More “services will save” us clap trap

From Domainfax:

1439786416313Services are close to filling the gap left by the mining boom but the Australian dollar remains a major stumbling block, according to a paper from Capital Economics.

…This growth has been critical in counterbalancing the drop in GDP growth coming from the plunge in mining activity, said the paper.

“But unless the dollar weakens much further, the support from services exports may soon run out of steam.”

…Resources exports have dropped to 24 per cent of total exports compared to 30 per cent of total exports in late 2013, said the paper. Over the same period, services exports had risen to 20 per cent of total exports compared to 17 per cent of total exports in 2013.

More terrible reporting from Domainfax. The Capital Economics report was much less favourable than this and indeed the reporting has distorted the findings. Services are not remotely close “close to filling the gap left by the “mining boom”, they are only large enough to almost offset iron ore. When we add that in wider mining revenues we find they have fallen $22 billion from the peak and services exports have risen only $6 billion over the same period:

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What CE actually said was:

While in the long-term we expect that services exports will play a big role in filling the hole in the economy left by mining, in the near-term the problem is that a lot of the boost to services exports from the weaker dollar has already been felt.

The weaker Australian dollar has recently generated significant growth in net exports of services, with tourism and education playing a starring role. This growth has been critical in counterbalancing the significant headwinds coming from the plunge in mining activity. But unless the dollar weakens much further, the support from services exports may soon run out of steam.

The good news, of course, is that the dollar will continue to fall. But then, so will mining in all of its forms. MB expects iron ore revenues to nearly halve from here and LNG exports to deliver very little of their promise such that major resources revenues will keep falling towards $100 billion, about as far again as they’ve fallen already. As the dollar falls services will continue to rise at their current rate so we end up with an another $15 billion blow to trade over the next two years.

What is worse is that the revenue substitution is from previously huge margin commodities to slim margin and loss-making commodities meaning that there are also large negative impacts on national income growth via lower taxes, wages and profits.

Services are not filling the mining hole. On the contrary, the hole is getting bigger all of the time.

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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