Deloitte throws Australia off the mining cliff


While the RBA is spending its time down the back garden dancing with the confidence fairy, Deloitte Access Economics has joined MB in its diagnosis that the approaching mining capex cliff is very large, very long and too severe to be offset by any non-mining investment. From the AFR:

Australia faces at least another three years of below-average economic growth as a business investment strike gathers momentum, according to a leading forecaster.

In a bleak assessment to be ­published on Tuesday, Deloitte Access Economics warns “hope is fading” for a recovery investment outside the slowing resources industry.

…Deloitte says the value of almost 1000 major investment projects across the nation fell 5.7 per cent from a year earlier to $873.7 billion in September.

The figure has now fallen for three straight quarters, the first such ­sustained decline in a decade, while investment outside the massive mining and gas sectors continues to stagnate.

…The report shows the value of projects under construction fell 3.3 per cent from June, while investments categorised as “possible” are now 18.4 per cent lower than a year earlier.

Mr Smith said the weakness in the line-up of future projects highlights the need for government investment.

…“It’s possibly not until 2016-17 that we see growth in excess of 3 per cent,” he said.

I will remind readers that the assumptions behind the Deloitte capex pipeline report tends towards the bullish end of the spectrum. This showed up in increases in the “firm” category of project assessments:

New figures from Deloitte Access Economics released today reveal the value of “firm” projects that are yet to start construction has more than doubled to $70 billion in the past year.

“The pipeline of projects continues to astound and potentially leaves room for a further lift in activity,” the group says in its report on investment in the September quarter.

All to the good. But not enough. And remember that these figures are for the stock of project dollars. It is the flow of those dollars which will determine growth. Here is the Goldman Sachs capex cliff, which forecasts the flow of spending:

Screen shot 2013-10-29 at 4.10.05 AM

You should know that this is not a “capital strike”. That suggests it is voluntary. It is the inevitable consequence of an economy that needs to deleverage, faces a paucity of demand, has been saved from doing so by a 1 in 150 year mining investment boom and, as the rest of the world has deflated to some extent, faces a severe shortage of competitiveness.

With that in mind, here are three points to guide you in the next three years as mining investment tumbles.

1.  Know that business investment is the primary job creator in any economy. Without enough of it unemployment rises, which is what will happen in the three years ahead, mitigated to the extent that government spends and competitiveness is restored, especially via a falling currency.

2. Know as well that this is not an environment in which wild asset market rallies make any fundamental sense. Indeed persistent rises in asset prices combined with falling business investment is a warning of irrational exuberance. That is, a bubble.

3. Finally, as the US has shown, 2% economic growth is survivable if it is managed well, even if the labour market remains soft. But in a world of accelerated change and correcting imbalances it is also a position from which recession is much more likely than normal because the economy has insufficient momentum to see off external shocks like sudden falls in the terms of trade or brief financial crises, especially  if authorities pin their hopes on something as ephemeral as “confidence”.

You have been warned!

Houses and Holes
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  1. reusachtigeMEMBER

    What’s this Cliff thing? Aint nobody got time for dat! Let’s go flip more houses. It’s a sure bet and all cool people are doing it. And it’s government guaranteed to succeed!!

    • I’m going to do what Glen wants and do my bit for the economy. I’m going to buy a big flash house and a new big 4WD.

    • Chris Richardson said mining investment ‘fading’ and ‘not as rapidly as some have predicted’ certainly ‘not a vertical fall’ which coming off a cliff is!

      Nonetheless unless new projects get the green light insufficient alternative investment will hurt.

  2. “as the US has shown, 2% economic growth is survivable if it is managed well”

    Huh? The US survives on 2% growth because it is the reserve Currency and can print up half a trillion dollars a year to pay for all the imports it needs. The inevitable dire long term consequences of that ‘managed well’ scenario are becoming more obvious and more imminent every day.
    Further we need to stop talking about ‘growth’ and start asking the question ‘growth in what?’ Growth in the FIRE sector, fuelled by increasing debt, is not real growth and does not improve the lives of ordinary citizens. It just screws them and their children.

      • Indeed. The rest of the western world is eagerly waiting for us to join them. Only one last step remains. Jack up our government debt to 100% quickly, then we will all be in the same happy camp.

      • mine-otour in a china shop

        Ireland thought it had fiscal scope too… until the taxpayers got the huge bill for recapitalising their banks. In that scenario it is game, set and match…

      • mine-otour, this would be base case for a problem in Australia’s credit markets, and anyone with over $250k in deposits would be taking a haircut.

      • @rob101 Anyone with any deposits will be taking a haircut so to speak. The presses will start up …

      • I suppose that depends on people’s reluctance to turn over cars throw bricks through the windows. So thus in australia everyone will be getting a hard cut except the most paranoid. I for one hope I will be paranoid enough by this stage if it ever happens that is.

  3. “Know as well that this is not an environment in which wild asset market rallies make any fundamental sense.”

    The fundamentals are expected earnings and a capitalisation rate. A semi permanent reduction in interest rates in the face of low demand for debt and spending is also a fundamental, just the same as the fall in rates as inflation was beaten out of the system by high interest rates.

    That doesn’t mean that the semi-permanent reduction in interest rates is a really good thing, nor does it mean that it won’t ever reverse, or that the stock market will never again fall 20%.

    It just means that the capitalisation rate/PE is a fundamental part of asset price determination.

  4. The other question that the scenario poses is how we deal with unemployment. Do we reduce hours across the board and keep people working, or do we sacrifice the young (the common pattern is huge unemployment among the young and less skilled and longer lengths of unemployment for the older workers who become unemployed), or do we embark on a Japanese solution of high government expenditure on infrastructure to maintain GDP and employment?

    This is a policy position that I hope the Coalition is exploring in earnest at present as a form of contingency planning.

    Rudd didn’t have the luxury of time during the GFC, but the Coalition does and so their policy should reflect a carefully crafted response.

    • “…so their policy should reflect a carefully crafted response.”

      Sorry, are you expecting this from politicians?