Life in the fast lane

FIRST the good news: the bad news probably isn’t so bad. Now the bad news: the best of the good news probably is past. By Michael Pascoe
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Both that good and bad news is according to the mob I rate as the most reliable observers of our economy, the economics team at the Reserve Bank of Australia.

As usual, the financial press only picked the quick and easy headlines out of the RBA’s latest quarterly statement on monetary policy and correspondingly gave a lopsided view of the RBA outlook. The standard headline was all about the RBA downgrading its growth forecasts and sounding worried about what the various clowns in Europe might get up to.

Worrying about Europe is a reasonable thing to do but you could waste your life reasonably worrying about any number of things. Every time you step into a car you could worry about the potential result of the human body’s ability to handle a tonne of metal travelling at high speed and hitting a wall or another tonne of metal also travelling at high speed.

You regularly leave the ground in a heavier-than-air contraption that travels at 1000 km an hour at a height of 10,000 metres? Worrying types easily worry about that. (And remember the old pilot’s wisdom: flight is a battle between man’s ingenuity and gravity – and the best you can hope for is a draw.)

The only rational thing to do when given the choice of worrying about any and everything is to play the odds and not worry about it. Thus, yes, the Europeans could be total fools and fling themselves off an economic cliff, taking the banking system with them, but they are unlikely to.

They are much more likely to stumble along the edge of the cliff for years to come, having a miserable time and experiencing low economic growth or worse in some cases.

The RBA seems to think the latter course is the most likely and confesses to being more pessimistic about European growth than the International Monetary Fund. To be fair, the IMF is run by Europeans.

However, even with such an outlook, the RBA still thinks the world will grow by about trend – around 4% – this year and next.

Get it? Europe’s going nowhere, ditto Japan and the US is only a bit better, but the world is still doing about average. The reason for that of course is that the rest of the world, the marvellous rest of us, will grow nicely anyway.

It was a major achievement just a few years ago when someone realised the non-G7 nations had grown to the extent of providing half the world’s growth. Then it became two-thirds of world growth.

Here is the latest update on that score from the RBA commentary team on November 3: “Growth in emerging economies is, however, expected to remain firm, contributing around three quarters of total global growth, although it has also been revised down modestly given trade and financial market linkages to the advanced economies”

How good is that? In a comparative blink-of-the-eye the emerging world, our world, has reached a critical mass and a momentum that will sustain it even when the G7 is poorly.

It is a fantastic reality that many worry warts still do not get.

Yes, Europeans feeling poorly and buying less stuff from China will mean China grows a little less quickly, but it is still growing very nicely indeed. Ditto most of Asia.

Says the RBA: “The Chinese economy has grown by around 9 per cent over the past year, with growth moderating slightly in line with the authorities’ efforts to restrain demand and limit inflation.

The bank’s forecasts assume some further moderation over the next year or so, with growth of 8-9 per cent expected over the next couple of years. Given current tight financial conditions, including restrictive measures affecting the property market, the authorities have scope to respond if the problems in the advanced economies threaten a more significant slowing in growth. A number of other emerging markets also have scope to ease monetary and fiscal policies should it be needed”.

There was a memorable “super cycle report” put out by Standard Chartered Bank last year that should knock the socks off Australian observers and probably drive the average American into a deep xenophobic depression.

According to the bank’s economics department, China’s consumer spending will overtake that of the US by 2017.

It also reckoned that by 2030 China’s nominal GDP would be twice the size of America’s, even while assuming reasonable US growth over that period.

So the good news is that the bad news of the Old World remaining weak is not so bad at all.

For the mining community though, the bad news is that the best of the good news in terms of prices may be behind us. According to the RBA, our terms of trade have peaked.

“For some time, the bank has been expecting that the terms of trade would gradually decline as global production of resources, including coal and iron ore, increases,” it says.

“The recent falls in commodity prices and the slowing in global demand suggest that the peak in the terms of trade has been reached and indeed the recent significant falls in the price of iron ore suggest that the decline could be happening a little faster than earlier expected.

“However, assuming continuing solid growth in China, commodity markets are likely to remain quite tight and the terms of trade are forecast to remain at very high levels compared with recent decades.”

No, Virginia, iron ore prices cannot keep going up forever – and neither can gold, coal or fairy floss futures.

The adjustment to that will be interesting at the margin, but reasonable enough for most. The result for the Australian economy overall is growth remaining around trend with a bit of an extra kick in 2012 thanks to various Queensland swimming holes reverting to coal mine status.

You can measure GDP growth either on a year-ended or year-average basis. Both methods average out eventually but can provide a better or worse look if you want one – if, say, you are a journalist seeking a headline. So you can point to the RBA’s forecast of year-average growth for calendar 2011 of 1.75% – or December 2011 year-ended growth of 2.75%. No prize for guessing which one the media went with.

Basically though, we’re looking at growth around 3.25% this financial year despite the Old World being miserable. That will pick up to 4% in calendar 2012 and then slip back to 3.25%. That growth remains underwritten by the resources industry both through export income and the capex boom.

On second thoughts, even the bad news isn’t bad.

Michael Pascoe is a finance and economics commentator with more than 30 years experience in publishing and broadcasting.

This article first appeared in the December 2011 edition of Australia's Mining Monthly magazine