-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
1/35
By Paul Bloxham
Australias growth has been uneven in recent years, as the economy has absorbed
a massive mining investment boom
With mining investment expected to peak in mid-2013, some rebalancing of growth is needed
We expect lower RBA rates and a steady AUD to spur a recovery in the housing, retail and
tourism sectors in 2013, helping maintain solid growth
Disclosures and Disclaimer This report must be read with the disclosures and analyst
certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Australias great
rebalancing actLooking beyond the mining investment boom
Macro
Economics Australia
November 2012
https://www.research.hsbc.com/midas/Res/RDV?ao=20&key=LUS0GPE8yW&n=353194.HTM -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
2/35
1
Macro
Economics Australia
November 2012
abc
Two major forces have affected Australias economy in recent years. High global commodity prices
have driven a massive mining boom, supporting growth, while at the same time households have
increased saving, which has been a drag on growth. But Australia has been lucky. The net result ofthese opposing forces was around trend growth, close to full employment and low inflation. Growth
has been uneven across sectors, with a strong mining sector and weaker conditions elsewhere, but the
overall story has been positive.
Now that commodity prices have peaked and the mining investment peak is also in sight expected
around mid-2013 the true test is coming. Can Australia see growth rebalance away from mining and
towards other sectors? Or, does Australia have a resources curse that has hollowed out its
economy and will constrain its ability to continue to grow?
Last year we wrote a report tackling this question and concluded that while not everyone would
benefit from the mining boom, the overall economy is expected to be significantly better off thanotherwise (seeDoes Australia have a resources curse?, 18 August 2011). We retain this view.
Australias economy has absorbed a once-in-a-generation mining boom successfully, with few signs
of irrational exuberance and inflation remaining low. The high AUD and above average interest
rates in 2011 held back some sectors to make way for the mining expansion.
Looking ahead, we expect recent cuts in interest rates to below average levels to drive a rise in
housing construction and house prices, which should also support retail sales. Gradual recoveries are
also expected in a number of the sectors that have been held back by the high AUD, including
tourism, as the effect of the high AUD on growth wears off and Asian incomes continue to rise.
Given that mining investment is still expected to rise until around mid-2013, there is time for these
other sectors to gradually recover.
We remain optimistic that Australia will see a smooth rebalancing of growth for a number of reasons.
First, Australias financial system is in good shape, so monetary policy still works. Second, previous
financial imbalances are well on the way to correcting. Households have increased saving and paid
down debt ahead of schedule for a number of years and local banks have been shifting away from
reliance on foreign wholesale funds towards domestic deposits. Lastly, government debt is low and
Australia does not have sovereign debt problems.
Critically, our positive outlook relies on ongoing growth in Asia, supporting commodity prices and
furnishing Australia with other opportunities. As the Asian middle classes expand and spendingpatterns shift, demand for education, tourism and other services will grow. The benefits Australia
could reap from the Asian Century should extend well beyond the mining sector.
Key points
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=9X00FMKi9h&n=305385.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=9X00FMKi9h&n=305385.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=9X00FMKi9h&n=305385.PDF -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
3/35
2
Macro
Economics Australia
November 2012
abc
Key points 1Mining story not over yet 3Mining has been the big story 3Not over yet 4Mining story has three stages 4Foreign involvement a cushion 8Growth has been uneven due to mining 8But not that uneven 9High household saving also driving unevenness 9
The great rebalancing act 11Shift back needed 11Housing ripe for recovery, though slow take-off so far 12Retail sector should improve 14Businesses have lowered debt levels 15AUD effect should wear off 16
Resources curse revisited 19Has Australia been cursed? 20If its permanent, its all okay 20High commodities = high AUD? 20The curse of weak productivity growth 21A sharper global slowdown 25
Other risks 25A weaker monetary transmission mechanism 26
Australias fiscal cliff 27A stickier AUD 27Rebalancing smoothly the key challenge 28
Forecast table 29Disclosure appendix 31Disclaimer 32
Contents
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
4/35
3
Macro
Economics Australia
November 2012
abc
Mining has been the big story
The re-emergence of Asia has driven a massive
rise in commodity prices over the past decade.
This has had a profound effect on the shape of the
Australian economy. It has also been a key driver
of Australias relative outperformance when
compared with the rest of the developed world.
1. Commodity prices have fallen, but are still very high
Australia's Commodity Prices2008/09 = 100
0
40
80
120
160
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
0
40
80
120
160
In AUD
In USD
Index Index
Source: RBA
Commodity prices quadrupled in USD terms
between the beginning of the century and their
recent peak in late 2011 (Chart 1). Given this
massive change in global prices, Australias
economy responded by shifting more of its labour
and capital towards the production of industrial
commodities.
Now that commodity prices have peaked though,
concerns that Australia could see a mining bust,
following its mining boom, have become more
commonplace.
We think these concerns are largely unfounded for a
number of reasons. These include: our house view
that Chinas growth will pick up next year; that we
expect commodity prices to stay structurally high;
that there is still a significant amount of mining
investment yet to be completed on projects that
have already started; and that we are yet to see a
significant ramp up in resource exports as a result of
the capacity that is being built.
While the contribution of the mining sector to
growth will probably be less in the future than it
has been in the recent past, the mining story is not
over yet. Plus, below average interest rates and a
Mining story not over yet
Rising commodity prices and rapid growth in mining investment
have supported Australian growth in recent years
Now that commodity prices have peaked, income growth is
slowing, but unless prices fall dramatically from here, the nominal
economy should continue to expand
Growth in the real economy should be supported by mining into
2013 as many investment projects are yet to be completed and
resource exports ramp up to support growth after this
Paul Bloxham
Chief Economist, Australiaand New ZealandHSBC Bank Australia Limited+61 (2) 9255 [email protected]
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
5/35
4
Macro
Economics Australia
November 2012
abc
steady AUD are expected to result in other parts
of the economy picking up and Australian growth
gradually rebalancing.
Not over yet
While commodity prices have passed their peak,
and we do not think they are likely to return to the
very high levels reached in late 2011, they remain
at high levels relative to history. Indeed, careful
examination of Chart 1 reveals that, while
commodity prices have fallen over the past year
(by around 20%) they remain above the high
levels reached at their previous peak in 2008 in
USD terms (which was much celebrated as a very
high level of commodity prices at the time).
We expect commodity prices to stay well above
the very low levels they reached in the 1980s and
1990s. We covered this topic in greater detail in a
recent report: Commodities and the global
economy: Are the current high prices the newnormal?, 8 August 2012. In short, we argued that
back in the 1980s and 1990s, when commodity
prices were very low, global growth was being
driven by the developed world and its very large
services sectors. Now that the emerging
economies are driving global growth and have
large infrastructure requirements, we expect
commodity prices to remain at high levels. Put
simply, global growth is now more commodity-
intensive than it was in the 1980s and 1990s.
While Australias terms of trade the ratio of
export prices to import prices have fallen
recently, in line with the slowdown in China, we
expect they will start to level out soon, after
declining by about 15% from their peak (Chart 2).
At this level they would still be around 70%
above their level in 2000 (which is around their
long-run average level).
2. Terms of trade to cycle around new high level
Australia's Terms of Trade
40
60
80
100
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
F/CIndex
Source: ABS; HSBC estimates
This is, of course, somewhat reliant on our global
outlook and particularly on our forecasts for
China. Our Chief China Economist estimates that
Chinese growth will lift from 7.8% in 2012 to
8.6% in 2013, with infrastructure investment a
key support for growth.
There are already signs that Chinas economiccycle is bottoming out, which gives us some
confidence that industrial commodity prices are
not likely to fall too much further in the near term.
Given an expected recovery in growth in China,
we expect that Australias terms of trade will
show a modest rise in 2013 and 2014.
Mining story has three stages
To understand the mining boom it helps to think
of it occurring in three stages. First, commodityprices ramp up, then investment picks up and
finally resource exports increase. We are only part
way through the second stage (Chart 3). We set
out this framework in July: seeDownunder
digest: Reports of the mining booms death
greatly exaggerated, 26 July 2012.
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=4TR7azrcKB&n=337242.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDF -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
6/35
5
Macro
Economics Australia
November 2012
abc
First stage is over, as commodity
prices have peaked
While we expect commodity prices to stay high, itis fair to say that the free kick to income growth
that Australia was getting from continually rising
commodity prices they rose in 9 of the past 10
years looks to be a thing of the past.
Chinas growth has slowed down from the
double-digit rates it maintained prior to the global
financial crisis and global supply of industrial
commodities is gradually increasing as we are
now some seven years into the upward phase in a
global resources investment cycle.
Commodity prices look as though they peaked in
Q3 2011. But we expect them to remain high and
to cycle around levels reached in the past five
years or so, in line with cycles in the economies
that are at the commodity intensive stage of their
development, including China.
Second stage ongoing, as mining
investment still rising
While the first stage of the mining story is passed,we are only part way through the second stage.
The second stage is when the high level of
commodity prices motivates an increase in
investment.
Much investment has already begun. But given
the long-term nature of a large number of the
projects in the mining investment pipeline
particularly the major liquefied natural gas (LNG)
projects growth in the Australian economy
should continue to get support from the
completion of already commenced mining
projects for at least the next year. The average
time required from commencement of these LNG
construction projects to completion is five years,
and the first project only got started in 2008/09.
There are seven major LNG projects in the
pipeline, with the most recent only getting final
approval this year (Chart 4).
3. Mining boom not over yet, just part way through stage 2
Source: HSBC
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
7/35
6
Macro
Economics Australia
November 2012
abc
4. Massive LNG projects still under construction
Estimated spend
Gorgon AUD 43.0Ichthys USD 34.0Wheatstone USD 29.0
Australia Pacific LNG AUD 23.0Queensland Curtis Island LNG USD 20.4Gladstone LNG USD 18.5Prelude AUD 12.0
Source: Australian Treasury
Work yet to be done on mining projects has only
just passed its peak in H1 2012 and is at anextremely high level (Chart 5). On these estimates
there is still around 30% of the value of quarterly
GDP of work yet to be done. We see this as
boosting the mining investment share of the
economy further in H1 2013.
5. Still a lot of work yet to be done over coming years
0
5
10
15
20
25
30
35
40
1986 1989 1992 1995 1998 2001 2004 2007 2010
0
5
10
15
20
25
30
35
40
*Per cent of quarterly nominal GDP
Engineering Construction Work
yet to be done*
Mining Investment Pipeline*
Source: ABS
We estimate that mining investment will continue
to make a positive contribution to GDP growth
over the next 6-9 months, as the projects that have
already commenced continue to be constructed
(Chart 6). This sees the mining investment share
of the Australian economy peak some time in
mid-2013 at around 8% of GDP. This is very high
when you consider that mining investment has
averaged around 1.5% of GDP for most of the
past century. In 2014 we expect the mining
investment share of the economy to level out.
6. Mining investment still to contribute to growth next year
GDP growth and mining investmentYear-ended change
-1
0
1
2
3
4
5
2000 2002 2004 2006 2008 2010 2012 2014
%
GDP growth
(y-o-y)
Engineering construction
(contribution to y-o-y)
Source: ABS; HSBC estimates
Importantly, the contribution to growth from
mining investment should be lower in 2013 than it
was in 2012. Engineering construction rose by
40% in 2011, is expected to grow by 40% in
2012, but we expect it will only rise by 14% in
2013 and to fall modestly in 2014. Of course,
mining investment was never going to be able to
sustain its recent extraordinary pace of growth, so
a slowdown at some point was inevitable.
Indeed, GDP growth in Australia has been very
uneven over the past year. Of the 3.1% GDP
growth over the year to Q3, around half came
from mining investment. Some part of this was
imported, so the net domestic contribution was a
bit lower than this suggests. This is, nonetheless, a
large contribution from the mining sector given
that it only accounts for 10% of value-added in
the economy.
By 2014 we expect mining investment will be a
modest drag on Australian GDP growth. But,
importantly, the overall mining sector is not
expected to be a large drag on real GDP. As new
capacity comes on line, resource exports will be
boosted (the third stage), which will contribute to
GDP growth.
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
8/35
7
Macro
Economics Australia
November 2012
abc
Third stage yet to come, as exportsstill to ramp up
The third stage is when the newly built capacity
becomes productive and boosts resource exports.
Indeed, the massive growth in investment in
recent years is yet to boost resource exports in a
significant way, because much of the capacity is
still under construction.
Last years floods in Queensland held back coal
exports until very recently, which saw an overall
fall in Australias exports in 2011. As most of
these coal mines have finally been pumped out we
have seen a pick-up in exports in recent quarters
and expect to see solid growth in export volumes
in 2013 and beyond (Chart 7).
7. Export ramp up is yet to come
-2
0
2
4
6
8
2001 2003 2005 2007 2009 2011 2013
Export volumesAnnual percentage change
% Forecasts
Source: ABS; HSBC estimates
Exports should rise despite the global slowdown.Demand for Australias resource volumes will be
supported by the fact that Australia is a low cost
producer of a number of high quality resources,
including iron ore, thermal and coking coal.
Marginal producers are typically the first to lose
market share when global demand eases. For
example, for iron ore, the cost of production in
China is much higher (probably around USD120
per tonne) than the Australian cost of production
(closer to USD50-60 per tonne for the bulk of
production). Chinese producers are likely to shut
shop before Australias large producers.
Industry projections suggest the medium-term
outlook for growth in resource exports is strong
(Chart 8). These projections are based on
estimates of increased supply capacity. Coal and
iron ore exports are expected to ramp up over the
coming five years. The increase in LNG exports
does not really pick up pace until 2014-15, when
the longer-term projects come on line. With the
LNG from these projects largely forward-sold on
contract, the demand is fairly unaffected by
changes in gas prices (for example, from
competition with US shale gas production).
8. Resource export rise a medium-term growth support
Australian Commodity Exports OutlookFinancial years
0
300
600
LNG*
Coal
Ironore
LNG*
Coal
Ironore
LNG*
Coal
Ironore
LNG*
Coal
Ironore
LNG*
Coal
Ironore
LNG*
Coal
Ironore
LNG*
Coal
Ironore
LNG*
Coal
Ironore
2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
0
30
60
MtMt
Forecast
* Righthand side axis
Source: BREE
As we have discussed before, Australias
expansion into LNG production can be thought of
as a great gift (seeDownunder digest: Australias
gas-fired mining boom, 3 May 2012). Technology
has reduced the cost of production and allowed
Australia to build capacity such that, in addition to
being a large global thermal coal producer,
Australias status as a global energy producer will
be bolstered by a significant ramp up in LNG
exports. Australia is set to become the worlds
largest LNG exporter by 2017. Australia has gone
from living off the sheeps back in the first half of
the 20th
century to being a big miner of industrial
commodities and will soon further bolster its
credentials as a major global energy producer.
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=DIYTThgBdC&n=329134.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=DIYTThgBdC&n=329134.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=DIYTThgBdC&n=329134.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=DIYTThgBdC&n=329134.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=DIYTThgBdC&n=329134.PDF -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
9/35
8
Macro
Economics Australia
November 2012
abc
Foreign involvement acushion
There has been a large amount of foreign
involvement in Australias mining boom. When
the mining boom was ramping up this was a
source of angst, as it meant that demand was
leaking offshore, and Australian domestic demand
was not getting the full support from the
investment ramp up. Now that the peak is in sight,
and the impact of mining investment on theeconomy will start to fade somewhere in the
forecast horizon, foreign involvement is a source
of some comfort, as it has a risk sharing effect.
As Australias mining sector is around 80%
foreign owned, much of the volatility in income
from rising and falling commodity prices is
absorbed by foreign companies and shareholders,
rather than the domestic economy. An eventual
slowdown in mining will, of course, have an
impact on local tax revenue, employment and
profits, but the full force of a fall in the mining
investment share of the economy, when it occurs,
will not be felt locally.
Growth has been uneven dueto mining
When the mining investment boom was at full
thrust, the Australian economy was operating at
around full capacity. The unemployment rate has
been fairly steady between 4.9% and 5.2% for
most of the past two years (Chart 9).
9. Australia was close to full employment until very recently
Unemployment RateSeasonally adjusted
2
4
6
8
10
1978 1982 1986 1990 1994 1998 2002 2006 2010
2
4
6
8
10
% %
Source: ABS
For one sector of the economy to be booming
without pushing the overall economy beyond its
potential, other parts of the economy needed to
slow down to make way. The high AUD was a
key driver of this trend (Chart 10).
10. AUD has been around 30-year highs
Exchange Rate
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
1970 1976 1982 1988 1994 2000 2006 2012
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
AUD/USD
Post-float
average
Source: RBA
The industries most sensitive to the exchange rate
manufacturing, tourism, education and retail
have (collectively) seen no growth in their
employment over the past four years (Chart 11).
To some degree, the weak growth in retail reflects
other trends in household spending behaviour,
though the effects of higher international
competition and greater overseas travel by
domestic residents have been partly due to the
high AUD.
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
10/35
9
Macro
Economics Australia
November 2012
abc
11. Growth has been uneven across the economy
Employment Across IndustriesTrend, February 2007 = 100
100
105
110
2007 2008 2009 2010 2011 2012
100
105
110
Exchange rate sensitive industries*
(33% of total)
Other industries
(67% of total)
* Includes manufacturing, retail trade, acc ommodation and education
Index Index
Source: ABS
Disparate industry performance has also been
reflected in variation in economic activity across
regions. Unemployment rates were low in
Western Australia the key mining state and
highest in states with higher reliance on tourism
and manufacturing, such as Victoria and
Tasmania. Some of these trends are reversing
more recently.
But not that uneven
There are signs, however, that while growth has
been uneven, the degree of unevenness has not
been historically unprecedented. One way to
assess this is to look at the variation across
unemployment rates across states. This has not
been unusually large when compared with history.
Indeed, the current range of unemployment rates
across the country is about average (Chart 12).
12. State divergence, though no more than average
Range of unemployment rates across states
0
1
2
3
1978 1982 1986 1990 1994 1998 2002 2006 20100
1
2
3
% %
Averages
Source: ABS
High household saving alsodriving unevenness
At the same time that Australia has seen the
mining boom crowd out other sectors of the
economy, there have been other forces driving
structural change in the economy.
Much as has occurred in other developed nations,
Australian households have become more
cautious in their financial choices in recent years.
Growth in Australian household wealth has
slowed substantially from the average rates of the
first decade of the 20th century. This reflects both
a slowing in house price growth and the sharp
decline and only mild recovery in equity prices
since the global financial crisis began (Chart 13).
13. Household wealth has been falling, but incomes rising
-15
-10
-5
0
5
10
15
20
1 99 3 1 99 5 1 99 7 1 99 9 2 00 1 2 00 3 2 00 5 2 00 7 2 00 9 2 01 1
-15
-10
-5
0
5
10
15
20
Australian household wealth and incomeYear-ended percentage change
% %
Household wealth
Household disposable
income
Source: ABS; RBA
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
11/35
10
Macro
Economics Australia
November 2012
abc
Given declines in household wealth, Australian
households have needed to lift their saving out of
income to rebuild assets (Chart 14). There has
also been a large reduction in households
willingness to borrow.
14. Households have become more cautious
-5
0
5
10
15
20
25
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-40
0
40
80
120
160
200
Household saving and debtPer cent of household disposable income% %
Debt
(RHS)
Saving
(LHS)
Source: ABS; RBA
This has seen the household debt to income ratio
level out over the past seven years. Householdshave been repaying debt ahead of schedule. This
has been made possible because income growth
has been solid in recent years, partly due to the
income boost the economy got from the run-up in
commodity prices.
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
12/35
11
Macro
Economics Australia
November 2012
abc
Shift back needed
Households and businesses have been
deleveraging. Much like the rest of the developed
world, declining asset prices and reduced appetite
for borrowing have seen Australias credit to GDP
ratio fall (Chart 15).
On its own, this would have meant much weaker
growth prospects in Australia. But offsetting this
drag on the Australian economy has been the run-
up in commodity prices which boosted the terms
of trade. Rising commodity prices boosted
incomes and led to a mining investment boomwhich supported growth while other parts of the
economy, particularly those that are interest rate
and exchange rate sensitive, have slowed down.
Now the economy needs to see a switch back
from commodity price-driven growth to credit-
driven growth. This shift away from the mining
industry being the key driver of growth towards
other sectors of the economy is what
policymakers, including the RBA, are seeking to
achieve. The next couple of years are expected to
see a great growth rebalancing act.
15. Need a switch from commodity to credit-driven growth
40
80
120
160
200
240
1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
0
30
60
90
120
Terms of trade*
(RHS)
*Ratio of export to import prices
Credit to GDP
ratio (LHS)
Commodity price driven growthIndex Index
Source: ABS; RBA
Source: ABS; RBA
There are a number of reasons to think they
should be successful.
First, the Australian banking system is in good
shape and having not suffered a banking crisis,
banks are well placed to lend. Banks have
reported solid profits this year and non-
performing loans are low at 1.5% of total loans.
Second, the parts of the economy the RBA is
seeking to support are interest-rate sensitivesectors, including housing, retail and consumer
services. Together these sectors constitute a much
The great rebalancing act
As the contribution to growth from mining slows from around mid-
2013 other sectors will no longer be crowded out
Combined with lower RBA interest rates and a steady AUD this
should allow growth to gradually rebalance in 2013 and 2014
Below average interest rates are expected to support a recovery
in housing and retail, while a fairly steady AUD and rising Asian
incomes should see a pick-up in tourism
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
13/35
12
Macro
Economics Australia
November 2012
abc
larger share of the Australian economy than
mining. Indeed, mining is less than a tenth of
value-added in the Australian economy. The bulk
of the economy is services (Chart 16).
Third, the RBA have time on their hands. As we
noted above, the mining investment story is still
supporting growth until mid-2013 which will then
see the exports come on-line and support growth
into 2014 and beyond. The RBA have already
lowered rates by 175bp, which is starting to showsome signs of supporting growth in the sectors
one would expect to be supported by lower
interest rates.
16. Australias economy is mostly services
Share of value-added
Agriculture 3Mining 9Manufacturing 8Utilities 2Construction 7Wholesale trade 4
Retail trade 4Transport 5Public administration 5Business services 23- IT 3- Finance and insurance 10- Other 10Household services 15- Health 6- Education 4- Other 5
Other 15
Source: ABS
Housing ripe for recovery,though slow take-off so far
Australias housing sector has been one of the key
areas held back as the economy contracted to
make way for the mining expansion. The key
driver of this, in our view, was the above neutral
interest rates the RBA kept in place through 2011,
as well as the fairly hawkish rhetoric they
espoused through this time.
As a result, building approvals have been at very lowlevels. Approvals for housing construction reached
their lowest level in over a decade (Chart 17). With
mortgage rates now having decreased to below
average, there are some tentative signs that the
housing construction cycle has troughed.
17. Some signs of a housing construction cycle trough
Building Approvals - AustraliaNumber of buildings*
0
5
10
15
1995 1997 1999 2001 2003 2005 2007 2009 2011
0
5
10
15
'000s'000s
Total
Houses
Other*** Thick line represents trend numbers w hile the lighter line represents seasonally adjusted number
** Includes non-residential buldings
Source: ABS
The historical relationship between the housing
construction cycle and mortgage rates implies that
we should expect housing construction to pick up
solidly from here (Chart 18). We have in mind
that housing construction will continue contribute
to GDP growth in Q4 2012 and will make a solid
contribution to growth in 2013.
18. Current rates setting implies construction pick-up
Building Approvals and Interest Rates
-50
-25
0
25
% bps
-400
0
400
800
1986 1989 1992 1995 1998 2001 2004 2007 2010
Building approvals
(year-ended change,LHS)
Cash rate, shifted 12 months
(RHS, inverted scale)
Source: ABS; RBA
There are also signs that housing prices are
beginning to rise, with prices up by 2.2% in the
past seven months, after having fallen by 7% in
the previous 18 months (Chart 19). With around
90% of Australian mortgages at variable rates, the
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
14/35
13
Macro
Economics Australia
November 2012
abc
below average RBA cash rate has already had a
substantial impact on household income flows and
this typically supports the housing market.
19. Lower interest rates are supporting a rise in house prices
Capital city housing prices
400
450
500
550
2006 2007 2008 2009 2010 2011 2012
400
450
500
550
$'000 $'000
Source: RP Data
Mortgage rates are now around 100bp below
average, which typically sees housing prices start
to rise (Chart 20). We expect housing prices to lift
modestly in 2013, with single-digit rates ofgrowth likely. This is a forecast we first
articulated in July 2012 (seeDownunder digest:
Australia housing outlook positive, 12 July 2012).
We estimate capital city house prices rise by
around 6% a year in 2013 and 2014.
Given the declines in housing prices in 2011 and
early 2012, some catch-up in housing prices over
the next couple of years would not be
unreasonable, given continued solid household
income growth. Indeed, housing prices would
need to rise by around 9% in each of the next two
years if we are to maintain the average pace of
house price growth that has been apparent since
the end of Australias 2002-03 house price boom.
That is, for housing price growth to average 4%
over the five years to end-2014 which is its
recent average pace and broadly in line with
household income growth housing prices would
need to rise by 9% a year for the next two years,
given the price falls in 2011-12.
20. House prices expected to rise further given lower rates
Australian housing prices and interest rates
-14
-7
0
7
14
21
2008 2009 2010 2011 2012 2013
4
5
6
7
8
9
Housing prices (six month
annualised growth, LHS)
Mortgage rate
(inverted, six months
advanced, RHS)
% %
Average
mortgage rate
(RHS)
Source: RBA; RP-Data Rismark
Housing loan approvals have already started to
pick up in response to below average mortgage
rates, though the recovery is, so far, more mild
than during previous upswings (Chart 21). We
expect below average mortgages rates and rising
housing prices to start to see a further pick-up in
new housing credit in 2013.
21. Housing loan approvals slow to start, but are rising
Housing loan approvals and mortgage rates
12
14
16
18
20
2005 2006 2007 2008 2009 2010 2011 2012
4
5
6
7
8
9
$b %
Mortgage rates
(RHS)
Housing loan
approvals (LHS)
Source: ABS
A shortage of housing in Australia is another
reason to expect a further pick-up in housing
construction and is expected to continue to be a
key support for housing prices.
Given the low rates of housing construction, most
estimates suggest Australia still has a housing
undersupply relative to the rates of population
growth. This is reflected in low rental vacancy
rates (Chart 22). Rents are also rising in the major
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=kfMMSlgcab&n=335713.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=kfMMSlgcab&n=335713.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=kfMMSlgcab&n=335713.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=kfMMSlgcab&n=335713.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=kfMMSlgcab&n=335713.PDF -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
15/35
14
Macro
Economics Australia
November 2012
abc
capital cities, which is another sign that there is
undersupply relative to demand.
22. Low rental vacancy rate implies undersupply continues
0
1
2
3
4
5
6
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
0
1
2
3
4
5
6
National rental vacancy rate% %
Source: REIA
Retail sector should improve
The retail sector has been weak in recent years.
Demand for goods has been subdued in part
because household wealth has declined. To
rebuild lost wealth, households have been savingmore out of their income and have been spending
less on goods.
What is interesting, however, is that while retail
spending has been weak, overall household
consumption spending is growing at about its
average pace (Chart 23). Households have been
spending more on services, on-line purchases and
on international travel than previously. With solid
income growth, households have had solid overall
consumption growth and still maintained elevated
rates of household saving.
23. Household consumption solid, but retail spending weak
Retail Sales and ConsumptionYear-ended growth, nominal
0
2
4
6
8
10
2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
2
4
6
8
10
% %
Retail sales
Consumption
Source: ABS
The retail sector has also been put under pressure
by the high AUD. It has encouraged increased
international travel by domestic residents, and
thus more spending abroad. The high AUD has
also seen greater on-line purchases from offshore
providers. In addition, the high AUD has put
downward pressure on imported goods prices,
eroding local retailer profit margins.
But there are a number of reasons retailers should
be optimistic about the future.
First, Australian households have done a fair bit
of deleveraging already, having done most of the
heavy lifting of their saving rate 3-5 years ago.
The household saving rate rose by 9.4 percentage
points between 2007 and 2009. It has only risen
by 1.2 percentage points in the past three years.
Most households are also now well ahead on their
mortgage repayments.
Second, the RBA has lowered rates by 175bp and
is looking to provide support for the retail sector
as they seek to rebalance Australian GDP growth
when the mining investment contribution to
growth fades later next year.
Third, lower rates are already driving some recovery
in housing prices and the residential constructioncycle. As more houses are built, more furnishing and
durables will be purchased to fill them.
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
16/35
15
Macro
Economics Australia
November 2012
abc
Fourth, the depressing effect of the AUD on
growth in retail sales and on retail margins should
start to wane, as the currency has now been steady
at above USD parity for over two years. There has
already been a significant slowdown in growth of
international travel by Australian residents (which
implies that the drag on growth is less than it has
been previously). With lower growth in
international departures there is likely to be less of
a pick-up in spending abroad by Australian
residents. There has also been strong growth in
international arrivals from China over the past
couple of years, with this trend set to continue.
The depressing effect of the previous AUD
appreciation on imported goods prices is starting
to wear off which should see local retailers better
able to maintain margins (discussed below).
24. Consumer sentiment is showing improvement
50
75
100
125
2000 2002 2004 2006 2008 2010 2012
50
75
100
125
Consumer Survey QuestionsLong run average = 100
Consumer
sentiment
Good time to buy a
household item
Source: Datastream; Westpac-Melbourne Institute
There are some early signs that suggest demand
for retail goods and services is improving.
Consumer sentiment has improved recently,
which is perhaps a precursor to improvement in
the retail sector (Chart 24).
Businesses have lowereddebt levels
Much of the Australian corporate sector, outside
of mining, has been under pressure in recent years
as the high AUD, rapidly changing structure of
the local and global economies and above neutral
interest rate settings in 2011 held them back.
Surveys have suggested that conditions in the
business sector as a whole have been slightly
below average recently (Chart 25). This is
significantly weaker than the heady days of the
mid-2000s.
This partly reflects that growth has been very
uneven. Without direct exposure to the mining
sector many corporations have been struggling.
Business surveys had shown significant weakness
in the retail, manufacturing, construction and
business services sectors. There has, however,
been some recent improvement in reported
conditions in the retail and manufacturing
industries, consistent with the notion that the
negative effect of the high AUD on these
industries is starting to wear off. Construction
remains very weak up to Q3 2012 though we
expect a recovery soon.
25. Business conditions have dipped a little below average
-50
-40
-30
-20
-10
0
10
20
30
1989 1992 1995 1998 2001 2004 2007 2010
-50
-40
-30
-20
-10
0
10
20
30Business Conditions
Source: Datastream; National Australia Bank
Weaker conditions in the non-mining corporate
sector have been reflected in falls in business
credit, until recently (Chart 26). Miners were
doing the bulk of the investment and were cashed
up due to rising commodity prices, which has
been supporting business investment growth even
though but credit growth had been weak. The
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
17/35
16
Macro
Economics Australia
November 2012
abc
businesses doing the investment did not need to
borrow from local banks.
26. Business credit growth has started to pick up
-4
-2
0
2
4
6
2000 2002 2004 2006 2008 2010 2012
-20
-10
0
10
20
30
Business credit growth
Year-ended (RHS)
% %
Monthly (LHS)
Source: RBA
Source: RBA
The positive aspect here is that falling credit has
meant that the corporate sector has been
deleveraging. Australian listed company gearing
rates are at very low levels relative to history
(Chart 27). Across the distribution of corporationsit is clear that the most highly leveraged have
been the ones that have done the most
deleveraging. Overall, the corporate sector looks
well placed to expand.
27. Corporate gearing is low, so well placed to rise
Source: RBA
At this stage, surveys of investment intentions show
no expected growth in non-mining investment in
2013. While this is somewhat disconcerting, there is
still time for a pick-up in intentions to materialise
(Chart 28). Keep in mind that we see the mining
investment share of the economy still increasing
until the middle of next year.
28. Forward-looking surveys show falling non-mining capex
Capital Expenditure SurveyCurrent prices
0
25
50
75
100
125
1989 1993 1997 2001 2005 2009 2013
0
25
50
75
100
125
$bn
Mining
Non-Mining
$bn
Source: ABS
AUD effect should wear off
One of the key constraints to a pick-up in the
economy has been the strong AUD. Clearly some
industries would be quite happy if the AUD were
to depreciate somewhat from its current level.
It is worth keeping in mind, however, that the
AUD has now been steady for more than two
years, at an average of just over parity against the
USD (1.03). Without appreciating further we
expect that the drag the AUD has had on growth
in various sectors of the economy will start to
wear off.
While it has had a dampening effect on some
sectors and has been a key catalyst of the
structural change in the economy, we expect that
the effect on growth will not be permanent.
Indeed, there are some early signs that the
depressing effect of the AUD appreciation on
growth is already starting to wane, particularly in
the tourism industry.
Tourism
One way the AUD has had its impact of
dampening some sectors of the Australian
economy has been by making it more attractive
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
18/35
17
Macro
Economics Australia
November 2012
abc
for Australian residents to travel abroad. While
abroad, Australians spend not just on travel and
hotels, but also on retail goods. This has seen
significant demand leakage, which has had a
tangible impact on the Australian local tourism
industry and the retail industry.
While estimates of the size of the tourism industry
are not made as a regular part of the quarterly
national accounts framework, there are special
accounts calculated infrequently suggesting thatconsumption by tourists probably accounts for
around 7% of the value of GDP and employs
around 500,000 people.
In 2011 the net flow of tourists into Australia
(overseas arrivals less domestic departures) was
1.8 million people. This compared with a net flow
of 1.2 million in 2010. Between those two years
there was a very large swing. If we assume that
the average tourist spends AUD3,000 on a two-
week holiday on retail sales as the statistics
bureaus survey suggests this amounts to
AUD1.8 billion, which is around 0.7% of retail
sales. That is, the AUD appreciation and swing in
tourist numbers had a noticeable dampening effect
on local retail sales.
More recently, however, we have seen a
significant slowdown in growth in international
departures. This has come despite the AUD
remaining high. This is what you would expect tohappen, as the AUD has not continued to
appreciate it has not continued to provide
increasing incentive for more international travel.
The biggest impact of the AUD on tourism and
associated spending occurred when the AUD
appreciated in 2009. In that year, the 25% AUD
appreciation saw 15% growth in international
departures of Australian residents. Over the past
year, these departures have only grown by 4%
(Chart 29). So while the increase in the net flowof tourists in 2011 was a massive 600,000 people,
it is only expected to be 150,000 people in 2012.
29. Biggest negative AUD effect on tourism is in the past
-5
0
5
10
15
20
25
2005 2006 2007 2008 2009 2010 2011 2012
-30
-20
-10
0
10
20
30
Overseas departures and the exchange rateYear-ended percentage change
% %
AUD trade-weighted
index (RHS)
Overseas
departures (LHS)
Source: ABS; RBA
The effect of the AUD on arrivals from offshore
should also diminish, particularly on arrivals from
Asia, as their incomes rise every year which is
boosting purchasing power over Australian
recreational activities, even without AUD
depreciation.
Increased demand for recreation by Asian
consumers is already having an effect on the
Australian tourism industry. In the past two years
the number of short-term visitors to Australia
from China has risen from 1.4 million to 2.1
million. Growth in Chinese visits to Australia is
by far the strongest amongst the range of
countries in that period (Chart 30).
This trend is set to continue. HSBC estimates that
60 million people left mainland China to visit otherparts of the world in 2011 and expects this to rise to
130 million by 2015. If Australia only gets a
constant share of that increase, then the Chinese will
be the most prolific visitors to Australia in three
years time (second only to New Zealand).
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
19/35
18
Macro
Economics Australia
November 2012
abc
30. Already big shift in source of overseas arrivals, to China
80
100
120
140
160
180
200
2007 2008 2009 2010 2011 2012
China (11%)
Overseas Arrivals*
IndexJanuary 2007 = 100
*Share of total in July 2012 in brackets
Other (12%)
Europe (18%)Asia ex China (32%)
US (7%) NZ (20%)
Source: ABS
Manufacturing
Manufacturers in Australia have been very vocal
about the impact of the exchange rate. This is
understandable, as it directly affects their
competitiveness.
However, the extent of weakness needs to be
assessed keeping in mind that there has been a
secular downward trend in the manufacturing
industry in Australia since the mid-1950s as has
been the case in many developed world
economies. The downward trend in manufacturing
in the West has been mostly driven by global
wage differentials rather than currenciesper se.
Indeed, despite the high level of the Australian
dollar, manufactured exports have continued to
rise in recent years (Chart 31).
31. Manufactured exports have continued to rise despite AUD
80
85
90
95
100
105
1990 1993 1996 1999 2002 2005 2008 2011
100
200
300
400
500
600
3.9% 2.9%
Manufacturing indicatorsIndex Q1 1990 = 100
Exports (RHS)
Employment (LHS)
Source: ABS
There has, however, been a faster than usual fall
in employment in the manufacturing industry in
the past couple of years. This probably reflects the
impact of the currency, through a number of
different channels. First, the high AUD makes
Australian manufacturing less competitive in price
terms, which means local manufacturers profits
have been under pressure, forcing them to reduce
costs. Second, the high AUD encourages local
manufacturers to shift their operations offshore, as
the strong AUD lowers the cost of production
elsewhere in local currency terms. Third, the high
AUD puts downward pressure on the prices of
imported capital goods encouraging firms to
substitute capital for labour.
All of these effects are strongest when the currency
is appreciating. The effect of these forces on local
growth should start to reduce as firms have spent
the past two years making adjustments in the face of
the high AUD. In this way we do not expect thehigh AUD to be a persistent drag on growth in the
manufacturing industry.
Education exports
One area of the Australian economy that has been
weak recently, but has medium-term prospects is
education exports.
Expanding middle classes will drive increased
demand for education. Being a developed
economy with geographic proximity to Asia
should help Australia to take advantage of
demand for education services. While education
exports have been hampered in recent years by the
strong AUD and student visa cutbacks, this area
should remain a medium-term focus for
policymakers, as it will offer opportunities to
Australia in the future.
But there are clearly risks to this outlook. These
are covered in the next two sections.
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
20/35
19
Macro
Economics Australia
November 2012
abc
Last year we posed the question: Does Australia
have a resources curse? (see our report dated 18
August 2011). As we explained back then, the
resources curse comes about when the gift of
higher commodity prices leads to other problems
in the economy.
This can take a number of forms. The one most
frequently discussed in relation to Australia is
Dutch disease.
Dutch disease describes the situation where a
resource discovery leads to a significant capital
inflow that forces an exchange rate appreciation,
making other sectors of the economy less
competitive and thus hollowing out the economy.
This is referred to as Dutch disease because of the
Netherlands experience in the late 1960s with
discovery of natural gas that led to an apparent
hollowing out of the economy and shrinking of the
manufacturing industry, as a result of the strongappreciation of the local currency.
Interestingly though, as we noted last year, the
Dutch did not really have Dutch disease. Once
the resource boom was over, the manufacturing
industry recovered. This happened despite the
guilder staying at high levels.
We also noted last year, that Dutch disease only
occurs ifpermanentdamage is done, such that the
economy is worse off in the medium term, for
having had the mining boom. So while it is
possible to argue that Australia has had weakness
in the exchange-rate sensitive industries, to argue
that it has Dutch disease is to suggest the
economy is permanently worse off for having the
run-up in commodity prices and the high AUD.
We do not think this is the case.
Another curse we discussed last year was that of
a stymied reform agenda. This comes about
because the free kick from rising commodity
prices boosts incomes such that policymakers andbusinesses lack impetus to reform and improve
Resources curse revisited
A much discussed risk is that Australia could have a resources
curse or so called Dutch disease which could constrain its ability
to rebalance smoothly
As mining gradually fades, other sectors need to recover to
support growth, which may not happen smoothly if Australia has
these resource curses
We remain unconcerned about Dutch disease, as we wrote last
year, but are worried about Australias recent weak productivity
performance, which is another of the resource curses
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
21/35
20
Macro
Economics Australia
November 2012
abc
the efficiency of the economy, leaving the
economy with weak productivity growth.
Has Australia been cursed?
Last year we concluded that while not everyone
would benefit from the mining boom, the overall
economy is expected to be significantly better off
than otherwise, so we do not think that Australia
has Dutch disease. We remain of this view.
While it has been true that some sectors of the
economy have been under a great deal of pressure
from the high AUD, we view this as necessary
structural change, rather than something that will
permanently lower Australias growth potential.
As the commodity price rise that occurred over the
past decade was driven by global forces, there was
little Australian policymakers, businesses or
households could do except to make adjustments to
the economy to best take advantage of the change.
The key development has been the mining
investment boom as Australia invested in capacity to
meet international demand for commodities.
If its permanent, its all okay
Now that commodity prices have peaked, the
question is whether the structural change in the
Australian economy will leave it with less
productive capacity overall? Much of this depends
on whether the change in commodity prices to
much higher levels than in the 1980s and 1990s
is permanent.
If not, and they were to fall back to the levels of
the 1980s and 1990s, then Australias economy
would face some challenging times as the
economy has recently been shifting in structure to
meet high demand for commodities.
But if commodity prices do remain at around their
current levels, rather than falling back to the levels of
the 1980s and 1990s, as we think they will, then the
shift in Australias productive capacity towards
mining should be thought of as an adjustment to a
take full advantage of a permanent change in the
composition of global demand.
We have recently argued that commodity prices
are, indeed, likely to stay around current levels
and well above the levels reached in the 1980s
and 1990s (Commodity and the global economy:
Are current high prices the new normal?, 8
August 2012).
In our view, this reflects that the composition of
global growth was unusual in the 1980s and 1990s
in that it was driven by already developed
economies with large services sectors, which
could grow without the need for commodities as
an input. With the bulk of global growth now
coming from the emerging world which needs
large amounts of commodities in order to build
infrastructure and make consumer durables
commodity demand is expected to stay high,
which is expected to maintain structurally high
commodity prices.
High commodities = highAUD?
As Australia is a large commodity producer, its
currency has followed broad trends in commodity
prices. Structurally high commodity prices may
also mean a structurally higher AUD.
A long-run comparison of the AUD and commodity
prices shows a striking resemblance (Charts 32 and33). What is most interesting is that both the AUD
and global commodity prices were at very low levels
in the 1980s and 1990s. Indeed, the last two decades
of the 20th century appear to be the unusual periods
in both the history of the AUD and real commodity
prices, when both were at very low levels compared
with history.
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=vRG9xh9inbEpc2HY3Qt-Llm&key=U23WPWM8B0&n=338157.PDF -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
22/35
21
Macro
Economics Australia
November 2012
abc
Despite having risen for the most of the past
decade, commodity prices have only gotten back
to the sorts of levels they were at on average over
most of the past 150 years. Likewise the AUD is
back to the sorts of levels it maintained for mostof the post-War period.
The curse of weakproductivity growth
While we do not think Australia has Dutch
disease we do think that recent weak productivity
growth may at least be partly due to another
resources curse: the curse of a lack of impetus
for reform. Specifically, the free kick to income
growth from almost continually rising commodity
prices over the past decade has left policymakersand businesses with less incentive to adopt
productivity enhancing measures.
Indeed, weak productivity growth is one of
Australias greatest challenges. Over the past six
years labour productivity has averaged 1.2% a
32. Has the currency really been that high, or is it back to a more normal long-run historical level?
0.00
0.50
1.00
1.50
2.00
2.50
3.00
1901 1908 1916 1923 1931 1938 1946 1953 1961 1968 1976 1983 1991 1998 2006
0.00
0.50
1.00
1.50
2.00
2.50
3.00
USD per AUD
Float
Nominal Exchange Rate
UK pound per AUD
Source: RBA
33. Despite the run-up in commodity prices in the past decade, they are only now back to around real long-run average levels
Real Commodity* Price TrendsAverage for 1860-2010=100
80
90
100
110
1865 1875 1885 1895 1905 1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
80
90
100
110
IndexIndex
* Excludes oil
Source: Erten and OCampo (2012)
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
23/35
22
Macro
Economics Australia
November 2012
abc
year, which is a significant slowdown from
productivity growth of around 2% a year in the
prior five years (Chart 34).
However, assessing why productivity growth has
slowed is not straightforward. There are two main
competing arguments. One suggests that the
weakness is structural and could reflect a lack of
reform (a resources curse). The other suggests
that it could largely reflect the unusual
composition of growth in the Australian economyand the structural change that is occurring,
particularly developments in the mining and
utilities industries.
34. Productivity growth has been weak
GDP per hour worked*Index (log scale)
4.60
4.70
4.80
4.90
5.00
5.10
5.20
1980 1984 1988 1992 1996 2000 2004 2008 2012
100
110
130
190
1980-85
1.6%pa
1985-90
0.9%pa
1990-95
1.7%pa
1995-00
2.6%pa
2000-05
1.9%pa
2005-11
1.2%pa
Source: ABS
Is it the curse of lack of reform?
Possible drivers of weak productivity growth
include: limited reform of the tax system; a labourmarket that is no more flexible than it was five years
ago; and, increased regulation across the economy.
Businesses have also played a role. The free kick
from the rise in commodity prices means there has
been less incentive for firms to adopt efficiency
enhancing practices in recent years.
Is it just part of the structural change?
On the other hand, a number of analysts make the
argument that the unusual recent composition of
Australian growth explains the weakness in
productivity growth.
The composition of growth argument suggests
that weakness in productivity growth in the
mining and utilities industries, for special reasons
specific to those industries, explains the
productivity growth slowdown (Chart 35).
For mining the argument is that much of the
recent growth has been driven by investment
which is yet to boost measured output because the
projects are medium term big developments, with
the boost to resources exports not occurring until
the projects are completed. The seven major LNG
projects being built in Australia are examples of
this as none of them has yet produced any LNG
but much capital and labour has already gone into
their construction. With little output (resource
volumes) but lots of input (capital and labour),
measured productivity growth in the mining
industry has been weak.
35. Decomposition of trend productivity growth
______________ Annual percentage change _______________1973/74-1993/94
1993/94-2003/04
2003/04-2010/11
Selected market sector industriesLabour productivity 1.8 3.1 1.4
of which:Capital deepening 1.3 1.3 1.8Multifactorproductivity
0.6 1.8 -0.4
Excluding mining and utilitiesLabour productivity - 3.1 1.7
of which:Capital deepening - 1.3 1.3Multifactor productivity - 1.9 0.4
Source: RBA
There are similar developments in the utilities
sector. Much of the recent investment has been in
electricity capacity to meet peak demand. Indeed,
estimates suggest that around 25% of the local
electricity generation capacity exists to produce
around 4% of the output. For example, much of
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
24/35
23
Macro
Economics Australia
November 2012
abc
the capacity is there to ensure supply when the
bulk of households all turn on their air
conditioners at the same time. There has also been
significant investment in recent years to ensure
consistent supply of water, in some cases using
desalination plants.
These two industries alone account for around
half of the slowdown in productivity growth in
recent years on most estimates. But this is not the
full story.
The verdict is that overall productivity
is still weak
Coming to a conclusion about which is the more
important explanation for the weak productivity
performance is difficult to do in real time. It
seems likely that the industry-specific mining and
utilities issues are important, but given the
broader slowdown in productivity growth there
are probably other factors at play, such as the
weakened reform agenda.
What weak productivity growth means
One of the key implications of weak productivity
growth is that the Australian economy may not be
able to grow as quickly as it has in the past. If that is
the case, then inflationary pressures will build at
lower rates of GDP growth than in the past and the
unemployment rate may not be able to be sustained
at the low levels it reached prior to the global
financial crisis (in the 4s) without stoking inflation.
There are already some early signs that weak
productivity growth may have implications for
inflation. Underlying inflation appears to have
already passed its trough, having risen from the
bottom of the RBAs target band to around the
middle in Q3 2012 (Chart 36).
36. Underlying inflation may have passed its trough
Measures of Underlying InflationYear-ended change
0
1
2
3
4
5
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120
1
2
3
4
5Weighted median
Trimmed mean
CPI
(excl vol items)
% %
Source: ABS; RBA
Domestically produced inflation non-tradeables
has been running above the RBAs target band
in recent years (Chart 37). Overall inflation has
only declined because of the lagged effect of the
appreciation of the AUD in 2009-10, which has
caused imported goods prices fall, driving down
tradeables inflation.
37. AUD effect wearing off and domestic inflation solid
Components of InflationYear-ended change
-4
-2
0
2
4
6
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
-4
-2
0
2
4
6
Non-tradeables
(domestic)
Tradeables(mostly imported)
% %
Source: ABS; RBA
High domestically produced inflation reflects
weak productivity growth, in part because wages
growth has been too rapid given the pace of
productivity growth. As the effect of the previous
appreciation of the AUD is already wearing off,
maintaining low inflation will require a fall innon-tradeables inflation. But the weakness in
productivity growth and comparatively high level
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
25/35
24
Macro
Economics Australia
November 2012
abc
of non-tradeables inflation are related. If
productivity growth is structurally weaker than it
used to be, then Australias sustainable growth
rate is also lower than if used to be and growth
will need to slow down to get a further
disinflationary pulse into the system.
The simple arithmetic used to be that inflation
could be sustained at 2.5% a year if wages grew at
4% and productivity growth was 1.5%. But if
productivity only grows at 1% a year, thesustainable pace of wages growth is closer to
3.5%. Thankfully, there are some signs that wages
growth has slowed in the past quarter (Chart 38).
There are also some signs that productivity
growth is lifting, although it is too early to be
confident that this issue has been resolved.
38. Wages growth has slowed in the past quarter
Labour Price Index GrowthSeasonally adjusted
0
1
2
3
4
1999 2001 2003 2005 2007 2009 2011
0
1
2
3
4
Year-ended
Quarterly
% %
Six month
annualised
Source: ABS
Our own estimates suggest that if productivity is
not lifted, then the sustainable pace of growth in
the Australian economy could be around 2.50-
2.75%, rather than the 3.00-3.25% growth that
Australia could previously sustain (see
Downunder digest: Australias productivity
challenge, 29 February 2012). If productivity
growth does not lift much further, then the
sustainable unemployment rate may also be closer
to 5.25-5.50%, rather than the 4.75-5.00%
previously achievable.
Lower structural rates of productivity growth
could also constrain the RBAs ability to cut rates
further to support growth. The RBA is only able
to affect demand and has almost no effect on the
supply side of the economy (that is, on
productivity).
https://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=WYOumZqBTC9vj2rwbH1XdIn&key=3ZuwlV0GbV&n=322588.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=WYOumZqBTC9vj2rwbH1XdIn&key=3ZuwlV0GbV&n=322588.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=WYOumZqBTC9vj2rwbH1XdIn&key=3ZuwlV0GbV&n=322588.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=WYOumZqBTC9vj2rwbH1XdIn&key=3ZuwlV0GbV&n=322588.PDFhttps://www.research.hsbc.com/midas/Res/RDV?p=pdf&$sessionid$=WYOumZqBTC9vj2rwbH1XdIn&key=3ZuwlV0GbV&n=322588.PDF -
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
26/35
25
Macro
Economics Australia
November 2012
abc
A sharper global slowdown
The biggest risk Australia faces is a slowdown in
global growth. This would be most problematic if
we saw a further slowdown in China and another
large decline in commodity prices.
This year the European financial crisis had a
larger impact on global trade than had been
expected and Chinas economy slowed more than
initially expected. Europe is Chinas major
trading partner and while Australias direct
exposure to Europe is small, its indirect exposure
through Asias trade is large. The effect of theslowdown in China also flowed through to
Australia via lower commodity prices.
The banking and fiscal problems in the euro area are
far from resolved and remain a key risk to the global
outlook. While ECB support and the promise to do
whatever it takes to keep the euro together have
stabilised conditions recently, there are many
reforms that need to be made before there is
confidence that the euro area economy is on a sound
footing. We expect the euro area economy to
continue to contract modestly into 2013, which will
be a headwind for global growth. The risk of
another financial meltdown is still significant. The
US also faces enormous fiscal challenges that
threaten global growth prospects.
Far and away the greater risk for Australia is the
possibility of weaker growth in China and what
that could mean for commodity prices. Of course,
Chinas performance is related to the West
through significant trade and financial linkages.
As 2012 has demonstrated, a shock from the West
can still have a distinct effect on the Rest.
Australias GDP growth has become more
correlated with that of China (Chart 39). Thisreflects that around 30% of Australias exports go
to China. This also reflects that China is
Australias key commodity export market and that
commodity prices have become a bigger driver of
Australias cycle in recent years.
Other risks
A sharper global slowdown remains a key risk, particularly if China
and commodity prices weaken further
Another risk is that monetary policy could be less powerful than
before, given households more cautious behaviour, or that
political constraints could force tighter than ideal fiscal policy
Recent stickiness of the local currency could reduce the ability of
the AUD to absorb global shocks
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
27/35
26
Macro
Economics Australia
November 2012
abc
39. Australias economy now highly reliant on China
Real GDP Growth in China and AustraliaYear-ended change
0
4
8
12
1996 1998 2000 2002 2004 2006 2008 2010 20120
2
4
6
% %
China (LHS)
Australia (RHS)
Source: Datastream
A weaker monetarytransmission mechanism
Our base line forecasts assume that monetary
policy is still powerful in Australia. However,
there is some risk that monetary policys power
has been reduced by ongoing household
deleveraging. In this way, a factor that couldmitigate the impact of lower interest rates in
supporting growth may be increased household
caution, which could see reduced willingness to
borrow and spend. Instead, households may
choose to pay down debt.
With the household saving rate still below the
level it averaged in the 1960s, 1970s and early
1980s, it is possible that the saving rate could
continue to rise further in coming years, back to
those previous levels as households seek to
rebuild lost wealth (Chart 40).
There are, however, some reasons to think that
this will not happen.
First, the pace of increase in the household saving
rate has slowed down substantially in the past
couple of years, after having ramped up 3-5 years
ago after the global financial crisis drove a sharp
fall in household wealth.
Second, there are reasons to think that the current
level of the saving rate may be close to a new
equilibrium. While saving is still only at 10%,
rather than the 15% rate it averaged in the 1960s,
1970s and 1980s, households have additional
saving now in the form of superannuation, which
is not included in the household saving rate
measure. This implies that we should expect to
see the saving rate settle at a lower level than it
did in the 1960s and 1970s.
Third, the banking system still works in Australia
and credit is available. Unlike many otherdeveloped economies, credit supply has not been
constrained by a banking crisis and subsequent
bank balance sheet repair.
40. Bulk of household saving rise may already be done
-25
-20
-15
-10
-5
0
5
10
15
20
1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013
-10.0
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
Household Saving%
%
Change in saving rate*
Level of saving rate
*Three-year rolling change
Source: ABS
Recent surveys of consumer sentiment provide
some hope that households are becoming a bit
more positive about their finances, aftersignificantly less confidence for most of the past
few years (Chart 41).
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
28/35
27
Macro
Economics Australia
November 2012
abc
41. Lower rates are having some effect on confidence
60
70
80
90
100
110
120
130
140
2000 2002 2004 2006 2008 2010 201260
70
80
90
100
110
120
130
140
Personal financial position over coming year
Source: Datastream
Australias fiscal cliff
The Australian government has committed to
achieving a budget surplus this financial year
(2012-13). To do this requires a significant
contraction. The budget needs to swing from a
deficit of around 3% of GDP to balance, which on
a literal read would imply a contractionary fiscal
impulse of 3% of GDP (Chart 42). This overstates
the full effect on the economy, however, as some
part of the spending cut back is on imported
items, such as defence materiel. Most estimates
suggest the fiscal contraction will be in the order
of around 1.5-1.75% of GDP.
While slower growth could see this fiscal plan
adjusted, the difficulty is that the commitment
made by the government has become political and
is being treated as a device for establishing the
governments economic credentials as we run into
an election year in 2013. This makes it more
likely that it will be achieved at any cost. There is
therefore a risk that, even in the face of weaker
economic conditions, the government may choose
even more contractionary fiscal policy. This is a
downside risk to the growth outlook.
42. Government committed to get back to surplus this year
Federal Government Budget BalancePer cent of nominal GDP
-5
-4
-3
-2
-1
0
1
2
%
-5
-4
-3
-2
-1
0
1
2
%
Jun 90 Jun 93 Jun 96 Jun 99 Jun 02 Jun 05 Jun 08 Jun 11 Jun 14
MYEFO
Oct' 12
Budget
May'12
Forecast
Historical
Source: Federal Treasury
A stickier AUD
The floating exchange rate has been a key part of
the Australian economys armoury in recent years
and helps to explain why the volatility of growth
in the Australian economy has been much lower
in recent years than it was in the 1970s and early
1980s.
It has been a key shock absorber in the past,
depreciating substantially when global conditions
have weakened and appreciating in the face of
positive economic shocks, such as the recent
sharp rise in commodity prices.
But in recent months the AUD has not been
following trends in commodity prices particularly
closely. Commodity prices have fallen by around
20% over the past year while the AUD has been
broadly steady (Chart 43). This has put downward
pressure on local income growth in local
currency terms.
-
7/30/2019 121207 Australia's Great Rebalancing Act - Looking Beyond the Mining Investment Boom
29/35
28
Macro
Economics Australia
November 2012
abc
43. AUD stubbornly high in the face of commodity price falls
80
90
100
110
120
130
140
150
1984 1987 1990 1993 1996 1999 2002 2005 2008 201160
80
100
120
140
160
180
200
Real Exchange Rate on
TWI-basis (LHS)
Terms of Trade
(RHS)
Real Exchange Rate and Terms of TradePost-float average = 100
Source: ABS; RBA
Increased interest in holding AUD assets by
foreign central banks, pension funds and
sovereign wealth funds may partly explain the
resilience of the currency in the face of weaker
commodity prices. The triple A rating of
Australian commonwealth government bonds
means they are in high demand, particularly as the
pool of triple A rated sovereigns has been
shrinking in recent times. Foreign ownership of
Australian government bonds has risen to 77%, up
from 60% in late 2009.
If the AUD were to stay high, even in the face of
weaker conditions in the Australian economy,
then the currency may lose some of its ability to
absorb international shocks. This adjustment
mechanism has provided the Australian economy
with a great deal of protection during previous
global downturns, including the Asian financial
crisis and after the failure of Lehman Brothers.
The sticker AUD is a downside risk to growth in
the Australian economy.
Rebalancing smoothly the keychallenge
We remain optimistic that the economy will be
able to rebalance in 2013-14, while maintaining
around trend growth.
A smooth transition from commodity price-driven
growth back to credit-driven growth should be
possible as monetary policy is still powerful in
Australia. The bulk of RBA cash rate changes get
passed on to households and businesses and fairly
quickly. Plus, a larger share of the economy is
interest-rate sensitive than the share that is driven
by trends in commodity prices. This should see a
pick-up in the housing market and retail sectors of
the economy. A continued broadly steady AUD
should also see some of the downward pressure
on growth from of the high exchange rate start to
wear off in 2013-14.
While many international observers see Australia
as a giant quarry, this ignores the fact that more
than four-fifths of what Australia produces is
services, much like the rest of the developed
world economies.
Our house forecast for a pick-up in growth in
China from 7.8% in 2012 to 8.6% in 2013 is a
critical factor supporting our view that commodity
prices will stabilise and Australias economy will
maintain close to trend growth. However, a key
risk remains the global environment, particularly
developments in the US and Europe as they
continue to deal with sovereign debt problems.
Other risks are domestic. The governments
imperative to get back to budget surplus thi