Tough Times Ahead, What Can Replace The Mining Boom?
BMI View: Persistent uncertainties in end-product demand, high costs , and scarce funding are likely to keep growth in the Australian mining industry subdued in the coming quarters. Weak performance in new orders and labour market rigidities suggest that profit margins for manufacturing and services sectors will narrow further, and the deteriorating outlook for the job market suggests that a correction in house prices is on the cards. Given the weakness in the private sector, the government's attempt to boost economic activity through increased spending in education and healthcare are likely to be insufficient. Thus, we forecast real GDP growth to slow to 2.1% in 2013 and further to 1.8% in 2014, versus a growth rate of 3.6% recorded in 2012.
A growing number of external and domestic signs point to tough times for the Australian economy in the quarters ahead, including a growing amount of evidence of job losses and capital expenditure cuts. These trends are in line with our expectations for economic activity to start slowing in H213. Indeed, statistics have begun to reflect this slowdown, with the unemployment rate in March inching up to 5.6% in seasonally-adjusted terms, the worst reading in four years as the economy lost approximately 36,000 jobs compared to the month before. We expect these negative trends to accelerate as we enter into H213 and persist in 2014, as the economy struggles to rebalance away from overinvested industries such as mining and real estate. As such, we expect real GDP growth to slow to 2.1% in 2013, and subsequently to 1.8% in 2014.
|Faltering Chinese Economy Bodes Poorly For Mineral Exports|
|Australia - 12-Month Moving Sum Of Non-Rural Exports, % chg y-o-y|
Uncertain Demand Leading Miners To Rein In Investments And Hiring
The downbeat outlook of the mining sector is clearly shown in the growing trend of miners cutting capital expenditures and jobs to control costs in view of funding scarcity ( see, Miners Signal Caution Amidst Rising Debt Woes, April 15 ) and high costs. Furthermore, the increasingly uncertain future of demand for their end-products such as iron ore and other industrial metals is likely to lead firms to delay plans for expansion or hiring. The decline in end-user demand as seen in the fall in the new export orders sub-index in China's official Purchasing Managers' Index (PMI) in April will likely lead miners to remain cautious.
Closely related up and downstream industries (such as mining equipment makers and mining services) are likely to be affected by the downbeat business sentiment amongst miners. Indeed, companies from these segments, such as Asciano, a bulk haulage firm, Atlas Copco and Sandvik, both mining equipment makers, have publicly revised down their expectations for new orders and earnings for 2013 to 2015 over Q213. Given our expectations for the Chinese economy to struggle in H213, we expect the trend of declining growth in mining and related sectors to persist.
|Plunging Deeper Into The Red|
|Australia - Performance Of Manufacturing And Services Index|
Manufacturing And Services Offer Little Reprieve
The latest reading from the Australian Industry Group's performance index for the manufacturing sector fell further 36.7 in April, close to the lows recorded in May 2009. The new orders sub-index suffered declines, reaching a five-year low, while persistent rises in wage and input costs imply further margin compression as output prices continued to fall. The dip in the performance of the services sector in April to 44.1 from 49.6 in March erased the gains made over the past three months, and the narrowing profit margins suffered by the sector also suggests that businesses are likely to cut back.
Given the minimum wage standards, union actions and other rules that increase the rigidity of the Australian labour market, making it more difficult for the market to adjust to a lower demand for labour, we believe that these wage pressures are unlikely to dissipate, and thus expect businesses to cope by reducing employment. Together with the job shedding by the mining sector, the persistent we maintain our expectations for the unemployment rate to reach 6.0% by end-2013.
Shaky Fundamentals In The Housing Market Suggests Price Declines On The Way
We believe the uncertainties surrounding the various sectors will begin to shake investors' optimistic outlook and the deteriorating outlook for employment is likely to push households to start deleveraging. The subsequent lack of housing demand is likely to lead to a correction in house prices as new supply from property developers continue to come online. Indeed, despite stamp duty cuts from the state governments and interest rate cuts from the Reserve Bank of Australia (RBA), annual new home sales remain near 16-year lows according to the recent Housing Industry Association report. Boral , a building materials firm echoed our downbeat outlook for the housing market, and recently announced further cuts to their workforce.
Moreover, the recently released 2010-11 report from the Australian Taxation Office showed an increase in the number of negatively-geared property investors (i.e. rental income does not cover the interest costs and other maintenance-related costs). We see growing risks that house price declines could lead to a rise in homes with negative equity, and together with the negative cashflow that property investors are facing, could force home owners and property investors to default. This trend would be further exacerbated as house price falls and results in more owners defaulting and the forced sale could push prices lower. Given our expectations for the Australian job market to see further deterioration in H213, we see few fundamental factors supporting further house price increases, but rather see a more probable case for the housing market to suffer declines similar to the other industries.
|Little Room To Grow|
|Australia - Housing Debt, As % Of Disposable Income|
Fiscal Stimulus Unlikely To Replicate 2008/09 Boost
With major sectors of the economy on track for a slowdown as the federal elections take the stage in September, we believe that the ruling Australian Labor Party (ALP) will attempt to engineer a fiscal stimulus, in hopes to reignite growth as in 2008/09. However, given the overextended household balance sheets, encouraging further investment into the housing market is unlikely to produce the same effect as fewer households are likely to participate. Indeed, with households' housing debt remaining at 133.2% of disposable income in Q412, close to the peak of 135.0% recorded in Q310, the government has instead turned its attention to boost investments in other sectors such as education and healthcare (through the Gnoski reforms and National Disability Insurance Scheme). However, the benefits from investment into these sectors are more gradual and long-term in nature, and as such, are unlikely to provide the same boost in economic activity as that which resulted from the fiscal stimulus in 2008/09.