29/10/2015 - 14:06

Quick fix can’t hide structural defects

29/10/2015 - 14:06

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As much as Australia might benefit from a cut in official interest rates, it would definitely benefit from encouraging a new industry, such as the nuclear-fuel processing facility being championed by the South Australian government, and supported by Prime Minister Malcolm Turnbull.

SLOWDOWN: Investment in oil and gas is drying up as a result of lower prices.

As much as Australia might benefit from a cut in official interest rates, it would definitely benefit from encouraging a new industry, such as the nuclear-fuel processing facility being championed by the South Australian government, and supported by Prime Minister Malcolm Turnbull.

The difference between the Reserve Bank of Australia reducing interest rates and the creation of a business turning uranium into fuel rods is that one is a short-term patch on a slowing economy, and the other represents the start of a permanent value-creating industry.

Sadly, the chance of the rate cut is much higher than the chance of a uranium processing business; and that says a lot about the state of Australia today, where a quick fix is preferred over a lasting solution to the problem of slow economic growth.

The rate cut, which could come as early as next Tuesday, will make life a little easier for home buyers and might help reverse a downward trend in Perth property prices; but it will also hurt retirees and savers.

Like all quick fixes, the benefits of another step down in interest rates will quickly fade because the real problem is that investment in new business continues to decline, placing an alarming number of Australia’s major export industries under pressure.

No-one in Western Australia needs reminding that iron ore, the state’s biggest business, has been badly bruised by a collapse in prices; or that investment in oil and gas is also drying up thanks to lower prices.

Meat exports, another important business, has joined the list of industries facing future problems, thanks to the return of a debate about whether red meat is a health risk.

And coal Australia’s second biggest export, remains an industry under extreme pressure from environmental protestors, despite continued strong demand from Asia.

It’s when you weigh up what’s going right for Australia with what’s going wrong that the importance of encouraging business investment becomes obvious, because so many traditional industries are under pressure.

That’s why the SA proposal to process uranium into fuel rods makes sense – because it adds value to a raw material that is currently being exported in a relatively low-value form as uranium oxide (yellow cake).

The fact that it’s a Labor government in SA that wants to establish a fuel rod industry is interesting, given that political party’s long-term objection to uranium mining; the fact that a Liberal PM is supporting the proposal is another positive step.

However the chances of anything actually happening are remote, because the same protestors who object to coal exports will quickly add nuclear fuel rods to their objections list; and even bi-partisan political support will not be enough to drive the concept through to development.

Another problem with the uranium-to-fuel-rods plan is that it would require international investment, because no Australian company has the technology to produce nuclear fuel and very few international companies consider Australia a good investment risk, partly because of high internal costs, but also because of the clever use of the law to gum up new projects.

So for now, Australia is stuck in a cycle of seeking quick fixes to a deep-seated problem. And while an interest rate cut is given a more-than 50 per cent chance of being delivered next week, it should not be seen as a positive development because it really reflects an economy in trouble.

The latest thinking in most big investment banks is that another 0.25 per cent off the RBA’s cash rate is on the way, taking the rate down to an historic low of 1.75 per cent, with home loan and other rates to follow, offsetting the recent round of mortgage rate increases.

Interestingly, rate cuts are unlikely to stop with a further 0.25 per cent reduction, because the latest inflation and economic-growth data indicates that the level of business activity in Australia continues to slow.

Macquarie Bank, in a note to clients earlier today, said it wasn’t so much a question of whether there would be a rate cut next week, but how many more rate cuts would follow next year.

What alarmed analysts at Macquarie is that Australia’s consumer price index has fallen much further than expected, with the September quarter rise of 0.5 per cent taking the CPI for the past 12 months to just 1.5 per cent.

Ever-lower interest rates will please everyone with a mortgage, but also signal a clear and present danger that Australia is sliding into a prolonged economic downturn.

Fresh investment in industry of the sort proposed by the SA government in nuclear fuel rod processing is becoming a priority, but whether the country has the political will to help itself is the more interesting question.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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