Asian visitors drive growth, but we must lift infrastructure

If we expect growth to be increasingly driven by visitors from Asia, we will need better roads, railways and airports.

Australia’s strong ties to Asia have been the key driver of the country’s recent economic success and they remain the main reason for continued optimism. Over much of the past decade, the story has been about China and industrial commodities. Now, the narrative has broadened, with the rise in Asian middle class incomes pushing up demand for Australian services and food products. The mining boom has given way to a wining and dining boom.

A vivid illustration of this trend is the rapid growth in Asian tourist visits to Australia. Chinese tourist numbers have risen from 350,000 in 2009 to over 1 million in 2015. In our view, this is just the beginning. Only about 5 per cent of China’s population currently has a passport and rising incomes and a growing appetite for travel are set to support strong growth in outbound Chinese tourism. Visitors from the rest of Asia have also picked up over the same period, from 1.7 million to 2.4 million.

This rise in visitor numbers cascades into increased local spending on hotel services, retail sales and even property. For example, these visitors are helping to keep occupancy rates in hotels at high levels, particularly in Sydney and Melbourne. This has, in turn, spurred investment in the building of hotels in Australia. The value of work yet to be done on hotels has risen from $800 million in 2013 to $1.9 billion over the past year.

Visitors from Asia are also spending more money in Australia’s shopping centres and restaurants. As a result, local mall operators are adjusting their business models to better meet the needs of Asian visitors. Increasing numbers of global retailers are setting up shop in Australia to capitalise on the expanding market.

As well as spending on goods and services, there has also been increased foreign investment in Australia from Asia, particularly in housing. Government approvals for foreign investment in residential property have risen from 7 per cent of Australian housing turnover in 2013 to 20 per cent in 2015. This has mostly been driven by Asian demand for apartments in the major cities, particularly Sydney and Melbourne, which has supported the strong pipeline of apartment building in these cities.

International enrolment in Australia’s education facilities has also reached a record high, driven by Asian students. In 2015 there were 640,000 foreign students enrolled in Australia, up from around 500,000 three years ago, with around one-quarter from China. Australia now has a larger international tertiary student population than Britain (excluding EU students) or Canada, and although it ranks behind the US in absolute numbers; international students account for 25 per cent of Australia’s tertiary students, well ahead of the 5 per cent share in the US.

Foreign students in Australia also support local retail sales and the property market. For example, student housing has played a part in the apartment building boom in the Sydney and Melbourne. Studying in Australia can also be a pathway to migration, which supports population growth, attracts skilled labour and strengthens Australia’s international linkages.

Another area of growing demand has been for Australia’s food products. This is evident in the strong rise in exports of meat and dairy to Asia and demand for local restaurant services. Exports of beef, dairy and wine to China have been picking up strongly. According to Wine Australia, China has recently overtaken  Britain as the second-largest export market for Australian wine, with exports to China rising 64 per cent over the past year.

The effect of these developments has been significant. Net services exports, which include tourism and education, have gone from being a drag of around 0.75 percentage points of GDP four years ago, when the currency was high, to contributing around 0.5 percentage points to GDP over the past year. This has helped to offset falling mining investment in recent years and is also creating a large number of jobs, which has helped to push the unemployment rate down, despite the end of the mining boom.

The recently signed free-trade agreements with China, Japan and Korea are helping to support these increased connections to Asia. Importantly, they may also create new opportunities. For example, the FTA with China allows Australian firms to wholly own hotels and restaurants in China, which could expand already strong tourism linkages.

The agreement also allows for wholly owned hospitals in certain provinces and Australian-owned age-care facilities in China. With China’s population ageing rapidly, this presents opportunities for Australian service providers. In time, Australia could become an important supplier of health services, building on the training of Chinese nurses and doctors, which we already do, to the development of medical technology and operation of health facilities in China.

Of course, more could be done to support this shift in Australia’s growth. A priority ought to be infrastructure development, given rising visitor numbers and population growth. Our cities are congested. If we expect growth to be increasingly driven by visitors from Asia, we will need better roads, railways and airports. With next month’s budget now not expected to deliver much tax reform, let’s hope it can provide a clearer plan for improving transport infrastructure. It would be disappointing if a lack of infrastructure investment constrained our ability to take full advantage of the opportunities rising from our Asian ties.

Paul Bloxham is HSBC’s chief economist for Australia and New Zealand