INSIGHT
oracle
On the lookout for new econoll1ic growth
inancial markets have begun the
year on a more buoyant note.
The US has played a significant
role with evidence the housing sector
has bottomed, and after the so-called
"fiscal cliff" (of simultaneous tax
increases and spending cuts) was
averted. There is also clearer evidence
of a pick-up in the Chinese economy
(spilling over into a rebound in the
iron ore price), and signs the European
economy and financial markets have
stabilised.
However, notwithstanding the
optimism evident in financial markets,
2013 is likely to prove challenging
as the search for alternative sources
of growth continues as we approach
and pass the peak in the mining
investment boom.
Mining investment is expected
to peak at just under 8 per cent of
GDP later this year - compared with
an average of 1. 75 per cent of GDP
during the decade ended 2010. Mining
investment has probably accounted
for about one-third of the growth in
Australia's GDP over the past two years.
Although likely to remain at a high
level (by historical standards at least
until work on the current crop of major
LNG and CSG projects is completed) it
will no longer be adding to the overall
growth in the Australian economy.
Nor will Australia's national income
be boosted by rising commodity
prices, notwithstanding the recent
rebound in iron ore prices. Australia's
"terms of trade" (the ratio of export
to import prices) actually peaked in
the September quarter of 2011: it fell
by nearly 9 per cent last year, and will
probably fall another 3 per cent this
year. That will detract from company
profits and government revenues.
So if overall economic growth is to
remain close to "trend" (of about 3-3.5
per cent) new sources of growth will
need to become more evident as 2013
unfolds. Unfortunately, most of the
obvious candidates for fresh impetus
to Australian economic growth face
some formidable hurdles. In particular,
16 MANAGEMENT TODAY I February 2013
-l improving productivity and reducing
~ costs, something which hasn't been a
8- priority for most Australian businesses
_ _ _-'9- since the late 1990s.
households are rebuilding their
balance sheets, which means saving
a high (by standards of the past two
decades) proportion of their incomes
and paying down debt, and being
much more selective in their spending
than before the GFC.
Hence, even with mortgage rates
down to within 55-70 basis points of
their post-financial crisis lows - the
IT SEEMS QUITE LIKELY Governments are being reflected in
UNEMPLOYMENT
WILL RISE THIS YEAR,
PROBABLY REACHING
6 PER CENT
recovery in housing demand has been
quite tentative. Would-be buyers
appear to remain apprehensive about
the possibility of further declines in
house prices, as well as wary about
taking on additional debt. Hence, any
upturn in new housing construction
this year (with flow-on benefits to
manufacturing and retailing) will
probably be quite modest.
Businesses outside of the mining
sector remain very pessimistic and
non-mining investment in 2013 seems
likely to fall to its lowest level as a
share of GDP in more than 25 years.
The strength of the Australian
dollar - in the face of falling
commodity prices and narrowing
interest rate differentials with overseas
financial centres - is becoming
increasingly problematic for many
businesses, and there does not appear
to be any sensible policy options open
to the Reserve Bank or the Government
for dealing with it.
As businesses come to accept the
continued strength of the Australian
dollar, and consumers aren't going
back to the spending habits of the
pre-GFC era anytime soon, they
are increasingly looking at ways of
Almost inevitably, that includes
"headcount reductions" - and
although there hasn't been a wave of
mass layoffs, employers have clearly
become more hesitant about new
hiring, something which is evident
both in tallies of job vacancies and in
unemployment among the young.
In addition, the more stringent
budgetary policies being pursued
by lhe Commonweallh and Slale
cutbacks in public sector employment.
Hence, it seems quite likely
unemployment will rise this year,
probably reaching 6 per cent, a
prospect which is likely to weigh on
consumer confidence.
Finally, a federal election is due
by late November. On top of the
uncertainty which elections always
bring, this year's contest seems likely
to be unusually bitter, with both major
parties more inclined to resort to
"populist" policies, something which
doesn't bode well for the outlook for
economic policy over the medium
term. All told, while Australia's
economy will remain in better shape
than the economies of most of our
traditional "peer group", it's unlikely to
offer an "easy ride" for businesses or
investors in 2013.11i!]
Saul Eslake is chief economist at Bank of
America-Merrill Lynch Australia.