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Key themes from the Treasury Business Liaison Programme — July and August 2005


Treasury officers met with around 80 companies and organisations in Sydney, Melbourne, Perth, Wollongong and Albury-Wodonga through the Business Liaison Programme in July and August 2005.1

Conditions in the retail sector are mixed, with some retailers reporting slowing sales while others are finding improved conditions. Car sales are strong in both domestic and export markets. Mining companies told how they are expanding production and those manufacturers supplying the mining sector describe business conditions as very good. The rural sector welcomed the recent rains.

Businesses expect to continue increasing employment although they say that skill shortages are becoming more widespread. However, this is only leading to a marginal acceleration in overall wages. While oil and steel prices have risen considerably, firms suggest there is only a minimal increase in the rate at which they can raise prices. Wage increases are being variously met by productivity improvements, cuts in other costs and modest reductions in profitability.

Treasury greatly appreciates the commitment of time and effort made by the Australian businesses and industry associations that participate in the Business Liaison Programme.2

Retail trade

A varied picture emerges from discussions with retailers. Some report that sales have picked up somewhat in recent months. The ‘baby bonus’ added to the sales of products such as toys. Motor vehicle sales are at record highs with industry contacts expecting sales of around a million cars this year.

Others report that the mild winter in much of the country, following a generally mild summer, has led to weak sales for some household appliances and seasonal clothing. Sales of furniture and appliances are also being dampened by the slower pace of home completions. Some retailers blame higher petrol prices for diverting spending away from other purchases.

Financial institutions report a slightly more cautious attitude towards borrowing by households, consistent with the slowdown in household credit. Intermediaries also pointed to a reduced usage of mortgage equity withdrawals. This caution is not surprising given that estate agents and others note a change in sentiment towards house prices, which are no longer assumed to be inexorably rising.

Production and investment


The most confident manufacturers interviewed are those supplying the mining industry. Some of these are undertaking investment to expand their productive capacity. Suppliers to the construction industry in Western Australia report very strong conditions.

As well as record domestic sales, automotive vehicle manufacturers are continuing to expand exports to the Middle East. As a result, they report high levels of capacity utilisation. Most have plans for investment to increase capacity as new models are introduced next year.

Some manufacturers report a rundown in their inventories earlier in the year which is leading them to increase production. In some cases, this might require more investment. Some other firms are investing to rationalise production in fewer sites to reap economies of scale.

Some manufacturers are finding it hard to compete with imports. One way they are reacting to this challenge is by moving some of their own production facilities overseas. Some manufacturers report increasing the proportion of components they source from overseas.


There are divergent trends in housing markets across Australia. House prices are reported as having fallen in Sydney overall. Prices for houses in harbourside suburbs are holding up while prices are still falling for inner city apartments. House prices seem to have stabilised in most other capitals, with the exception of Perth where they are still rising.

Housing construction has weakened to varying degrees across the country, although it may now be stabilising. Industry sources believe that underlying demand is being supported by strong immigration, increased prevalence of one-person households and an increased rate of demolition.

Other construction

The construction of offices and refurbishment of shopping centres, schools and hospitals, are supporting other building activity. There is increasing construction of infrastructure projects such as roads. Construction activity for mining companies remains an area of strength.


Stimulated by the very high prices for iron ore and some types of coal, and the prospect of continued strong growth in demand from countries such as China, Australian mining companies continue to aspire to increase production. Some mining companies report record levels of output, but in some cases supply constraints are limiting their ability to expand production as much as they want. One example of a supply constraint is a shortage of tyres for very large vehicles. Some improvements have been made in capacity at transport nodes, although some mining contacts still report problems. As well as increasing production from current mines, some mining companies report increased exploration.


While welcome rains have fallen across much of Australia’s farmland, rural contacts warn that follow-up rains are still required. Contacts report that some areas (such as the NSW-Queensland border, western NSW, and central Queensland) missed out on rains.

Beef exports to Japan are particularly strong at present and the second case of BSE in the United States may delay resumption of their exports to some key Asian markets. The current strength of Australian beef exports has further slowed rebuilding of herds, which are still below pre-drought levels.

Tourism and education

Tourism is reported as picking up with improved business for airlines, hotels, gaming resorts and car rentals. As well as hosting foreign students on Australian campuses, universities are earning more revenue from running courses overseas.


The majority of the companies interviewed expect at least to maintain employment around current levels. However, it was noted that in some cases automation to improve efficiency would reduce employment.

As unemployment falls, there are growing signs of labour shortages. The occupations most frequently mentioned as being in short supply remain accountants; some kinds of engineers; professionals in the mining industry; some construction tradespeople; and truck drivers. However, some contacts cited a wider range of skills and there are also some reports of semi-skilled or experienced unskilled labour being hard to find. Concerns are being expressed about the ageing of the workforce in certain occupations, and the potential for this to lead to skill shortages in coming years.

As noted last quarter, the increased investment in the mining sector has increased the demand for labour. Furthermore, the markedly higher prices recently negotiated for iron ore and coal exports have increased the capacity of mining companies to pay higher wages. Accordingly, contacts suggest that the mining sector is attracting workers such as truck drivers, cooks and labourers away from the farm sector and engineers and mechanics away from other sectors.

Some firms, especially those with international operations, report bringing in overseas workers, even some with limited English language skills, to meet labour demands. Many firms report hiring less experienced or lower skilled workers than usual.

Labour costs

Unsurprisingly, firms are noticing upward pressure on labour costs for occupations where labour is in short supply. For some specialised niches, it was suggested that salaries are rising at 10 to 20 per cent a year. However, the moves towards more flexible labour markets over the past two
decades mean that, unlike during previous periods of labour shortage, wages increases obtained for workers with skills in short supply are not flowing through the whole economy. Overall wages growth is rising, but only modestly.

As well as paying higher wages, some firms in remote areas were spending on improved accommodation and facilities to attract workers. A number of firms report significant compliance costs in meeting occupational health and safety requirements, with firms operating across state jurisdictions reporting the heaviest burdens.

Costs, prices and profits

The ongoing rise in global oil prices has raised costs for many firms. Steel prices have also increased substantially over the past year, despite falling back in recent months. Some firms have price contracts that allow for these price rises to be passed through to purchasers, but most firms report that competitive forces in the markets in which they sell mean that such cost increases have to be absorbed.

Some firms are offsetting higher labour and raw material costs by reducing costs elsewhere. More firms are cutting costs by tendering for purchases of inputs. Insurance charges are reported as moderating, following significant increases in previous years. However, many retailers report much higher rents in large shopping malls.

In many cases productivity increases from more efficient productive processes are sufficient to cover the increases in labour and other costs. Some companies are explicitly tying remuneration increases to achieving these productivity increases. But as noted above, some firms are hiring lower skilled labour, or tradespeople who had worked in different industries. There are also reports that firms are now more likely to ‘hoard’ labour during a temporary lull in sales for fear that when demand picks up they will not be able to rehire sufficient workers. Both these factors could be leading to a (short-term) reduction in productivity in some areas.

Some firms report reduced margins, although in general profits are still increasing.

Regional economic conditions

As has been the case for some time, activity is particularly strong in Queensland and Western Australia. This was driven by strong population growth and the strength of the resources sector. New South Wales is weaker, which is generally attributed to the earlier and larger fall in house prices there.

This round included a visit to Albury-Wodonga. This area has a vibrant economy, attracting activity from the surrounding region, partly because of its good transport links and educational and aged care facilities. Local businesses perceive unemployment as relatively low, and report some difficulty in attracting skilled and semi-skilled staff. The businesses located there regarded Albury-Wodonga as a good location. As essentially a single city straddling a state border, Albury-Wodonga businesses report being particularly affected by state rivalries and inconsistent regulations.

1 A detailed explanation of the Treasury Business Liaison Programme is provided in the Treasury Economic Roundup, Spring 2001.

2 This summary of business conditions reported in liaison meetings reflects the views and opinions of participants. It is provided for the information of readers. While Treasury’s evaluation of the economic outlook is informed by findings from business liaison, a much wider range of information and data are utilised to ensure a rigorous assessment of the Australian economy.