One of the key factors underpinning the Reserve Bank of Australia’s (RBA) forecasts for a pickup in economic growth this year is an expected lift in commodity export volumes along with less drag from the unwinding mining capital expenditure (CAPEX) boom.
“Over the next couple of years we expect GDP growth to be around the 3% mark,” said RBA governor Philip Lowe in an address to the A50 Australian Economic Forum two week’s ago.
“In both years it will be boosted by a significant pick-up in LNG production. And the headwinds that we have been experiencing from the unwinding of the biggest mining investment boom in a century will blow themselves out,” he added.
Essentially, one will add to growth while the other will detract less, seeing the RBA adopt the view that the economy is likely to grow at an above trend pace this year and next.
And this excellent chart from Deutsche Bank explains why Lowe is feeling optimistic on the prospects for real GDP growth.
It shows where major liquefied natural gas (LNG) projects in Australasia currently sit in the production cycle, starting from from front-end engineering and design (FEED) to the final investment decision (FID) and, eventually, to production.
Although not all projects are based in Australia, the vast majority are.
Clearly, a lot of these projects have been completed, and are now producing gas. While that’s been dragging on mining CAPEX in recent years, and with it GDP, these projects coming online are now starting to add to real GDP through export volumes.
As such, the drag on economic growth created by declining investment in these projects is also starting to wane.
And while the new projects yet to come online are far smaller in scale, they will still require investment, contributing to further to GDP.
So while concerns persist at about Australia’s household sector, particularly given soft labour market conditions, high indebtedness and low wage growth, from a real GDP perspective, with export volumes expected to rise just as CAPEX looks set to hits its nadir, it’s understandable why the RBA, and others, think that growth will be fairly strong in 2017.