Monday, July 29, 2013

Manufacturing will bounce back?

So says the Grattan Institute...

In the wake of major job losses at car manufacturers and as the Rudd government tries to bed down a politically difficult series of budget cuts there is glimmer of good news on economic front with new report suggesting manufacturing will bounce back from the mining investment boom back stronger than ever.

The Grattan Institute report says that far from being “permanently damaged,” the exchange-rate sensitive industries of manufacturing, tourism, education and agriculture “survived the boom in reasonable shape”.

It comes as the government prepares to reveal a downgrade in its economic forecasts along with a fresh round of budget cuts perhaps as soon as this week and as the Reserve Bank prepares to meet next week to consider cutting interest rates once again.

Already at a half century low of 2.75 per cent, a further cut would take the Reserve Bank’s cash rate to the lowest level since the 1950s, well below the so called “emergency low” of 3 per cent that prevailed during the global financial crisis.

Around 400 Holden workers took voluntary redundancy on Friday. The remaining 1700 workers at the Adelaide car assembly plant are considering a management proposal for reduced pay and conditions in order to keep the plant open.

Entitled The mining boom: impacts and prospects the Grattan Institute report concedes Australia runs the risk of a recession as the resource investment boom fades. But it says “recession is far from inevitable”, in part because Australia has avoided the high inflation that accompanied previous booms...

Figures released in the past week show that excluding the effect of the carbon price Australia's annual inflation rate is less than 2 per cent, easily low enough to allow the Reserve Bank to cut rates further.

The Grattan report says that rather than killing manufacturing, the mining boom “temporarily accelerated” its long-term decline as a share of gross domestic product.

Manufacturing has been sliding as a share of GDP since the 1970s.

An survey of exchange rate hikes in 16 countries similar to Australia shows manufacturing grew particularly rapidly after the exchange rate came back down. “Within three years, manufacturing exports as a share of GDP had risen by more than a third on average,” the report finds.

“Therefore temporarily high exchange rates in economies comparable to Australia have not had long-lasting effects on export volumes and the added value of manufacturing, the report concludes. “Manufacturing exports usually bounce back rapidly and reach trend within a few years.”

Australian Manufacturing Workers Union president Andrew Dettmer said he would “have to believe in the tooth fairy” to think that “once an industry has been devastated suddenly a few economic indicators return and therefore it will somehow return to production”.

Ford was leaving Australia and Holden was considering its future. “The international thinking is that once manufacturing dips 5 per cent of the total economy it is fundamentally lost,” he said.

Manufacturing constitutes around 8 per cent of the economy.

The Grattan report finds neither the Howard nor the Rudd and Gillard governments saved enough of the proceeds of the boom. “Tax decreases and spending increases have been larger than Australia can afford in the long run,” it says. “ Some spending was justified by the response to the global financial crisis and some has been invested, but underlying budget deficits now need to be repaired in more difficult times.”

Australian Industry Group Chief Executive Innes Willox said there were reasons for optimism.

“The currency has come off about 15 per cent since April. If it is held down or falls further those companies that have been able to stay afloat will be very globally competitive,” he said.

In The Sydney Morning Herald and The Age

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