases during economic downturns. Rising unemployment occurs as a result of employers decommissioning existing jobs and failing to create new positions.

“Finding employment can be particularly difficult for students entering the national workforce, with businesses allocating fewer resources to train and employ graduates. As a result, students are more likely to pursue higher education in order to improve their employability,” said Mr Youl.

Regardless of the domestic economy’s performance, Australian universities are anticipated to perform well due to strong demand from international students. Revenue for the University and Other Higher Education industry is expected to grow by 4.0% in 2019-20.

-Ends-

IBISWorld reports used in this release:

 

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Kim Do
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3641
Mobile: 0422 773 995
Email: kim.do@ibisworld.com