InvestSMART
The Intelligent Investor Growth Fund is listing on the ASX. Initial Offer closes Friday.

Dutch disease or China blight?

For the origins of the two-speed economy, you need to go back to the 1980s, when China first began undercutting Australia's manufacturers and exporters.

For the origins of the two-speed economy, you need to go back to the 1980s, when China first began undercutting Australia's manufacturers and exporters.

TIM Brimelow gained early insight into how China is creating a divide between winners and losers in Australia. Melbourne-based Brimelow spent the late 1980s selling equipment to small manufacturers across the south of Australia.

He remembers the (now closed) Simpson washing machine factory in Adelaide and a major factory of Morlynn Ceramics producing many of the porcelain insulators for electricity power poles.

By the mid 1990s Brimelow, now 49, thought of himself as living a ''Tattslotto existence'': he would win big if he had the right price for his customers.

And, just like in a lottery, Brimelow was more often the loser.

The winning numbers were increasingly held by Chinese imports, as their lower price made the products Brimelow sold less competitive.

As Brimelow's career moved into sales for Taiwanese injection moulding equipment and European plastics handling machines in the late 1990s, his Tattslotto existence continued. Then he started to see many of his manufacturing customers facing the same problem: ''A lot of my customers were closing up,'' he says.

In retrospect, Brimelow can be seen as being at the birthplace of a two-speed economy that is continuing to transform corporate Australia.

The changes wrought by China and, to a lesser extent, a less confident Australian consumer, were demonstrated by headlines this week about BHP Billiton's record $22 billion profit juxtaposed with 1000 job losses at BlueScope Steel.

Just as has occurred to manufacturers across Victoria, there are winners and losers as great changes continue. And the trick for Australia will be to ensure that there are more winners than losers.

An analysis by BusinessDay of the most recent results posted by 50 of Australia's largest companies shows that a two-speed economy of winners and losers is now entrenched.

BusinessDay examined the most recent outlook statements released by the top 50 Australian companies, assessing whether their future growth (or lack of it) against five major economic themes.

The first two of those themes were the broadly positive elements of resources and China or Asian markets.

Then the research noted when companies referred to three less positive elements affecting Australian companies as they reported their profits: Consumer confidence a multi-speed or fragile economy and volatility, including currency shifts.

In the red corner you have the great extractive industries of (mainly) Western Australia and Queensland aligning their fortunes with China. In some cases - for example, Origin Energy - profit growth forecasts for next year top 35 per cent.

Also in the red corner are the businesses that serve the resources industry. WorleyParsons, a mining services company that listed nine years ago, is now the 39th largest company in Australia.

In the blue corner you have, pretty much, the rest.

The one-time profit factories of Australia's banks are making cautious statements as their future growth prospects stumble on reluctant Australian consumers.

The retail, manufacturing, tourism and housing industries are all creaking to greater or lesser degrees based on their exposure to weaker consumer confidence or to a higher Australian dollar.

The split is shown in the analysis in the following ways. A total of 18 companies in the top 50 cite the continuing resources boom as a driver of growth. Largely the same group cite Chinese and Asian markets as a source of their future wealth. Of those companies, about 70 per cent give a mainly positive or extremely positive outlook. A largely separate 11 companies say they are hostage to consumer confidence. About 80 per cent of that group say their outlook is challenging.

Underlying the current fascination with the resources boom is a queasy sense that this too will pass. And questions are being asked at the highest levels of corporate Australia about how much the country can afford to lose in a headlong pursuit of resource riches.

''The first thing we have to recognise is that the mining boom will finish, as opposed to the head-in-the-sand attitude that it will go on forever, which it won't, and then [we have to] ask what kind of Australia we want once it does finish,'' says Coca-Cola Amatil chief executive Terry Davis.

''And you see what has happened to America, where they have basically outsourced manufacturing, they are bearing the brunt or cost of that.''

There is a host of well recorded fastest-highest-strongest statistics for Australia that have accompanied the rise of China.

The dollar reached its highest value of $US1.10 against the US dollar since it was floated in 1983. Our terms of trade - how much the price of exports outstrips the price of imports, or vice versa - is also the highest ever in our favour. Mining investment is the highest ever recorded as a percentage of gross domestic product (GDP).

This spate of record-breaking has its downsides as well. In a ''push me, pull you'' from the growth of mining investment, the non-mining private sector is on its way to becoming the smallest ever proportion of the economy.

And, as a widely recognised indicator of consumer caution, Australia's saving rate has reached levels not seen since the mid 1980s.

And those fasts, highs and strongs - and the flip side of slows, lows and weaks - were well represented in the most recent profit reporting season.

But how much does Australia have to worry about the boom? Aren't we all getting richer?

The optimistic case about the resources boom is being borne out so far, says HSBC chief economist Paul Bloxham, who published this month a 38-page paper titled Does Australia Have a Resources Curse?

Bloxham asks whether Australia is suffering what economists have termed ''Dutch disease'', the hollowing out of an economy as it overwhelmingly focuses on one industry.

Dutch disease describes the decline of manufacturing that seems to accompany the discovery of natural resources, as happened in the Netherlands when it discovered natural gas in 1959. The premise is that a concentration on resources drives up the local currency and hits industries affected by high exchange rates.

Bloxham warns that the Australian economy is susceptible to Dutch disease and two other variants of ''resources curses'': a country putting all its eggs in one (Chinese) basket and a failure to gain the full benefits of the boom by complacent public policy.

Bloxham identifies five sectors that, at least at first glance, are being affected by a high Australian dollar and a resources-based economy: manufacturing, education, tourism, retailers and housing.

But he relies on whole-of-economy indicators to spell out his case that their pain is being more than offset by the resources boom.

Employment is edging up, leading to an increase in household disposable income. Domestic demand grew by 3.1 per cent over the past year and Bloxham is forecasting a strong increase in the fourth quarter of the calendar year.

Bloxham's view that we are all doing better does not mean that we are all doing equally better. Or, to put it bluntly, there are winners and losers from the changes being wrought in the economy.

But, putting aside for a moment the hurting industries and the human cost, Bloxham sees the pain as pricing signals telling the economy which direction it should move in. The high Australian dollar is a price signal that is telling Australia's manufacturing, tourism and education industries to squeeze over and make way for the boom.

In Australia, the price signal of higher wages in the resources sector is attracting more labour and allowing Australia to capture more benefits from the boom.

If only the world were an economic model we would all be out dancing on the streets. But the world is a much more complex place, as the BlueScope Steel workers put out of a job found last week.

And company chiefs are expressing concern about just how the boom is going to play out.

''The real impact is out in the western suburbs of Sydney and the southern suburbs of Melbourne, where all the medium manufacturers can't compete against Chinese imports, finding exports impossible,'' says CCA's Davis.

''That's the area that is the real struggle and we just hope the government can look at that and see what they can do to level the playing field for Australian manufacturers.''

For his part, Bloxham dismisses as a mug's game the idea of the government picking winners through tariffs, subsidies, capped exchange rates or pegging wage rates. He also bemoans the lack of productivity gains to get that most elusive thing: more bang for the same buck.

Bloxham does, however, support a broad-based mining tax to capture some of the one-off wealth that is being generated by historically high commodity prices to create a sovereign wealth fund.

And his basic theme about how to bear the end of the boom is to save money now so we can spend it when the music stops.

The twin-speed economy embodied by the rise in resources and uncertain consumers reaches deep inside individual companies.

''If you look at AMP's business, you could argue it sits a bit in both camps,'' says AMP chief executive Craig Dunn.

He says, given shaky confidence, consumers save by tipping more money into bank deposits rather than locking away their money in the superannuation AMP offers.

''What you find is when you get real consumer uncertainty, liquidity becomes the priority,'' Dunn says. ''Therefore we are, if you like, disadvantaged in that part of the market.

''Against that, if resources stocks do well, the equity market grows - I know it's volatile at the moment - and that means markets are stronger and we benefit from improved returns.

''And, on the risk insurance side, that uncertainty actually means people are more interested in having better protection than they have in other periods.

''You can see wins and losses in our business I might argue that we're a net loser, but at the margin.''

And more and more non-resources businesses have hitched their wagon to the Asia growth story.

''We recognised the shift in global growth to Asia, and we positioned ANZ to take advantage of that,'' ANZ chief executive Mike Smith said after his latest quarterly results.

He added: ''I think we've got an extraordinary opportunity really in this region over the next few years.''

BRIMELOW worked as a salesman to manufacturers until 2000, when he retrained in information technology.

He had a job with transport company Linfox as a computer technician for eight years, then in 2009 established his own business, Nimrods Computer Services.

As the name suggests, Brimelow has made the transition from being in the manufacturing camp to being in the services camp.

He is battling cheap offshore computers by differentiation - offering fast, reliable computers that he puts together himself with the latest chipsets.

He sells his computers at slightly higher prices than versions with older chipsets available at major retailers.

He also offers an end-to-end service, installing computers in customers' homes, and establishing their security systems with proprietary systems.

On a personal level, Brimelow has embodied a shift to take advantage of opportunities, after China dramatically changed the game plan in his previous career in the manufacturing industry.

At a country level, ANZ's Smith sees Australia doing the same thing in response to China and the region's growth prospects. ''We'll see this driving the performance of the resources, the agricultural and the infrastructure sectors, which are now joined at the hip to Asia's process of industrialisation and urbanisation,'' he says.

''And although there will be volatility in commodity prices, there is very clearly significant upside for those sectors for the next 20 years or more.''

However, Bloxham offers the warning that with many of our eggs sitting in the China basket, at some stage we may all be losers.

''Being tied to a single source of income is risky as changes in that source of income do significant damage to the economy,'' he says.

With ELI GREENBLAT and FATIMA KDOUH


Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles