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The story of the real Australian economy


Benjamin Wee

By

March 25th, 2015


Part 1: A post boom future.


In a four part series titled ‘The Story of the Real Australian Economy’, Benjamin Wee seeks to tell the narrative of Australia’s current economic position and the issues facing the country in a seemingly uncertain future. The series will analyse the structural makeup of the economy and the detail of current policy settings.

In Part 1, Ben analyses the context of the mining boom, current economic indicators and the circumstances Australia faces moving forward.


 

Over the past decade, Australia has experienced a once in a lifetime resources boom with capital investment in the mining sector driving domestic growth and income.

Skyrocketing commodity prices and a booming China as a result of debt driven investment growth saved Australia from the perils of a technical recession during the Global Financial Crisis. However, behind the veil of prosperity were key structural weaknesses which would be exposed at the downturn of our economic riches.

The reality of Australia’s post resource boom has already revealed itself in several key economic indicators. In trend terms, unemployment surged to a 12 year high of 6.3% in February. Furthermore, underemployment is at an all-time high 8.7%, and youth underutilisation (youth unemployment and underemployment combined) is at a record 32%.

Underlying inflation has dipped toward the lower bound of the RBA’s 2-3% target range to 2.1% , and trend GDP to 2.3% over the year in December 2014 . Seasonally adjusted real net national disposable income grew in the December quarter by 0.4% after two consecutive quarters of negative growth (popularly coined an ‘income recession’). However, the trend measure of real national income has been falling alarmingly when put in per capita terms since December 2011 .

Consumer and business confidence remains lacklustre and below long-run average levels , which comes as no surprise given rising unemployment and zero growth in real wages. Figure 1.0 shows the downwards trend in business confidence as illustrated by the Roy Morgan Research confidence survey, revealing sentiment levels falling to their lowest levels in three years.

Figure 1.0 Business Confidence (Index)
 

biz conf new
These weak results, in particular the decline in national income, have predominantly been driven by a massive fall in commodity prices; the key factor being the iron ore price. The RBA Index of Commodity Prices (Figure 2.0) reveal a plunge in prices from a peak of 124.7 per cent in July 2011 to 72.5 per cent in February 2015.

Figure 2.0 Index of Commodity Prices
 

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The fall of commodity prices has put further downwards pressure on our terms of trade (Figure 3.0), causing a major decline in our export prices relative to the prices of our major trading partners. Not only does this negatively impact the national economy, but it is also a massive hit to the tax receipts of the federal and state governments, eroding the fiscal balance.

Figure 3.0: Terms of Trade
 

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Another important area to observe is the fall in capital investment in our mining industry. Increasing levels of capital expenditure was a key force in our boom, fuelling growth in income and jobs in the construction of mining infrastructure. This high level investment has passed its peak, with new capital expenditure growth declining by 3.9% over the year in December 2014 . Figure 4.0 shows the recent peak of mining investment as we now go over the “capex cliff”.

Figure 4.0 Mining and Non-Mining Capital Expenditure
 

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The fall in mining investment has been widely acknowledged by economic commentators with heavy job losses expected and other areas of the economy, such as dwelling construction, unable to fill the void as mining capex declines . As shown in the above chart, the sheer steepness in mining capex’s rise and subsequent fall back to ‘normal’ will likely leave other forms of investment extremely insufficient to fill the gap.

Employment will take another hit as the local car manufacturing industry closes by 2017, serving as a predictable double shock to the labour market, particularly in Victoria and South Australia. This could develop into a triple shock if the accelerating property market cools, leading to falling prices, dwelling construction, and employment into 2016 and 2017 – just as losses in mining and the car industry mount.

Shock absorbers have already responded to the decline of our economic position. The Australian dollar has fallen significantly to around 75 cents to each US dollar, giving much needed relief to our exporting industries by improving their overseas competitiveness. This has also been helped by the RBA setting the cash rate at a record low of 2.25%, with further cuts this year expected (stay tuned for deeper analysis into the effectiveness and context of monetary policy setting).

The downwards trend of recent data is only the beginning of our post boom future as our deteriorating economic circumstances will leave Australia more vulnerable to another global down turn or external shock. The resources boom was narrowly driven by a hugely expanding China, which is in the process of rebalancing and will be unable to save us as it slows down and restructures towards consumption driven growth. Australia’s poor competitiveness and lack of investment into productive infrastructure also means that our sluggish non-mining sectors (bar housing and complimentary services) will be ill-equipped to fill in the massive hole left by our resources industry.

In my next article, I will be taking a deeper look into the structural imbalances of the economy, our lack of competitiveness and our current model for economic growth.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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