The Demise Of The Australian Economy Has Once Again Been Greatly Exaggerated

Only a few short months ago the RBA was cutting rates, emerging markets and Chinese data seemed in a downward spiral and the Aussie dollar was under 90 cents and heading lower.

Or so it seemed.

Since then the Aussie has rallied 5 cents, Chinese and Emerging Market data has started to print a lot more positively and the RBA and the Australian economy seem more confident that the stimuli we have seen in the multiple cuts to the official cash rate since 2011 are starting to gain traction.

Markets are now even thinking about when the RBA might start to raise rates.

But Australia remains an economy in transition, as the ANZ’s chief economist Warren Hogan told journalists this week.

He pointed to his team’s expectation that in time, the increase in house prices and a big improvement in Australian consumer risk appetite will lead to more economic activity in the domestic economy.

On housing, while land may be still be in limited supply across some parts of the country – especially Sydney – and thus lead to a muted construction cycle, the increase in house prices should see an uplift in additions and alterations. That will help that transition necessary in the economy, creating the jobs that will go missing as mining investment reduces.

On spending it seems that Australian households might, having had years of retrenchment, finally start to open their wallets and start spending again. At present the ANZ says that Australians’ “risk appetite”, as shown by the fall in bank deposit, superannuation and debt reduction as the wisest place for savings in the Westpac Consumer Sentiment Survey, is at its highest level since the GFC. This will drag the savings rate lower and start to see money flow back into spending and through the economy.

This will also ease the transition.

But Hogan made a strong case as well. Even though it seems clear that the mining investment boom is past its peak, exports will still be strong, a point NAB’s chief economist Alan Oster also made on ABC radio this week; and capital expenditure expectations have been downgraded too far.

Capital expenditure has been the fuel that drove the mining investment boom – mines are capital intensive to start and require significant investment.

The long lead time means that if the market turns, projects can be shelved or cancelled outright, something that we have seen in the past nine months.

Hogan highlighted the fact that there exists a “corridor of uncertainty” between what is under construction or committed, and those projects that have not been started but remain at risk of postponement or cancellation.

He noted that he thought a number of economists and the commentariat had been too pessimistic and automatically gone to bearish in only accounting for actual commitments and constructions in their expectations for growth.

His view is that things will turn out better than this negative expectation.

It’s a point made by Mike Henry, BHP’s president of its marketing and technology unit, in an email that Bloomberg cited before a speech he was to deliver today.

Commodity demand growth will remain robust as the fundamentals of wealth creation, demographics and urbanization continue to drive demand for resources.

This is exactly the point that ANZ’s Chinese chief economist, Li-Gang Liu, made earlier in the week as well.

Liu’s point was that there has been a lot of focus on the real rate of growth in China and disappointment about it potentially slowing to 7% or below over the next year or two.

China has achieved the size, in economic terms, now that even a slower rate such as 7% or even 6.5% is still a huge nominal rate of growth and as such, China would remain a key source of demand for Australian exports.

Liu noted that between 2000 and 2010, China had average 10.3% growth rate which equated to an average nominal increase in economic size of approximately $US390 billion per annum.

At the 8.3% average over the five years to 2015, this would equate to a massive $US1.1 trillion in economic growth every 12 months.

That’s just under 75% of Australia’s total economic output each year.

Scale matters.

Picking up on BHP’s Henry’s point Liu said that “China’s renewed drive for urbanisation, demand for infrastructure and new housing will remain very high which suggests that demand for resources will remain massive.”

Australia is an economy in transition – away from the mining investment boom and back toward more balanced domestically lead growth. It will take some time but it seems that like many times over this past 22 years without a recession stories of the demise of the Australian economy look to have been greatly exaggerated.

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