Time to foster green shoots as mining starts to roll downhill
In mid-1990, when Don Russell was chief of staff to treasurer Paul Keating, he experienced a moment when, as he recalled later, you could almost hear the economy snap - and Australia went into recession.
Thursday was the day when anyone listening heard the mining boom snap. The Bureau of Statistics revised away virtually all growth in mining investment for the first half of 2012-13, and reported a 6.2 per cent plunge for the March quarter.
That doesn't mean we are necessarily heading for recession. But it does tell us that the resources boom has peaked, sooner than anyone expected. And it lifts the urgency of the quest to stimulate other sources of growth.
Other bureau data on Thursday suggested housing could help. The March quarter was discouraging, with housing construction work falling 1 per cent when it was expected to rise. But April recorded the best housing approvals for seven months. Outside Victoria, approvals for new houses are rising steadily.
Traditional retailing won't help. National Australia Bank reported online retail sales have surged 23 per cent in the past year, and now make up 6 per cent of retail spending. Growth in online sales by domestic retailers is now matching that of overseas websites.
But the scale of the contraction in mining dwarfs anything produced by the "green shoots" in housing and retailing. In the March quarter the plunge wiped almost $1.5 billion off Australia's quarterly output. A day earlier, the bureau reported that total construction activity shrank by $1 billion in the quarter.
Between them, that will slice roughly 0.5 percentage points off Australia's growth rate for the quarter. It raises the question Professor Ross Garnaut asked this week: where will our growth come from as mining fades?
The financial markets did not hear the economy snap in mid-1990; the recession took them by surprise. They weren't listening either when the mining boom snapped. Their analysts had persuaded themselves that what mattered was the miners' forecast for spending in 2013-14 - and against expectations, that was up a touch to $102 billion.
The analysts diligently turned out forecasts of what mining investment might be in 2013-14 if you grossed up the forecast by applying the average realisation ratios recorded in the long boom that took mining investment
from $9.7 billion in 2004 to $94 billion in 2012.
They missed the point, big time. The boom peaked in mid-2012. We have now begun the decline.
In the same survey a year ago, the miners forecast capital spending in 2012-13 of $119 billion. They now say it will be $98 billion, and past experience suggests it will really end up below $95 billion.
Are none of these well-paid analysts aware last year's preliminary estimate was wrong by 20 to 25 per cent? That is some error. If they don't know that, who pays their salaries? And if they do know it, why on earth are they telling us this is the figure that matters?
One hopes the Reserve Bank was listening. The upside of the mining boom is behind us - and what a rise it was, with mining investment accounting for roughly half the economy's growth since 2010. Even if the descent is gradual, as the Reserve hopes, mining investment from here on will mostly be detracting from Australia's growth rate, not dominating it.
Garnaut is right: we need to bring down interest rates to bring down the dollar, so firms in other trade-exposed industries have the incentive to invest and expand to pick up the slack mining will leave.