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This analyst says LNG exports will 'come to the rescue' of the Australian economy

Gorgon LNG loading wharf. Image: Chevron.

The energy complex is under pressure again with crude oil down more than 5% in trade last night.

That’s seen Brent crude, the global benchmark, make a new 11-year low and it’s dragged the energy complex as a whole, including natural gas futures, sharply lower.

That’s problematic for Australia given the size of the investment in large scale Liquified Natural Gas (LNG) production in the north-west of the country.

But Kate Hickie, an assistant economist at Capital Economics still believes that LNG, and the surge in exports that will flow from this investment in production capacity, means that, “despite a slowdown in the growth of iron ore exports, resources exports will probably continue to offset some of the ongoing falls in mining investment”.

That’s good news for the economy given data this week in the AiGroup’s PMI surveys showed manufacturing and services hit a flat spot at the end of 2015.

Hickie says that “real GDP growth has been surprisingly resilient to the dramatic falls in mining investment triggered by the end of the mining boom”.

“This is partly due to the surge in the volume of resources exports in recent years, particularly of iron ore, which has cushioned the drag from investment.”

And she says, that forecasts of a “contribution of LNG exports to annual GDP growth rising from nothing now to about 0.5 ppts by 2017/18” mean that “the combined contribution to GDP growth from these two exports should therefore remain close to 1.0 ppt per year over the next couple of years””

But she warns that this might be a best case scenario given delays in Australia’s LNG production facilities coming on line and crucially she warns:

While LNG demand in the long-term may be supported by the desire for environmentally friendly substitutes for coal, weaker than expected economic growth in Asia and more nuclear power production may mean that in the near-term overseas demand falls short of expectations. The latest falls in the price of LNG substitutes of oil and coal won’t help.

In the end though she still says “LNG will come to the rescue, but there is a danger it won’t be quite the saviour that is expected.”

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