[Making sense of the GDP] Australian growth is rebalancing away from mining


Some quick notes taken today 2 Sept 2015 as Australia posted a GDP growth from April until June of 0.2% – lower than expectations set at 0.4%, and the weakest quarter of growth in two years. 

Two opposite trends are at work on the Australian economy.

A downward trend: On one end commodity prices are falling because China has been slowing its development.

Australia's Terms of Trade

For Australia, the most important declines have been iron ore and coal, given their high weights in our export basket. Iron ore, which makes up $1 in every $5 of Australian exports, saw its price fall by 50% in 2014. Coking coal, which accounts for 7% of exports, saw a price fall of 17% in 2014, and thermal coal, which accounts for 5% of exports, had a price fall of 26% in 2014.

Goldman Sachs sees this trend continuing and believes “iron ore prices may tumble about 30% over the next 18 months (from Aug 2015) as supply expands while steel output falters”. The graph showing the Iron price fall since 2010 is pretty unequivocal…


On top of this price issue, we also have a timing problem. The fall in commodity prices and incomes comes at a time when mining investment is already in decline in Australia, following a sizeable ramp-up in the past years when we were busy building mines and their infrastructure – hence paying for construction. Now that those mines have been built, the job is to dig the ground, which requires less engineering investment.

All of those factors are contributing to push Australia’s GDP down.

Fortunately some upward trends are (slightly) offsetting this fall (for the time being): activity in non-mining sectors is lifting

From following the daily news, we obviously know that low interest rates are “supporting the housing market” (the housing bubble we’ve been worried about for some time), consumption (despite the economic worries, we keep buying stuff), business conditions (the fact is that businesses have been posting profits) and credit growth (we keep borrowing money and our household debt has been growing).

And as we saw in those first days of September, the AUD keeps depreciating, which makes Australian products cheaper to export and improves competitiveness.

2015-09-02 Image 006

So, all in all, the net effect of those trends is a rebalancing, a transition, from a mining to a non-mining economy. It is clearly shown by the following graph lifted from a speech by Reserve Bank assistant governor, Christopher Kent.

It clearly shows that iron ore is no longer Australia’s biggest export, which you can enunciate with a glass half-empty or glass half-full angle:

– “Iron ore, for years Australia’s biggest export earner, has crashed and is no longer our export king.”

– Alternatively, you could apply positive spin: “Australia’s high-value services exports, led by tourism and education, have overtaken iron ore to become our biggest foreign exchange earners. Services exports now are worth more than coal and LNG combined.”

RBA export value graph 2015-03-11-graph5

In fact, the growth of services exports is a very fine thing, especially when much of that growth period included a strong and rising Australian dollar.

The graph also puts the “crash” in the contribution of iron ore and coal to our export income in perspective: yes, after lightning-fast spikes to stratospheric, undreamt-of levels, our two biggest mining exports have fallen back to be merely extremely rich sources of foreign exchange.

So, somewhere between the bad news/good news spin is this reading: Australia’s export earners are doing quite nicely with indications that the economy is starting to rebalance, as it must. The RBA’s assistant governor economic said our services export industries should benefit from further strong growth of demand from Asia as many more households there gain a foothold in the middle class.

“While Australia has many strengths in these service industries, our comparative advantage here is perhaps not as obvious as it is in mining and agriculture, which benefit from our substantial endowments of natural resources.” he said. “This means that we will need to continue to work hard to maintain competitiveness in these global markets.”

An unashamed opportunity to conclude with a link to the current push towards innovation and the knowledge economy. This macro-economic rebalancing shows why this push is so important. It indicates why research, education, and supporting new technology sectors is so crucial to Australia. It also puts initiatives such as last week’s launch of Sydney’s latest FinTech incubator Stone and Chalk, and next month’s Sydney Startup Week in context of this bigger picture. To be continued…

Xavier – 2 September 2015 – Sydney



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