Friday, July 27, 2012

Access Economics, Michael Pascoe & the end of The Australian Mining Boom

On 23 July the Australian media carried stories reporting on an Access Economics report that the Australian mining boom would end in two years. Peter Martin's Mining boom forecast to end in two years is an example. The following day, this led a very snooty piece from Michael Pascoe in the same paper: Accessing a headline opinion.  I quote from the start of story:

Well this is embarrassing. The future of the private economic forecasting industry is under threat. Some cruel spoil sports have been keeping note on prior forecasts that failed. So what will Deloitte Access Economics do for free publicity?

The Deloitte Access Economics brand was plastered across media yesterday thanks to its forecast that the resources boom is all over in two years and that the federal budget surplus is no more.

Trouble is, it seems Access has been forecasting the imminent demise of the aforementioned boom almost since it started. Who knows, maybe this time they will be right.

Not nice, Michael!

During the what is now called the GFC or global financial crisis, I almost went ballistic at what I saw as headline scare mongering by Access's Chris Richardson. On 28 January 2009 my Armidale Express column was headed Access Economics feeds the herd instinct.

I watched Australia just before Christmas. There is a spectacular stampede scene where cattle being driven to Darwin are deliberately spooked by the bad guys. Once started, all the cattle go with the herd in a blind panic.

The release of the latest report by Access Economics on the Australian economy made me quite angry because it played to the herd instinct. And we don’t have a little kid to stand in front and bring the mob to a halt.

I have a deal of respect for Access.

Sometimes known as the Treasury in exile, the firm was founded by former colleagues from the Australian Treasury. Their economic reports go into the board rooms of all the big firms in the country. Their reports also attract media attention, a great deal of media attention if, as appears to be the case here, they carefully craft their words to attract that attention.

The single message that came through the media reporting was that the Australian economy was buggered. Access says so.

The previous September I had been in Shanghai as handbag at, of all things, an international conference of insolvency practitioners. As the crisis deepened, conference numbers dropped sharply as people went back to work. I left a confident Australia and came back to gloom and doom. But whichever way I cut the the numbers, I couldn't see that that gloom was justified in local terms. In January just before Access released its report, I wrote in part in Australian Business Solutions Magazine: 

While Australia could not hope to be immune from the global downturn, we remain a remarkably lucky country.

Although affected by the global financial crisis, our banking system remains stable. Australia has no net Government debt at national level, while the Howard Government built up consistent budget surpluses. Further, the decision by former Treasurer Keating to float the currency means that our exchange rate has depreciated at just the time we needed it to do so to provide a domestic buffer.

Influenced in part by this depreciation, our net trade position itself has turned around at just the time we needed it to do so.

In recent years, the balance on goods and services (what Australia sells internationally less what the country buys) has been negative. This has been funded by private overseas borrowings especially by our banking system, creating a channel down which the effects of the US sub-prime crisis first flowed.

The most recent trade statistics from the Australian Bureau of Statistics show a very important turn-around in this position. In simple trade terms, Australia moved from a net consumer to net saver at just the right time, thus cushioning the effect of the global financial crisis.

My conclusion was that things would be okay. I got some things wrong. I didn't see some elements of the fragility of the global economy, nor did I forecast the Euro crisis, but my view of the domestic economy was spot-on. So Access was wrong and I was right.

This time, and while I haven't read the Access report, I agree with Access. To understand this, you need to understand that Australia has experienced two related but very different mining booms.

The first is a demand side boom, the second a supply one.

On the demand side, the country has benefited from the best terms of trade for a very long time from high mineral prices. This is the boom targeted by things such as the resource rent tax. It is also a boom that started coming off the boil quite some time ago.

On the supply side, a demand boom leads to new investment. This is the second boom, a rapid expansion in investment in new supply. It is this second boom that still has a little while to run, that is presently helping hold up the economic numbers. Yet it has also been slowing down.

Big investment projects have long lead time. The investment now underway dates back some time. The new investment due to begin over the next few years has been choked off by a combination of reduced prices with a rapid escalation in Australian costs. Australian resource development is now, on all reports, the highest cost development in the world. So existing development projects will continue, but the pipeline is emptying.

This doesn't mean doom and gloom for the Australian economy. It does mean that there are some issues that we need to address. 


Two thoughtful related pieces from the Sydney Morning Herald.

In Resources boom not ending, but changing, Ian Verrender takes a positive view of Australia's economic outlook:

The first part of the boom - the construction investment frenzy - may have peaked. It may have just a few more years to run. But the ongoing part - the bit that involves decades of vastly increased mineral exports and export earnings - has yet to really kick in.

Central to his argument is the belief that while resource prices have come off the boil, Australia will still benefit from the extra production flowing from the resource construction boom.

In a related piece, Why the Reserve Bank governor is an optimist, Ross Gittins discusses the reasons why Australian Reserve Bank Governor Glenn Stevens remains a positive glass half full person; there are problems, but Australia is well equipped to weather them.

Over on the ABC's The Drum, Alan Kohler takes a far more negative view. To his mind, deleveraging associated with high debt levels will continue to drag down global economic performance. I quote:

The point is that it (debt) hasn't come down one bit since the crisis of 2007-08. There has been a lot of talk of austerity, and passionate argument from economists like Paul Krugman that it shouldn't happen, but there hasn't been much of it yet, and certainly not enough to reduce debt.

I'm not suggesting there should have been - far from it - but if and when it does happen, watch out.

Maybe the world's savers will be prepared to forgive the debt, or do a debt for equity swap. No, they won't do that. Or maybe the debtors could print enough money to create inflation and reduce the value of the debt that way. That won't work either because the creditors would simply demand higher and higher interest rates via the bond market so that the debtors wouldn't be able to service the loans.

But cutting debt the old-fashioned way (spending less than you bring in for a while) risks setting up a feedback loop. The "paradox of thrift" applies, which, as John Maynard Keynes explained, states that if everyone tries to save then aggregate demand will fall, which will result in total savings actually falling because of lower consumption and economic growth.

I am in the somewhat funny position of broadly agreeing with all of them! Talk about a bob each way!

In commenting, let me start with a comment from Ian Verrender that I strongly disagree with:

No one, least of all those closest to the action at the big miners, saw the China slowdown coming. Until two months ago, the world's biggest miner and Australia's biggest company, BHP Billiton, had committed itself to the greatest capital expansion program in global history, $80 billion over three years. Now it is having second thoughts.

That first sentence is just not true. Michael Pettis, among others, saw a slow down coming. Even yours truly could see it. The second sentence may be correct, although my impression is that BHP has been signaling growing market weakness for some time.

Michael Pettis argues that the structural imbalances in the Chinese economy are such that pain does lie ahead. Pettis also takes a very negative view on Europe. His most recent post, The unacceptable behavior of the market, manages to combine a negative view of Europe and China. Whether he is right or not, the probability is that Chinese growth will continue for the present, even if at a slower rate. By contrast, Europe's leverage problems will continue as an economic drag.

The critical issue from an Australian perspective is just what all this will mean for the Australian economy. How can one plan in the face of so much uncertainty? What if the worst happens and we have that perfect economic storm in which Europe and China both crash, bringing the rest of the world down with them?

Nobody can plan against a perfect storm except by not going to see. Indeed, attempts to do so are likely to just make things worse. The most probable outcome is that Australia will continue its run of luck. Assume that Europe stays in recession, that Chinese growth does drop. Our export prices will drop, but production is still likely to grow because of growing capacity combined with our relatively low cost of production. We will simply increase market share. To the degree export receipts do drop, then the value of the Australian dollar will decline, cushioning the fall.

So the mining boom may be ending just as previous booms have ended, but it need not mean economic disaster. I suspect it won't. In fact, it might be quite a good thing, because presently severe adjustment pressures - the hollowing of other parts of the Australian economy - will ease.


Anonymous said...

Interesting Jim. Thank you.

As I read this piece in the SMH:

- it seems the author also identifies 'two booms' but is a little more hopeful for the future than either yourself or Access? The other thing is, while China's growth has slipped, it is still far and away nothing short of impressive, don't you think?

Hope your Sunday goes well.


Jim Belshaw said...

Hi kvd. I saw the SMH piece and am bringing up a postscript later this morning. Sunday not bad, mainly writing & domestic. Had hoped to get all my family here tonight for a traditional roast, but crikey it's difficult to find a common date in the craziness of four modern lives!

Anonymous said...

Hi Jim

You may think this unrelated, but I have not been a fan of BHP under Marius Kloppers (I'm pretty sure I've mentioned this before...), so it would come as no surprise to me if the following proves to be accurate:

Dunno, but from my exceedingly large distance from the (periphery, never mind the)centre of things I find it hard to remember any single decision this fellow has got either right, or timely.


Jim Belshaw said...

Interesting story, kvd. There have been a number of related stories in the Financial Review.