Reserve Bank of Australia Governor Glenn Stevens said policy makers are prepared to respond in the event the economy slows, predicting the nation’s mining investment boom has at least another year before easing.
“The peak of the resource investment boom as a share of gross domestic product, the highest such peak in at least a century, will occur within the next year or two,” Stevens said today in semiannual testimony at parliament in Canberra. The RBA is ready to act if growth veers off from the outlook, he said.
BHP Billiton Ltd. (BHP)’s decision this week to delay approval of an estimated $33 billion expansion of the Olympic Dam copper, uranium and gold mine in South Australia has sparked suggestions the resources boom that has powered economic growth is over. A slowdown in China, the nation’s largest trading partner, may extend into a seventh straight quarter as a contraction in manufacturing probably deepened this month.
“With commodity prices coming off, it adds a bit more uncertainty to how quickly mining investment retraces after its peak,” said Justin Fabo, senior economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Sydney. “There is a bit more of a risk that the down leg of investment may be a little bit quicker than previously thought.”
A drop in resource investment may threaten Prime Minister Julia Gillard’s pledge to return the budget to surplus this fiscal year after four straight deficits. BHP and Rio Tinto Group both reported profits have declined as commodity prices fall amid slowing global growth.
Lower earnings for mining companies may reduce the A$6.5 billion ($6.8 billion) the government estimates it will reap over two years from a new tax on iron ore and coal profits. The mining tax is payable when a company’s annual profits reach A$75 million, so as not to burden smaller businesses. The government expects to raise A$3.2 billion from the tax in fiscal 2015 and A$3.7 billion in 2016.
“Given what has happened recently with commodity prices, the assumption the government has in the budget around Australia’s terms of trade might look a little bit optimistic but we are only two months into the financial year,” Fabo said.
The local dollar slid to a one-month low against its New Zealand counterpart after Stevens said the nation’s currency would probably fall if a mining boom ends. The so-called Aussie touched NZ$1.2820, the weakest since July 12, before trading at NZ$1.2830 as of 4:37 p.m. in Sydney.
Australia’s economy and currency have been bolstered in recent years by the biggest resources bonanza since a gold rush in the 1850s as Chinese-led demand for iron ore, coal and natural gas brought investment projects the government estimated to be worth A$500 billion.
The central bank governor’s comments on the timing of the resource-investment peak contrast with Australian Resources Minister Martin Ferguson, who said the mining boom has ended.
“You’ve got to understand, the resources boom is over,” Ferguson told Australian Broadcasting Corp. radio yesterday. “It has got tougher in the last six to 12 months.”
He later said he had been talking only about the end of the boom in commodity prices, the Financial Times reported. The mining boom “in terms of construction is not over,” the paper said, citing Ferguson who referred to A$270 billion in committed capital investment. Deutsche Bank AG estimates BHP’s Olympic Dam expansion will cost $33 billion.
Brazil’s Vale SA, the biggest iron-ore producer, said this month that China’s “golden years” are gone as its growth slows. Iron-ore prices fell to the lowest since December 2009 yesterday as slowing growth curbs demand in China, the biggest buyer.
China’s industrial production and lending missed economists’ forecasts last month. Foreign direct investment in China fell to the lowest level in two years in July, fueling concern that waning confidence in the nation’s growth prospects may restrain any economic rebound.
There is increasing evidence of slowing growth in the Asia- Pacific region. New Zealand reported today exports fell in July from June, while Singapore said industrial output growth slowed to a three-month low. Vietnam’s inflation eased in August, a report showed.
Britain’s economy may have shrunk less than previously estimated in the second quarter, the statistics office is forecast to report today, while Poland will release unemployment and retail sales data. In the U.S., data today may show orders for durable goods climbed in July.
Stevens said today he’s cautiously optimistic about the outlook for the global economy and that Australian policy makers are “well equipped” to manage any turmoil that arises. He cited several favorable domestic signals including low unemployment, top-rated government debt, tame inflation and a strong banking system.
The RBA’s central outlook is for growth “close to trend” and inflation within a 2 percent to 3 percent target range, and the central bank is “prepared to respond to significant deviations,” he said.
Australia’s central bank lowered borrowing costs by a total of 50 basis points late last year and a further 75 basis points in May and June to help shield the economy from Europe’s debt crisis and slower growth in China. It held the key rate at 3.5 percent, the highest among major developed economies, at the past two meetings.
The reductions in rates have resulted in borrowing costs “a little below their medium-term averages,” Stevens said.
The RBA this month predicted average GDP growth of 3.75 percent in 2012, stronger than its May estimate of 3 percent. Consumer prices will rise 2.25 percent in the year to December, from a previous prediction of 2.5 percent; underlying inflation is forecast at 2.5 percent from a previous 2.25 percent, the central bank said in its Aug. 10 statement on monetary policy.
Traders are estimating a 29 percent chance Stevens will reduce rates by a quarter point to 3.25 percent at the next meeting in September, according to swaps data compiled by Bloomberg.
“The governor continued to paint an upbeat picture of the Australian economy, traveling well through global headwinds,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “With the economy growing close to trend, further rate cuts are unlikely.”
Gillard is faced with a two-speed economy -- a phrase the RBA uses to distinguish resource-rich regions in the north and west that are powering growth and hiring workers, from struggling tourism, manufacturing and retail industries across the south and east.
Growth in resource exports will exceed that of investments after the peak, Stevens said today.
“By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up,” he said.
Resource investment to meet Chinese demand and foreign investment funds seeking a haven have spurred gains in the nation’s currency, which closed above parity with the U.S. dollar for all but 23 days this year, remaining stronger than the average 75 U.S. cents since the currency was freely floated in December 1983.
The local dollar has advanced about 7 percent since the central bank last lowered rates June 5, making it the best performer after the Swedish krona and the New Zealand dollar among the Group of 10 major currencies tracked by Bloomberg.
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