Tough times ahead for the festival state

Published 29 November 2012 05:14, Updated 29 November 2012 07:08

+font -font print

It was big news – and understandably so – when BHP Billiton decided it wouldn’t be expanding its Olympic Dam mine in the near future.

That $20 billion to $30 billion hole in the outlook for state demand sent a shudder through South Australia, with many observers having long since noted that the state – which has long been getting a shrinking share of Australia, as the chart shows – could benefit from a larger resources sector to help it sell into the rapid growth in emerging Asia that is expected to be evident over the next decade or two.

In effect, the hope had been that South Australia could transform itself into the next Western Australia through a big bout of resources investment.

So there’s no sugar coating it – that decision was a disappointment.

Yet some perspective is handy here. Olympic Dam is a world class resource, and sooner or later its economics will stack up.

Besides, you’d be missing a bigger point if you focused only on the negatives. That’s because the state’s existing industrial make-up has been a classic example of those businesses on the wrong side of Australia’s two-speed economy.

Several sectors – agriculture, manufacturing, health, education, and the arts and recreation – are comparatively large in South Australia, while some, notably construction, finance, professional services, real estate and information and communications technology, are smaller than the national average.

There is plenty of manufacturing and farming in South Australia but relatively little mining and related engineering construction compared with Australia as a whole.

In that sense, China’s slowdown should have its eventual upside for South Australia. Not tomorrow, of course, as so far the dollar has stayed stubbornly high even as commodity prices and Australian interest rates have taken a tumble.

In fact the key to the silver lining will be the timing of any fall in the dollar.

However, much of the bad news in this state in recent years has revolved around the strength in the deadly duo of exchange and interest rates, and chances are that the latter will be less of a problem for South Australia in the next few years than they were in the past few.

Or, in other words, although the state has lost an early boost to demand from the lack of an Olympic Dam go ahead, it also will gradually gain from a loosening of the exchange and interest rate noose that has been slowly strangling some other sectors.

That said, as of today the dollar is still riding high and South Australian businesses have to deal with that. So, for example, the state’s car and car parts manufacturers are under a lot of pressure.

And nor is the damage of the moment due only to currency competitiveness (or the lack of it). Housing starts have lost their lustre of late, with the potential for further weakness in the pace of housing construction.

In addition, with manufacturing shedding jobs and housing construction weak, job growth in South Australia has been nothing to write home about.

So there is a lot to be concerned about in the short term.

On the other hand, interest rates have already been cut, with more good news to come on that front and I expect the dollar to stop stomping on the heads of the state’s manufacturers – or, at least, to stop stomping so hard.

And that’s all it takes to generate a turnaround. Or rather, I do see South Australia’s economic growth getting worse before it gets better but it will indeed get better, with the lows in this business cyclical projected to come in the first half of 2013.

In turn, that doesn’t change the longer term trend of South Australia growing more slowly than the rest of Australia and thereby losing more market share within Australia in coming years.

But it does say the loss of Olympic Dam’s expansion from the short-term outlook isn’t nearly as bad as it seems.

The south will rise again.

Comments