There’s a strange and gentle war going on in news feeds and papers across Australia. Banks, economists, academics and analysts are pummelling the declining mining industry with dire predictions for its future. Meanwhile, the Reserve Bank of Australia (RBA) is executing targeted defensive manoeuvres in an effort to rescue, not just the mining industry, but the Australian economy as a whole.
What the majority of economists are saying
Mining consultancy firm, Wood Mackenzie, reckon the 2012-14 mining boom is the last we’re likely to see in Australia. Research and forecasting organisation, Bis Oxford Economics, claim the downturn is still a third of the way shy of hitting rock bottom, with no recovery expected until around 2020.
The NAB’s gloomy forecast is for 50,000 jobs to be lost as the downturn continues. Echoing the NAB’s figures, BetaShares chief economist, David Bassanese, predicted a further decline of 25-30% in 2017.
While most of the predictions being proffered by experts are dark, there are a few lonely vestiges of hope; all of which can be traced back to the Reserve bank.
Why is the RBA bucking the trend?
Midway through 2016, America’s equivalent of the RBA—the Federal Reserve—released research demonstrating the stock market can be influenced by news stories. The team accurately predicted stock market returns by running more than 900,000 news articles through text analysis algorithms. The key finding of their research:
“Positive news affects stock prices within one week. However, negative news predicts low stock returns for up to one quarter.”
Our Reserve Bank seems to be conducting real-world experiments based on these findings from its US counterpart. Whenever RBA board members make statements, they become news. The ABC, SBS, Sydney Morning Herald, Daily Telegraph, Courier Mail, Australian and many smaller websites and blogs have all echoed the RBA call that the mining boom isn’t dead.
If enough newswires pick this positive spin up and spread it, the Fed’s research suggests investment will be stimulated, stock prices will gain health and the downturn may be stalled.
The Reserve Bank’s tactics
Earlier this year, RBA Governor, Philip Lowe, said the drop in mining investment was slowing its roll and heading for an about-turn. With evidence mounting against this theory, the RBA altered the course of their defensive strategy. Their latest manoeuvre comes from board member, Ian Harper.
Harper’s view is that the mining boom isn’t over, it’s just entered a new phase; one that could last another 30 years. Harper has conducted research, commissioned by the Minerals Council of Australia, into the state of the mining industry in Australia.
“Resource booms typically have three phases—the prices phase, the investment phase and the export or production phase. We’re well and truly into the export, or production phase, and that will last probably for the next 30 years.”
The resources boom pulled Australia back from the precipice of a recession in 2008, and has been propping our economy up ever since. While Harper’s thesis is that the boom will continue, he was careful to point out that the Australian economy needs to focus more on non-mining investment.
“Policy makers have been keen to see that mining investment is replaced by other forms of non-mining investment, even as the export phase gets underway.”
This makes a lot of sense. Whenever there’s a boom, it draws a flurry of investment and this can lead to a myopic financial focus that squeezes other industries out of consideration. This is precisely what happened in Australia throughout the mining boom. The problem is, when a country becomes heavily reliant on one industry, and that industry falls into decline, the whole economy is at risk of being dragged down with it.
The RBA carry the responsibility, along with the elected government, for ensuring the stability of the Australian economy. So this situation places them in an interesting bind. They can see the risk of a recession but if they come out and say as much, they’re spreading negative news which erupts like wildfire and will turn their warning into a self-fulfilling prophecy. In order to prevent this from happening, they need to hedge around the issue and fill the newswires with as much positive input about the state of the mining industry as possible.
RBA Governor Lowe’s prediction of an uptick in investment poses a perfect antithesis to the dire predictions of other analysts. And Harper’s latest announcement has spawned a fresh round of positive news stories. If their gambit is successful, it will, at the very least, buy them time to put other measures in place. If they can set in motion the concept of spreading investment into other sectors, we may have enough resources at our disposal to hold our economy back from a recession.
While this may seem manipulative, it is the RBA’s contractual obligation, according to the Reserve Bank Act (1959), to promote:
“(a) the stability of the currency of Australia;
(b) the maintenance of full employment in Australia; and
(c) the economic prosperity and welfare of the people of Australia.”Sect 10(2)
Finally (in case that was all a bit heavy for you), here’s a lighter look at the role of the Australian Reserve Bank: