Two recent reports have suggested the southern states may have to learn to cope with uneven economic growth.
Two recent reports have suggested the southern states may have to learn to cope with uneven economic growth.
RIO Tinto is searching for 6,000 workers. Macquarie Bank is sacking 1,300 workers. It’s hard to imagine a more personal illustration of the divide separating Australia’s west from its east.
In Sydney and Melbourne, home of the banking and manufacturing industries, there is a deepening concern about where the resources boom is taking the country.
In Western Australia and Queensland there is no such questioning – the boom is taking Australia closer to Asia, whether Sydney and Melbourne like it or not.
Wealth migration, and that’s what the Rio Tinto versus Macquarie job difference is about, has been under way in Australia for a decade now, though it took two economic reports last week to highlight what it actually means.
Deloitte Access Economics and Commonwealth Securities arrived at the identical conclusion – WA and Queensland will continue to boom, and the rest of the country will slide backwards.
Two days after the boffins produced their considered analysis of the situation the job reports were lobbed, driving home the fact that they are being created in resources-focused parts of the country and lost in others.
The challenge now is to find a way to share the wealth without destroying the industries that are creating it, and that means either encouraging more growth to make a bigger economic pie, or taxing the existing pie to share out among the underperforming parts of the country.
Europe, as has been discussed here in the past, faces an almost identical challenge. Some parts, particularly Germany, are booming. Other parts are stagnating and, as in Australia, there are two recommended solutions – austerity to control government spending or policies that encourage investment.
In Australia so far the response to the boom in WA and Queensland has been to opt for the equivalent of austerity in the form of higher taxes on miners, which might deliver a short-term boost to government revenue but will do nothing for the country in the long term.
It would be far better for the country if growth were encouraged, than extra taxes levied, to increase the size of the pie.
Neither Deloitte nor CommSec arrived at that precise conclusion, but they certainly came close by warning the low growth Australian states that they should stop complaining and learn to live with uneven growth that will eventually flow through to the rest of the country.
“It may be a lopsided period in Australian growth but growth it will be,” Deloitte Access boss Chris Richardson said.
“The split in that growth is widening further,” he added.
WA Premier Colin Barnett told me a similar story when I had a chance for a face-to-face chat last week, predicting there would be a continued acceleration of capital spending in WA during the next decade.
“Not so much as a once-in-a-lifetime event, but a once-in-50-years event,” he said.
Savanth Sebastien, an economist with CommSec, was a third voice telling the same story; that WA is Australia’s engine-room and likely to stay that way for some time.
“Without WA it’s clear that the Australian economy would be effectively going backwards or even just treading water,” Mr Sebastien said.
What Messrs Richardson, Barnett and Sebastien are seeing is WA becoming more of an Asian economy, or at least a preferred supplier to fast-growing Asian economies, while the rest of the country hangs on or, worse still, tries to turn back the clock to a time when a domestic manufacturing sector could compete with Asia.
The key to everything happening in Australia is money. More specifically, the direction in which it is flowing, and where it is accumulating, and you do not need an economics qualification to know the answer to that question – it’s flowing west, or as Mr Richardson put it: “The outlook for capital spending, particularly for mining investment has been revised up from the previous (December) quarter, while the soft areas of retail, housing construction and government spending were revised down.”
To that list of soft spending can be added the specialty of Sydney and Melbourne, financial services, a fact 1,300 Macquarie bankers understand all too well.
The view from France
NOT everyone agrees that the mining boom is here to last. Economists at the French investment bank, Societe Generale (SocGen) reckon that Australia will soon plunge into a debt-induced crisis.
In a note to clients, SocGen suggested investors short-sell the Australian dollar and buy back later after it has fallen substantially.
Central to this negative view, admittedly from a bank mired in the poverty gripping Europe, is that the so-called commodity super cycle is not the miracle that some people see, just a traditional commodity price cycle that will come down as fast as it has risen.
Australia, according to SocGen is: “A credit bubble built on a commodity market built on an even bigger Chinese credit bubble. Australia looks like leveraged leverage, a CDO (collateralised debt obligation) squared.”
What particularly worries SocGen is the soaring level of debt to disposable income, which has risen from 40 per cent to 150 per cent over the past 20 years.
Much of that debt increase is related to confidence in Australia that China will continue to grow. If it doesn’t then Australia has a problem, and WA the biggest problem of all.
Hedging bets
IF optimism in the shape of the CommSec and Deloitte Access view of the world is offset somewhat by the pessimism of SocGen, then a similar split-view of the outlook can be found at the more speculative end of the investment world, where hedge funds are placing bets on both a boom and a bust.
The boom view is from fund managers in Europe who reckon base metals, such as copper and zinc, are set for a strong revival.
“In the second half of the year you want to own risk assets,” Nathan Ebeling from Ospraie Management told a recent commodities conference in the Swiss city of Lausanne.
Offsetting that reasonably strong buy tip, was a warning from New York fund manager Jim Chanos that WA’s Fortescue Metals Group was a ‘value trap’ with a share price that would fall materially.
They can’t all be right.
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“I hate to spread rumours but what else can one do with them.”
Amanda Lear
