Wednesday, August 24, 2011

Mining hurts us more than we think

Wednesday column

Mining was always going to crush manufacturing.

If you are in any doubt that as mining advances manufacturing inevitably retreats you can set yourself right by examining an extraordinary graph of mining and non-mining export earnings produced by Richard Denniss of the Australia Institute.


Over the past decade mining exports have climbed by around five per cent of GDP; non-mining exports have slid by around five per cent of GDP. The relationship has been almost exactly one to one.

That’s not to say the ratio won’t improve. Mining exports might one day do more than simply replace non-mining exports. There might one day be few other exporters left to crush, the massive investment in new mines and mining machinery currently underway might one day pay off in much higher earnings, as it is meant to. But what’s important are the directions of change. As the mining industry does better, other trade exposed industries do worse.

The main mechanism is straightforward. Higher minerals push up the Aussie dollar which makes exports harder to sell and imports much cheaper.

There’s also a secondary mechanism. The mining boom (particularly the mining construction boom) gets the Reserve Bank worried about inflation. It talks up the possibility of higher interest rates - until this month that’s exactly what it has been doing - and consumer and business confidence stall.

Step three takes place when our relatively high interest rates and talk of higher ones draws more money in from overseas pushing up the dollar further.

It’s bad for steelmakers, bad for any trade-exposed industry, and to a lesser extent also bad for industries with no competition from trade. If consumers and businesses are wary of spending - as the Reserve Bank has tried to ensure they are - they will be wary across the board.

There’s a view about that this is a reasonable price to pay... Our record mining investment should pay off big-time. By throwing far more than ever before at mining we are pushing ourselves out “further along the risk-return frontier,” as Reserve Bank assistant governor Philip Lowe recently put it.

The high dollar has positives for all of us, even as it makes it harder for some of us to compete. It increases the buying power of each dollar we earn and also the buying power of those we’ve saved. It is one of the ways in which the proceeds of the boom are shared more widely.

And jobs will take care of themselves. It is not carelessness that makes Treasury assume full employment in its modeling of tax and other changes, it is reality. Employment is usually close to full. The ratio of working age Australians to dependent age Australians is set to shrink from 2 to 1.5 in coming decades making workers even more prized.

So should we be worried?

You should if you are in the steel mills owned by BlueScope that are being squeezed out of business. Sure, they’ll probably be another job available for you somewhere, but it mightn’t be where you live and it mightn’t be doing the kind of work you are used to. Employment is growing fastest in the health and aged care industries.

Australia as a whole would have good reason to be worried if the mining boom suddenly ended. We might have lost the ability to make steel and cars even though, with the dollar low again, it would make sense to return to doing it.

To this the former Treasury head Ken Henry would reply that the boom isn’t likely to end any time soon.

In his final Senate appearance this year he said: “Lets' suppose that in 20 years time commodity prices come off, quite significantly. I would say to you then that the best industrial structure of the Australian economy then, in 20 years time, would be quite different from the one we had 20 or 30 years ago."

Firms in trouble need to face "the very real question of whether with the exchange rate being where it is they are able to remain in business".

But something else is lost with the ability to make steel and cars apart from flexibility we may turn out not to need.

It’s the ability to make steel and cars. Other nations subsidise those industries precisely because they think they are worth having - for defence reasons, for security of supply and also for emotional reasons. While much of my generation deals with intangibles in white collar jobs, we know our fathers made real tangible products in factories. We think it matters.

What can be done to make sure we continue to make things? OneSteel is making a better first of it than BlueScope, expanding its iron ore export operation as a hedge in the same way that newspapers are getting into the internet.

Getting behind the originally-designed mining super profits tax would have helped. It would have taken money from the miners and given it to manufacturers and other non mining companies in the form of a 2 percentage point tax cut - enough to offset the effects of the higher dollar for a while. Some may be regretting not getting behind it.

And staring down the Reserve Bank would help.

It’s been saying it’ll eventually have to push up rates because wage growth is running ahead of anemic productivity growth.

It is, but the measure of productivity growth relied on to make the claim is bogus:



Australia Institute research released this morning shows non-mining productivity growth is a very respectable 2.5 per cent. Mining productivity is plummeting pulling the average way down. As minerals prices get higher more and more resources are being thrown at mining and less and less productive mines are opening.

The gross value added per mining worker has almost halved since the start of the mining boom eight or so years ago. This shouldn’t surprise us, and it’s not a bad thing.

But it isn’t a reason to punish the non-mining economy even further. That’d be adding insult to injury.





Published in today's SMH and Age


Mining Australias Productivity


Related Posts

. Australia's terms of trade. Reality vs repeated forecasts

. Gee, how are our mining companies doing?

. Our dollar's high. Learn to love it


12 comments:

Brad said...

Some untested assumptions here, eg. that talk of interest ate rises (in the absence of actual rises) hit consumer confidence and bring more $ in from overseas. Is this actually the case?

The Lorax said...

A 2 percent tax cut won't offset the dollar

Getting behind the originally-designed mining super profits tax would have helped. It would have taken money from the miners and given it to manufacturers and other non-mining companies in the form of a 2 percentage point tax cut - enough to offset the effects of the higher dollar for a while. Some may be regretting not getting behind it.

I agree with all of that -- and thank Christ you've finally moved beyond cheerleading the mining boom and the dollar -- but a 2 percent tax cut won't offset the effects of the higher dollar for many businesses.

My business has (actually had, its past tense now!) costs of around $100K AUD a month, mostly salaries. It had revenue of $100K USD/mo* -- a 30% margin with the dollar at 70c.

With the dollar at $1.05 to $1.10 its making a loss. How does a 2 percent tax cut offset the effect of that massive change in revenues? Answer: It doesn't.

I develop software. I employ (employed!) several highly skilled software engineers. They don't have jobs any more due to no fault of their own, no failure of the business model, but because of the frickin' price of coal and iron ore rose to astronomical levels on the back of an investment bubble in China.

Good businesses are being destroyed for no good reason. The much promised income boom from the resources sector is not being distributed through the economy. As Heather Ridout said on Monday "Its just not happening".

You, Gittins, Treasury and the RBA have been wrong all year about this. Boom Boom Battellino is still in deep denial.

The fact is there are now many more Australians in the slow lane of the two-speed economy than the fast lane. Add up the number of people employed in manufacturing, retail, tourism, education, and residential construction, and compare that to people employed in mining and related sectors. Its not even close, and its high time you acknowledged that.

I don't care if the high dollar can buy me a cheap TV or a cheap overseas holiday if my job is under threat and my mortgage repayments are 150bps above where they should be.

Do you get it yet?

* Figures invented for illustrative purposes.

Peter Martin said...

Hi Brad,

"Some untested assumptions here, eg. that talk of interest ate rises (in the absence of actual rises) hit consumer confidence and bring more $ in from overseas. Is this actually the case?"

Most assumptions about this sort of stuff are "untested" because researchers can't get into people's heads.

But they can come close.

The Westpac Melbourne Institute consumer sentiment survey found "interest rates" at or near the top of the most recalled news items throughout the period consumer confidence was sliding.

An overwhelming 73% of those surveyed thought rates were about to rise.

Have this expectation dented confidence? It has certainly been associated with it. It looks as if there is a causal relationship.

What's the size of the causal relationship? We don't know, but we can be fairly sure about the direction.

Do high interest rates and talk of even higher interest rates bring in more money from overseas? You would have to think so. Traders in the business of making (or not losing) money.

What's the size of the effect? Again, we don't know. But we can get a fair idea of its direction.

The Lorax said...

Parko spells it out for you Pete:

Sustainable Wellbeing - An Economic Future for Australia -- Martin Parkinson

The mining and related metals manufacturing sectors were expected to grow at around 10 per cent, boosted by the surge in mining investment. But the mining and related metals manufacturing sectors only comprise around 12 per cent of the economy (in 2009-10).

In addition to generating strong growth in the mining industry, the resources boom is supporting strong growth in the mining-related construction, services, manufacturing and transport sectors. Mining-related production, which represents a further 8-10 per cent of the economy, was expected to grow around 30 per cent in 2011-12 and 20 per cent in 2012-13.

But this leaves around three quarters of the economy's output not being boosted directly from the mining boom. Abstracting from the agricultural sector, it is estimated that the remaining non-mining economy will only grow at around 1 per cent annually in 2011-12 and 2012-13. In other words, a structural decomposition of the budget GDP growth forecasts implies that a large proportion of the economy will record weak growth for at least the next two years – a direct consequence of the impact of the terms of trade on the exchange rate and competitiveness, the lingering effects of the global financial crisis including the cautious consumer, and Australia's decade-long productivity performance.

But even this 1 per cent growth rate masks significant divergence, with some service sectors growing and generating significant increases in employment (for example in 2010-11, the number of people employed in health care and social assistance grew by 6.2 per cent) with other sectors (for example retail and wholesale trade, and manufacturing) under considerable pressure.


To that we can add tourism, education and residential construction -- all big employers.

Parko continues...

So while households have higher real purchasing power as a consequence of the boom and its impact on the exchange rate, real income growth is occurring only at a rate with which people are already familiar. This, combined with the employment effects of restructuring, appears to be resulting in a sense that people are not sharing in a once in a century increase in Australian wealth.

Appears? appears? Earth to Parko: Its real mate.

To quote Heather Ridout again:

The Reserve Bank and Treasury have been warning for some time that manufacturing is going to have to quote 'make way' for the mining boom. But if this is the pain that is going to be part of this adjustment, I suspect it is more acute than most people thought because I think they actually thought the income boom that the resources boom would generate would be much more widespread and consumers would be much more confident, so we'd get demand in other areas.

It is just not happening.

Peter Martin said...

Lorax:

"I don't care if the high dollar can buy me a cheap TV or a cheap overseas holiday if my job is under threat and my mortgage repayments are 150bps above where they should be. Do you get it yet?"

As I see it your mortgage payments are a good deal lower than they were - almost two entire percentage points lower than they were in late 2008, if you have been on variable rates.

Some jobs may be under threat, but they are not being lost en mase, yet.

As we have discussed the outlook for jobs is anything but alarming.

The Lorax said...

The non-mining economy wasn't in recession in 2008. Indeed it was still booming on the back of the housing/credit binge.

Manufacturing, tourism, retail -- all are big employers, all are in recession now, and rates 400-450bps above everywhere else in the developed world, adding further upward pressure on the exchange rate.

As we have discussed the outlook for jobs is anything but alarming.

But your "outlook" has been six months behind the curve all year. Only now are you conceding that employment growth has stalled, whereas just a few months ago you were spouting nonsense about "dodgy numbers" because the data didn't fit your view.

Interestingly Battellino was asked by the host yesterday whether the unemployment rate was much higher than the data indicated and "you just can't see it yet". Battellino completely ignored the question.

Go here, click the Q&A link (top right) and go to 5:05.

Have a listen.

Anonymous said...

Peter,

Very interesting graph on productivity. It would be interesting to see 'all industries except mining', to see if other productivity growth is growing even more quickly than the pink line.

I have been hearing about terrible productivity growth compared to the glory days of the 80s and 90s, and it does look to have slowed a bit. But it doesn't look like the basket case suggested by those proclaiming the need for further labour market deregulation.

Thanks,

Kymbos

Peter Martin said...

Hey Kymbos,

I've added that graph, above.

Its evocative.

Anonymous said...

fyi - the Australia Institute's calculation is wrong - non-mining labour productivity has been stagnant for almost a decade, the same as totallabour productivity - suspect this is true for multifactor productivity as the last time I looked it was also weak across several industries

Peter Martin said...

Gee Anonymous that's helpful.

Should I take your word for it?

Could you say how?

Anonymous said...

well I am trustworthy.

As background, labour productivity matters for inflation because mark-up models have consumer prices set as a mark-up over input costs, where nominal unit labour costs are the biggest influence on inflation.

Growth in nominal unit labour costs broadly equals wages growth less growth in labour productivity. You can make adjustments for taxes etc but these don’t change the broad relationship.

Looking at the Australia Institute’s calculation, I am not sure what they have done to get non-mining productivity growth at 2.5% per annum.

Using quarterly National Accounts and Labour Force Survey data, I calculate compound growth in non-mining activity per worker at zero over the past seven years versus compound growth of 2% per annum over the 1990s. .

If I calculate non-mining activity per hours worked, I get growth of about 0.5% per annum over the same period versus compound growth of 2% per annum over the 1990s.

The difference over recent years reflects a decline in average hours worked of about 0.5% per annum.

The hours adjustment makes it seem as if there has at least been some productivity growth over recent years, but separate to the huge problems the ABS has in measuring average hours properly, it is irrelevant for inflation, though, in that nominal unit labour costs = wages bill / labour productivity = hourly wages bill / hourly labour productivity.

That is, if you have higher hourly labour productivity through declining average hours worked, you simultaneously have higher hourly wages, such that your unit labour costs numbers are unaffected.

All this means that nominal unit labour costs are growing strongly outside the mining sector.

Making tweaks to look at GDP at factor cost or to exclude ownership of dwellings from the calculation doesn’t change the story.

As for multifactor productivity, it is a broader measure of productivity that is calculated as GDP growth less weighted growth in the labour supply and the capital stock.

It gets around the problems you see in some sectors of companies substituting capital for labour (eg, mining and utilities).

It can be constructed from ABS data, although the ABS also publishes some annual data and it has been as woeful as labour productivity in recent years.

Hope this helps.

Peter Martin said...

I agree with you productivity is woefully measured, along with saving.

The Australia Institute has sent me the spreadsheets it used to create the graph.

Email me: peter AT petermartin.com.au

Post a Comment

COMMENTS ARE CLOSED