Price growth edges lower despite reasonable economy
Insight
January 6, 2014
Below the surface
As many SMEs might be a million miles away from the mining and resources sector, it’s easy to think it’s all completely irrelevant. That’s not the case. It’s important that you're aware of the general direction of the industry because it can affect your own business.
Small businesses seemingly unrelated to the mining industry can still be affected by its general direction. Alan Oster explains why.
Many small business owners looking at the financial news over a cup of coffee in the morning may be tempted to turn the page. With so much news about the mining sector, if you’re not directly involved in that market it’s easy to think it’s all completely irrelevant. That’s not the case.
The mining and resources industry has been an engine of growth for the Australian economy for a long time and there’s an inextricable link between growth and profitability in this sector, and the overall prosperity of Australia. According to the Australian Bureau of Statistics, the mining industry’s contribution to GDP was 10.1 percent in 2012–13.
GDP growth is expected to soften to 2 percent by the end of the 2013, rising towards 3 percent by the end of 2014, though this still represents below-trend growth. Export volumes should help drive growth as major minerals and energy projects begin the transition from construction to production and export.
Mining, rates and employment
It’s important that you’re aware of the general direction of the mining industry because it can have spill over effects into your own business.
Capex survey expectations, recent engineering construction commencements and our own business survey all imply a substantial decline in mining investment in 2013-14. What does this mean? Importantly, this can signal worsening employment levels as mining and resources companies shed jobs.
Given employment is currently the factor driving the Reserve Bank of Australia’s (RBA) rates decisions – inflation is another factor – business owners should keep an eye on developments in the mining sector. As the mining transition from the labour-intensive investment phase to the capital-intensive exports phase takes hold, we see significant deterioration in labour market conditions ahead. Weakness will continue to be especially pronounced in the second half of 2013 and into 2014.
At this stage, our forecast is that the unemployment rate will exceed 6 percent by the end of 2013 and will peak at 6.75 percent in the second half of 2014. The weaker employment market means wage growth has also been softer – and this situation clearly won’t change until employment looks better.
So for business owners wondering just how much pressure there’ll be on wages in the months to come this is good news. Annual wage price index growth has declined from 3.7 percent in the June quarter 2012 to 2.9 percent in the June 2013 quarter, at the same time the unemployment rate has risen from 5.1 percent to 5.6 percent (quarterly averages).
Further reductions in wage inflation as the unemployment rate continues to drift upward may encounter resistance from consumer inflation expectations. We expect annual wage growth to remain moderate at around 3 percent.
Labour market conditions are a key input into the RBA’s decisions around interest rates. The weaker labour market and continuing low inflation are a recipe for a more accommodative monetary policy stance from the RBA. At this stage, the RBA’s actions suggest there’s no imminent rate cut coming, so the next easing of policy is unlikely before February.
As most business owners are interested in wages, employment and interest rates – business owners should keep an eye on what’s unfolding in one of our key industries.
For the latest economic updates from NAB’s Group Economics team visit nab.com.au/insights.
This article was first published in Business View magazine (November 2013). For Alan’s outlook on more key economic issues download the iPad edition of Business View for free via our new app NAB Think.
