Opportunities and challenges ahead 6 min read
We're always looking around the next corner, yet it's more challenging than ever to do so. While 2023 is likely to see a contraction in the global economy, exceptions look to exist in public infrastructure, the energy-transition sectors and related private investment, technology and data solutions.
There are still opportunities ahead. We're seeing new reforms being implemented in migration, which will open new pathways for workers, and we're also witnessing a greater push towards the energy transition, which will ultimately transform the way we live, work and play. All of this should create significant competition for both labour and materials.
During the recent webinar: 'Navigating the key issues of 2023', Danielle Wood (CEO, Grattan Institute) and David Donnelly (Allens Partner, Projects & Development Practice Group Leader) identified and discussed the following four key issues facing both the Australian economy and policymakers in 2023:
- Inflation is expected to temper, but remain high. This will continue to unevenly impact the economy and create greater inflationary pressures in the transport and infrastructure sectors, building wage growth pressure and increase the cost of resources required for the energy transition and infrastructure pipeline.
- Migration reform is essential to address the labour and skills shortages in key growth sectors in Australia, such as the development of public infrastructure and energy assets.
- Energy transition is required across sectors, including in industry, transport, agriculture and household and commercial gas use, if Australia is to achieve net-zero by 2050.
- Government budget deficit challenges will require state and federal governments to make difficult decisions on revenue and spending, given the anticipated growth in the costs of servicing rising debt, as well as spending required in key areas such as healthcare (ie hospitals, aged care and the NDIS), the Age Pension and defence.
These interrelated issues provide opportunities and challenges for both the market and consumers in what is likely to be a slower year for economic growth, but a key moment for determining Australia's approach to the global energy transition.
Inflation is higher and more enduring than expected. Economists expect higher wage pressure and further interest rate rises over the next six months. However, the RBA has indicated that the peak is expected to have been reached in December 2022, with inflation remaining high but moderating in 2023 following a slowdown in discretionary spending.
Sectors exposed to discretionary spending are expected to slow first because inflation is not impacting the economy evenly. Lower income households are being hardest hit as essentials such as food, energy (electricity and gas) and fuel prices have disproportionately increased. Economists also expect inflation will impact rental prices as vacancy rates continue to decline.
The industrial labour and materials sectors are disproportionately impacted by inflation as energy transition, transport and infrastructure projects compete and bid-up prices of labour, materials and tools. Expanding the capacity of this labour and materials market is likely to be a significant opportunity in an otherwise tight economy.
Labour shortages have prompted the Federal Government to review Australia's skilled migration system, and the Government is expected to report on its review in the first half of 2023. These shortages have been exacerbated by the COVID-19 pandemic, historic under-investment in skills and training and a bureaucratic 'occupation-based' migration program which focuses on low-wage, low-skilled jobs.
The energy transition and the growth of associated sectors (such as finance, data, tech etc) will require an influx of high-wage, high-skilled labour. Clear, efficient and guaranteed pathways to migration for migrants and business are essential to a competitive migration policy in the context of the 'global war for talent'. Young, skilled migration is essential to boosting productivity and growth in the economy, and will provide a fiscal dividend for Australia in the long term.
In addition to migration policy, the Federal Government has begun looking at how to build skills capability within the economy by increasing opportunities for training, and through initiatives like the 'Jobs and Skills Australia' (JSA) consultative forum. The JSA brings business, unions and higher education together to help understand businesses' skills shortages and seek to develop programs and incentives to build these skills within the economy.
Australia has committed to achieving net-zero carbon emissions by 2050. At present, even if the current Government passes its Safeguard reforms and implements its 'Rewiring the Nation' policy, this will be an ambitious target for Australia and will require a significant increase to the pace of decarbonisation across all sectors (including industry, transport, agriculture and household and commercial gas use).
Decarbonising through electrification, which is expected in sectors like transport, will require regulatory certainty and expansions to the electricity grid to capitalise on renewable energy opportunities. These issues require coordinated leadership from the federal and relevant state governments to enable efficient solutions to be pursued.
It is essential that governments provide a transition plan for regions that are heavily dependent on fossil-fuel businesses, so that staff can be upskilled and redeployed in new sectors. This ensures the benefits and challenges of the energy transition will be shared equally. Energy transition is also a prime example of where targeted, and certain, government involvement in underwriting and procurement is appropriate, given the speed of change required to achieve the required emissions targets and the opportunities for new technologies that are currently not economically viable (such as green hydrogen).
The Federal Government budget was running a structural deficit prior to the COVID-19 pandemic, but this is forecast to increase substantially due to higher government expenditure that will continue to grow faster than the rest of the economy. It is expected that the highest areas of growth in spending will be the costs of servicing rising debt, as well as in key areas such as healthcare (ie hospitals, aged care and the NDIS), the Age Pension and defence.
While Australia will continue to be a comparatively low-debt country, net debt is expected to grow as a share of the Australian economy. This means difficult decisions in relation to structural debt repair will need to be faced. The Federal Treasurer is looking to begin this conversation following the release of the Intergenerational Report, which is expected to discuss long-term approaches to economy-wide issues such as climate change, the aging population and structural debt to guide revenue and spending reform.
Despite the structural debt, a revenue windfall is expected in 2023 due to strong commodity prices. A key challenge for the Federal Government is avoiding a 'spend-down' of this revenue through distributions to households, which may exacerbate inflation and reduce the effectiveness of the RBA's monetary policy. Delivering a budget without a net increase in spending and a focus on targeted relief (ie electricity or rent assistance) for low-income households is essential for our fiscal and monetary policies to work in sync.
While there are challenges ahead with the global economy expected to slow in 2023, growth in the energy transition and public infrastructure sectors will provide opportunities for the market. Expanding the capacity of our labour and materials markets will be essential to supporting growth in these sectors. It is also important that our governments put the right policies in place, through migration reform, investment in the energy transition and fiscal policy that is consistent with the goals of our monetary policy.