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A third of Australia is in recession, PwC finds

Australian Financial Review Australian Financial Review 21/06/2015
The percentage of Australia where national income is being produced is shrinking.© AAP Image/Paul Miller The percentage of Australia where national income is being produced is shrinking.

More than one-third of Australia is in recession, with a shrinking handful of locations generating most of its wealth, according to research that highlights the need for businesses and governments to make tough investment and spending decisions.

The groundbreaking work by accounting giant PwC shows that close to one in every five dollars of national income is produced by just 10 locations out of 2214 nationally, led by the central business districts of Melbourne and Sydney as well as the iron-ore-rich Pilbara in the north-west.

With growth effectively coming from less than 0.5 per cent of the nation's landmass, the findings add to growing anxiety that the economy is becoming too concentrated.

The figures also suggest the trend is set to intensify in coming years, as falling commodity prices erode the income earned by the big mining regions of Western Australia.

While the economy has expanded by 46 per cent in real terms over the past 14 years, Melbourne's CBD surged by 76 per cent, followed by Brisbane's 72 per cent increase, with Sydney recording a more modest 37 per cent gain.

East Pilbara's economic output rose 776 per cent to $17 billion between 2000-01 and 2013-14.

The biggest losers were Nanango in Queensland and Victoria's Latrobe Valley district of Churchill, both home to major coal-fired power plants, where their share of the economy shrank by 61 per cent and 21 per cent, respectively.

Rob Tyson, director of economics and policy at PwC, who spent 18 months crunching reams of data to construct a geospatial economic model, said the findings are critical, as businesses and governments spend close to $350 billion a year on investment across the nation.

"More and more locations are suffering declines, while a key handful of locations are becoming more and more important," he said.

There are signs the trends identified by the PwC model are likely to worsen, he said. About 35 per cent of locations around the country were effectively in recession in the last financial year, with incomes contracting.

That's equal to the highest proportion recorded in data going back to at least 2001-02, when around 23 per cent of locations were contracting.

The best performance during that period was recorded in 2003-04, when economic growth was at its broadest as the commodity price boom had just started to pick up while property markets in Melbourne, Adelaide and Brisbane boomed.

Since then, the resources boom and high Australian dollar have further narrowed the economy, according to the research, which shows the number of manufacturing regions has declined sharply.

Mr Tyson estimates the concentration of national income in the top 10 locations has risen to 17.9 per cent in the last financial year from 16.2 per cent in 2004-05 – equivalent to $27 billion shifting into those locations compared with the rest of the nation.

"This is equivalent to the entire Tasmanian economy and all its employees being transferred into these 10 key locations."

He argues that the trend has been significantly masked during the now-waning mining boom.

"While the spotlight has been on the Pilbara and the phenomenal growth of economic activity generated from these resource deposits, it has actually been in the urban areas which have been steadily capturing a larger share of economic output."

Mr Tyson's research provides significant pointers to where the next phase of investment by both the private and public sectors should be directed.

For instance, he argues that governments should focus on increasing public transport links between the four major powerhouse locations of greater Sydney – the CBD, Parramatta and the high-tech and research-based hubs of North Sydney and Macquarie Park.

The latter is a classic example of how rapidly locations can develop. A low-growth backwater in the 1990s, the area was boosted after the completion of a new railway line, attracting offices from some of the world's biggest businesses, including Microsoft, Siemens, Nestle, Ford and General Motors.

"Fewer key locations will be relied upon to drive an increasingly large share of economic growth," Mr Tyson said.

"From an economic point of view, this implies we should potentially be less worried about the fact that one in three locations are contracting.

"However, from a social and equity point of view this creates unique challenges and potential conflicts between the economic and social policy and investment imperatives."

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