Minerals investment is tipped to fall sharply over the next three years, with BIS Shrapnel forecasting a fall of 50% with the possibility it could be even worse.
Last week the Reserve Bank of Australia claimed the outlook for the economy is “near-term weakness” but Australia is “well placed to benefit from a renewed expansion”
And while BIS Shrapnel agrees Australia does not face the same issues as other developed nations as a result of the global financial crisis, the company said the shortage of debt and equity funding will be disastrous for business investment over the next five years.
In its Long Term Forecasts, February 2009 Update, the economics forecaster argues the financial crisis in many countries means those nations will experience sharp recession followed by prolonged weakness.
Australia, on the other hand, will experience a relatively moderate downturn, followed by lingering weakness as fall in business investment constrains growth.
“Currently, investment remains firm as we finish the last round of projects across the board,” chief economist Frank Gelber told MiningNews.net.
“However, the next round of projects has been slashed and business investment will fall sharply over the next two years.
“Some miners will be sheltered on a cash flow basis because they have locked in prices, and those that are cashed up and lowly geared are in a much better position to survive. Gearing is poison.”
Gelber said the flow-on effect for mining towns could be catastrophic, but the impact would also be strongly felt in the services industry, much of it based in major cities, namely Brisbane and Perth.
“Queensland and Western Australia are the two states which will do it exceptionally tough over the next couple of years,” he said.
“This downturn is the price you pay for the boom and brings the next upswing closer, although that will not happen soon, maybe not for five, six or seven years.”
Gelber said the latest forecast shows government infrastructure spending has a much larger role to play in filling the gap left by the fall in business investment. But the question is how long it will take to get these projects off the ground.
“Weak exports, the fall in commodity prices and the shock to demand have hit the financial viability of projects,” he said.
“Meanwhile, the continuing credit squeeze and constraints on equity funding mean there is little finance available for new projects. And that has slaughtered business investment.
“The result is that Australia will experience a moderate downturn followed by protracted weakness as reduced investment constrains growth.”
As a result unemployment rates are predicted to reach 7% in the coming year.
“Businesses need to survive the current shock, but they also need to look beyond it and understand where they fit into the changing structure of the economy, particularly the shift away from imports and back to domestic production, which will be underwritten by the lower Australian dollar,” Gelber said.
BIS Shrapnel concluded the strength of the economy over the next five years will depend on the extent to which strong housing and government spending on infrastructure will offset falling business investment.