Brighter days ahead for Queensland: Pete Wargent

Another interesting article was written by the doyen of economic commentary Ross Gittins this weekend, in which he points out that the economy will look better once mining investment stops falling. 

 

The reversion in resources capital investment has long been flagged as a major downside risk for the Australian economy, or even as some kind of economic Armageddon.

 

Engineering construction activity had declined by about 10 percent in the year to September 2015 to a quarterly value of around $25.4 billion, which is now some 24 per cent down from the peak of $33.6 billion.

Yet as highlighted by Gittins, despite this ongoing contraction the economy managed to grind out GDP growth of 2.5 per cent, helped by net exports and an increase in dwelling construction. Indeed, the non-mining economy grew by about 3 per cent.

I took a more detailed look at the components of GDP growth (and the troublesome decline in the terms of trade) over the year to September 2015.

Mining investment won't fall forever

The good news noted by Gittins is that resources investment cannot continue to decline forever, and sooner or later the nadir will be reached.

 

The latest available figures showed that the decline was reasonably well advanced by September 2015, although activity still remained well above its "normal" level, particularly in Western Australia and the Northern Territory.

As you can see in the chart above the good news for Queensland is that much of the decline had already taken place by September, with quarterly engineering construction activity declining by 42 per cent year-on-year to just $4.9 billion. 

 

This was a substantial 57 per cent below the September 2013 quarterly peak, when engineering construction activity hit a state record $11.5 billion. 

 

The September 2015 National Accounts showed state final demand (a measure of activity which excludes exports) in Queensland of -0.2 per cent marking a fifth consecutive quarterly decline for the Sunshine State, driven by an ongoing weakness in private gross fixed capital formation (declining non-dwelling construction) as large scale resources projects approached their completion.

This was a significant improvement on the -1.3 per cent decline in Queensland state final demand in the June 2015 quarter, and hearteningly the largest part of the decline in engineering construction activity is now in the rear view mirror.

 

A great challenge for Western Australia (where quarterly engineering construction activity is still highly elevated at $10.3 billion) and the Northern Territory (miles above historic norms at $2 billion, due to the massive Inpex Ichthys LNG project), however, is that the great bulk of the decline in construction activity has yet to take place. 

 

 

It is worth noting that decline in resources construction is not in itself a bad thing: after all the whole point of constructing mining and resources projects is that they will eventually produce commodity exports (reductio ad absurdum if a decline in construction is a 'bad thing', we should never have partaken in a mining boom in the first instance).

A look at the latest International Trade figures shows that over the past three months Queensland has produced a positive trade balance of $1.2 billion per month, after churning out several negative prints in 2014. 

 

With the Gladstone natural gas venture now kicking into gear and the first shipments underway, GLNG exports will begin to make a welcome positive contribution in 2016, question marks over commodity price action notwithstanding.

 

The figures show that the decline in mining investment still has a way to run, but eventually the downturn will be complete and the remainder of the economy will enjoy rising commodity exports.

The biggest unknown factor is what will happen to commodity prices over the years ahead.

Queensland's economy has been through a rough trot since 2013 as resources investment has nosedived, knocking it down to sixth spot in the state rankings.

However, things should begin to pick up in time, and although population growth from net overseas migration has slowed, Queensland will be one of only two states (the other being Victoria) to benefit from net interstate migration, particularly as more Sydneysiders opt to make the journey north. 

 

But if doom and gloom is your thing, fear not, for there will always be someone doing something stupid somewhere in the world, and in turn there will be something new to worry about: oil prices, China's property bubble, a Cyprus default, weapons in North Korea, the Ebola virus...

 

 

 

An exciting week ahead! 

 

The Reserve Bank of Australia (RBA) will leave interest rates on hold at 2 per cent on Tuesday afternoon (recall that it wasn't so very long ago that a rate cut by February was 100 per cent priced in). 

 

With the unemployment rate having declined from 6.4 per cent to 5.8 per cent and employment having reportedly grown by +2.6 per cent in 2015, another interest rate cut does remain fully priced in, but not until the fourth quarter of 2016.

 

At the end of the week the RBA will also release its Statement on Monetary Policy (SOMP), within which it is expected that economic growth forecasts for 2015 will be revised up from 2.25 per cent to 2.5 per cent. 

 

Inflation forecasts on the other hand are likely to remain unchanged after this week's release showed that inflation is well under control. 

 

Also this week we will get the latest Building Approvals figures for December, which may show a bit of a bounce from last month's sharp drop, but we might expect to see the downtrend remaining in place.

 

Finally there will be the latest International Trade figures to look forward to - expect to see a another substantial deficit in December of perhaps more than $3 billion, with low iron ore prices the key driver - and recall there was a wild explosion in rural exports (legumes boom!) last month, which surely cannot be repeated in December.

 

The truth is still out there. Stay tuned, and have a great week!