Mining Downturn

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<p>GUEST OBSERVER</p>
<p>The rotation in economic activity towards the non-mining states is continuing, while conditions in mining states have become more challenging as commodity prices have fallen further.</p>
<p><span>•</span><span> </span><span><strong>In terms of domestic demand, NSW and Victoria will be the most solid performers, with growth gradually improving</strong>. </span></p>
<p><span>Both will receive less impetus from housing activity and prices in FY 2016-17. </span></p>
<p><span>Notwithstanding this, our central case remains for solid (though unspectacular) employment growth and lower petrol prices to sufficiently support household incomes and consumption (despite ongoing subdued wages growth). </span></p>
<p><span>•</span><span> </span><span><strong>The AUD is acting as a stabiliser, although the troubled global backdrop presents downside risk to all states and territories. </strong></span></p>
<p><span>Further depreciation of the AUD to USD66c will continue to improve the competitiveness of export-oriented and import-competing firms to varying degrees. </span></p>
<p>This will be particularly helpful for services sectors, including those benefiting from tourism and international student arrivals such as hospitality, retail and education. </p>
<p><span>States for which tourism-related activity makes up a large proportion of the economy such as Tasmania and Queensland will be particularly supported. </span></p>
<p><span>Tourism and education are also bright spots for NSW, Victoria, South Australia and the NT. </span></p>
<p>While not our core view, a sharper global slowdown could lower demand for travel to Australia, education exports and Australian property, particularly if the household sectors in China and East Asia come under stress. </p>
<p>Queensland and the Northern Territory will outperform in terms of overall gross state product in coming years as LNG export volumes ramp up.</p>
<p>However the outlook for associated income and government revenue has deteriorated as commodity prices have dropped further, and any residual mining-related investment in the pipeline is unlikely to proceed. </p>
<p>Western Australia is more advanced into the mining investment downturn, with broad-ranging effects to continue across the states’ economy in 2015-16, before LNG export volumes come through in subsequent years, but to a lesser extent than previously forecast. </p>
<p>A restrained approach towards non-mining business investment is likely to persist across all states in coming years.</p>
<p>Recent equity market volatility and uncertainty about future taxation arrangements are likely to add to this air of caution, particularly given firms continue to demand a restrictively high rate of return on investment. </p>
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<p><span>•</span><span> </span><span><strong>An overview of the outlook for each state and territory is in the attached document. Links to individual handbooks for each state and territory are available at the links below. </strong></span></p>
<p><span>•</span><span> <a href="https://business.nab.com.au/wp-content/uploads/2016/01/NSW_Jan16.pdf"><span><strong>New South Wales</strong></span></a></span><span> will remain the standout in terms of domestic demand. Robust employment growth will be supportive of household spending, while business conditions and capacity utilisation remain elevated, particularly across services sectors. The challenge for NSW will be maintaining robust growth as momentum from the housing sector begins to fade through 2016.</span></p>
<p>• <a href="https://business.nab.com.au/wp-content/uploads/2016/01/VIC_Jan16.pdf"><strong>Victoria</strong></a> will also continue to experience solid domestic demand growth, and is also well positioned to take advantage of the lower AUD in its tourism and education sectors. Strong employment growth will support consumer spending, although there will be less impetus from the housing sector through 2016. </p>
<p><span>•</span><span> </span><span>In <a href="https://business.nab.com.au/wp-content/uploads/2016/01/QLD_Jan16.pdf"><span><strong>Queensland</strong></span></a> , the sharp decline in mining investment will be offset by exports, although lower LNG and coal prices will reduce the export earnings, profitability and government revenue. Meanwhile, key tourist destinations are benefiting from the lower AUD (with interstate visitor arrivals particularly strong). Domestic demand growth is slowly improving. More attractive rental yields and housing affordability than in NSW and Victoria are driving dwelling investment in Brisbane.</span></p>
<p><span>•</span><span> <a href="https://business.nab.com.au/wp-content/uploads/2016/01/WA_-Jan16.pdf"><span><strong>Western Australia</strong></span></a></span><span> is well into the throes of the mining investment downturn, which is having a dramatic impact across many segments of the economy. Offsets from stronger mineral export volumes helped to prop up Gross State Product (GSP) growth in 2014-15, but big declines in state final demand have had a major impact on the state’s labour market and asset prices. These trends are expected to continue given the lack of momentum in non-mining sectors. A ramping-up in LNG exports in subsequent years should see growth lift, but by less than previously forecast.</span></p>
<p><span>•</span><span> <a href="https://business.nab.com.au/wp-content/uploads/2016/01/SA_Jan16.pdf"><span><strong>South Australia</strong></span></a></span><span> continues to underperform, challenged by unfavourable demographics and the structural decline of its manufacturing base. Business conditions remain weak, with the retail sector and some improvement in tourism rare bright spots.</span></p>
<p><span>•</span><span> <a href="https://business.nab.com.au/wp-content/uploads/2016/01/TAS_Jan16.pdf"><span><strong>Tasmania</strong></span></a></span><span> – while the outlook has improved over the last year, thanks in large part to a pick-up in business investment and strong domestic tourism, recent data suggest that the recovery may be losing a little steam. </span></p>
<p><span>•</span><span> <a href="https://business.nab.com.au/wp-content/uploads/2016/01/ACT_Jan16.pdf"><span><strong>Australian Capital Territory</strong></span></a></span><span> – the economy is gradually recovering from the recent fiscal tightening and public sector job cuts. The labour market has shown promising signs of improvement, and together with a modest pick up in population growth will support household consumption and dwelling investment. </span></p>
<p><span>•</span><span> <a href="https://business.nab.com.au/wp-content/uploads/2016/01/NT_Jan16.pdf"><span><strong>Northern Territory</strong></span></a></span><span> - Growth<strong> </strong>will remain strong in coming years as the Icthys LNG project commences export. Medium-term the economy will struggle to replace this source of income and employment, despite the lower AUD supporting tourism.</span></p>
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A delicate re-balancing act: NAB's Alan Oster

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<p><span>GUEST OBSERVER</span></p>
<p><span>Australia's economy has done well, considering it has had to absorb a significant negative shock from the end of the mining boom. </span></p>
<p><span>Over the past few years, commodity prices have fallen by 60 percent and mining investment has declined from around 8 percent to 3.5 percent of GDP. </span></p>
<p><span>Historically, much smaller falls have typically caused recessions. But, as last week's GDP figures clearly illustrated, Australia's 'R-word' has been rebalancing not recession. Although business investment was a -1.6ppt drag on growth, overall GDP grew by a strong 3.3 percent y-o-y in Q2. </span></p>
<p><span>The mining investment fall has been more than offset by a ramp up in resources exports and growth in services exports, housing construction and household spending. Looking forward, the drag from mining investment and falling commodity prices should now fade. This is expected to mean continued solid overall GDP growth, despite the housing construction boom nearing its end. We see the RBA on hold in coming quarters. </span></p>
<p><span>The more downbeat economic observers have, in recent years, described the economy as falling off the 'mining investment cliff' and said that Australia would have an 'income recession' as a result of the fall in commodity prices. The end of the mining boom has, indeed, been a big negative shock to absorb. </span></p>
<p><span>But although mining investment has fallen significantly and declining commodity prices have weighed on nominal GDP, growth in real GDP and employment has remained solid. Last week's GDP numbers showed that Australia's economy grew at an above-trend 3.3 percent over the year to Q2 2016. Over the past five years, GDP growth has averaged 2.8 percent (which is around its trend rate) and jobs growth has been strong enough to see the unemployment rate fall from its early-2015 peak of 6.25 percent to now sit around 5.75 percent. </span></p>
<p><span>How has this happened? Australia's growth has been rebalancing from the mining to the non- mining sectors (</span><span>'Australia's great rebalancing act', December 2012</span><span>). Low interest rates have supported a housing price and construction boom while the lower AUD and rising middle class incomes in Asia are driving increased demand for Australia's services exports, including tourism, education and business services. </span></p>
<p><span>Importantly, the big drag from mining investment and commodity prices is almost done. The worst is in the past. As a result, even those that have been pessimistic about the impact of the end of the mining boom should now have less to worry about. </span></p>
<p><span>Mining investment, which has been a drag of a hefty 4.5ppts of GDP over the past four years, will stop being a drag soon. On our estimates, mining investment subtracted around 1.8ppts from GDP over the year to Q2 2016, but will only subtract 0.5ppts from growth in the year to Q2 2017 and will not be a drag the following year. </span></p>
<p><span>The drag will therefore subside by 1.3ppt this coming year and 0.5ppt the next year. And, because the LNG export ramp up will still be underway, the resources sector as a whole should contribute to overall real GDP growth. </span></p>
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<p><span>We also expect that commodity prices have already passed the trough. If so, nominal GDP growth, tax revenues and even wages should get some support. Commodity prices have already made up the losses from late last year and are flat y-o-y, so are no longer a drag. On our forecasts, nominal GDP growth could pick-up from 3.4 percent y-o-y in Q2 2016 to 6 percent y-o-y by Q2 2017. </span></p>
<p><span>Other downbeat commentators now point out that the end of Australia's housing price and construction boom could see weaker growth next year and into 2018. Having grown so strongly recently, housing construction will fall at some point and weaker house prices could deliver a negative wealth effect. While we agree that the housing price boom is over and that housing construction will start to be a drag on growth from around mid-2017, to us, the arithmetic suggests that this will be more than offset by the subsiding mining investment drag. </span></p>
<p><span>Mining will stop being a drag just as the housing sector becomes one. The net of the two effects should still leave the economy growing, as the fall in mining investment was much bigger than the decline in housing investment is likely to be. </span></p>
<p><span>We see little evidence that the housing price boom has driven a particularly strong positive wealth effect so doubt that the cooling of the housing price boom will see a significant negative one. </span></p>
<p><span>What will be the main driver of growth? Services exports, led by tourism, education and business services. It's already happening, and in our view, is set to continue. Keep in mind that the services sector accounts for over 70 percent of Australia's GDP. </span></p>
<p><span>This should continue to support jobs growth, as it has done in recent years. It should also start to spur more business investment. Last week's GDP numbers showed tentative signs of a pick-up in non-mining business investment. </span></p>
<p><span>Australia's rebalancing is almost complete, at which point we expect domestic wages and inflation to stabilise. Once we have passed the trough in domestic wages and underlying inflation we expect that the RBA is unlikely to cut further. Our central case has the RBA on hold at 1.50 eprcent in coming quarters. </span></p>
<p><span><span> </span><em><a href="https://www.about.hsbc.com.au/hsbc-in-australia/management-team" target="_blank">PAUL BLOXHAM</a> IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. </em></span></p>
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Property 101: Mining's big drag is almost done: HSBC's Paul Bloxham

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<div>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. </div>
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<div>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.</div>
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<div>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.<br><br>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.<br><br>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.<br><br><strong><span style="text-decoration: underline;">Mining investment won't fall forever</span></strong><br><br>The good news noted by Gittins is that resources investment cannot continue to decline forever, and sooner or later the nadir will be reached.</div>
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<div>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.</div>
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<br><div>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. </div>
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<div>This was a substantial 57 per cent below the September 2013 quarterly peak, when engineering construction activity hit a state record $11.5 billion. </div>
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<div>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.<br><br>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.</div>
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<div>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. </div>
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<div><strong><span style="text-decoration: underline;">Trade balance improving</span></strong></div>
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<div>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 (<em>reductio ad absurdum</em> if a decline in construction is a 'bad thing', we should never have partaken in a mining boom in the first instance).<br><br>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. </div>
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<div>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.</div>
<br><strong><span style="text-decoration: underline;">The wrap</span></strong><br><div> </div>
<div>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.<br><br>The biggest unknown factor is what will happen to commodity prices over the years ahead.<br><br>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.<br><br>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 <a href="https://petewargent.blogspot.co.uk/2015/12/sydney-melbourne-dominate-population" target="_blank">net interstate migration</a>, particularly as more Sydneysiders opt to make the journey north. </div>
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<div>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...</div>
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<div><strong><span style="text-decoration: underline;">The week ahead!</span></strong></div>
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<div>An exciting week ahead! </div>
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<div>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). </div>
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<div>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.</div>
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<div>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. </div>
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<div>Inflation forecasts on the other hand are likely to remain unchanged after this week's release showed that inflation is well under control. </div>
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<div>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.<br><br>
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<div>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.<br><br><div class="separator"><a href="/images/2016/02/02/A3.jpg" target="_blank">Click to enlarge</a></div>
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<div>The truth is still out there. Stay tuned, and have a great week! </div>
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<p><span><em>PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank" rel="nofollow">AllenWargent</a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank" rel="nofollow">blogger</a>.</em><br></span></p>
<p><em>His latest book is <a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank" rel="nofollow">Four Green Houses and a Red Hotel</a>.</em><span style="line-height: 1.3em;"> </span></p>
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Brighter days ahead for Queensland: Pete Wargent

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<p>GUEST OBSERVER</p>
<p>Australia continues to grow jobs, but wages aren’t keeping up and policymakers are running out of options.</p>
<p>Let’s begin with an economy that is doing relatively well.</p>
<p>In the US, the data were both predictable and moderately positive.</p>
<p>Consumer prices (as measured by the CPI) were up only 0.1% in October, but this was in line with expectations. Recall that two major hurricanes drove up gasoline prices in September, and those increases rolled off (they were up 13.1% in September and fell 2.4% in October). The year-on-year CPI increase was 2.0% – again, in line with expectations.</p>
<p>The Producer Price Index (PPI) rose by a healthy 2.6% on a year-on-year basis – despite a drop in gasoline prices for producers of 4.6% (note the difference between wholesale and retail price changes). Perhaps most importantly, there were relatively strong increases in elements of the index that the US Federal Reserve cares most about (as they are less cyclical than, say, energy prices), like healthcare costs.</p>
<p>Less expected, but happy news, was the 0.2% rise in retail sales. That puts retail sales up 4.6% on an annual basis. This is further evidence of the solid rebound in the US economy.</p>
<p>And now to Australia.</p>
<p>On the plus side, a fair number of jobs are being created. As Treasurer Scott Morrison was eager to point out on Thursday, 296,400 jobs have been created this year; 236,000 of them full-time.</p>
<p>But the continued depressing news is about wages. The wage-price index was up 0.5% for the third quarter, below market expectations of 0.7%. That puts annual wages growth at 2.0%. With inflation running at 1.8%, that means real wages growth is effectively zero. And it has been like that for a long time.</p>
<p>This is causing enormous problems for Australian households and policymakers.</p>
<p>Recall that Australian households are among the most highly leveraged in the world – with debts at around 190% of GDP. So what is going to reduce that debt?</p>
<p>There are two possibilities: more inflation or more income. Inflation helps reduce the debt in real terms, and income helps for obvious reasons. Right now, both avenues look shaky.</p>
<p>On the former, the Melbourne Institute reported on Thursday that inflation expectations fell this month, providing further evidence that future inflation is likely to be low.</p>
<p>On the latter, there has been a continued run of low wages growth. This is an experience being felt in advanced economies around the world. That suggests it is something to do with technology, or global economic conditions, and therefore not all that amenable to policy.</p>
<p>That leaves us with heavily indebted households, with no obvious way out. This, of course, puts a strain on consumer spending, which in turn affects business investment and employment, and the whole (vicious) cycle loops back on itself.</p>
<p>What is the cut-through for policymakers?</p>
<p>The RBA could drop interest rates from their current 1.50% level – and increasingly some economists are suggesting that. The worry is that a rate cut might further fuel housing prices, making the problem worse, not better.</p>
<p>Federal income tax cuts would be another avenue, but with the budget in structural deficit, and with an economically illiterate crossbench, that looks unlikely.</p>
<p>The government could embark on a major infrastructure spending plan, which could rejuvenate regional employment in areas hit by the forces of globalisation. With interest rates at very low levels, for very long maturities, this seems like a good idea, as long as the projects are assessed on a rational basis.</p>
<p>The concern in this regard is politics. Both major parties have their predilections and bases to pander to. A bad outcome would be, for example, a big coal mine investment by the Coalition, and some uneconomic green-energy boondoggle by the opposition.</p>
<p><img src="https://counter.theconversation.com/content/87517/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">As I have said before in this column, the US seems to be navigating the post-2008 economic world relatively well, although caution is certainly warranted. Australia is doing much less well. And the narrative that we have “successfully transitioned from the mining boom” seems a lot more like wishful thinking than hard evidence.</p>
<p><em><strong>Richard Holden</strong>, Professor of Economics and PLuS Alliance Fellow, UNSW.</em></p>
<p><em>This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/vital-signs-australias-mining-boom-transition-is-on-shaky-ground-87517" target="_blank">original article</a>.</em></p>
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