There has been a lot of pessimism lately about the economic prospects for the Australian economy as it leaves the mining investment boom behind and moves to transition to domestic and export lead growth.
So yesterday’s Capex data was a welcome surprise for most pundits as was the simultaneous news that Rio Tinto is going to invest US$8 billion in expanding its iron ore mines in Western Australia.
Amidst all the doom and gloom about Australia’s economic growth prospects, the mining investment cliff and the “hole” it is supposed to leave in the Australian economy comes a report from Annette Beacher, TD Securities Head of Asia Pacific research, which suggests Australia is not going to stay in the economic doldrums but rather is on its way back to trend growth.
We are not anti-mining pessimists, rather of the view that the debate is not so much about mining → nonmining, but should be about investment → exports. Our medium-term forecasts assume the headline growth driver morphs from investment to net exports (Figure 1). Moving away from point forecasts, we compare sector contributions to annual growth from the mining investment era of ‘2011-12’ with our projections for ‘2014-15’.
Over both periods, consumption added and is expected to add +2%pts to annual growth, in line with the long-run average and provides the bedrock of GDP growth in Australia. In contrast, while housing was a drag on growth over 2011-12, it is expected to add +½%pts to annual growth in our forecast period.
The big rotation: from business investment, which added nearly 3%pts to annual growth in 2011-12 is expected to slice off -1%pts over 2014-15; to net exports, that sliced off -1.5%pts over 2011/12 and is expected to add + 3%pts to annual growth over 2014-15. The bottom line is trend growth is coming, and it is going to be broad-based, we need to be patient.
If Beacher and her team are right, the Australian economy is going to do a lot better than most Australians and economists expect.