28/08/2012 - 09:14

Analysis: the boom is over, long live the boom

28/08/2012 - 09:14


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Martin Ferguson is not a baby, but when the Federal Resources Minister let slip an obvious fact last week, that: “the resources boom is over”, it was a classic example of the old saying about truth coming from the mouths of babes.

Denials from across the business and political spectrum followed Ferguson’s statement of the obvious, though as Mandy Rice Davies so famously said of an affair denied by Lord Astor: “he would say that, wouldn’t he”.

The point about dredging up an incident from the 60s, and a quote from a less than reputable woman (which actually made it into the Oxford Dictionary of Quotations), is that the Davies comment so aptly sums a situation where people with vested interests try to suppress reality.

In effect, Ferguson let the resources cat out of the bag, and who better to do that than the Resources Minister.

His detractors, led by Finance Minister, Penny Wong, later extracted a back-down from Ferguson who said he only meant that commodity prices had fallen – a correction to which even Homer Simpson might have said “duh, surely lower commodity prices equal an end to the boom”.

For a definition more technically literate than one from a cartoon character consider how the investment dictionary, Investopedia, defines the word boom: “A period of time during which sales of a product or business activity increases very rapidly”.

What Senator Wong and a parade of business leaders are attempting to do with their denials of the boom ending is put a positive spin on a series of negative developments for political or commercial advantage.

There are three problems with the denials. They are:

  • Abundant evidence that commodity prices have fallen sharply. Iron ore, for example, last night slipped below the magic $US100 a tonne barrier.
  • Big projects are being mothballed because of lower prices and higher costs. BHP Billiton’s Olympic Dam and Port Hedland outer harbour deferrals are two of many examples of companies withdrawing their capital from profitless investments.
  • The “deniers” all appearing to have zero background in the resources sector which as anyone with an understanding of resources knows is a cyclical industry that always (and that means always) booms and then un-booms (for readers who can’t say bust).

On that final point it is amusing to consider the background of the chief “boom over” denier, Senator Wong who, while holding her current job of Finance Minister has a background as a lawyer and Minister for Climate Change, a job which entailed denying the climate change deniers.

Dextrous as her arguing skills might be Senator Wong is also pitting herself against a long list of experienced business cycle observers, including former Reserve Bank board member, Bob Gregory, JP Morgan chief economist, Stephen Walters, and the chief economist of Deloitte Access Economics, Chris Richardson.

What the boom-over deniers are trying to argue is that construction projects left-over from the commodities boom constitute a continuation of the boom. They do not. They are boom remnants, and while they will keep builders busy they are continuing largely because it would be more expensive to stop them.

Far more interesting than a semantic argument about word definitions are two questions that no-one yet appears to have considered. Firstly, is the end of the boom a bad thing, and secondly, how long before the next “up” wave in a cyclical process that anyone living in WA for the past 60 years has seen at least seven times.

On the merits of the boom ending, yes, it is a good thing that it has ended. The WA economy needs a breather, though with the flurry of oil and gas activity it might not be a long break.

The reason it’s a good thing is that booms create a hot-house economic environment that artificially inflates prices (and the currency) and in the long run can cause as much, if not more, harm than good. Steady growth is what an economy requires, not extreme cyclical movement.

As for the next phase of the perpetual boom/bust process through which all resource economies pass it is worth considering the famous cry whenever a king dies: “the king is dead, long live the king” – because his heir is instantly promoted.

In other words the end of a boom in a country struggling to meet the resources demand of three billion Asian consumers is merely a turning point in an economy that has decades of growth ahead of it – though not in a straight line.

What Australia’s politicians and investors ought to be saying is that: “the boom is dead, long live the boom”.



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