Outlook for Australian Growth and Investment

If 2017 was Australia’s year of optimism for business and economic growth, then 2018 is the world’s.

Australia's CEOs remain upbeat: 59% expect global economic growth to improve over the next 12 months (the highest-recorded level of optimism for this survey).

Global CEOs are increasingly positive too: 57% say they believe global economic growth will improve in the next 12 months - almost twice the level of last year.

loading-player

Playback of this video is not currently available

This confidence comes off the back of strong global economic indicators: stock markets are booming; gross domestic product is predicted to grow in most major markets; commodity prices have stabilised; there is a steady recovery in the Eurozone; US economic growth is expected to hit 3%; and growth in China is expected to be 6.5–7%.

Optimism among Australia’s CEOs for their own growth prospects over the next 12 months (46% very confident) is riding high alongside business leaders from the US (52%), Canada (53%) and the ASEAN countries as a group (44%).

When Australia’s CEOs and CEOs globally are asked about their own organisation’s growth prospects over the next three years, the bandwagon slows down. While still generally confident (more CEOs say they are ‘very confident’ rather than ‘somewhat confident’) there are diminished levels of confidence compared with recent years.

But this dip is not necessarily a harbinger of doom. Instead, it may indicate a reluctance to make longer-term forecasts. The unpredictability of recent geo-political and technological changes makes the longer-term future appear less certain.

Domestically the economy’s transition from mining to services is almost complete and this is expected to assist growth. But the Australian economy is not growing where it should, despite employment rising every month in 2017 (for the first time in four decades according to the Australian Bureau of Statistics).

Other economic indicators aren’t strong. Wage growth – the traditional engine of growth, is low and has the potential to diminish GDP growth – as well as both consumer confidence and sentiment.

Meanwhile much of the wage growth that is occurring is pushing people into higher personal income tax brackets. This ‘bracket creep’ means traditional middle-income earners are paying more income tax than previous generations. This increases the cost of living, exacerbating housing affordability issues and leaving little opportunity for a real wage increase without tax reform in this area.

While optimism is good and can help steer leaders through economic hurdles in 2018, Australia’s CEOs will also need to make key decisions in these areas to maintain growth:

  • Can Australian leaders restore trust and align economic growth with social progress?
  • What is the right mix of talent and technology?
  • Are our organisations using new technologies to help meet employee and customer expectations?

US reforms renew need for Australia tax reform

The world’s business community is taking notice of the most comprehensive tax reform in recent US history. Australia should be concerned  because the US is the biggest investor in Australia ($860 billion, which is $345 billion more than our second biggest investor, the UK, and more than 10 times that of China).

This ‘America First’ approach from the US Trump Administration significantly risks making Australia a less attractive place to invest.

Australia has dropped out of the top 10 destinations for global capital, falling from 10th position in 2017 to 11th in 2018. With Australia now one of the highest taxing nations in the OECD, the concern is around inaction to embark on real and meaningful regulatory change and tax reform. Without reform, the risk is that Australia’s global relevance will continue to decline.

“The improved confidence is encouraging CEOs to invest in and grow their businesses with the US. The US is reaping the rewards of substantial changes to its regulatory environment and tax system,” said Luke Sayers, PwC Australia CEO.

“These results ring another warning bell for Australia. If we want to remain globally competitive and attract investment, we need tax reform. Otherwise we are at serious risk of foreign direct investment flows slowing as organisations prioritise investment in the US.”

Australia’s CEOs have a good understanding of the geopolitical sphere, believing that the world is moving towards increasing use of tax competition (65%) to attract investment. If Australia loses its competitive edge CEO confidence will be lost too. No wonder the increasing tax burden has jumped into the top three threats to organisations’ growth prospects.

Investment: Where in the world?

 

For the first time since the PwC CEO survey began asking seven years ago, an increased number of Australia’s CEOs say they are shifting away from China as their primary market for growth.

In 2018 the US is the leading country for Australia’s CEOs when it comes to current global growth and their organisation's expected growth in the next 12 months. China has increased its prominence from last year (from 57% up to 63%) yet the US leaps ahead to 73%.

The same picture is being seen globally with the US widening the gap with China as the number one spot for growth. China held the lead until 2015 but now there is a 13% gap between the US and China in terms of perceived importance (US 46%, China 33%).

The effects of US tax reform are already being felt economically. A similar reduction in Australia’s corporate tax rate would have a number of flow-on benefits to the community including wage growth, investment and new jobs. Without tax reform there is a risk these direct benefits will not be realised in Australia. With the competition for global investment heating up, the danger is that the flow of investment dollars will move offshore.

The evidence and urgency is mounting in the case for Australian tax reform.

Contact us

Jeremy Thorpe

Chief Economist & Partner, PwC Australia

Tel: +61 (2) 8266 4611

Pete Calleja

Australian Tax Leader, PwC Australia

Tel: +61 2 8266 8837

Scott Gillespie

National Thought Leadership Leader, PwC Australia

Tel: +61 2 8266 3229

Kieran McCann

National Thought Leadership Manager, PwC Australia

Tel: +61 2 8266 0252

Follow PwC Australia