According to many experts, Australia is in the midst of a mining boom and the government often tells us that the Australian economy is performing better than most if not all, of the world’s major developed economies. Certainly the commodities boom has delivered record profits for many companies, generated massive tax revenues for the federal and state governments plus created many thousands of jobs.
But I often find myself asking, has the mining boom been well managed?
Today the Australian All Ordinaries Index is trading around 4300 points which means that effectively the Australian stock market is around the same level as it was back in 2005. That doesn’t strike me as the sort of performance one would expect from a stock market in a booming economy, and that’s probably because the economy isn’t really booming at all.
Australian All Ordinaries Stock Market Index 1988-2012
On the above chart of the All Ordinaries Index I have indicated the bull market run from 2003-2007 in red, the long term trend in green and marked where the market is now via the black line between 2005-2012.
If we accept that the stock market reflects how the wider economy is fairing on a long term basis, then the chart of the All Ordinaries Index indicates we are back to the pre-mining boom rate of growth (green line) and that the mining boom could almost be over.
On one hand that might sound like a crazy statement to make since the major mining companies are still making huge profits and expanding their operations. But a quick look at the stock prices for BHP Billiton & Rio Tinto for example show that they are trading considerably below their ‘boom’ highs. In addition hard commodity prices are generally lower than they were 12 months ago.
Perhaps the time to manage the ‘boom’ has past and if so, was it managed well?
In 2009 I wrote a post called GDP growth does not equal a quality Australian economy in which I highlighted that a growing economy in terms of GDP does not mean that the economy is performing well in terms of quality or sustainable growth. In that article I outlined two concerns I had about how the economy was being managed which I would like to expand upon today.
Firstly I wrote about the obsession with GDP and stated that:
“The focus on GDP leads us into an economic trap because once most people are convinced that GDP growth is good, that is what governments will strive to give us. Quality of life issues, diversifying the economy and a whole host of other factors we should be taking into account in terms of managing the economy don’t get much attention.”
I believe one thing that can be said today, with some certainty, is that Australia has not used the mining boom to diversify the economy. In fact I would argue that we have allowed the mining boom to make the economy dangerously unbalanced and sat almost idly as economic sectors such as tourism and manufacturing have slid backwards.
Also back in 2009 I commented that:
….Australia has wasted a golden opportunity to position our economy for the decades ahead. I believe the majority of the stimulus money that has been pumped into the economy has not been well spent, I see few clearly defined outcomes and reckon the Australian economy has a cold which could easily become something a lot more nasty.
Now in early 2012 there is almost daily commentary in the media regarding the various economic signs that indicate that the Australian economy is slowing. Economic indicators from home prices, consumer spending to employment data & credit growth suggest to me that the “something a lot more nasty” that I mentioned in 2009 could be about to hit the economy during 2012 or 2013.
About the only thing that has kept the GDP numbers positive has been the almost insatiable demand from China for iron ore, coal & copper etc. If that demand wavers (and it’s wavering at the moment) then the mismanagement of the boom will become apparent.
I will even go as far as saying that it appears that the mining boom has been managed into a bust. Instead of the government having the funds to stimulate the economy if needed, it now finds itself scrapping to balance the books and pay down debt. (raiding the Future Fund for cash will be a clear sign the government is getting desperate)
How a nation in the midst of a so-called boom can end up in such a situation is a touch puzzling to me. Perhaps borrowing & spending billions on stimulus measures that delivered no long term economic benefits wasn’t the brightest economic plan after all hey?
Or it could be that the economy will rebound strongly this year, the budget will be balanced and that all will be well.
It’s Wayne Swan in one corner and myself in the other, so place your bets ladies & gentlemen!
Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital & a Director at Eco Marine Power. He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp