Economy in for a “bumpy ride” as mining boom nears end, report from government forecaster reveals

The resources and construction boom will start deflating by the end of this year, a report has predicted, with economists flagging an uncertain economic future for Australia with no clear sector ready to “pick up the slack”.

The Bureau of Resource and Energy Economics reported yesterday a decline in the number of committed projects in the resources sector, with a forecast this number is likely to continue declining for the next five years.

Current total investment in committed resources and energy projects is $232 billion across 73 projects, and there is $120 billion invested in publicly announced projects which are yet to commence.

The total value of existing committed projects did not fall from the $268 billion predicted by the bureau at the end of last year, but this was only because of a $29 billion cost blow-out of remaining projects.

By 2018, the amount invested in resources projects is predicted to plummet to $25 billion.

The bureau has labelled this prediction the most “likely scenario”, as the current publicly announced projects expected to progress are “insufficient to maintain the current stock of investment”.

The end of the mining boom forecast by the bureau is in line with predictions from the Australian Bureau of Statistics and the Reserve Bank of Australia, and economists have signalled the end could spell “bumpy” economic times for Australia.

Chief economist with AMP Capital Investors Shane Oliver told SmartCompany the report has confirmed the boom has peaked, but the real question is how the Australian economy will respond.

“We’ve known the mining boom was going to fade for some time, but the big issue which remains is if the Australian economy can fill the gap.”

“I believe it can, but the RBA has left it too long to lower interest rates and the Australian dollar will need to fall even lower. All of this suggests the mining boom will end and the transition to the rest of the economy isn’t going to be smooth,” he says.

The current economic climate Oliver says indicates “we’re right for a bumpy ride”.

JPMorgan economist Tom Kennedy told SmartCompany there is no clear sector which has the strength to take on the economic role the mining sector has filled.

“Over the past decade or so the investment phase for the resource boom has been the main economic driver, but we think this will peak in the latter half of this year.

“This means the sectors which haven’t been doing as well, such as retailing, construction and manufacturing, will have to pick up the slack. But when you look at the economy at the moment, it’s hard to see which sector could do it,” he says.

Oliver says the end of the mining boom will bring forth a “more dispersed” economy.

“The mining boom was unusual in the recent history in Australia. In the 80s and 90s it was a balanced economy and then it became very imbalanced and a two-speed economy with the mining boom driving economic growth.

“This environment probably wasn’t a very healthy one. Now with the mining boom fading away it’s probably a good thing, they went over the top in terms of their investment in new projects and can go back to being more balanced,” he says.

Oliver says it’s human nature to see disasters everywhere, but we can “look forward to getting back to a balanced economy, rather than a two-speed economy”.

A Productivity Commission report released in April found there was a fall in the number of micro businesses in mining states since the boom, as workers swapped trade entrepreneurship for paid employment.

Kennedy agreed the economy is likely to return to a move even state, but says the mining boom has been fundamental to Australia’s recent relative economic prosperity, when compared to other global economies.

“It’s provided an additional source of income for Australia and this wealth has been spread throughout the country. If we didn’t have the resource sector in Australian performing the way it has, unemployment would be much higher and we’d have fallen into a deeper recession.

“This year I think we will see growth fall below trend to around 2.5%. The Australian economy will have to adjust, but it’s not going to be smooth,” he says.