Clouds over the Australian economy

28 Oct 2013 91 month(s) ago

Westpac's chief economist is calling for further drops in interest rates to spark the Australian economy after the mining boom ends. It is not likely to be enough; Australia is likely to develop the weaknesses of the other economies of the developed world.

The massive investment in Australian resources is nearing its end. Increasingly, the investment will result in actual production, which will iprove the productivity statistics, but the question is where will economic growth come from after the boom is over? The value of oil and gas projects currently under construction is $200bn compared to $12bn in iron ore and $14.4bn in coal. Committed new projects in oil and gas total only $3.7bn compared to only $6.3bn in iron ore and $15.2bn in coal. That is a big drop.

The RBA is hoping lower interest rates will stimulate demand. It is more likely to push capital into shares and property, especially with so much money in SMSF funds. It is not a unique problem; it is more the case that Australia is joining the rest of the developed world. China's massive growth has made Australia an economic exception, but even the Chinese surge is moderating. Economic growth is proving stubbornly hard to stimulate, at least in the developed world. The problems, of which the GFC were a symptom as much as a cause -- excessive debt and the invention of reckless "meta-money" -- are still there. For SMSF investors, the level of risk in the investment climate remains.

Westpac's Bill Evans is arguing for lower domestic interest rates:

"One of the critical outcomes from the Reserve Bank’s move to lower the overnight cash rate from 4.75% to 2.5% over the last 2 years has been the response of business to these lower rates. The slowdown in mining investment is mainly a function of the large lumpy projects in the gas sector which are now approaching completion over the next few years.

"We estimate that mining investment will fall as a proportion of GDP over the next 5 years from 8% to 3% (RBA estimates “3 percentage points or more”). Even after adjusting for the imported component of this investment it is still a significant drag on an already fragile economy over the next few years. Reserve Bank Deputy Governor Lowe discussed prospects for non mining
investment in a speech to the CFA Australia Investment Conference on October 24.

"Governor Lowe also noted “the profile of non mining investment in Australia is not dissimilar to the profile for overall investment in many of the developed economies”.

"A key theme supporting our view that interest rates are in need of further reduction revolves around our more downbeat view of the world economy in 2014. We forecast growth in the world economy in 2014 of 2.8% compared to 3.6% for the IMF and the Reserve Bank. Such a weak growth environment is likely to be associated with ongoing weakness in business investment in the developed economies. Our view of domestic non mining investment is likely to be considerably more downbeat than the Reserve Bank and the IMF."

The key investment imperative is to choose companies and sectors that do not necessarily rely on healthy economic growth. And keeping expectations in check is also an important psychological requirement.

it is unlikely Australia will be finding avenues of new growth any time soon. Households are laden with debt and there is probably going to be more government austerity. The AFR is reporting that there is no post election bounce:

"Wesfarmer chief executive Richard Goyder on Thursday said discretionary spending jumped in the week after the election and quickly reverted to where it started.

"Another retail chief, John Pollaers – of workwear maker Pacific Brands – warned this week that retail conditions are “far from ideal” and likely to remain so.

"Greg Hywood, chief executive of Fairfax Media, publisher of AFR Weekend, said there had been no post-election pick-up.

“You look at the people reporting [results] at the moment, I was just having a conversation with a retailer just yesterday,” Mr Hywood said on Friday. “I think it’s pretty clear that there hasn’t been a post-election bounce in the economy. It’s pretty clear. We see it, everyone sees it.’’

"National Australia Bank chief economist Alan Oster, who publishes a closely-watched gauge of business sentiment, said the remarks from company chiefs supported what he had been saying since the federal poll.

“Confidence went up, but conditions didn’t change,” he said. “There was an element of people saying ‘right we’ve got rid of the government we didn’t like,’ so the animal spirits improved."