Fall in mining spending 'lifts' recession risks
With most calling the peak of investment in the mining boom and a raft of poor economic data showing that non-mining sectors have not yet filled the gap, Australia's reliance on resources for gross domestic product growth may pose problems.
Morgan Stanley analyst Gerard Minack said mining investment might become a drag on growth this year, and while it was too early to assure a recession, "an earlier peak in mining investment also raises the risk that the decline in 2014 could be significantly more damaging that we have in our current forecasts".
While most economists would agree a rapid fall in mining investment is the most obvious catalyst for a recession, the chances of that happening are contended. "We're not forecasting a recession, but we're saying here's some evidence that the chance of a precipitous fall may be larger than people think," Mr Minack said.
The analysis takes a more sombre view on the level of mining investment in Australia.
Most analysts, including HSBC chief economist Paul Bloxham, said they expect expenditure in the resources sector to plateau.
"We're expecting to see growth rebalance from being led by mining investment to being led by other parts of the economy, in large part because of the effect that low interest rates are having in providing support," he said. Mr Bloxham said he expected retailing and housing to help fill the void, as cuts to the official cash rate filter through to the other parts of the economy.
This view was supported by the Reserve Bank in its May Statement on Monetary Policy, which said there were signs the shift was beginning, but there was "considerable uncertainty about how it will proceed".
"The recent ABS data on [non-mining] firms' capital expenditure plans for 2013-14 were positive. Nevertheless, other near-term indicators of investment remain subdued, despite conditions generally being favourable for investment overall," the Reserve Bank said.
Mr Minack said that during the first leg of the mining boom, the rise in terms of trade drove real national income growth 18 per cent faster than GDP growth over the past decade.
"With commodity prices now, in our view, past their peak, the terms of trade have swung from being a structural tailwind, to a structural headwind. Real national income has fallen through the past five quarters, even as real GDP has risen 3.8 per cent"
New focus on cost cutting as well as a decline in sentiment in the sector would suggest a more cautious approach and a fall in investment.
"Trend sentiment among miners is now below the level seen in the global financial crisis. Sentiment was last as poor as now at the tail end of what was a near 20-year bear market for the sector, in the late 1990s," Mr Minack said.
Frequently Asked Questions about this Article…
Morgan Stanley research warns that an abrupt fall in mining capital expenditure could become a major drag on growth because Australia has relied heavily on resource investment for GDP growth. If mining spending drops sharply before other sectors expand enough to fill the gap, the next 18 to 24 months are the greatest risk period for a slowdown that could tip into recession.
According to the article, Morgan Stanley highlights the next 18 to 24 months as the period of greatest risk for a significant slowdown or potential recession if mining investment falls abruptly.
No. While most economists agree a rapid fall in mining investment is the most obvious catalyst for a recession, views differ on the likelihood. Morgan Stanley’s Gerard Minack says the chance of a precipitous fall may be larger than many think, but they are not definitively forecasting a recession.
HSBC chief economist Paul Bloxham and others expect growth to rebalance away from mining investment toward other parts of the economy, particularly retailing and housing, helped by lower official interest rates filtering through to the broader economy.
The Reserve Bank’s May Statement on Monetary Policy says there are signs the shift from mining-led growth to other sectors is beginning, but it also cautions there is considerable uncertainty about how that transition will proceed.
Gerard Minack notes that during the first leg of the mining boom the terms of trade boosted real national income—about 18% faster than GDP growth over the past decade. With commodity prices now past their peak, the terms of trade have swung from a structural tailwind into a structural headwind, and real national income has fallen over recent quarters even as real GDP rose.
The article points to a new focus on cost cutting and a decline in sector sentiment. Trend sentiment among miners is now below levels seen during the global financial crisis, matching lows last seen in the late 1990s—factors that suggest companies may adopt a more cautious approach and reduce investment.
Investors should monitor mining capital expenditure plans, commodity price trends (which affect terms of trade), non-mining capital expenditure and ABS capex data, retail and housing activity as potential offsets, central bank commentary (Reserve Bank statements), and sentiment indicators in the mining sector—these are the signals highlighted in the article as relevant to growth and recession risk.
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