EDITORIAL: by Peter WestmoreNews Weekly
Hard landing likely for Australia's economy
, December 22, 2012
Since the global financial crisis hit in 2007, Australians have been far more risk-averse than many economists and business leaders would like, by repaying mortgages, foregoing increased debt and limiting purchases of expensive consumer goods.
Despite the willingness of banks to extend credit, most people have clearly decided to ignore the official economic outlook in favour of their own more cautious assessment of the state of the Australian and global economies.
This caution could well be vindicated if the expected fall in commodity prices causes a hard landing for the Australian economy in 2013.
By cutting official interest rates to 3 per cent — the level last reached at the depth of the global financial crisis — the Reserve Bank has indicated there are significant downside risks for the Australian economy.
Falling commodity prices have already taken the shine off the Australian mining industry, which has driven Australia’s economic growth over the past 20 years.
SA’s $30 billion Olympic Dam expansion has already been put on hold, and several WA miners have cut employment, in the wake of falling commodity prices.
The federal Treasury last week predicted that lower export prices could cut government revenues by around $5 billion this year, pushing the budget from a promised surplus into a deficit, with the revenue shortfall rising to around $14 billion in the next financial year.
Commodity price predictions are notoriously unreliable; but the unresolved debt crisis in Europe and the budget stalemate in the United States — two of China’s main export markets — will probably hold commodity prices down next year.
Additionally, Australia’s natural gas exports — driven by massive discoveries off the north-west shelf of Western Australia over the past decade — will be affected by increased international competition, driven by the rapid increase in US natural gas production.
The expansion of US gas production was caused by the discovery in the 1990s that pumping water under pressure into impermeable rock formations released vast quantities of natural gas trapped inside the rock.
Although it took some years before the industry applied the technology, the discovery has led to a massive expansion of natural gas production in America. Instead of being an importer of natural gas, the United States now produces three billion cubic feet more natural gas than it consumes every day, and gas prices have fallen nearly 50 per cent in the past year alone. (See Alexander Green’s report, “Natural gas price forecast 2012-13”, Investment U).
While falling energy prices are good for the United States, they will certainly depress gas export prices for Australia. Falling gas prices will also push down the price of electricity in the US, as gas replaces coal in power generation.
In contrast, Australia is locked into rising electricity prices as a result of the Gillard Government’s coal and mining taxes, both of which push up the price of coal from which most of Australia’s electricity is generated.
Some observers also believe that China’s central government has been encouraging stockpiling of imports, both to capitalise on current falling prices and to control future supply prices.
An ANZ commodity report recently predicted that the price of aluminium, for which Australia is one of the major suppliers of the raw materials bauxite and alumina, could fall by as much as 20 per cent, while another highlighted the lack of profitability of China’s steel industry, at current prices.
One of the complications for economic management in Australia is that the exchange rate of the Australian dollar remains very high, as the Reserve Bank has noted.
In a time of significantly falling commodity prices, the Australian dollar would be expected to fall as well. But because of global financial uncertainty and higher interest rates in Australia, there has been a flood of “hot money” into the country which has kept the Australian dollar above both its historical levels and above parity with the greenback.
This, in turn, has contributed to Australia’s rising trade deficit, as imports flood into the country and export earnings stagnate.
All this will directly affect the Australian economy in 2013 — not just state and federal government revenues from royalties and taxes, but also employment in Queensland and Western Australia, the two states which have been driving the Australian economy since 2009.
Already, state governments in the major resource states are tightening their belts and making significant cutbacks on government spending in their recent budgets. On the other hand, the federal government is still committing taxpayers’ money to a range of projects, including the recent bid for a seat on the UN Security Council, the UN climate change agenda, and the vastly expanded cost of paying for its failed border-protection policy.
All this suggests that the next 12 months will be difficult for Australia. The federal government’s fiscal irresponsibility will only make it worse.
Peter Westmore is national president of the National Civic Council.