Australia’s growth picked up around the turn of the year as it rebalanced from being driven by mining investment to being led by household spending and residential construction. Growth is also supported by a ramp-up in resource exports as the country’s trade exposure continues to shift towards China.
Strong demand in Asian emerging markets, particularly China, has substantially boosted Australia’s key resource exports – first through higher commodity prices and now in terms of higher volumes.
Strong demand in Asian emerging markets, particularly China, has substantially boosted demand for Australia’s key resource exports
Despite commodity prices having peaked, Australia’s exports to Asia are likely to rise further as new resource capacity continues to come on line. In 2013, China took 32 per cent of Australia’s exports, up from 5 per cent in 2000, with iron ore and coal accounting for most of the increase.
The projected ramp-up in resource export volumes in coming years is substantial. The increase could account for around two-fifths of Australia’s GDP growth over the next five years, compared with an average one-fifth over the past two decades. Iron ore and coal export volumes are rising now, but the boost to liquefied natural gas exports to China, Japan, Korea and India is yet to come.
However, with mining investment now falling, resource exports will eventually plateau. The question then becomes, where will Australia’s new trade opportunities lie? As with the resources boom, these new opportunities are likely to come from emerging Asia.
The global middle class is projected to increase by 1.3 billion by 2030 – with most of this growth in emerging Asia. This wave of new consumers on Australia’s doorstep will present the largest opportunities for trade beyond the mining boom.
Farming should benefit as growing emerging-market incomes boost demand for agricultural commodities – goods for which Australia is already a leader in global export markets. Rising incomes in Asia should also present significant trade opportunities for tourism, education and business services.
Australia’s rebalancing of growth has already started to create jobs. Mining companies are cutting back because fewer workers are needed to operate mines than to build them, but the more labour-intensive non-mining sectors are taking on more workers.
Because this rebalancing appears to be underway, we expect that the central bank’s easing phase is done. The Reserve Bank of Australia has noted that the “policy setting is likely to be appropriate for some time”.
However, figures suggest the momentum has slowed a bit. Retail sales, building approvals and housing prices have steadied. This may reflect the impact of May’s Federal budget, but while its overall drag on growth is expected to be modest, cuts to social payments have been prominent and consumer sentiment has fallen.
China’s growth slowdown has not helped either. This has seen iron ore prices fall to 18-month lows. And without a matching decline in the Australian dollar, local currency income flows are likely to have fallen.
Nonetheless, we continue to see the underlying momentum in Australia’s trajectory as one of trend improvement, with rebalancing continuing and the labour market likely to lift. A 7.4 per cent growth in China’s GDP this year, as HSBC’s economists still expect, should support commodity prices.
This research was first published on 23 and 30 May 2014.