Non-mining Australia “in recession” last quarter

By Leith van Onselen

Bill Mitchell, Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at the Charles Darwin University, last night published an interesting post dissecting Australia’s December quarter national accounts.

In the post, Professor Mitchell argues that Australia’s non-mining economy is in recession based on two consecutive quarters of negative growth in state final demand. Below are the key extracts:

In media interviews over the last 6-9 months I have been saying the “East Coast” of Australia is either in or close to recession and it is only the mining states of Western Australia and the Northern Territory, which are keeping Australia in the positive real GDP growth range.

The record terms of trade that Australia has enjoyed in recent years (since around 2005) has promoted exchange rate appreciation. Since early 2001, the Australian dollar has fluctuated significantly. In March 2001, the Trade-Weighted Index was 47.4. By June 2008, it had risen to 73.4 (a 55 per cent increase). Then it plunged to 53.2 six months later (a drop of 28 per cent), only to rise again on the rebound in commodity prices to 79.2 (a 49 per cent rise). Similar movements against the major currencies also occurred. It is now over parity with the US dollar.

However, the commodity prices for non-base metals have not enjoyed the same increases as for the mining commodities. This suggests a classic “Dutch Disease” situation. In the Australian context, the concept typically applies to the impact of a resources boom on the Australian dollar.

The appreciating currency then: (a) damages the competitiveness of ‘import-competing’ sectors (dominated by manufacturing, service and agricultural firms) because import prices fall relative to local cost levels; and (b) promotes wage pressures which further damage sectors who are not enjoying buoyant demand conditions.

A trend that has been emerging in Australia for several years, whereby some sectors (such as manufacturing) and regions (such as Sydney and Victoria) are struggling while other sectors (such as mining) and regions (such as Western Australia) are booming is consistent with these exchange rate dynamics.

These developments – popularised by the term ‘two-speed economy’ – whereby serious sectoral and regional imbalances accompany overall economic growth, challenge the fundamental patterns of our economic and social settlements and threaten the financial viability of many Australian households.

While the term ‘two-speed economy’ has taken on a number of meanings in different countries the imbalance of most interest here is the precariousness of the NSW (particularly, Sydney) and Victorian (Melbourne) economies relative to the prosperousness of the mining regions of Western Australia, Queensland and the Northern Territory.

Several coincident factors are driving the ‘two-speed’ economy some of which have not received much public attention (for example, the fiscal austerity that the national government imposed before the non-government sector had recovered from the 2008-09 slowdown.

This is a danger for any nation where exports are highly specialised and where the traded-goods sector is comprised of one dominant industry group. It is clear that mining has been growing at the expense of manufacturing and agriculture.

While the Australian Bureau of Statistics produces annual measures of Gross State Product, they also produce quarterly measures of State Final Demand (Australian National Accounts: State Accounts, cat. no. 5220.0). State Final Demand is thus the best estimate of economic activity available at the State/Territory level on an on-going basis (quarterly).

The ABS define State Final Demand as:

“a measure of economic demand for products in the economy. It is an aggregate obtained by summing government final consumption expenditure, household final consumption expenditure, private gross fixed capital formation and the gross fixed capital formation of public corporations and general government. It is different from Gross State Product (GSP) as it excludes international and interstate trade as well as change in inventories.”

What does the evidence tell us about the existence of a “two-speed” (or multi-speed economy)?

The following graph shows the quarterly growth in real State Final Demand for the last three quarters by State/Territory. It is clear that Victoria, South Australia and Tasmania are in recession (at least two consecutive quarters of negative output growth).

New South Wales is close to recession and Queensland avoided that classification by a whisker (zero growth in the December-quarter). Western Australia is also slowing now as the peak of the mining boom fades.

The next graph aggregates the States/Territories into two groups – East Coast plus South Australia and the two mining strongholds of Western Australia and the Northern Territory. I excluded the Australian Capital Territory because of the dominance of the public sector. Most of the Australian population are concentrated around the East Coast. Very few Australians live in Western Australia or the Northern Territory (although Perth, the capital of WA is a large city).

The data shows that the East Coast (Tasmania, Victoria, New South Wales, and Queensland) plus South Australia are now in recession as hypothesised.

To give you some idea of the disparity in growth across States/Territories since the Mining boom began, the following graph indexes real State Final Demand from the March-quarter 2005 (base quarter). This was about the time the first phase of the commodity price boom started.

It is clear that the Western Australian economy has been the stand-out performer given its concentration of mining. The Northern Territory and Queensland (both who enjoy strong mining sectors) have also enjoyed similar prosperity although they both flattened out during the economic crisis.

As the nation’s capital and public service centre, the ACT has also enjoyed relatively strong growth in State Final Demand.

Contrast that to the manufacturing states of NSW, Victoria and South Australia and the smaller state of Tasmania. Their performance over the period has been modest at best and all are in recession or near recession now…

The blanket statement that Australia grew close to trend in 2012 not only obfuscates the fact that the current growth rate is well below trend and declining even further but also hides the fact that the majority of the population are living in regions which are in recession. That paints a totally different picture than the political spin coming from the Government.

I think today’s national accounts data paints a gloomy overall picture for the Australian economy.

Of course, the December quarter national accounts are backward looking, and given the recent improvement of the various second tier data, it could be the case that non-mining states have already exited recession, but that it won’t show up until the March quarter accounts are released mid-year.

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Unconventional Economist
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  1. Yeah great outcome for Australia this mining boom. The vast majority of us endure recessionary conditions while the miners get stinking rich and complain endlessly about a tax that doesn’t actually collect any revenue.

  2. C’mon Lorax, it’s the shareholders of miners that will end up paying the tax, and I’d hardly call them a group that’s getting stinking rich… stinking poor, maybe?

    The wealth is being disproportionately distributed to mining executives/board members/ and people driving around trucks all day. Just look at the discrepancy between salaries doled out by Australian miners versus Rest of World!

    • Last I heard its the mining executives who are complaining the loudest about the MRRT. Twiggy has even taken it to the High Court!

    • Exactly why I left Melbourne in 2008 and headed over west. I ejected out of manufacturing engineering and worked a way into mining engineering.

      Wow has it PAID off. I earn 2.8 times more, and save a whole lot more.

      End of the day, you have to take opportunities as they present you. Booms come, and go. Most of the “people driving around trucks all day” i’ve seen are actually young females from eastern states.

      • Good for you waltK. Unfortunately mining only employs a few hundred thousand so these kinds of opportunities are not available to most Australians and never will be. For most Australians, the mining boom hasn’t delivered anything except a recession.

      • Booms come, and go.

        That is the key phrase here.. The “Go” part is approaching us fast and we have nothing else to do when the mining boom goes away..

        • NBN roll out, infrastructure, increased housing construction. The RBA and government made room for the mining boom. They’ll work out how to keep people employed, or be thrown out.

          The charts above show why Labor are on the nose in the Eastern states. In those states construction, retail and manufacturing are big employers.

          If the RBA rate cuts and turn around of fiscal contraction from 2012 work, unemployment could be falling and employment rising in all three sectors by July if not already.

          Expect Gillard to highlight job losses from Liberal state government retrenchment and austerity as being the Abbot Liberal vision for Australia.

      • waltk,

        Since the boom began over 10 years ago, enormous opportunities have become available to those that are prepared to have a go. Good on you for having the initiative and drive to do so.Here in the west people from all over have come to better themselves. Half of Ireland and big chunk of NZ must be here. As long as it’s all lawful, good luck to them too.

        For some though, they choose not to grasp those opportunities preferring to rely on others to bail them out perhaps. That road is accepting a lot more risk than charting your own course in life.

  3. It’s pretty obvious that we are in recession here in Melbourne and have been for some time. The anecdotal evidence is everywhere – yesterday I went to Centrelink to see about getting a Health Care Card because my causal income has dropped off – I waited nearly two hours to see someone and the dole queue was at one stage outside the door; the last time I saw that happen was when I was living in Adelaide in the early 1990’s.

    • Strange you should say that – the other day I went to go and get my new born daughter put on my medicare card. Standing room only (Medicare and Centrelink being in the same space).

      • I think job seekers are having just as tough time in Sydney. I’ve only managed two casual jobs in last 6 months. The unemployed people I’ve chatted to while at my local job search provider, have similar stories.
        The number of jobs advertised on Seek in my profession (electronic technician) seems 1/3 to what it was when I started searching mid 2012. When I follow up with a phone/email to an application, nearly every employer says they’ve had an unprecedented number of responses to the advert. The recruitment guys are also struggling, saying employers are being extremely picky these days, mandating higher prerequisites as the employers want to take on someone with an absolute minimum risk.

  4. I’m not arguing with Mitchell’s take on what has happened however there are a couple of points need to be made

    1. Mitchell blames mining as does most of MB. However it is very clear that the bigger culprit in the distortion of the A$ value is capital flows. For some reason this gets the front running on MB and then we seem non-sensically, to revert to blaming all the ills on mining. In particular short term interest rate dependent flows are most damaging. They are underwritten by our willingness to sell off mining assets to cover our consumption. The mining industry of itself is not the problem.

    2. Clearly the current structure of the Aus economy is not sustainable long term. We will eventually, possibly sooner rather than later, run out of assets to sell. We will eventually stretch our debts somewhere above 1.2Trillion to such an extent that the world wakes up to the real risks rather than the current fairy story.
    Our current social and economic structure, including the continuous concentration of population in what have become largely non-productive cities, is based on an untenable assumption that we can increase debt and flog off assets at an accelerating rate forever.

    Reform of the economy to a more productive base IS going to involve dislocation. It IS going to involve the relative, and perhaps absolute, shrinking of economies in areas that have in the past been the major beneficiaries of debt based growth.

    Mitchell assumes that the current, until the last couple of years, distribution of population and wealth largely favouring Sydney and Melbourne, is ideal and any variance from that is in some way negative.
    It ain’t necessarily so!

    • However it is very clear that the bigger culprit in the distortion of the A$ value is capital flows.

      But isn’t mining/gas investment responsible for most of the incoming capital flows? Yes, banks borrow over a 1/3rd of their liabilities from overseas, but on a yearly basis, I don’t think it will measure up to the mining/gas investment pipeline..

      • MAV My take is this FWIW. Turnover in the A$ on Forex markets is some 140 times the value required to finance all imports and exports. So sure as hell the value of the A$ is not determined by trade or Current account.
        If the mining industry were the central problem we would be trying to get rid of CAS funds. We aren’t, nor as we are currently running the place, will it ever be so.
        That being said the speculative capital IS underwritten by the mining industry. More specifically it is underwritten by our mining resources.There is a perception that the A$ can’t tank because of the level of resources we have. Further it is underwritten even to a larger extent by our demonstrated willingness to fun what ever over-consumption/CAD we run by our demonstrated willingness over a very long period (50 years)to flog assets to cover same. It’s assumed we’ll continue to do so and indeed the RBA, Treasury, Govt of all colours, make very clear that this is their intention. Indeed we will immediately ridicule vote out any b….rd that even talks about this happening. Note the hammering both Paul Keating and Barnaby Joyce copped in the media for even daring to raise the issue at all.(Got my tin-foil hat on!) 🙂

        So yes without all these resources available to us one form and another the dollar would surely be in the septic and our living standard would be down there with it.

        • Flawse, I admire your persistence in trying to educate these dudes but they don’t want to know what they don’t want to know.

          Delusional Economics here at MB has written some very fine primers on the topic but these appear ignored because they don’t fit the narrative of some. Not to mention the opinions of some of the finest economic analysts in the country – all of who understand.

        • Turnover in the forex market is a tad misleading. It represents the notional value of the trades, not the net value of money that has changed hands. Besides, even those forex speculators use AUD as a proxy for commodities/China!!

          I agree with you that mining sector didn’t principally cause the CAD.. we (mainly our banks) malinvested all the domestic capital/savings in second hand houses while selling all the mining assets off to overseas investors.

          • Mav Agree re forex markets but what we were discussing was whether mining per se is the prime cause of the high dollar and the destruction of other sectors.
            I’m arguing these damned spec capital flows are the culprit one form and another. Further we are talking about marginal effects. I’d guess if we didn’t have the speculative inflow we’d have the dollar value problem pretty well solved. Mind you we need to have done it long ago. To do it now would create a whole series of monstrous problems from rapidly declining living standards, high interest rates, very high bordering on hyper-inflation amongst them.
            It’s not a debate one can settle i guess.

            We need to abandon this free floating exchange rate crap as soon as possible and get on with running our own country properly.
            It’s not a debate one can settle i guess.

          • My contention is Spec capital inflow is negligible compared to mining investment inflows.. Anyway, I agree with your conclusion re free float 🙂

  5. Who says this is a bad thing? The Australian economy is shifting factors of production (land, labour, capital) from the non-mining to mining industry. This is structural change for the better and it is the natural tendency of a relatively free market economy.

    • Can I quote you on that when iron ore is selling for $50/tonne, the AUD has crashed below 60c, and we have no manufacturing sector left to speak of?

      When we derive a huge proportion of our export income from a single commodity sold to a single country that is run by Communists engaging in a unprecedented centrally-planned construction boom, can I suggest to you that is not capitalism.

      • Sure because in that situation a low AUD will increase demand for exports. The same thing that happened in 2008/2009.

        Manufacturing has been in a long-term decline. I would say it’s more to do with the high cost of doing business in Australia (wages, land, electricity prices etc.).

        • Manufacturing had been in long-term decline, a decline that has accelerated dramatically over the past decade as the mining boom took off and the exchange rate doubled.

          A low AUD is only helpful for exports if you have the capacity to respond. Our non-mining exporters are now so weak they will not be able to take advantage of a weaker dollar for many years.

  6. To some extent, what is happening in Australia reflects what has happened in Europe. The policy settings that are appropriate for one part of Australia (or the EMU) are not appropriate for the other part.

    We should be thankful that the situation is not a lot worse. At least the productivity of east coast workers is reasonably comparable to those in WA.

    Possible solutions? Separate currencies? More flexible labour market regulation? Get rid of stamp duty to make it easier for workers to move where the jobs are? More flexible fiscal policy (ie get away from the deficit fetish and build some infrastructure in the east)?

    • “More flexible fiscal policy (ie get away from the deficit fetish and build some infrastructure in the east)?”

      So you mean to incur a whole lot of new debt, sell more assets to foreigners, to settle more people in the SE where there is little actual production rather than invest in the new areas where there is potential for growth?
      Alex it can’t go on. It’s got to stop somewhere.
      As Herb Stein said “If something cannot go on forever it WILL stop!”

      • If we didn’t have such a high dollar, had more flexible labour markets etc, there would still be more significant production in the SE.

        I agree, it has to stop sometime. But I would rather our government borrowed to build significant infrastructure than we borrowed to buy inflated housing, imported cars and bigger flat screens. At least then we might stand a chance of repaying the debt via increased production.

        • “But I would rather our government borrowed to build significant infrastructure than we borrowed to buy inflated housing, imported cars and bigger flat screens.”

          Alex notionally I must agree with that.

          Also more flexible labour markets are needed. However three other areas we need to stop as well
          1. Outrageous RE and rental values
          2. Govt employment just to interfere in production and productivity
          3. The entrenched upper echelons who add so much to teh cost of doing anything here…viz law Society et al
          Adds afterthought
          4 Eliminate by the thousands overpaid under-performing business execs

    • Last paragraph looks good to me with one important point Re: ” making it easier for workers to move where the jobs are … ”

      Does one move first then apply for a job or apply and obtain a job first?

      Much has been said about “mining jobs” but to obtain one is notoriously difficult . Most are not advertised. To obtain some of these jobs one must be part of ” the network ” where insiders disseminate the knowledge of where the next jobs are. Foreign forkers are brought in under the pretense of ” skilled work ” when in effect the work for most part is unskilled.

      Trust me! I have sons laying submarine gas pipes with a singapore company.

      • “Foreign forkers” – I love it!

        Jesting aside, I’m sure you are right to a degree. I do know someone whose daughter is driving a truck at the Big Pit in Kalgoorlie, and I’m fairly sure she wasn’t an insider (her parents are school teachers). It’s hard to know for certain how widespread this issue is. Not really any hard data, just anecdotal “evidence”.

      • jerry,

        Every hiring industry has it’s insiders entry channels. Resources is no different. But your impression is entirely wrong if you are saying it’s the biggest path to entry- it is not.

        Skills would have to be the biggest and most demand led path into Mining. A good knowledge of who is hiring is also very helpful. A great deal of the so called “mining” jobs are grown by local contractors providing skills on contract.

        In terms of location, those who put themselves into the proximity of the activity tend to do best. However , there are thousands who make the commute from east to west, south to north on a weekly basis.

        It largely comes down to individual drive and determination IMO.

        • My sons have been part of this ” system ” for many years, it is trying to help others who are far less qualified obtain similar though lesser jobs. Drive and determination ? Works well for me with a sprinkling of nouse.

  7. Dig or be damned? So what else is new?

    Waiting for 3d1k/ Waiting for all who flocked to the mines in 80’s/90/s. What say you about the rest of the miners? Et tu/