Economy will struggle: BIS Shrapnel

In its Long-Term Forecast Update Report, BIS Shrapnel said the extraordinary stimulus to GDP from the recent minerals investment boom is receding and will turn negative as minerals investment recedes from peak levels.

BIS Shrapnel sees residential investment stepping up as the next phase, with activity strengthening through to the middle of the decade. After that, they expect the main driver of growth to be non-mining business investment.

“We do not think non-mining business investment will pick up pace for another year or two,” BIS Shrapnel chief economist Frank Gelber said.

“However, once it does, it will constitute a long and strong upswing. The delay to the commencement of this investment is setting the preconditions for a strong cyclical upswing.

“Dare we say boom? Followed by a bust next decade?”

The current investment round has added substantially to Australia’s capacity to produce and export minerals. BIS Shrapnel does not believe that investment can continue indefinitely at these levels. Nor do they expect commodity prices to remain this high indefinitely.

“Eventually, worldwide supply will catch up to demand,” Mr Gelber said.

“We do not know when ... that will happen. Our forecast is for an orderly decline in minerals investment. However, the risk is that a fall in commodity prices will precipitate a much sharper decline in investment, leading to a substantial negative shock to the economy.”

BIS Shrapnel believes the next structural shift will come when the Australian dollar falls.

“That will again be a painful process involving substantial change at the industry and regional levels, with declining minerals investment offset by a recovery in other parts of the economy,” Mr Gelber said.

“Most likely, the dollar will fall when commodity prices fall. The extent of structural change will depend on the extent to which the dollar falls.”

BIS Shrapnel believes the lower Australian dollar will offset part of the negative impact of the fall in mining investment and partially reverse the structural change the country has been going through, with an improvement in the competitiveness of industries currently hit by the high dollar. It would mean a boost to manufacturing, agriculture, tourism, education, finance and business services.

“But we are unlikely to go back to where we started,” he said. “The key to achieving this growth in Australia will be labour productivity growth, which will require the combination of good government policy and investment by businesses in labour-saving technology.”