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Has the economic boom in Australia been managed into a bust?

March 12th, 2012 · Greg Atkinson · 23 Comments

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

all_ordinaries_index_chart_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


23 responses so far ↓

  • 1 Peter // Mar 13, 2012 at 3:39 pm

    Betting on a Labor government delivering a good economic outcome is a low probability wager.

    We are also not learning from history.

    In the good old days, we exported woodchips to Japan. The Japanese turned the woodchips into fine paper, and sold it back to us at 1000% mark-ups.

    We continue to dig stuff out from the ground, shipping them overseas, and then importing all sorts of value-added goods made from the same resources exported overseas.

    We celebrate our mining magnates and sporting stars. But no one remembers the inventor for cochlear devices.

  • 2 Greg Atkinson // Mar 13, 2012 at 4:22 pm

    That’s a good point about Cochlear. We actually don’t focus much on science & engineering in Australia. When I was back in Sydney I worked in a so called “technology zone” which was in fact largely made up of support centres for overseas technology companies like Fujitsu, Ericsson, Siemens etc.

    Digging out of the ground is fine but I wonder why we as a nation, haven’t branched out more into say mining equipment and related technology. Most of this is imported.

    Recently Rio Tinto for example made an announcement about the implementation of driver-less trains and will roll out driver-less trucks for their mining operations as well. Not a single component as far as I am aware, is made in Australia, not even the tires for the trucks. (and those tires for the large mining trucks are not low value products either)

    Sadly I am not sure that we have the manufacturing base now to even move back in a significant way into advanced manufacturing even if we wanted to. Even in the naval ship building area we seem to be sending more work overseas.

    In any case I think the carbon tax will push the last of the major manufacturing operations either offshore or into oblivion including most, if not all of, the car industry.

  • 3 Leigh // Mar 14, 2012 at 8:46 am

    We do indeed seem to have a strange approach to how we live in this world. Perhaps it is that Australians really do have a “she’ll be right attitude.” We are happy to export uranium for nuclear power stations but wont touch them ourselves, we are delighted to sell iron ore but think steel is made better elsewhere, we love to drink beer but both FGL and LNN are now overseas owned and we have more sun than anywhere on the planet but don’t make solar panels. I worked in an Australian University and saw some amazing research on solar paint, ship guidance systems and cancer cures but all of them had to get overseas money to continue their work. It took a relatively short time for both Ireland and Spain to go from boom to bust and I fear we are being sold a similar story about our economy. The U.S is recovering, we are stagnating and that does not make sense if we are the envy of the world. One thing is certain, “she” is not quite as right as she should be.

  • 4 Greg Atkinson // Mar 14, 2012 at 9:32 am

    Leigh yesterday I was looking at the summary of patent applications put out by WIPO and what struck me is that since 2007 Australia has been sliding backwards in terms of Patent Cooperation Treaty (PCT) applications.

    Source: International Patent Filings Set New Record in 2011

    In 2011 patent applications in Canada grew by 8.3% while in Australia they fell by -1.8%.

    Meanwhile patent applications in Japan was up 21% and in China they were up 33.4%.

    More worrying is that not one Australian company made it into the list of Top 100 holders of patent applications. Not one.

    I think that says something about innovation in Australia and how much focus we place on it.

  • 5 Leigh // Mar 14, 2012 at 1:49 pm

    Greg, I am not sure how the patent system works in other countries but in Australia, it takes at least two years and thousand of dollars to get a patent through the system, although there is some early protection in the patent pending category. However, once a patent is in place they do not send a renewal notice; you have to remember when it is due and you are charged heavily the later you are with your payment. The fee increases dramatically each year and the patent terminates after fourteen years. Maybe this is just normal sort of governmental process but it is hardly encouragement for innovation as they say in the WIPO article, “in a world where innovation is an increasingly important feature of economic strategy.” I note that these are multi country applications.

  • 6 Greg Atkinson // Mar 14, 2012 at 2:36 pm

    Leigh the figures are for PCT applications not for granted patents. Yes the fees can be an issue but I can’t see that they would hold larger companies back. But they could be holding back smaller companies & ventures which would be another sign the economy is not ticking over quite as good many would lead us to believe.

  • 7 Leigh // Mar 14, 2012 at 4:21 pm

    Ok Greg, My point is that there is no incentive, like a payroll tax if you are silly enough to employ more than sixteen people. The attitude to innovation and development seems to be negative. To do nothing should not be an easier option.

  • 8 Greg Atkinson // Mar 14, 2012 at 4:40 pm

    That I agree with Leigh. I don’t see the carbon tax helping much either. It’s pretty tough out there for a lot of small business owners there days & I don’t feel the government is all that focused on their plight.

  • 9 Peter // Mar 15, 2012 at 9:32 am

    I totally agree with Leigh.

    Look at companies such as Carnegie Wave Energy (ASX:CWE), Ceramic Fuels (ASX:CFU)and Geodynamics (ASX:GDY). It is a wonder that they bother to remain in Australia. And what about those that have left already?

    The Labor government, with none of the cabinet members having any business experience to speak off, often has things arse-end backwards. What is the use of spending big on education if you do not support and incentivise R & D and higher value IP? What is the point of the NBN if the smart people are all in Silicon Valley?

  • 10 Market Madness // Mar 17, 2012 at 9:41 am

    “But I often find myself asking, has the mining boom been well managed?”

    A question that simply asking it suffices to answer it. Centrally planned mining, as with centrally planned anything, is certainly not the most efficient model. Many, however, would argue that there are “public goods” involved and that the trade-offs are worth it.

    “If we accept that the stock market reflects how the wider economy is fairing on a long term basis…”

    A potentially dangerous assumption to make these days isn’t it?
    🙂

    I reviewed some great investment books I’ve read over the last couple years today. Might be helpful to some. And if us indices are of interest to anyone here’s today’s charts.

  • 11 Greg Atkinson // Mar 20, 2012 at 7:52 am

    I would say that the ASX All Ords/ ASX 200 is giving us a fairly good indication of how the economy is fairing. Sure the relationship broke down during the height of the GFC and after the Lehman collapse where fear took over, but at the moment it is at a recession-like level and that is probably a good reflection of where the economy is heading. Remember the theory is that the stock market is a leading indicator.

    As for mining, well I don’t see much planning at all 🙂

  • 12 GoWest // Apr 16, 2012 at 5:02 pm

    Interesting graph – implies that the share market is at the cross roads and we should start to buy in again for long term gain. BDI seems to be going up as well. Shares reflect optimism in 12 months time perhaps.
    To answer your question the mining boom taxes have already been spent. The Feds have done their best to stimulate their pensions with 50billion a year, but thats only helped Canberra. I hear WA will get 55cents per dollar back on their GST next year so yes any remaining mining boom is being sucked eastwards big time to fix Swans pre-election budget… not that it will do much good to you with the carbon tax eating up all the free dollars into another swag of regulators. We can hope that Brown resigned because Julia told him she was going to dump the carbon tax. However I doubt it – she still acts like she is still in the communist party complete with red jacket.

  • 13 Greg Atkinson // Apr 16, 2012 at 6:17 pm

    GoWest I reckon we might be close to the market being set up for the next bull run but what worries me is China. I don’t expect the Chinese economy to implode but it will come off the boil and that will hit the Australian stock market. However if you look at the share prices for many of the mining stocks then it looks like a China slowdown has been priced in.

    So 2012 might be the year we start to see stocks find their legs again and when Julia is shown the door next year we should see the market rally even further.

  • 14 Lachlan // Apr 18, 2012 at 4:43 pm

    Greg last week showed short term reversal on the AUD/USD and I feel good about risk. Hoping for a sharp snap up in silver. My shares started red today and finished up 1.8%..the sort of action I like for a turn. Who knows. Looks good so far anyhow.

  • 15 Lachlan // Apr 18, 2012 at 5:56 pm

    Industry Funds Management chairman wants inflation.

    …He said lower interest rates could help depreciate the Australian dollar, which is currently above 103 US cents, and reduce the pressure on exporters.

    ‘That would be a very good thing overall for the economy,’ Mr Weaven said.

    Think I have heard that somewhere before.

    http://bigpondnews.com/articles/Finance/2012/04/18/RBA_focus_too_much_on_inflation_740805.html

  • 16 Greg Atkinson // Apr 22, 2012 at 11:27 am

    Lachlan ee also have the RBA and Government pulling in opposite directions at times…that doesn’t help either. I have said for a long time that rates were raised too far and have remained too high but we can’t blame the RBA for everything since they can’t do anything about government spending or the influx of investment into mining for example.

  • 17 Lachlan // Apr 23, 2012 at 11:13 am

    I am agreeing with you then Greg. The price inflation threat is very high imo and I am not a believer in currency devaluations since they transfer financial power away from individuals. I also believe Mr Weavens idea is dangerous for Australia’s economy. No doubt many people are worried regarding solvency issues. However I prefer the RBA does everything they can to keep the currency strong and to keep savers happy in dollars, the over-leveraged in deleveraging mode…and consumers restrained from borrowing for every frivolous whim.
    My inflation bets were mostly encouraged by the management of the global reserve currency. In my opinion it has been used as a tool to drive political changes desired by some people. A result will be it’s replacement by another GRC of which I am sure the same people are aware.
    So the RBA cannot keep everyone happy but I support their stand at this time.

  • 18 GoWest // Apr 24, 2012 at 4:54 pm

    The RBA seems to have lost its economic impact – the banks won’t follow RBA interest rate reductions anymore (no matter how much the goose honks) because overseas credit has become more expensive again and housing debt has become a bigger risk. The cost increases in wages, and inputs combined with a reduction in productivity are doing a predictable number on the Aussie economy so I can’t see where the domestic economy can help either.
    The job losses are a predictable consequence and things will get worse before we recover.
    Maybe Campbell Newman and Costello can find a way forward.
    I had high hopes, but Victoria and NSW seem to be keeping a low profile in the hopes that Swan won’t see them as a target for his Henry state tax thieves!

  • 19 Greg Atkinson // Apr 26, 2012 at 8:42 am

    GoWest I believe the RBA, Treasury and Government have taken the wrong approach in terms of managing the economy. Over the last few years they have been focused on managing the boom & trying to stop the economy overheating whereas I would suggest they should have been focused on steps to diversify the economy and preparing it for the end of the commodities boom.

    At the moment I don’t see any coherent plan to manage the economy apart from the government being focused on opinion polls & the RBA being obsessed with inflation. As for the Treasury, they appear unable to look past China.

  • 20 Stillgotshoeson // May 25, 2012 at 2:21 pm

    Well, one would tend to think things like this would not be happening if the country was indeed in boom times and things were in fact good because we are “different” here..

    http://www.theage.com.au/business/forced-home-sales-on-the-rise-as-slowdown-bites-20120525-1z9k3.html

  • 21 Stillgotshoeson // Mar 6, 2013 at 11:16 am

    http://www.theage.com.au/business/victoria-slides-into-recession-with-sa-tasmania-20130306-2fkeq.html

    Who’d have thought Victoria would fall into recession… 😉

    Victoria has slumped into recession, along with South Australia, Tasmania and the ACT, as the Australia’s two-speed economy has sent much of the country into reverse.

    The Bureau of Statistics reports that state final demand – the total spending of consumers, business and governments – fell 0.7 per cent in Victoria in the December quarter, in trend terms, on top of a fall of 0.4 per cent in September.

    Investment in the state has now fallen for three quarters in a row, falling 5 per cent in that time. Asset sales cloud over how much of that is in the public and private sectors respectively, but the Bureau reported last week that as a share of output, capital expenditure by Victorian business has now fallen to the levels of the 1990-92 recession.

    Government spending on services – Federal, state and local – fell 1.5 per cent over the same six months, and even household spending declined 0.1 per cent in the December quarter.

    It is a similar story in South Australia, where state final demand fell 1.9 per cent in the second half of 2012, while in the ACT it fell 0.7 per cent. Tasmania is the state suffering worst, with trend spending levels falling 5 per cent over the past five quarters.

    Queensland has slowed abruptly,, with state final demand up just 0.7 per cent over the past six months

  • 22 Biker // Mar 6, 2013 at 3:31 pm

    Just imagine what might happen when things in Vic improve…

    http://www.news.com.au/realestate/investing/darwin-and-melbourne-drive-growth-in-property-prices/story-fndbarft-1226588396362

  • 23 Greg Atkinson // Mar 18, 2013 at 2:19 pm

    Well if you put your money on Swanny being right you would have lost the bet.

    From Bloomberg today:

    Australia Faces ‘Massive Hit’ to Government Revenue, Swan Says

    “Australia faces a “massive hit” to government revenue, pushing the nation further into deficit ahead of an election in September, Treasurer Wayne Swan said.

    The national budget fell a further A$4.6 billion ($4.8 billion) into deficit in the first four weeks of 2013, taking the total shortfall to A$26.8 billion for the first seven months of the financial year, according to Treasury figures released by the government March 15. Just three week ago, Swan predicted a reduction in revenue would add just A$2 billion to the deficit in January.”

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