The Australian economy

First, the delusionary hype...

Consumers and mining fuel growth

A SURGE in mining investment and an apparent upswing in consumer spending have delivered Australia one of the fastest economic growth rates in the developed world.

SMH,

26 April, 2012

At 4.3 per cent, Australia's annual growth rate is bigger than any of the developed nations in the Organisation for Economic Co-operation and Development. The quarterly rate of 1.3 per cent is more than twice the most optimistic forecast.

One day after the shadow treasurer, Joe Hockey, described the Australian economy as "underperforming", the Treasurer, Wayne Swan, used the March quarter news to lambaste the Coalition for talking the economy down, denting confidence and then complaining about weak confidence.

He said business figures were also to blame, echoing concerns held within the Reserve Bank.

Asked who in the business community was relentlessly negative, he declined to name names, telling the ABC's 7.30 there were "one or two who go out there and run the economy down all the time".

"Let's make these figures an extraordinary circuit-breaker. This tide of negativity, this relentless negativity from the doomsayers has to stop. It insults the hard work that so many Australians put in to make our economy strong,'' Mr Swan said.

"We have seven eurozone economies in recession, as well as in the UK, and many more developed economies which are crippled by unemployment. This result says something very special about Australia and about our capacity to face up to the worst that the world can throw at us."

But the growth is very uneven around Australia. NSW spending, seasonally adjusted, slipped 0.3 per cent in the quarter, Victoria advanced 1.8 per cent and Western Australia climbed a phenomenal 7.8 per cent.

More reliable trend figures show NSW spending climbing 2.1 per cent a year and Victoria 1.9 per cent. In contrast WA spending ballooned 13.6 per cent - a faster rate of growth than in China.

New engineering construction - most of it related to mining and concentrated in WA - accounted for almost all of the quarter's economic growth, jumping 19.7 per cent over the quarter and 53 per cent over the year. Consumer spending was almost as important, with the volume of goods and services bought swelling a near record 1.6 per cent over the quarter and 4.2 per cent over the year.

The figures suggest Australians bought 4 per cent more food during the quarter, 6 per cent more transport services and 3 per cent more health services. The UBS economist Scott Haslem described the figures as "positively unbelievable".

The consumer inflation rate was zero in the quarter and 1.4 per cent over the year. Household incomes grew 2.5 per cent in the quarter. Household savings were little changed at 9.3 per cent of income.

The news sent the Australian dollar to its highest close in a fortnight - US98.48¢. The sharemarket inched ahead 0.29 per cent.

Describing the figures as "surprising to all", Mr Hockey said they would be better with a better government. "Imagine how well our country could do if we had a good government," he said. "This is not the time to make conditions more difficult for the mining industry. It is not the time to put a new tax on the mining industry."

Asked whether he was running a scare campaign, Mr Hockey said "the scariest thing in Australia is Wayne Swan and … if you look at his words over the last few months he confirms it."

...and then the reality

Pipeline in limbo as China slows, says BHP Billiton

THE world's biggest mining company has given the strongest signal yet that it will park planned investments - including projects in Australia worth tens of billions of dollars - as it prepares to ride out the slowdown in China and weaker commodity prices.

The Australian,

7 June, 2012

BHP Billiton chief executive Marius Kloppers yesterday admitted the miner was wrong to pledge $US80 billion ($82bn) on projects such as the Olympic Dam expansion and an outer harbour at Port Hedland, saying the current economic conditions had made the resources giant more cautious on its spending outlook.

"This is a conservative, low-risk company," Mr Kloppers said yesterday, adding that most companies "blow themselves up" because they were overly exuberant rather than overly pessimistic.

Mr Kloppers's comments signal that the BHP board is almost certain to delay spending on some of its major new projects in Australia - including the $30bn Olympic Dam copper and goldmine expansion in South Australia and the $20bn outer harbour for iron ore exports in the Pilbara - amid the latest round of global economic uncertainty.

BHP snubs call for capital return

The admission came as Mr Kloppers cast fresh doubts over Wayne Swan's promise to deliver a $1.5bn budget surplus in 2012-13 through the controversial mining tax that starts next month. He said BHP would escape paying much of the tax if iron ore prices continued to weaken and the Australian dollar remained strong.

"It is almost impossible to forecast," he said of BHP's expected contribution to the minerals resource rent tax. "It is a highly volatile tax."

The federal Treasurer last month downgraded expected MRRT revenue from $10.6bn to $9.7bn over the first three years, but analysts have questioned this figure and claim the big miners could pay less due to generous depreciation allowances.

The Gillard government has said previously that the three big companies that helped design the MRRT - BHP, Rio Tinto and Xstrata - will account for about 90 per cent of the revenue.

Mr Kloppers conceded BHP had erred last year in promising $US80bn in capital spending over four years, before China's economy began to slow and commodity prices retreated. "We said to the market (18 months ago) we are going to do all of these things - what we should have said is we have the ability to do all of these things, should the conditions be right," he said.

"We just don't want to make that mistake in reverse by saying we will do this on that date."

Mr Kloppers would not comment on whether the BHP board would approve construction of the Port Hedland outer harbour by the end of the year, but he said the iron ore price would play a crucial role in whether it went ahead.

Iron ore is trading at about $US135 a tonne - down from a high of $US180 last year - but some analysts have forecast it could fall below $US100. "We may or may not approve the outer harbour by the end of the year," Mr Kloppers said. "If the iron ore price goes to $US80 tomorrow, we probably won't."

Despite his bearishness about future expansions, Mr Kloppers said there were no signs that customers were cancelling orders and he believed Australian iron ore producers were well placed to continue to meet Chinese demand in the long term.

"We've got lower demand overall from a global perspective and that means supply conditions in some products are clearly different from what they were in September of last year," he said. "But customers are continuing to perform. I just looked at our overdues. They are extremely low . . . which means that customers are continuing to pay."

Earlier, Mr Kloppers told a Perth business breakfast that Australians' reluctance to move to work in the mining industry was just as important to the nation's economic future as the debate over boosting productivity.

He believed Australians were less likely to leave their families to work in the mining industry than Americans and Canadians.

The debate over interstate migration erupted last month after billionaire Gina Rinehart won government approval for an Enterprise Migration Agreement to import up to 1700 foreign workers for her Roy Hill iron ore project in the Pilbara.

Mr Kloppers said BHP had not yet needed to use an EMA, but he believed policymakers should examine why Australians were unwilling to move to work in the mining industry.

"People are simply not willing enough to move to Western Australia and to Queensland," he said.

Mr Kloppers said there was no single solution to addressing the issue of declining productivity in Australia. "We often think there is one silver bullet that is going to change the overall course of competitivity," he said. "The reality is it's a mosaic of things interacting."