It’s not a bad story, given the circumstances. We are now midway through the biggest mining investment bust Australia has ever seen. Yet the economy as a whole is still moving along in third gear – and the mainstream is running rather faster than that.
The Bureau of Statistics’ latest report card on the economy tells us that on the conventional seasonally adjusted measure, Australia’s total output of goods and services (otherwise known as gross domestic product, or GDP) grew by 0.9 per cent in the September quarter and by 2.5 per cent in the year to September. Remember that the equivalent figures three months ago were 0.2 per cent for the June quarter and 2 per cent for the year, and you might think we’ve suddenly moved up a gear.
Not really. As I pointed out at the time, seasonally adjusted figures bounce around a lot, and in the first half of this year Australia’s economy was doing much better than that bottom line suggested. The new report card confirms that observation, showing clearly how the lower dollar is reigniting the sectors that suffered in the mining boom.
The result is still modest: on the trend measures the Bureau urges us to use, GDP growth has edged up only slightly, to 0.6 per cent for the quarter and 2.3 per cent for the year. But it is crucial that we see that in context.
For more than a decade, the Australian economy has been dominated by the biggest mining investment boom in our history. The Bureau estimates that mining investment grew from 1.2 per cent of the economy’s output in September 2000 to 7.9 per cent when it peaked in June 2012. Huge upheavals, socio-economic dislocation and poor policy decisions were the result, with the Reserve Bank allowing the dollar to soar to a new benchmark of US$1.05, making a host of Australian industries and workplaces uncompetitive.
A huge boom like that is bound to be succeeded by a huge bust. And every time a mining investment boom has gone bust in postwar Australia, the economy has gone into recession. Until now.
Mining investment has been falling for three years, at an accelerating pace. The Bureau estimates that it has fallen from 7.9 per cent of GDP to 4.5 per cent. That’s roughly halfway back to where it started. In the September quarter, spending on mining investment was down almost 40 per cent from its peak. In round figures, mining companies are now investing $1 billion a week less than they did three years ago. That hurts.
And yet the economy sails on. It’s not going as fast as we would like, but it’s certainly not struggling to stay afloat, as the buoyant labour force figures show. Consumer spending maintains a solid pace of growth, up by 2.5 per cent over the past year, and the shops have bought up for a big Christmas. Confidence is high.
What has gone right? Essentially, three things are driving the economy:
• All that mining investment means we now dig up far more minerals, which we then export. In the September quarter, in volume terms, Australian miners shipped out 45 per cent more ores (mostly iron ore) than three years earlier, 30 per cent more coal, and 29 per cent more gold. (The big rise in LPG exports is still ahead.) Sure, all that over-investment has created a glut in the market, so prices have crashed, but that no longer matters so much because…
• The dollar, which rose with commodity prices during the boom, has fallen with them during the bust. That fall not only cushions the mining companies against price falls in US dollars, but it has also sparked a new wave of growth in the globally exposed industries – farming, manufacturing, education and tourism – that had been clobbered by the high dollar while the Reserve Bank watched from the sidelines. In the nine months to September, rural and manufacturing exports alike were up 12 per cent from a year earlier. Foreign students were spending 13 per cent more money, and tourists 9 per cent. Collectively, that’s a powerful stimulus.
• Population growth is generating a solid base for economic growth. The Bureau’s figures imply the population grew by 1.5 per cent in the year to September, a much faster pace than they suggested three months ago. That is the key reason why consumer spending keeps growing solidly – and consumers carry out 57 per cent of all spending in Australia.
Population growth also helps explain where the economy is growing. The industry data shows the main growth in output over the past year was in IT and telecommunications (up 8.5 per cent), rental, hiring and real estate services (7.9 per cent), finance (5.3), health and welfare (4.4 per cent) and – of all things – public administration and security (up 4.3 per cent). These are your quintessential urban industries, and it’s the big cities of Sydney and Melbourne where this new wave of economic growth is concentrated.
If you believe the labour force figures, the main strength is in Sydney. If you believe the GDP figures, it’s in Melbourne. The Bureau’s first estimate suggests that in the year to September, the trend level of total demand in Victoria has risen 3.9 per cent, as against 2.7 per cent in New South Wales. That’s not quite as hard to believe as the Bureau’s estimate that full-time jobs in the past year have risen 4.9 per cent in New South Wales, but just 0.6 per cent in Victoria. Clearly, the detail of one or both figures is wrong, but the general picture is probably right: both of them are doing well, because the times right now suit the mainstream of our economy.
It’s why the Reserve Bank is ignoring the silly calls from bank economists for another interest rate cut. On these figures, and on the labour force figures, it’s more likely that the next interest rate move will be up – unless investors lose confidence in China, or the war in the Middle East comes closer to home, or some other x-factor cuts in.
Sure, business investment is falling – down 9 per cent in the past year, and down 19 per cent over the past three years – because mining investment is shrinking faster than non-mining investment is growing. The long surge in new housing investment now seems to be peaking, but then, we are building four new homes now for every three we were building in 2012.
Treasurer Scott Morrison tells us we are doing better than most other countries. Sorry, Scott, but you’re wrong. In the year to September, GDP per head grew just 0.9 per cent; that’s the real bottom line, and it’s growing at barely half European rates. Those falling mineral prices meant real national income per head shrank 1.8 per cent, and the Bureau’s bottom line, real net national disposable income per head, shrank 2.7 per cent.
Still, we can’t do anything about commodity prices, except to remind our economic decision-makers next time that, as a rule, what goes up must come down. They ignored that during the boom.
Overall, so far, so good. Non-mining investment is growing, the low dollar will continue to provide a powerful stimulus, consumers are spending more and more – and remarkably, so are our governments.
Two years ago, we believed Tony Abbott and Joe Hockey when they told us they were going to slash the budget deficit. How dumb we were. The Bureau reports that in the final twelve months of the Abbott government, even in volume terms, the federal government’s day-to-day spending rose 4.5 per cent. State and local government spending rose 3.1 per cent. Both grew faster than the rest of the economy.
What both levels of government cut was investment. The man who told us he wanted to be known as the infrastructure prime minister presided over less infrastructure investment in his final three months than the level he had inherited from Labor. It was a similar story at state level. Total public sector investment in the September quarter was 10 per cent less than when Kevin Rudd handed over.
That’s another story, for another day. For now, despite the infrastructure fiascos being inflicted on us by virtually every government in Australia – federal, state and territory – the economy is still afloat, still getting bigger, and creating more job opportunities. We could be doing a lot worse. •