Three key charts in the Budget document highlight the Federal Government’s lack of vision, particularly around investments and infrastructure, and the tough outlook for the Australian economy.
These charts, which we look at in more detail below, suggest the Budget:
- Will fail to stimulate or encourage big business to increase capital investment above its current low levels;
- Acknowledges growth in inbound Chinese tourism, but fails to create the groundwork needed to maximise this opportunity; and
- Had no response to the likely further deterioration in the price of our major export commodity, iron ore.
Here are the charts:
1. The Budget fails to spark weak non-mining investment
Figure 1. Nominal non-mining CAPEX (left); Non-mining capacity utilisation (right)
Source: ABS, The Commonwealth of Australia, Treasury (left); NAB, The Commonwealth of Australia (right)
The first is that non-mining capital expenditure is below the levels of eight years ago, and is not projected to lift in the next few years.
The above chart is in nominal terms and so it reflects a significant fall in non – mining capital investment as a percentage of GDP.
Business confidence to invest is clearly at historic lows.
Australia needs the Commonwealth Government to stimulate economic activity through a visionary infrastructure program.
But there is no vision or strategy from the Government to get things going. There are no significant capital investment initiatives.
There is the NBN, which will hopefully be finished in two years, and about $1.5 billion of infrastructure, some of which goes as loans to the Northern Territory.
But the total government investment figure is woefully inadequate for our $1.7 trillion economy.
2. Australia is ill-prepared for a surge in Chinese tourists
Figure 2. China overseas visitor arrivals (persons monthly)
Source: ABS, The Commonwealth of Australia
The Budget papers showed that Chinese inbound visitors/tourists have doubled in the last 3 years. The run rate is now approaching an astonishing 1 million per annum.
What if it doubles again in the next 5 years?
Will the airports in Perth, Melbourne and Sydney cope if 2 million Chinese inbound tourists arrive?
The problem is that previous Governments sold off the airports and there is now no public-private partnership arrangement.
Now we’re running into a log jam of people wanting to come to Australia to spend money and help us grow. But the airports are owned by private operators who have limited financial capacity to invest in them.
Sydney’s Badgerys Creek is ten years away, but we need a rapid expansion of capacity now.
Like the weak non-mining investment, this highlights the lack of vision and strategy around key infrastructure.
3. The outlook for the iron ore price is weak
Figure 3. Iron ore cost curve, 2015
Source: AME Group, The Commonwealth of Australia
The Budget showed how reliant Australia is on iron ore prices.
The conventional story has been that the fall in iron ore prices will drive out low cost producers and cut supply, which will see a return to more rational pricing.
But the above chart from the Budget confirms growing evidence that producers worldwide have actually lowered their cost of production.
The chart indicates that less than 20 per cent of world production has a cost base above $60 per ton.
With that supply, and with more low-cost production available to come on stream, the outlook for iron ore prices is sober.
The Budget tentatively forecast an average $48 per ton in 2015/16 and hopefully that is conservative.
But given the chart above, the Government should have a multi-pronged infrastructure investment response.
Time will tell
The Federal Government’s recent Budget has proven to be a political success and delivered a bounce in the polls.
But in our view, the Budget lacked a big picture and there was no real acknowledgement of either the pressing issues or opportunities that currently face Australia.
Time will tell whether the Budget outcome forecasts are reasonable but there were three key charts in the Budget document that highlight the Federal Government’s lack of vision, particularly around investments and infrastructure, and the tough outlook for the Australian economy.