Saturday, December 7, 2013

Mining still driving economy - slowly

The economy performed poorly in the September quarter, but that's OK. It was all Labor's fault, but now Labor is out. From here on it will be the Coalition's watch and everything will be much better. Or not. At least from here on Joe Hockey will be talking the economy up - as a treasurer should - not talking it down.

The national accounts we got this week show the economy grew by only 0.6 per cent in the quarter and by 2.3 per cent over the year to September. According to Hockey this shows "an economy that is growing below trend, with a soft labour market, cautious consumers and plateauing business investment".

That's the frankest assessment we're ever likely to get from the man. Although no one can say with confidence what the future holds, the best guess is that, this time next year, the economy won't be growing much faster than it is now. The non-mining economy should have picked up a bit by then, but this may be offset by big falls in mining investment spending.

As it is now, the national accounts show little strength in the rest of the economy, leaving mining accounting for what growth we did get. Starting with consumer spending, it grew by just 0.4 per cent in the quarter and by 1.8 per cent over the year to September.

That's well below its trend rate of about 3 per cent and is explained mainly by weak growth in employment (a smaller increase in the members of households earning incomes) and slower growth in wage rates. Households saved 11 per cent of their disposable income, roughly what they've been saving for three years.

Overall, home building activity fell by 0.5 per cent in the quarter to grow by just 1.7 per cent over the year, but this was because another fall in spending on renovations outweighed weak growth in the building of new homes.

The fall in renovations is surprising: usually when the buying and selling of homes picks up - as it has - renovations pick up as sellers tidy up for a sale and new buyers undertake more extensive changes.
We've seen an increase in council building approvals that's yet to show up in actual building activity, so perhaps housing will make a bigger contribution to growth in the coming year.

Overall, business investment spending increased by 1.1 per cent, but fell by 2.5 per cent over the year. Within this, mining investment rebounded in the quarter, but still looks like it reached its peak last year. Kieran Davies, of Barclays bank, says he expects mining investment to make a major subtraction from growth as it returns to a more normal level over the next few years.

Non-mining investment spending was broadly unchanged during the quarter and down about 4 per cent over the year. Davies says business confidence has picked up sharply, and this normally leads to increased investment, but the delay varies and at this stage he's not expecting much of a pick-up until later next year.
"This is because relatively low levels of capacity utilisation suggest companies are in no rush to expand, even though they can borrow at record low interest rates and many firms are cashed up," he says.

Public demand - spending by governments and their authorities - was broadly unchanged in the quarter, after rising by 0.7 per cent the previous quarter. Within the lack of change overall, however, a 5.5 per cent fall in public investment spending was negated by a 1.1 per cent rise in public consumption spending (mainly public service wages).

Davies says the fall in investment was driven by lower state capital works spending, but this "could turn around later next year and into 2015" because Hockey is encouraging the states to spend more on infrastructure and may introduce some new arrangements to help the states fund this investment.

The volume of exports grew by 0.3 per cent during the quarter and by 6.1 per cent over the year, while the volume of imports fell by 3.3 per cent during the quarter and 3.7 per cent over the year.

Most of this is explained by mining. Bulk commodity exports are up about 15 per cent over the year, while the fall in mining investment - which is "import-intensive" - accounts for the fall in import volumes.

This means "net exports" (exports minus imports) account for more than all the growth in the quarter, and contributed 2.1 percentage points of the 2.3 per cent growth in real gross domestic product over the year.

Who said the resources boom was over? Developments in the mining industry will go on having big effects on the economy for a long time yet. It won't be long, however, before the negatives exceed the positives. That is, before the decline in mining investment spending (even net of the helpful decline in imports of capital equipment) exceeds the gain from increasing exports of minerals and energy as the new mines and natural gas facilities come on line.

And don't forget the quarter saw a further, mining-driven deterioration in our terms of trade - export prices relative to import prices - of 3.3 per cent, taking the total deterioration since the peak in 2011 to 17.7 per cent. This reduction in our real income contributes to the explanation of why consumer spending has been weak.

Hockey is right when he says other indicators - retail sales, building approvals, business and consumer confidence - have improved since September. And it's reasonable to hope this will lead to a modest improvement in consumption, home building, business investment and other aspects of the non-mining economy.

But we know there will be big falls in mining investment, which could offset most of the gain. There's not a lot Hockey can do about that between now and then. Even infrastructure spending takes a long time to get going.