Sudden drops in mining capital expenditure could trigger a recession in the next 18 to 24 months, research conducted by Morgan Stanley suggests.
According to the research, the problem lies in Australia’s heavy reliance of resources for GDP growth and poor economic data around non-mining related sectors which are not strong enough to fill the gap, SMH reports.
Morgan Stanley analyst Gerard Minack said that mining investment may weigh down 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''.
A rapid drop in mining investment has got many economists agreeing this would be a clear cause of a recession, the jury remains out on the chances of it actually happening.
''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 Minack.
But HSBC chief economist Paul Bloxham, said he expects resources expenditure 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.
Bloxham added that the retail sector and housing market will help fill the gap as recent interest rate cuts begin to take affect in other parts of the economy.
A view that was supported by the Reserve Bank’s May monetary policy statement, which said there were signs of a shift.
''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,'' the RBA said in its statement.
Minack said that “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''.
Major miners are backing this sentiment with a shift towards cost-cutting and efficiency measures.
“Larger miners appear the most aggressive in their cost reduction targets, with a higher proportion of the savings viewed as permanent,” Morgan Stanley said in a statement.