Australia special report


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Australia – what will provide impetus for growth as mining investment peaks?

Our new report ‘Australia – Riding the Boom’ looks at the factors driving Australia’s growth in recent years. Mining investment has been the main reason for Australia’s growth since the global financial crisis in 2008, keeping its economy buoyant while other developed markets have suffered. The boom is largely due to increasing demands from China for iron ore, coking coal, liquefied natural gas and a range of other minerals.

Australia’s strong growth, healthy consumer spending, investment opportunities and relatively high interest rates have encouraged large inflows of capital. However, with mining investment is now peaking, leaving investors wondering if Australia has more than one trick up its sleeve.

Will other sectors like agriculture, building and production lead to the emergence of broader-based growth?

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Australia special report

  1. 1. Firing on all cylinders What will provide the impetus for growth as mining investment peaks? Mining investment has been responsible for much of Australia’s growth since the global financial crisis in 2008, keeping its economy buoyant while other developed markets have suffered. But that investment is now peaking and there are concerns that Australia may prove to be a “one-trick pony”. It is hard to overstate the importance of mining investment—driven by China’s demand for resources—to Australia’s economic performance over the past decade. In the decade to fiscal year 2011/12 (July-June), engineering construction— which is dominated by investment in mines, oil and gas fields and related rail links and ports—grew at an average rate of 18.3% per year. In fiscal year 2011/12 alone, engineering construction generated nearly 59% of Australia’s overall economic growth. Although spending on mineral resource development will remain high, that investment is near its peak. At the same time, the federal government, keen to rein in its budget deficit, is eschewing further pump-priming. Nonetheless, Australia’s economy is set to continue expanding, as resource investment and government spending give way to rising exports, increasing investment in agriculture, renewed building activity and a pick-up in consumer spending. Australia’s exports are expected to grow rapidly over the next few years, as mining investment translates into increased output and exports. To take just one example, the country’s iron ore exports are set to grow by 13% in 2013, and are set to continue expanding strongly for several more years. Gas and, to a lesser extent, coal exports are also poised to boom. Investment in agriculture (including foreign investment) and the resulting increase in agricultural exports will also contribute to growth, although the vagaries of the climate (drought and floods) make volatility likely. Investment and farm consolidation (merging small holdings into larger ones) are expected to bring productivity gains, increased output and higher food exports. Renewed building activity (outside the resource sector) will also drive growth. Lower interest rates and pent-up demand will contribute to increased building approvals, which are most likely to be concentrated on shops, offices and healthcare facilities. Spending on housing, which was flat in 2011 and fell in 2012, is also poised to recover. Australia’s strong (for a developed country) population growth, typically amounting to about 1.5% per year, will underpin further increases in homebuilding approvals and flow-on activity in construction. Australia, like other developed economies, is heavily dependent on consumer spending. In 2012 it generated 53.5% of the country’s total economic activity. After the global financial crisis, consumer sentiment was both volatile and fragile (despite Australia’s solid growth performance), and households turned their minds to saving rather than spending. But that mood has shifted. Consumer sentiment is high and rising, buoyed by lower interest rates, recent increases in house prices and strong gains on the stock market. In the first two months of 2013, retail sales made the strongest start to any year since 2001, suggesting that consumer spending will help to foster growth. The “minerals supercycle” (defined as a decades-long movement), along with the mining investment boom it sparked, have propelled the Australian economy. However, the near future will see the emergence of broader-based growth, proving that Australia has more than one trick up its sleeve. Sponsored by: Consumer sentiment is high and rising, buoyed by lower interest rates, recent increases in house prices and strong gains on the stock market. About Aberdeen Asset Management Aberdeen Asset Management is a global investment group, Aberdeen manages eight Asia-Pacific closed-end funds for U.S. investors including Aberdeen Australia Fund, Inc. For more information on Aberdeen Australia Fund, including up-to-date performance and pricing information, please see Important Information Closed-end funds are traded on the secondary market through one of the stock exchanges. The Fund’s investment return and principal value will fluctuate so that an investor’s shares may be worth more or less than the original cost. Shares of closed-end funds may trade above (a premium) or below (a discount) the net asset value (NAV) of the fund’s portfolio. There is no assurance that the Fund will achieve its investment objective. Past performance does not guarantee future results. International investing entails special risk considerations, including currency fluctuations, lower liquidity, economic and political risks, and differences in accounting methods; these risks are generally heightened for emerging market investments. There are also risks associated with investing in Australia, including the risk of investing in a single-country fund. Concentrating investments in the Australia region subjects the Fund to more volatility and greater risk of loss than geographically diverse funds. Equity stocks of small and mid-cap companies carry greater risk, and more volatility than equity stocks of larger, more established companies. Aberdeen Asset Management (AAM) is the marketing name in the U.S. for the following affiliated, registered investment advisers: Aberdeen Asset Management Inc., Aberdeen Asset Managers Ltd, Aberdeen Asset Management Ltd and Aberdeen Asset Management Asia Ltd, each of which is wholly owned by Aberdeen Asset Management PLC. “Aberdeen” is a U.S. registered service mark of Aberdeen Asset Management PLC. The information in this report is accurate as of April 2013. About the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at or follow us on Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in the report.
  2. 2. Australia’s economy barely skipped a beat during the global financial crisis: growth slipped slightly, but remained positive, while the unemployment rate peaked at 5.9% in mid-2009. The country’s well-regulated and robust banking system stood the economy in good stead, and the federal government’s lack of debt at the start of the global financial crisis left it well-placed to implement stimulus measures without fear of creating a large debt burden. Since then, conditions have only improved, as the mining investment boom carries the economy on a wave of prosperity. Economic growth accelerated from 1.4% in 2009 to 3.6% in 2012, buoyed by rapid growth in business investment. Having remained flat in 2010, investment expanded by 17.3% in 2011 and continued to grow by 16.1% in 2012. The driver behind that performance was mining investment, aimed at meeting burgeoning demand from Asia (especially China) for commodities such as iron ore, coking coal, liquefied natural gas (LNG) and a range of other minerals. New mines, new gas fields and new LNG plants are all under construction. One component of business investment—engineering construction—highlights the extent of spending on these and other mining operations. Engineering construction investment, which is dominated by mining projects, surged by 39.8% in 2011 and then accelerated to 41.7% in 2012. While the pace of spending will ease, the investment pipeline remains substantial. As the focus shifts from development to production, the gains will come in the form of increased exports rather than investment. The geographic focus of the boom is Western Australia, which is home to much of the country’s mineral wealth. Its economy grew by 10.9% in 2012, propelled by a 33.5% surge in business investment. Earlier spending on projects also paid dividends, underpinning growth of 7.5% in the state’s exports for 2012. The only downside for the state is the ongoing difficulty of finding enough workers, especially for the more remote mine sites. By end-2012, Western Australia’s unemployment rate stood at 4.3%. Strong demand for workers in isolated areas and the high wages that go with it, have proved to be of particular benefit to indigenous Australians. In Western Australia’s resource-rich, but remote Pilbara iron ore region, major mining companies are eager to tap into the local indigenous workforce as a means of easing skills shortages. Between them, Anglo- Australian mining giants Rio Tinto and BHP Billiton employ well over 2,000 aborigines in their Pilbara mining operations. Australia’s strong growth, investment opportunities and relatively high interest rates (compared with most other developed countries) have encouraged large inflows of capital. The country’s attitude is welcoming, as foreign funds are needed to develop local resources. Total foreign investment in the Australian economy amounted to A$2.2trn (US$2.27trn) at end-2012, up from A$2.1trn a year earlier. Almost one-half of that investment was in the financial sector. Australia’s four major banks (ANZ Banking Group, Commonwealth Bank, National Australia Bank and Westpac Bank) use their strong fundamentals and high ratings (AA- according to a ratings agency, Standard & Poor’s) to borrow overseas funds on attractive terms for lending to local businesses and individuals. The mining sector accounted for about 14% of the foreign investment in Australia at end- 2012, up from 13% at end-2011. The inflow of foreign funds into mining amounted to A$41bn (US$42.3bn) in 2012. Australian government bonds are also highly sought after by foreign investors. By end-2012, non-residents held A$206.4bn in Australian government securities, up from A$185.9bn a year earlier and over five times the level at end-2007. Australia’s AAA credit rating from Standard & Poor’s, combined with the relatively high rates available on government bonds, has attracted investors seeking yield and security. In February 2013 yields on ten-year Australian government bonds were 3.6%, compared with 1.9% in the US and 1.5% in both Japan and Germany. Just as the global economy offers Australia—a small, resource-rich trading nation—its greatest opportunities, it also poses the biggest risk to continued prosperity. Investor concern over Europe and its growth prospects remain heightened. Although Australia has relatively little direct export exposure to the region, its indirect exposure, via China’s exports, is greater. If China’s growth were to slow sharply, owing to a sharp correction in its housing market for example, Australia’s exports would feel the pain. Australia’s reliance on foreign capital may also prove to be a double- edged sword, particularly if interbank lending from overseas dries up. Slower domestic growth triggered by falling commodity prices is a more remote threat, given the EIU’s view that international prices for coal and iron will rally over 2014-17, while LNG prices will weaken steadily, in response to rising supply and the prospect of sales from the US. © The Economist Intelligence Unit Limited 2011 Report sponsored by Aberdeen Global Asset Management As in other developed countries, consumer spending is the single largest component of GDP, accounting for 54% of the total. While consumers were rattled by the crisis and remain both cautious and sensitive to bad economic news from overseas, spending has remained relatively robust, growing by 3.2% in 2012. Low unemployment and solid wage growth are the key contributors to the resilience of consumer spending. Australia’s love affair with residential property cooled after the crisis, although it avoided the large falls in property prices seen in the US, the UK and most countries in Europe. Spending on housing in 2012 was marginally lower than in 2009, but strong population growth (1.6% in 2012)—buoyed by both a natural increase and in particular, migration—is expected to revive spending on housing. The current year will no doubt prove interesting, given the combination of volatile commodity prices and the strong Australian currency. Surveys of business investment intentions suggest that the mining sector’s capital spending will peak in fiscal year 2012/13 (July-June), although levels in subsequent years will still be high. The natural cyclical shift from construction to production, combined with lower commodity prices, the continued strength of the Australian dollar and the relatively high cost of bringing projects to fruition in Australia, are all contributing to the end of the investment upswing. Nonetheless, the most vibrant part of the economy will remain the mining sector, where production volumes are poised to grow strongly for years to come. The Economist Intelligence Unit expects Australia’s GDP growth to average a brisk 3.3% per year during 2013-17, reflecting the expected rapid expansion of mineral and energy exports. By the end of that period, LNG will overtake coal and iron ore as the main driver of growth in commodity exports. Export growth is expected to average 6.2% per year in 2013-17. AUSTRALIARIDING THE BOOM Macroeconomic overview 2 0 1 2 Population: 22.7 m Population growth: 1.6% Unemployment rate: 5.2% GDP: US$ 1,541 bn Real GDP growth: 3.6% Consumer price inflation: 1.8% Current-account balance: -3.7% Average earnings: US$ 78,925 A$: $US 0.97 Mineral, energy & metal exports, share of total exports: 53.9% Net foreign debt: 51.1% Net official debt: 15.1% The most vibrant part of the economy will remain the mining sector, where production volumes are poised to grow strongly for years to come. New engineering construction (percentage change) Source: Economist Intelligence Unit Quarter on quarter Year on year 2008-Q1 2008-Q2 2008-Q3 2008-Q4 2009-Q1 2009-Q2 2009-Q3 2009-Q4 2010-Q1 2010-Q2 2010-Q3 2010-Q4 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 2012-Q4 30.0 40.0 50.0 60.0 20.0 10.0 0.0 -10.0 -20.0 Quarter on quarter Year on year Gross domestic product (percentage change) Source: Economist Intelligence Unit 2008-Q1 2008-Q2 2008-Q3 2008-Q4 2009-Q1 2009-Q2 2009-Q3 2009-Q4 2010-Q1 2010-Q2 2010-Q3 2010-Q4 2011-Q1 2011-Q2 2011-Q3 2011-Q4 2012-Q1 2012-Q2 2012-Q3 4.0 5.0 3.0 2.0 1.0 0.0 -1.0 Quarter on quarter Year on year Household consumption spending (percentage change) Source: Economist Intelligence Unit 2008 -Q12008 -Q22008 -Q32008 -Q42009 -Q12009 -Q22009 -Q32009 -Q42010-Q12010-Q22010-Q32010-Q42011-Q12011-Q22011-Q32011-Q42012-Q12012-Q22012-Q32012-Q4 4.0 5.0 3.0 2.0 1.0 -1.0 -2.0 0.0 Gross domestic product (annual forecast) “US$ bn (right scale)” “% change; real terms (leftscale)” Source: Economist Intelligence Unit 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2500.0 2000.0 1500.0 1000.0 500.0 0.0