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Two-speed economy is the new normal

The resources boom is creating winners and losers across the Australian corporate sector, writes Stuart Washington.

The resources boom is creating winners and losers across the Australian corporate sector, writes Stuart Washington.

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, 49, used to think of himself as living a "Tattslotto existence": he would win big if he had the right price for his customers.

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

The winning numbers were increasingly held by Chinese imports, as their cheaper 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 transforming corporate Australia.

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

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

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

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

Those themes were, firstly, the broadly positive elements of resources and China or Asian markets.

Then the research noted when companies referred to three less positive elements 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 Australian 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 growth prospects stumble.

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

"I think 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 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 and they are bearing the brunt or cost

of that."

A host of fastest-highest-strongest statistics for Australia have accompanied the rise of China.

The dollar recently hit its highest ever level of $US1.10 against the US dollar since it was floated in 1983. Our terms of trade - how much the price of our exports outstripped the price of our imports - is also the highest ever.

Mining investment is the highest recorded as a percentage of gross domestic product.

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 broader economy.

And as an 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 ably 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 Paul Bloxham, the HSBC chief economist who this month published a 38-page paper, "Does Australia have a Resources Curse?".

Bloxham examines the question of whether Australia is suffering what has been termed by economists as "Dutch disease", the hollowing out of an economy as it focuses on one industry.

The notion of Dutch disease comes from the Netherlands' discovery of natural gas in 1959, with the premise 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 both the 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 major sectors that, at first glance, are being affected by a high Australian dollar and a resources-based economy: manufacturing, education, tourism, retailers and housing.

But Bloxham 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 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 in the changes being wrought in the economy.

But, putting aside the hurting industries and the human cost, Bloxham sees the pain as pricing signals that are telling the economy which direction it should move in.

The high dollar is a price signal that is telling Australia's manufacturing, tourism and education industries to squeeze over and make way for the boom.

Within 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 in the streets.

But the world is a more complex place, as the Bluescope workers put out of a job found last week.

And chief executives are expressing concern about just how the boom is going to play out.

"Where the real impact is out in the western suburbs of Sydney and 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 the government picking winners - through tariffs, subsidies, capped exchange rates or pegging wage rates - as a mug's game.

He also bemoans the economy's broader lack of productivity gains being made to get that most elusive thing: more bang for the same buck.

But Bloxham does support a broad-based mining tax to capture some of the wealth being generated by high commodity prices to create a sovereign wealth fund.

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

The twin-speed economy reaches deep inside individual companies. "If you look at AMP's business, you could argue it sits a bit in both camps," says Craig Dunn, the chief executive of AMP.

Given shaky confidence levels, he says consumers save by tipping more money into bank deposits rather than locking it away in the superannuation AMP offers.

"I think what you find is when you get real consumer uncertainty, liquidity becomes the priority," Dunn says. "Therefore we are disadvantaged in that part of the market.

"Against that, if resources stocks do well, the equity market grows 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 non-resources businesses have hitched their wagon to the Asia growth story.

"We recognised the shift in the global growth to Asia, and we positioned ANZ to take advantage of this," the bank's chief executive, Mike Smith, told investors after his latest quarterly results.

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

Tim Brimelow worked as a salesperson 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 a higher price than cheaper versions with older chipsets available at major retailers.

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

On a personal level, Brimelow has embodied a shift to take advantage of opportunities, after China changed the game plan in his previous career. At a country level, ANZ's Smith sees Australia doing the same thing as a response to China and the region's growth prospects.

"We'll see this driving the performance of the resources, the agriculture and the infrastructure sectors, which are now joined at the hip to Asia's process of industrialisation and urbanisation," he says. "Although there will be volatility in commodity prices, there is clearly significant upside for those sectors for the next 20 years or more."

But Bloxham offers the warning that with many of our eggs 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."

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