The resources boom is great news for mining-reliant companies, but other companies are forecast to struggle in the coming years
By Brad Gardner | May 16, 2011
Businesses hitched to the mining bandwagon are likely to benefit significantly in the coming years in stark contrast to other companies throughout the country.
Federal Budget papers forecast new business investment to grow by 16 percent in 2011-2012 and 14.5 percent the following financial year on the back of record capital expenditure in the mining sector.
According to the papers, the mining industry is planning to invest $76 billion in 2011-2012 due to demand from resource-hungry China and India.
The mining sector alone is seen as a key driver in above-trend forecast economic growth and is expected to increase imports as businesses source more goods for major resource projects.
However, the papers say tight economic settings, a high dollar and increased competition for labour are hampering conditions in other sectors.
“Australia’s high terms of trade are supporting strong national incomes and growth in the broader economy. However, conditions are expected to remain challenging in those sectors that are not benefitting – either directly or indirectly – from the resources boom,” the papers say.
“For many businesses, these challenges are compounded by more cautious household spending behaviour and greater difficulty accessing credit following the GFC [global financial crisis]. The mining investment boom is also increasing competition for labour and other inputs, raising cost pressures for some businesses.”
The papers say the mining sector will be largely responsible for increased business investment over the next two years. Investment in new machinery is forecast to grow 17.5 percent in 2011-2012 and 14 percent in 2012-2013.
Engineering construction alone is expected to grow 56 percent over the next two years due mostly to liquefied natural gas (LNG) projects.
“Strong real GDP growth is expected to drive solid growth in jobs and reduced unemployment. With the unemployment rate already low, price and capacity pressures are likely to emerge,” the papers say.
The demand is expected to propel a 4 percent growth in the wage price index to the end of the 2012 June quarter and a 4.25 percent increase by the end of the 2012-2013 financial year.
“However, solid growth in aggregate wages is expected to mask considerable divergences between industries, with resource-related industries likely to continue to experience much stronger wages growth than other sectors, supported by extremely strong growth in labour demand,” according to the Budget papers.
The unemployment rate is tipped to fall to 4.75 percent by the end of the 2011-2012 financial year and to 4.5 percent by the end of 2012-2013.
There are concerns, however, over Australia’s heavy reliance on Asia, particularly China and India.
“One consequence of the increasing concentration of Australia’s trade in non-rural commodity exports to China and India is that Australia’s economic outlook is now more sensitive to developments in those two countries,” the papers say.
Exports are anticipated to grow by 6.5 percent in 2011-2012 and 5.5 percent in 2012-2013, but the Budget papers expect the high Australian dollar to hinder growth in the manufacturing and services sectors.
While the global economy is expected to grow 4.25 percent in 2011 and 4.5 percent the following year, the papers point to rising world oil prices, economic uncertainty in Japan, sovereign debt concerns among EU countries and the US’ dire fiscal position as substantial risks to recovery.
While other economies struggle to contain debt and break free of the lingering effects of the GFC, the Budget papers forecast Australia’s GDP to grow to 4 percent in 2011-2012 and 3.75 percent in 2012-2013.
Net debt is due to peak at 7.2 percent of GDP next financial year before the Federal Government reaches a $3.5 billion surplus in 2012-2013.
The Federal Government is forecasting an underlying cash deficit of $22.6 billion, which represents 1.5 percent of GDP.
Conversely, Japan’s net debt as a percentage of GDP is forecast to exceed 127 percent of GDP this year and peak at more than 160 percent by 2016.