Freshly returned from holiday, Ross Gittins wrote a weekend article that claimed mining will soon stop being a drag on the economy:
The economy should speed up as soon as it loses the drag coming from the big contraction in mining investment. And that should happen by about the end of this year.
…we’ve been very unhappy with our “below trend” (below average) rate of economic growth in recent years, such as our growth of just 2.5 per cent over the year to September.
But everyone knows our problem is that we’re having to make a transition from growth led by mining – in particular, by the massive surge in investment in the construction of new mines and natural gas facilities – to growth led by the rest of the economy.
And rough calculations suggest that the “non-mining economy” grew by about 3 per cent over the year to September.
Since we know the economy overall grew by 2.5 per cent, this means the “mining and mining-related economy” must have contracted over the year. This is hardly surprising: mining investment spending is dropping like a stone.
It’s also good news. For a start, it says we’ve made a lot of progress in getting the rest of the economy growing strongly.
But there’s another, arithmetic point. The collapse in mining investment can’t go on forever. Eventually you hit bottom and can’t fall any further. When that happens, the mining sector stops “subtracting from growth”.
And when mining is neither subtracting from growth nor adding to it, the quite-strong growth in the non-mining economy will be all the growth we’ve got – and it, we can hope, will still be growing by 3 per cent a year.
In other words, the economy should speed up as soon as it loses the drag coming from the big contraction in mining investment. And that should happen by about the end of this year.
First, the capex cliff will run right through 2017 as iron ore and LNG plants are completed next year not this including Roy Hill, Wheatstone and Ixthys. After that there’ll be no rebound as global gluts weigh on any and all expansion plans for a decade.
Second, when we reach the bottom of the mining capex cliff, the so-called “third phase” of the mining boom will also end; it is the mining export volumes boom currently making an huge contribution to the net exports component of GDP (mining volumes will very likely be going backwards by 2017 given iron ore, coal and LNG are all caught in global market share battles that will kill volumes right down the cost curve but we’ll let that be).
Indeed, roughly speaking, during the “third phase”, the falling mining investment taking away from GDP is roughly offset by the rising mining net exports contribution to GDP of increasing volumes.
So, what we will be left with by the end of 2017 (not 2016 Rossco) is precisely what we have now; non-mining growth only. It has four components in household and government consumption, as well as non-mining and government investment. But the government component will remain under pressure given coast-to-coast Budget tightening. In reality, then, we’ll have only consumption and non-mining investment as the GDP growth drivers. Current ABS data suggests that the latter will fall heavily next year so that leaves only consumption. And given it only ever withdraws from the net exports component of GDP because it sucks in huge volumes of consumption imports, even it will be up against it. In its favour will be that the job losses stemming from the switch in the mining sector from construction phase to production phase will be over.
Mr Gittins is a dedicated Domainfaxman which is fair enough. But where does this stop? It is one thing to love the ‘confidence economy’ that underpins your employer, but fabricating an entirely unique system of national accounts in support of it is a little rich.
Or perhaps he just forgot.
