Thursday, 8 October 2015

Stronger Global Linkages = New Opportunities

Every year when the Australian Bureau of Statistics (ABS) releases updated National Input Output Tables new insights are provided regarding the structure of the Australian economy.

The tables help us to understand the relative contributions that different industry sectors make to our Gross Domestic Product - the value of final goods and services produced in Australia, and also shed light on the wages and salaries paid to workers, the gross operating surpluses generated by industries and their net payments of tax.

Not only do the input output tables profile industry contributions, they explain the supply chain connections between industries.

Why is it important to understand these connections?

Industries do not operate alone but as part of an interconnected system.  In order to produce goods and services, all industries need to purchase intermediate goods and services as inputs into production.  Some of these intermediate goods and services are purchased from within Australia, and the remainder are imported from other countries.  

What affects one industry has implications for all supply-chain linked industries.

The economic analysis resources that REMPLAN delivers to councils, government agencies, universities and consulting firms incorporates ABS National Input Output Tables. As new tables are released by the ABS, REMPLAN responds and updates clients' region-specific data accordingly.  At REMPLAN we have been updating these datasets for over fifteen years and have made the following observation.

Domestic supply-chains within Australia are weakening.

The trend is particularly evident in those sectors with requirements for high-value goods and services which are used as inputs into production.

Following the three most recent releases of national input output tables by the ABS we can see below that in 2008-09 the manufacturing sector spent $0.48 on Australian goods and services.  By 2012-13 this had fallen to $0.42.

Figure - Manufacturing Expenditure on Australian Goods and Services per Dollar of Output

Similar patterns can be observed for the construction sector.  

Figure - Construction Expenditure on Australian Goods and Services per Dollar of Output

Why are supply-chains within Australia weakening?

There are are range of factors influencing these trends over recent years including relatively high labour costs, a high Australian (although this has now reduced against the $US by around 30%), as well as movements towards increasing specialisation and servicing global rather than domestic-only markets.

All of these factors at times create direct competitive pressures for Australian companies.  Strategies to remain competitive include reducing costs by substituting to cheaper imported goods and services as inputs into production, to specialise in terms of product and services offerings, and to spread risk by diversifying into overseas markets.

As our linkages with the global economy have strengthened supply-chains within Australia have weakened.   

What are the local opportunities associated with these structural shifts?

At a regional or local level the first step is to understand you local economy, the local industry sectors making the largest contributions, and the local supply-chain linkages.  REMPLAN develops a suite of resources that deliver these insights.

Your Local Economy

 Mackay Economic Profile
REMPLAN online public-access economic profile

Key Local Industry Sectors

REMPLAN staff-access economic impact modelling and analysis software - Key Propulsive Sectors Report

Local Supply Chains and Gaps

REMPLAN staff-access economic impact modelling and analysis software - Gap Analysis Module

In understanding these trends in the context of your local economy, potential opportunities can be identified.

As global supply chains strengthen there are opportunities for local firms to achieve greater specialisation as global markets provide the scale to allow niche businesses to be viable in a way that isn't possible if operating within the domestic market alone.

Through undertaking a 'gap analysis' of local supply chains, there may also be high-value, realistic opportunities for firms to compete in the local market to replace some of the goods and services that are currently been imported.  Local businesses may struggle at times to compete with imports on price alone, however on a value-for-money basis that takes into account quality, service and support, there can be great opportunities.

Gap analysis also assists in understanding the aggregate value of local market opportunities.  Many business know their customers and suppliers, but don't always know the total value of the local market they sell into.  This information can be a catalyst for investment and job creation in the local economy.

As global supply chains continue to strengthen, connectivity with external markets and the enabling infrastructure, telecommunications, and logistics services, will increase in importance over time.

What are the broader national policy implications?     

Following the Global Financial Crisis in 2007-08 the Australian Federal Government targeted so-called 'shovel ready' projects and also rapidly rolled out a range of major capital expenditure programs.  Broadly speaking this was a logical fiscal policy response to stimulate the economy at the time.  Targeting construction activity in particular was undertaken due to the sector's requirements for a raft of intermediate goods and services to deliver projects.  This projects delivered not only short-term direct benefits but also stimulated the economy across Australian supply-chains.  One of the greatest indirect beneficiaries of these initiative were companies manufacturing construction related products.

In the face of an economic crisis the main items in the tool kit of governments are short-term, quick-to-implement fiscal responses such as those detailed above, combined with the independent activities of the Reserve Bank of Australia (RBA) in setting official interest rates to manage inflation and economic growth within target ranges.  The effects of the RBA monetary policy settings typically take a long time to filter through the economy, and with official interest rates at historically low levels there are concerns that any further decreases in interest rates will have limited impacts in terms of stimulating economic activity.

In this context an even greater burden is placed on fiscal policy to manage the economy. From the supply-chain analysis presented above the questions that emerge are 'How effective will a local fiscal policy response be in future if local supply-chains continue to weaken?; 'Will stronger global supply-chains weaken the efficacy of local fiscal policy?'   

If the supply-chain trends presented above to continue then it is self evident that the effectiveness of fiscal policy to deliver broad based economic stimulus will weaken over time.  Combined with the muted impacts of monetary policy under historical low official interest rates, the importance of small area level economic development policies and initiatives is greater than ever.            

Authored by Matthew Nichol - Principal Economist at REMPLAN


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At REMPLAN we are a team of economists, demographers and software developers. We develop online analytical tools and information resources for economic development and planning practitioners in local, state and federal government agencies, consulting firms, university researchers and students.

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