Mining continues to keep Australia out of recession

Sustained growth in mining production and export levels has managed to buoy Australia’s economy, protecting it from a potential recession, new BIS Shrapnel data states.

Despite falls in trade and low commodity prices, Australia’s ability to fill the gap made by supply exiting the market has supported the country, while its multi-commodity base has inured it from the devastating effect of the oil slump.

“Canada slipped into recession in the first half of 2015 but has since recovered – although growth for this year is projected at a meagre 1.4 per cent,” BIS Shrapnel Chief Economist, Dr Frank Gelber said.

“Russia and Brazil – two countries which benefitted greatly from the commodity price boom last decade – are currently in recession.

“So, why not us?

“The decade-long boom in mining investment – primarily in coal, iron ore and gas – was the primary driver of construction and economic growth during that time,” he said.

“It took Australian investment to new heights.

“Now comes the correction. And it will constitute a major negative shock to the Australian economy.”

He went on to state it is time for the non-mining economy to step in.

According to Gelber, the main reason Australia has yet to spiral into a depressed economy has been strong and sustained growth in resource production and export volumes (around eight per cent per annum in each of its past three years), aided recently by surging education and tourism exports, but this situation can’t continue indefinitely.

He pointed to Australia’s position as a low-cost, bulk commodity producer which has lifted output levels and rode out the worst of the downturn, albeit not without repercussions.

BIS Shrapnel’s report goes on to state that the low cost producers in the Pilbara are playing a major role in keeping the nation afloat.

 “Australia is a low-cost, high quality resources exporter, and other countries simply cannot compete with that,” Gelber said.

“While prices have fallen dramatically, export volumes are growing strongly as projects come on stream.”

This is likely to be later supported by the LNG production coming online however it will not be entirely offset, as we are currently entering only the second year of a predicted four to five year decline “that will constitute an enormous negative shock to GDP growth,” BIS Shrapnel stated.

“We are only at the beginning of the decline in mining investment, but we are still looking at strong growth in production and exports,” Gelber said.

“The net effect is that the negative impact from falling investment is being offset by continued growth in production. Having been a strong driver of growth during the boom, mining is now not contributing at all. That’s why growth is, and will remain, weak.

“There is little risk of recession, but we’re stalled, waiting for the non-mining economy to pick up.”

He went on to state that this transition is “agonisingly slow”.

“Business isn’t ready to invest yet – demand is weak, profits are weak and there is still excess capacity. It will take years for business investment to build momentum.”

In the interim, BIS Shrapnel forecasts GDP growth rates of 2.5 per cent in 2015/16 boosted to 3.1 per cent in 2016/17 as LNG projects come on stream, as infrastructure investment picks up and as solid household spending continues.

However, growth will again weaken in the subsequent two years as mining investment continues to fall, as residential building runs out of steam and parts of non-dwelling building plateau.

The main contributor to growth at that time will be rising public infrastructure investment, BIS Shrapnel said.

“Hence, we believe a recession in Australia is highly unlikely,” Gelber stated.

“That said, growth will be soft for another three to four years as non-mining business investment remains weak, weighed down by a pervasive cost-cutting mentality, plenty of spare capacity and weak demand and profits.

“There’s no magic wand for the economy, and the shift to non-mining investment will be agonisingly slow. But it’s not all doom and gloom. 

“Yes, growth will be soft. But it’s still growth.”

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