Phil Ruthven

Phil-Ruthven-IBIS-100Want to know the great growth sectors of the next five years? Or what’s the outlook for the Australian dollar and when that mining boom will finally fall over?

Phil Ruthven is your man.

Ruthven, the founder and chairman of business information and forecasting service IBISWorld, describes why the Australia dollar is in the land of the tooth fairy, and reveals why 2011 was an epiphany year – it’s not why you think.

The friend of SmartCompany, who has spent decades monitoring business in Australia, also delivers some hard truth on the future of bricks and mortar in Australia. It’s not just online shopping and cyclical and structural changes: the next generations are not in love with shopping as the previous generations.

Still, Ruthven is optimistic about economic growth and unemployment in 2012, and says one sector is in for “phenomenal growth” in the next 20 years – and it isn’t mining.

How do you think Australia is placed at the moment? Are we in a delayed recession or just having a bit of a hangover from the GFC?

In a sense, I think we’ve been influenced by the GFC rather than impacted by it. Because in a sense we didn’t play any part in the GFC at all given that we did not have exposed banks and other financial institutions to any of the sort of problems that the United States and Europe had.

Secondly, that 80% of our exports are to Asia so we were really not going to be impacted by any subsequent fall in the EU and US economy.

And so, in a sense, the only thing that we were exposed to was the fear element rather than the reality of the GFC. And I think that wasn’t helped in 2009 by the then Prime Minister [Kevin Rudd] saying publicly that we were in recession all year when in fact we weren’t.

In other words, I think our biggest exposure was fear and hyperbole, not the actuality of the GFC – and that’s still true today.

There’s been a very slight slowdown in the Chinese economy, which is reflected to some extent in the [recent] BHP results, but that’s not all that serious and China is still growing at a very fast pace.

In fact, during this calendar year of 2012 the Asia region is going to be growing at a real rate of 6% – and that’s twice what we’re expecting as the world average growth, and of course far greater than the EU, which is going to have no growth at all, or the United States, which is at just over 2%.

The Asia region – which consists of what we call the Asia Pacific plus the India subcontinent of India, Pakistan, Bangladesh and Sri Lanka etc – something like 70% of our exports go to the Asia Pacific, and at least 10% now to India I think and the rest of the subcontinent.

The Australian dollar, where do you see that going?

One of the problems from the influence of the GFC has been the rising Australian dollar, which has made some exports particularly difficult.

The number one [affected industry] has been tourism; when you’ve had $1.10 for the US dollar against the Australian dollar it makes us a pretty expensive country to visit. It’s also influenced our agricultural industry. But more particularly it’s been a very heavy burden on our manufacturing sector, both in exporting and the ease of importing, which displaces local manufacturing.

So in a sense the Australian dollar has had a collateral impact on us as part of the GFC, because we look good by default and that’s why our dollar has been strong.

And it’s not that our inflation levels have been lower; in fact, our inflation levels have been higher than the rest of the world and that’s been because of the mining boom prices where we’ve had the GDP inflator, as they call it, of up around 5% or more.

Now that’s far higher than Europe has had and yet despite that the dollar’s gone up, which tells us that it’s in the land of the tooth fairy at the moment.

It will eventually come back to a more normal figure, but probably not until the United States and Europe regain something of their mojo if I can put it that way and then we’ll see a return to a much more normal exchange rate.

What challenges does Australia face?

I think one of the biggest challenges we’ve had here is our productivity challenge.

It’s important to point out that the two industries that have caused our very low productivity, the two worst industries, have been mining and our utilities.

Mining actually has had negative productivity for pretty well the last five years or more where they’ve been putting on piles and piles of people at a much faster rate than they’ve ever been producing minerals to export. They can afford to do that because their prices have gone up four times in the last decade.

The utilities, being government-owned, seemed to have had particularly negative productivity as well.

And there is some suggestion that the industrial relations legislations may be a bit of a time bomb for the future, including this year where we know the construction industry is going to be under pressure and we know the mining industry already is.

Mining is copping a whole heap of problems this year and we know construction certainly is, so there is a degree of concern in the business community about the IR problems that are likely to emerge.

What are your expectations for unemployment and economic growth this year?

Economic growth I think is going to be over 3%. I mean, at one stage late last year we thought it might get to 4%. I think that’s been cut back to somewhere between 3% to 3.3%, and I would think that’s eminently achievable.

I think inflation is probably on the way down, because we’re not going to get any more inflationary impact from the mining industry because their prices won’t keep rising as fast as they did in the past which has been the biggest single cause of our inflation.

So I think we’re looking at inflation sitting around 3% or better by the time we get to the end of this year.

Unemployment I think is currently sitting around 5.2% or 5.3% and should improve a fraction if we’re going to growth of 3.3%.

And we could, with a bit of luck, end up with about 5% at the end of this calendar year, but that’s predicated on the fact that we do get that sort of growth which as I say I hope we do. Or it could be stalled at around 5.25% unemployment.

So unemployment won’t end up as the problem we’re fearing now?

No.

To what extents are the troubles we’re seeing in retail and housing, for example structural rather than cyclical?

I think we’ll deal with retail first mainly because it’s a fairly visible industry. It’s not that big an industry in the economy funnily enough. It’s only around about 5% of the GDP but of course its turnover is enormous, sitting up around $400 billion and therefore it does have a fairly big impact on the upstream industries such as manufacturing and other sectors that supply the retail industries, so about 4% or 5% of GDP disguises the fact that its impact does stretch a bit further than that.

Now as to whether it’s cyclical or something, it’s both.

Retailing is going through a double-whammy. It’s going through a cyclical downturn mainly because of the brought forward buying of the last five to seven years, and that brought forward buying occurred for quite a number of reasons.

One was because of a free giveaway by the Rudd Government during 2009 where we were in fact encouraged to go out and buy things that we might not have ordinarily done for a year or two later.

Secondly, the dollar which has been pretty high now for a couple of years has also meant that retail goods have been much cheaper so people have brought forward their purchases.

Another element is we did go on a bit of a consumer spending boom in retailing where growth was sitting up around about 4% or 5% – that’s very unlike retailing, with its normal expected real growth of around 3% or less.

So we had several years up around 5% [growth] and then we had all that brought forward purchasing by the Rudd giveaway and the high dollar.

That cyclical part of it means that part of it will self-correct over the next couple of years, and we’ll come out of that slowdown back into a normal growth rate nearer to 3% compared to the 2% or so that we’ve been getting recently.

However the much longer impact, of course, is the online revolution and the only way I can compare that is to go back to the age of the advent of self-service in retailing which took place in the late 60s, and within 15 years there were no corner stores left. The serviced corner stores were gone, because supermarkets were cheaper and had a much wider range of product compared to the corner grocer.

That then spread into hardware stores with Mitre 10 taking up the challenge of self-service, leading to today’s big stores like Bunnings.

So self-service spread right across the retail industry and caused the demise of many old-fashioned sections of retailing at the time. And now online is doing that all over again. So 45 years on from the last revolution, we’ve got another that’s going to stretch right out to the rest of this century.

But it’s not only the technology, but it’s also the change in the generations. Because  unlike the baby boomers or even some of the Gen Xs, the next generation don’t see anything terribly sexy about going to a shopping centre. Shopping in the way that it used to really be attractive to the baby boomers and the older generations doesn’t really have the same appeal. They’d rather go to a gym than a coffee shop or something. They don’t see a lot of sense in it.

In other words, they will be bigger adaptors of online and already are compared to earlier generations. So the online revolution is not cyclical, it’s permanent and it’s already just over 5% of our retail sales, and there’s no doubt that will continue on until it’s 30% or 40% well before the middle of this century.

That’s a huge percentage.

It’s going to cut a swath through retail as we know it today. It’s not going to be an overnight thing. You’re not going to see shopping centres shut down because shopping centres have got the advantage that they can turn some of their shops into service establishments. It might be a hairdresser or a cinema or some other thing.

But you can’t do that as easily on the high streets, and you’re starting to see a lot of empty shops around the high streets of Australia and that’s partly because of the slight flowing of the economy but it’s also because of the general revolution coming through is hurting.

But also the strength of the very big retailers is hurting too, particularly the Coles and the Woolworths and the Bunnings. Those sort of big giants with their big buying and selling advantages are really starting to have a much more severe impact on the high street shopping than we’ve seen for some time.

But as I often say, of all the consumer spending each year, retail sales only account for about 23% of that – and this includes motor vehicles and petrol as well supermarkets and everything else. If you look back 100 years ago, it was 60%.

And it’s still falling, which means that three-quarters of what we spend our money on each year is not to do with retailing at all.

And in fact in [calendar] 2011 it was the first time that we spent more money on just the outsourcing of household services than we did on the entire shopping spending. So things like child minding, washing the car, cleaning the house, entertainment, fast food – all the sort of things that we used to look after ourselves, that outlay came to $30,000 a year or more per household, which is more than we spent on retailing.

It was quite an epiphany year for quite dramatic change in the way that Australian households spend their money.

And you expect the growth in services to continue?

Yes, because we’ve only really outsourced a third of household services at this stage.

We’ll never outsource the lot because quite a few household services and activities are considered therapy by the individuals. I mean, some people would never dream of getting their ironing done because they love doing it while watching the TV. I couldn’t think of anything worse but for some people painting is a real therapy; others like washing their cars or gardening.

You’ll never get rid of it all, but one-third of it has been outsourced and at least another one-third will go as well. The growth in services is going to be still quite phenomenal for the next 20 years.

That’s interesting. So obviously services is one area that’s going to grow, what else are you expecting to have a boom year?

Well, I think if you look at exports this year, mining is still a very strong exporter.

We won’t see that for manufacturing and we still won’t see that yet for inbound tourism unfortunately; the dollar is going to see to that probably, and the fact that we’re still in the last year of what I call the serious effect of the GFC.

But I think there is now some composure being reached in both Europe and the United States, and I expect this could be a sort of watershed year for potential growth industries which can’t yet to boom until our dollar returns to a bit more normal values and until the United States and Europe get their act together.

I think this year some of the fear is going away, but I think 2013 you’ll start to feel a great deal more buoyancy in those areas. That certainly include tourism and to some extent agriculture as well because agriculture is getting a boost because of better weather conditions than we had during the long drought, although the floods aren’t helping much at the present time. I think an easing Australian dollar plus continuing good seasons probably all go fairly well for agriculture.

Manufacturing I think is going to be quite spasmodic and I don’t see any great joy in that area because I think the competition from China and other developing economies is so great that even a fall in the Australian dollar value is going to overly help us much.

But to come back to your growth areas, health is going to continue to grow for decades yet to come so that’s obviously a strong growth industry.

I think professional and technical services are going to grow and that includes accounting. Accounting’s suffering a bit at the moment and so too is legal but I think by the end of the year they’ll have regained a fair bit of the impetus again.

We’re finding in the database industry, which is a professional service, that growth is very, very strong. In other words, people’s thirst for information is unabated which is good news for us I must say.

So we think that professional services is looking pretty good.

You mentioned housing, I think housing is still in the doldrums and I think that’s partly because interest rates are not going to come down on mortgages despite what the Reserve Bank does because the banks are quite clearly having to borrow at whatever increasing rates themselves from overseas so I don’t see interest rates as being a spur for construction growth in housing.

I think the biggest advantage to the house construction will come from a change from regulations from state governments and maybe including some revisions of their taxes of course which are horrendous as we know.

Most of the capital cities are now starting to encourage high rise, Sydney’s been doing that for quite some time and those sorts of things will help and I think that also it’s going to be a change in attitude of people towards looking towards a smaller place than they have.

So I think there are changes to the aspirations of homebuyers that is going to help, there are going to be changes of state governments in terms of zoning laws and perhaps the taxation system that’s going to make a difference to the number of houses we build.

Because what’s extraordinary about housing is we haven’t really been building any more houses than we did in the mid-70s – 36 years ago we were building about 150,000 dwellings a year and that’s all we’re still doing.

In other words, we’ve been building houses that are too big, interest rates occasionally that have been too high and zoning laws have been too tough and taxation’s been too high by state governments.

So I’m a little more confident of the dwelling construction industry but not necessarily this year. I think that’s emerging during the course of this decade rather than saying that 2012 is a major turning point because I think it’s a bit slower than that.

Just in terms of our patchwork economy, is this a long-term phenomenon? When will the resources boom come to an end?

It’s certainly going to be medium-term. It’s been happening for the decade just gone, the noughties, and it will probably occur for most of this decade through to 2020 one way or another.

But the boom was more of a price boom than a volume boom. When we talked about the mining boom that was a total misnomer because the actual volume of minerals being dug up and being exported only grew at about the same speed as the general economy, around about 3.5% per annum. It was the prices that went up fourfold.

These prices, we won’t see prices rise, but we will see volumes rise. And I think the three mining states, including the Northern Territory, will continue to grow strongly.

Having said that, the standard of living in Melbourne and Sydney is better than it is in Perth or Queensland. We ought not get carried away about mining. It’s big in WA – it’s about 25% of that economy – and about 10% of Queensland’s. But there are only 200,000 people employed in mining and in Sydney and Melbourne there are many people in professions earning similar money.

So it’s growth rather than absolutes that’s been causing the two-speed economy, and good on them. But will it last beyond 2020? No, it won’t. The prices boom won’t, because China’s manufacturing and production will fall – there’s a limit to the mining boom because there’s a limit to what China can get out of manufacturing. And then mining will return to being what it was before, an awful industry.

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