THE DISTILLERY: GDP gander

Jotters give mixed reviews to the latest GDP figures, while one delves into commodity price forecasts for the year.

What can you make of a set of national accounts when they don’t take into account the project cancellations and delays of two of our biggest miners? It depends on whether you think the mining boom is over. While some commentators examine the latest set of GDP figures, others look deeper into the commodity plunge and find a disastrous scenario for mining services companies along with an ironic boost for BHP Billiton.

Firstly, Fairfax’s Michael Pascoe has a crack at our very own Alan Kohler for his reference in July about the first depression "I’ve ever been awake during,” as part of a broad critique of the bearish commentators.

"The final score of 0.8 per cent trend GDP growth in the June quarter making 3.8 per cent for the year was a little better than the Reserve Bank and Treasury had predicted – and they were both criticised as being too optimistic by the much the same pet shop denizens who continue to declare we'll all be ruined any minute now.”

The Distillery would point out that most bearish commentators speak of the consequences of a prolonged European recession – where Kohler was primarily drawing his depression analysis. Pascoe speaks only of yesterday’s GDP numbers. Readers can judge it for themselves, here’s the link (Too fat to fail, July 11).

Regardless, the national accounts don’t help the bears; Pascoe has got them there. Fairfax’s Tim Colebatch mostly agrees, characterising yesterday’s numbers as "so far, so good.”

"The detailed figures show weaknesses all through the economy – manufacturing is in a deepening recession, as is housing investment, areas of discretionary spending such as eating out, the media, and entertainment, and, not least, Tasmania, now clearly in recession. But those weaknesses are outweighed by the economy's strengths: above all, mining investment. In the past year, more than half of Australia's growth in spending has gone into developing new mines. Mining investment grew 72 per cent. The rest of the economy grew by a bit over 2 per cent. That's why the growth figure looks so out of whack with what we're experiencing.”

Be that as it may, The Australian Financial Review’s economics editor Alan Mitchell says there was nothing in yesterday’s GDP data that will stop the Reserve Bank from cutting interest rates next month.

"While mining’s contribution to real GDP grew by 5 per cent in the year to June with (mainly mining) engineering construction growing 60 per cent, manufacturing’s contribution to GDP shrank by more than 3 per cent. This is an important part of the context in which the RBA is likely to cut the official cash rate. The resources boom is far from over, but slower growth in China will reduce the size of the investment boom. That will make a dent in Australia’s growth rate, and we will be looking for other sectors of the economy to fill the gap. And that will be the main purpose of the rate cut – or, probably, cuts.”

Business Spectator’s Stephen Koukoulas explains how the next result won’t deliver quite such strong readings from consumer spending with the government playing a diminished role.

"Indeed, working on the estimate that around half of the 0.6 per cent rise in June quarter GDP was the direct result of the household sector spending its carbon compensation payments in May and June and the government boosting demand as it shuffled spending out of 2012-13 and into 2011-12, the September quarter GDP growth rate will almost certainly be less than 0.5 per cent and could be flirting with zero.”

Readers will look at all this and think of the commodity price slides that have pulled the rug out from some big mining investments and proposed projects. The Australian’s Robin Bromby surveys a few commodity price forecasts and finds some terrible news for the rest of 2012 when it comes to copper, nickel and zinc.

Fairfax journalist Adele Ferguson has a less encouraging interpretation of the latest GDP numbers in the context of a sector that’s been smashed over the last few months, mining services.

"In the past few weeks drilling giant Boart Longyear has lost 57 per cent of its value, after losing another 16 per cent yesterday. Leighton Holdings has lost 9 per cent, UGL 18.8 per cent and Bradken 18 per cent… The negative sentiment looming over the sector wasn't helped by the overall quarterly GDP growth rate that more than halved compared with the March quarter, coming in at 0.6 per cent from a revised 1.4 per cent. On a seasonally adjusted basis, a breakdown by industries showed mining shrank 1.2 per cent for the quarter.”

Business Spectator’s Stephen Bartholomeusz has a fantastic piece that reflects on the dour tones from Fortescue Metals Group, a once jubilant pure iron ore player, with BHP Billiton’s once embattled oil and shale gas leader Mike Yeager:

"The significance of the shale gas acquisitions is underscored by Yeager’s forecast that of the $US6.5 billion his division will invest this financial year about $US4 billion of it will be devoted to shale liquids. Overall BHP expects 8 per cent volume growth in the division – and 15 per cent growth in liquids… When iron ore prices were at stratospheric levels – they approached $US200 a tonne around this time last year – Rio’s larger iron ore exposure and the highly leveraged exposure to the price provided by Fortescue were competitive advantages. Today, while it may have slightly mistimed its plunge into the US shale gas sector just ahead of a very sharp fall in gas prices, BHP’s $US20 billion shale play and the massive expansion of its oil and gas resource base is looking like an increasingly valuable strategic shift in the balance of its vast portfolio of resources.”

In other company news, Fairfax’s Elizabeth Knight runs through the possible structures of a code-sharing deal that Qantas Airways looks like it has done with Emirates. The Australian’s John Durie reports on ING’s new online superannuation fund with zero fees.

The Australian Financial Review’s Chanticleer columnist Tony Boyd says shareholder activists pushing for reform at News Corp face an uphill battle for a couple of reasons. Put simply, Murdoch is unlikely to concede his power over the register because the company is one of the best media players in the business and its outlook is strong.

In economic matters, The Australian Financial Review’s Geoff Kitney speaks to Trade Minister Craig Emerson, who strongly attacks the Nationals for their stance on foreign investment in Australian farmland. The Australian’s economics editor David Uren says the government’s white paper on Australia in an Asian Century might have come too late.

And The Australian’s Asia Pacific editor Rowan Callick has a small go at Opposition Leader Tony Abbott for his protectionist stance on direct foreign investment from state-owned Chinese enterprises. Callick says we have to "deal with China as it is,” anything else is a fantasy.

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