- Mining sector growth slowing
- Government spending reversing
- RBA easing
- Non-mining the next growth driver
By Greg Peel
Economic forecaster BIS Shrapnel has just released its Long Term Forecasts 2012-2027 report in which it attempts to identify drivers for the Australian economy into the greater distance, and the magnitude of GDP growth.
We can set the scene by first acknowledging the drivers of the past decade of Australian growth, and in so doing we should also acknowledge Australia is now marking its twenty-first year of consecutive annual growth. There has not been a “recession” in Australia, taking two quarters of negative growth as the (spurious) measure, since 2002. The GFC brought only one quarter of negative growth before both local and Chinese government stimulus righted the ship.
Beijing's enormous stimulus package at the end of 2008 was important, given up to that point Australia's economic fortunes were all about the commodities super-cycle and behind-the-curve mining investment. The period up to the GFC was also one of cheap money and lax lending practices, which drove Australia's non-mining economy to giddy heights. Mining has stumbled but not yet faltered. Non-mining has faltered. The recent rise in the Aussie dollar has proven a devastating drag on many sectors.
Once lagging resource sector supply has begun to catch up with now plateauing demand. The European Crisis is filtering through to China and the US, thus reducing global investment confidence. Australia's big miners and energy producers begun 2012 with grand capex plans. These are now being eased back. The days of ever-surging commodity prices – including bulks – appear to be over.
In its 15-year outlook report, BIS Shrapnel suggests a switching between different types of investment will drive the next stage of Australia's business cycle. Mining investment has been the primary driver of Australia's GDP recently, forcing the RBA to hold off on rate cuts despite the weakening of non-mining sectors. But commodity prices have eased, mining investment plans have backed off , Europe is posing an ongoing threat and a worsening non-mining economy has finally delivered RBA easing. Mining investment will continue to grow for the next two years, suggests BIS, but at a more moderate pace.
New private engineering construction – which has been dominated by resource sector-related projects – has increased by 50% over the past (financial) year, will increase by only 16% over the next year, and a mere 8% the year after, BIS estimates. At the same time public sector investment – which has been boosted by several post-GFC stimulus packages – is now falling sharply as those packages wind down and all levels of government switch to spending cut mode. Residential and non-mining investment have continued to decline, but it is these components which will drive the next stage of growth, BIS predicts.
The residential and non-mining sectors have now received a total of 1.25% of rate cut relief from the central bank since late last year. Rate cut benefits take a while to filter through an economy, and BIS suggests that when the impact meets the developing dwellings shortage residential investment will start to grow from late this year. Non-mining investment has fallen so far as to not be able to underwrite even moderate demand, the economists suggest, so when the rate cuts meet demand and capacity constraints investment will begin to recover.
The word is “recover”. Do not look for any return to the halcyon spending days of the pre-GFC party. Despite average employment and wages growth, household debt remains persistently high.
Recovery is not, however, guaranteed for all sectors . Aggregated economic data mask the extent of the “multi-speed” nature of an out-of-balance economy undergoing significant structural change. Widespread job losses in concentrated sectors – manufacturing, tourism, education and business services – reflect the new regime of a strong Aussie dollar. On the flipside, those sectors sheltered from currency impact – banks, supermarkets, utilities and healthcare – are doing well (60-75% of Australia's economy is not currency impacted). These sectors have the economic power, while small and medium enterprises relying on servicing the fading sectors of the non-mining economy are languishing under weak profitability and growth. Those with high gearing are particularly vulnerable and more insolvencies are inevitable, BIS believes.
So while we have been looking at Australia's economy as “two-speed”, between mining and non-mining, the real “two-speed” effect is now between those sectors trade and currency-exposed and those not, with mining falling back to a steady middle ground. Netting all sectors out, BIS is forecasting just above 3% annual GDP growth for the next five years.
The economists foresee three main risks to their own forecasts. Let's label them (1) Europe, (2) Dutch Disease and (3) commodity prices.
We need not go into any more detail about the European threat here, other than to say BIS is among the camp assuming Europe will likely get worse before it gets better and linger as a problem for years. Australia is somewhat sheltered from Europe (assuming China's domestic economic growth effectively overcomes lost export revenues, I suggest) but not from the hit to consumer and business confidence European woes provide.
“Dutch Disease” has not been cited in the BIS summary but it has oft been mentioned in political circles of late. It refers to a period when Holland put all its economic eggs in one basket – energy – and neglected the rest of its economy only to suffer more extensively from a later downturn in energy demand. An enduring risk for Australia, BIS suggests, is the extent of under-investment in non-mining and infrastructure and the risk such under-investment ends up crimping Australia's capacity for economic growth in the future beyond mining.
In such a case Australia would be left very exposed to commodity price cycles. And on that note, the final risk is that commodity prices tank. At this stage the greatest immediate risk to commodity prices is the supply catch-up underway, but if demand were for some reason to collapse as well, then Australia would be facing a recession.
At least the Aussie might come off.
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