Warning bells over mining investment

An abrupt fall in mining capital expenditure could trigger a recession, with the next 18 to 24 months the greatest risk period, according to Morgan Stanley research.

An abrupt fall in mining capital expenditure could trigger a recession, with the next 18 to 24 months the greatest risk period, according to Morgan Stanley research.

With most analysts 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 GDP growth may pose problems.

Morgan Stanley analyst Gerard Minack said that mining investment may become a drag on growth this year, and while it was too early to declare a recession, "an earlier peak in mining investment also raises the risk that the decline in 2014 could be significantly more damaging than we have in our current forecasts".

While most economists would agree that a rapid fall in mining investment is the most obvious catalyst for a recession, the chances of that happening are unclear.

"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," said Mr Minack.

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 the retail sector and the housing market to help fill the void, as recent cuts to the official cash rate filter through to other parts of the economy.

This was supported by the Reserve Bank in its May monetary policy statement, 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," said the RBA.

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"

Newfound 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.

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