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Are we all just doomed? – OPINION
5 minute read
I mean, it’s a fair question if you’re watching the news.
Consultancy BIS Shrapnel put out some thoughts earlier this week suggesting that the only reason Australia isn’t in recession is because of the mining boom.
Well, not the mining boom you’re thinking of.
Back in 2012, then resource minister Martin Ferguson sensationally called the end of the mining boom, literally saying “the resources boom is over”.
What most failed to appreciate at the time though, is that it wasn’t.
The resources investment boom was over, and that’s a very different thing.
The economic prosperity of Australia from the mid-2000s was driven by massive levels of investment in the resources sector on immense projects.
We’re talking iron ore mines and LNG facilities.
What Ferguson was talking about was the end of the investment boom.
BIS Shrapnel has suggested in a release (the more low-key one released this week) that Australia has now well and truly moved into another area of the boom – the export boom.
Resources booms generally have three phases:
One, the price of commodities goes up. Two, investors throw a whole lot of cash and construct projects to capitalise on the commodity price. Three, those projects start exporting their product and governments state and federal start to get their cut.
We’re firmly in phase three, but because of a very well publicised decline in commodity prices – Australia can’t truly capitalise on the third phase.
It is, however, probably keeping us out of recession according to BIS Shrapnel.
“The main reason has been strong and sustained growth in resource production and export volumes...aided by surging education and tourism exports,” BIS’ chief economist, Dr Frank Gelber said.
“And Australia is lucky. We’re a low-cost producer reaping the rewards of the increased capacity resulting from the mining investment boom, albeit at lower prices.”
Despite all the talk about runaway wages and productivity, it turns out in the iron ore sector at least we’re doing pretty well.
“Without this export volume growth, Australia would have gone into recession,” Gelber notes.
So basically the iron ore sector is keeping the whole Australian economy afloat. Well that’s just peachy.
He makes the point that the non-mining sector of the economy has just kind of stalled instead of driving the next wave of growth, which had been hoped.
Meanwhile, earlier this week Australia’s GDP rose to an annual growth rate of 3%, well above estimates.
However, exports had no net effect on the rise, with the Australian Bureau of Statistics saying that a 0.6 point expansion for the latest quarter was driven primarily by growth in industries such as information, media and telecommunications, and arts and recreation services.
These are all industries driven by consumer demand in one form or another.
That was a quarterly release though and doesn’t give a full look through for the Australian economy over a substantive period of time, but the news is mixed.
Those property blues
Interestingly, BIS Shrapnel was involved in another area of public policy this week – the vexed issue of negative gearing.
It circulated a report on Thursday (although there were drops before this), which found that cutting negative gearing on established properties would drive up rental prices and push down house values.
The report, which is already being disputed, found that rents would rise by 10% annually while new home building would shrink by about 4% each year.
Its reasoning is that without negative gearing on established properties, there would be fewer investors in the market and therefore fewer people investing in the building of new homes – despite Labor’s plan being to keep negative gearing for new-build properties.
The latest imbroglio around negative gearing is especially interesting given that at one time at least, the property construction industry was really going to soften the blow from the end of the mining investment and construction boom.
After all, many of the workers who worked on large construction projects for the resources sector have skills which are directly applicable to the property construction industry.
A price spike in recent years for property – especially in Sydney and Melbourne, is now showing signs of cooling off as buyers keep their powder dry rather than buy at inflated prices.
This is starting to play out in the start to 2016 the construction industry has gone through.
Instead of the contraction in housing prices being driven by the construction of new homes to increase supply, it appears on the surface at least that it’s more about investors staying out of the game.
So, BIS and the Liberal party will argue that changing the negative gearing system is hardly going to entice them back into the market.
The broader argument here is that the property construction market can’t necessarily be relied upon to be the driver of growth that it was once hyped to be.
So what’s next?
Gelber and others have suggested that the growth potential is now coming from industries such as tourism and education, which both benefit from a lower Australian dollar.
In terms of the tourism sector, more overseas visitors come if the Australian dollar is lower but more crucially more Australian holidaymakers stay within Australia if it’s too expensive to go overseas.
Meanwhile, in education there has been a veritable boom in the numbers of foreign students coming to Australia to study – and a sustained drop in the Australian dollar will make the country seem more attractive to potential students.
Interestingly, if the price of iron ore or oil goes up in the medium term, that may see Australia’s GDP go up and affect the Australian dollar.
It really is a balancing act.
In asking whether we’re all doomed, it’s all a matter of perspective.
Just to re-cap:
Our economy has been held from recession from mining output; the housing market is flagging and there’s a massive debate underway which may effect investment in the sector; the next growth industries rely on the Australian dollar being low to sustain them.
That all being said, this is the Australian economy we’re talking about. It is by any objective measure one of the best in the world and has not yet been buffeted around like other economies such as Canada – which has also been highly resources-leveraged.
Comparatively the Australian economy is in rude health, but on its own terms it’s looking only a little bit challenged.