Research and analysis

Australia: Mining exports and economic growth

Published 12 June 2014

0.1 Detail

Economic growth surprised in the March quarter, GDP jumping 1.1% producing annual growth of 3.5%, the highest rate in two years. The buoyant result was built on sharply rising mining exports as new mine capacity leads to higher exports more quickly than anticipated. Over two thirds of the growth came from net exports – a combination of surging iron ore and coal exports and declining mining capital imports.

Last month’s budget forecast economic growth of 2.75% in 2013-14, easing back to 2.5% next financial year. These forecasts now look too pessimistic although there are headwinds that will probably see the solid first-quarter growth rate ease over coming quarters. The central bank has acknowledged as much, leaving interest rates unchanged this week at record lows of 2.5% and sticking to guidance suggesting rates would stay on hold for some time. Unemployment is at 5.8% and looks near its peak. Inflation is contained at 2.7%.

The upside

Iron ore production is up 23%, and iron ore exports have topped 550 million tonnes – 17% up on last year. The bulk of the country’s largest export commodity goes to China, whose appetite has not at all waned despite its growth challenges of the last two years. Coal exports are up too, 18% over the year.

Soaring exports and declining capital imports see a rapidly shrinking current account deficit, down to 1.4% of GDP. It has ranged from 2-7% of GDP for three decades, and a current account in balance is now in prospect.

The “two-speed” economy, where the resource-rich states of Western Australia and Queensland grew much faster than the populous south east, is in convergence. Victoria and NSW, the two big non-mining states, are leading growth, having responded best to low interest rates. Amid higher house prices and housing construction, they lead the long-awaited, yet still tentative, “growth transition” away from mining to other sectors. Growth is moderating in WA and Queensland, which saw final demand contract.

The downside

Leaving net exports aside, economic growth in the domestic economy (the other 82%) was only 1.6% with most analysts agreeing that the headline growth figure overstates the current strength of the economy. The growth shift is not happening fast enough country-wide to keep growth at March quarter levels. Mining exports will increase for years, with an LNG surge still to come, but the current dazzling rates of growth should moderate by 2015. Combined with sagging iron ore prices, the pace of the increasing export contribution may start to slow this quarter.

The fall in mining investment spending from its supercharged peaks will pick up speed and government spending is flat at both federal and state levels. These will detract from growth this year and into 2015. Non-mining business investment remains chronically weak, unmoved by low interest rates. The currency is 12% lower than a year ago, but at US$0.94 still at historically high levels and continues to drag on the economy.

There are risks too in a deepening dependency on exporting to China. China took 32% of Australia’s total exports last year, up sharply from 26% in 2012, making the Australian economy among the most reliant on Beijing’s fortunes.

Budget anxiety

Consumer and business confidence both lifted on the election of the new government last year but have since waned somewhat. Consumer sentiment declined sharply around the budget of 13 May, where low and middle income earners bore the brunt of spending cuts. Measures that will reduce welfare payments for the aged, students, the young unemployed and those receiving medical treatment face opposition in the Senate..

Treasurer Joe Hockey welcomed the GDP figures as proof of the Australian economy’s resilience. But he warned that the budget’s growth measures, centred on infrastructure spending, were needed to lock in the growth transition and called for Labor and minor parties to pass the budget.

0.2 Comment

Seemingly endless resource riches continue to carry “the lucky country”, providing breathing space to tackle the bigger medium-term economic and financial challenges. An unsustainable fiscal position, falling competitiveness, high wages and low productivity, are slowly turning around. But the Government faces challenges in steering this budget through the Senate. ,

0.3 Disclaimer

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