Australia improves in relative cost competitiveness, KPMG study shows

Australia improves in relative cost competitiveness

In KPMG’s Competitive Alternatives report, out today, Australia has risen from 8th place in 2014 to 5th in 2016.

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Australia has improved its ranking for business cost competitiveness over the past two years, a KPMG comparative study of 100 cities in 10 countries reveals.

In KPMG’s Competitive Alternatives report, out today, Australia has risen from 8th place in 2014 to 5th in 2016. The report examines a range of 26 cost factors including labour, facility, transport, utility, financing and taxation costs, across four business sectors: digital services, R&D, corporate services, and manufacturing.

Australia had the biggest improvement in cost competitiveness of the countries studied between 2014 and 2016, improving by 9.9 percentage points, and moving ahead of France, UK and Japan. Australia and Italy, which was in fourth position, ranked very closely on overall cost advantage. The US and Japan were the least cost-competitive, while Mexico, Canada and the Netherlands had the lowest business costs.

The main reasons for Australia’s increased cost competitiveness were:

  1. The sharpest depreciation in value of currency of all countries compared to the US dollar, the benchmark for this report. The A$ fell 22.3 percent against the US$ from 2014 to 2016. 
  2. Australia’s proportionately larger decrease in utility costs for both electricity and natural gas – including the withdrawal of the carbon tax. 
  3. Slower wages growth since the mining boom ceased. There has been excess capacity in the labour market, reflected in higher unemployment rates and sluggish salary growth. 
  4. Counter-balancing the above to some extent was an increase in lease costs for industrial and commercial office space.

Brendan Rynne, KPMG Chief Economist, and leader of the Australian component of the study, said: “The slowdown in the Australian economy since the resources boom tailed off is clearly reflected in the results of this study compared to 2014. Wages growth has slowed, while utility costs have come down. Australia has a consistent middle ranking (5th) for competitiveness among three of the four sectors we considered – digital services, R&D and corporate services – but has higher costs in manufacturing due to high facility leasing and transportation costs. This suggests Australian policymakers must play to our strengths and focus on those areas we do well in. For example we have a strong offering in R&D services, with business costs more than 20 per cent below the US baseline.”

Taking the last two reports together, Australia has improved its cost-competitiveness by a total of 13.8 percentage points since 2012, second only to Japan.

Rankings and cost index results for all countries

(listed from lowest cost to highest)

2016
rank
Country 2016
Cost
Index
% cost
advantage
versus US
2014 rank
High Growth Market
1 Mexico 77.5 22.5%
1
Mature Markets
2 Canada 85.4 14.6% 2
3 Netherlands 87.7 12.3% 3
4 Italy 89.3 10.7% 6
5     Australia 89.4 10.6% 8
6     France 90.5 9.5% 5
UK 90.9  9.1% 4
8     Germany 92.3 7.7% 10
9     Japan 92.7 7.3% 7
10 US 100.0  9
  • 1. Business costs in this table are expressed as a percentage index, with the United States being assigned the baseline index of 100.0. A cost index less than 100 indicates lower costs than the US. For example, an index number of 95.0 represents a 5.0 percent cost advantage relative to the US.
  • 2. The US baseline of 100.0 reflects average costs in the four largest US cities: New York City, Los Angeles, Chicago and Dallas-Fort Worth. National costs for all other countries are also based on major cities in each country.

The full report can be accessed at CompetitiveAlternatives.com.

Further information

Ian Welch
Senior Communications Manager, KPMG
T: 02 9335 7765 / 0400 818 891
E: iwelch@kpmg.com.au

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