Aussie dollar and post-mining boom economy test government and Coalition policy mettle: Analysis

There are two key economic challenges for Australia this year: coping with the impact of the high dollar and managing the transition to the post-mining boom.

The government understands the first challenge and, judging by his economics speech last week, Joe Hockey is starting to as well, although it still seems like he’ll be in for a shock on that front when he finally gets his hand on the treasury portfolio.

On the second challenge … hmmm.

A confident government should be drafting policies to avoid a shock to the economy as the mining investment boom slows, having recognised that the Reserve Bank has done just about everything it can to kickstart the economy’s decidedly mixed domestic sector.

The RBA is trying to make sure the pick-up in domestic demand from a housing-led recovery (an old-fashioned Australian rebound, but also one we are seeing gathering more and more strength in the US) arrives roughly at the same time to start replacing the easing demand from the resources investment boom. That’s the challenge for policymakers in Martin Place and Canberra.

Yes, the boom still has a long way to go and will still be outsized compared to normal in three to five years’ time. Mining investment will total an estimated $105.1 billion this financial year, up from $82 billion in 2011-12, and $46.8 billion the year before, and the first estimate for 2013-14 is a still solid $100.2 billion.

But once the peak has passed, the long tail of the boom will in effect be withdrawing its powerful stimulus from economic growth. RBA monetary policy has been aiming at this transition point in the economy to try and kickstart housing and non-residential construction to expand and pick up the emerging slack in the non-mining sectors of the economy.

In Tuesday’s RBA statement, Governor Glenn Stevens said “looking ahead, the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.”

But the problem for the RBA is that the monetary policy loosening it has driven since late 2011 has yet to work its way through the wider economy, so it can’t really do much more. As yesterday’s statement from Stevens notes:

“The Board’s view is that with inflation likely to be consistent with the target, and with growth likely to be a little below trend over the coming year, an accommodative stance of monetary policy is appropriate. The inflation outlook, as assessed at present, would afford scope to ease policy further, should that be necessary to support demand. At today’s meeting, taking into account the flow of recent information and noting that there had been a substantial easing of policy as a result of previous decisions, the Board judged that it was prudent to leave the cash rate unchanged. The Board will continue to assess the outlook and adjust policy as needed …”

Which leads us from Martin Place down to Canberra, and what role fiscal policy can play in managing the transition. Manufacturing capital expenditure is forecast to fall 16% in 2013-14, after a 29% drop in 2012-13. Construction is expecting to invest $1.9 billion next financial year, down from $4.2 billion this year. Wholesaling expects spending to fall from a forecast $3.5 billion for the year to June to $2.3 billion in 2013-14, down a third.

But there’s better news elsewhere: so far in 2013, retail sales were solid in January. ANZ job ads showed more jobs were advertised in January and February. Car sales jumped 8% in February from the same month in 2012 (to more than 90,000), housing approvals overall (including apartments and units fell), but new home approvals rose 3.2% in January, reversing December’s 3.3% fall.

The growth in inventories slowed sharply in the final quarter of 2013 compared with the three months to September. But wages and salaries grew in the December quarter, against a fall in the three months to September, while company profits again fell, but the seasonally adjusted fall of 1.0% was far better than the 2.9% drop reported for the September quarter. New home sales continue their weak, but steady rebound.

Today’s national accounts for the December quarter and 2012 showed what the RBA expected; an economy growing around trend at 3.1% (and 0.6% in the final quarter) over the year to last December, with domestic demand fairly solid, the labour market a bit weak, but some areas of consumption (car sales) very strong. A fall in private investment knocked gap by 1.0%, but a rise in “public investment” helped lift output, along with a 0.6 of a point rise in exports, according to analysis from the Australian Bureau of Statistics.

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