The mining boom and the property boom have now peaked, warn Academics at Victoria University.
‘The Resources Boom and Macroeconomic Policy in Australia’ by Bob Gregory and Peter Sheehan at the Centre for Strategic Economic Studies at Victoria University ask the simple question: Why is it that Australia – which is in the midst of an unprecedented mining boom, the biggest in history – is experiencing a domestic slowdown? Real GDP rose by just 1.4% over the past year while employment is virtually flat in the first nine months of 2011.
The academics offer a simple explanation; the mining boom has peaked, and the yearly benefits to the broader economy from the mining boom are no longer rising. This statement has ramifications for not just stocks but for Australian investments more broadly.
From early 2003 until October 2007 the resources index rose four fold, pushing the ASX All Ordinaries Index up 144% and lifting the market capitalisation of domestic equities by 151%, or $1014 billion, according to the report.
However much of the rise in asset values accrued to foreign rather than domestic partners as the resources sector is some 80% foreign owned (the result of Australia successfully auctioning off its ‘lucky country’ status to the highest offshore bidder).
Gregory and Sheehan note that rising share prices stimulated the rise in property prices – a growth rate that was more than three times the long-run average. This phenomenon might explain why 92 properties are now up for sale in Australia’s once ‘hippy’ Byron Bay for over $1.5 million, a township that doesn’t offer much in the way of executive employment.
The increase in ‘real asset prices’ such as property has come to an end, the paper argues; the broader sharemarket as well as resource stocks are well off their 2007 peak, “The period of rising asset values driven by the resources boom have well and truly passed.”
The final effects of the mining boom will be felt in mining investment, according to the report. As a share of GDP, mining investment rose from 1.6% in 2002-03 to 4.8% in 2010-11 – and could hit 7% by 2013-14. It notes that the pattern of investment is shifting sharply to LNG projects, especially large offshore projects such as the Gorgon, Wheatstone and Prelude.
Increasingly, mining investment has been directed offshore – leading to a fall in employment locally. For instance, employment in manufacturing in Western Australia rose by 2.1% from August 2002 to August 2008, but in the three years to August 2011 it has fallen by 8.1% per annum, or 22.4%.
As the higher Australian dollar has become entrenched, combined with global market uncertainty, manufacturing employment has fallen by 10.2% in the three years to August 2011.
The report concludes: “It is clear that the incremental effect of the ongoing resources boom, strongly positive for so long, has now peaked…real household per capita assets are now falling, after a strong period of rapid growth; resource investment is continuing to rise as a share of GDP, but its net impact is being eroded by the changing nature of resource projects and the high Australian dollar, which is also contributing to weaker investment in other industries.”
Gregory and Sheehan believe that the outlook for the Australian economy is now much weaker than that presented in the May 2011-12 budget papers, in spite of the continuing resources boom. Real GDP has grown by 1.9% per annum over the last three years, and GDP growth for 2011-12 is now likely to be closer to that figure rather than the 4% forecast in the Budget papers.