Economic revival rests on China

By: Graham Gardiner

China’s recent coal-buying spree has the potential to limit the impacts of the global crisis on Queensland, according to Access

China’s recent coal-buying spree has the potential to limit the impacts of the global crisis on Queensland, according to Access Economics.

The firm’s Business Outlook report shows a winding back of business spending, job cuts, weakening construction prospects and low house-approvals have caused tough times for Queensland.

On the upside, it says Australia has made it through the most dangerous phase of the recession thanks to China’s early bounce.

Australia’s mums are another surprise lifeline, spending 6 percent more at shopping centres than they were when the crisis first hit.

"But we aren’t out of the woods yet. Consumers will flag from here: although interest rates will stay low, the cash splash will fade and unemployment will climb," Access Economics says.

On a state level, the surge in commodity demand has played to Queensland’s strengths, according to the consulting firm.

"Its economy responded to a surge in investment in new mining projects and related export infrastructure. And the State began a long overdue overhaul of its urban infrastructure plans as it put into place a framework to catch up with the road, water and other demands of the fast growing population share in Queensland’s south east," Access says.

Unfortunately for Queensland, its biggest customer, Japan, is also one of the biggest victims of the current financial chaos.

However, China’s impact is growing at a promising rate.

"One of the side effects of the global crisis was that China closed many of its high cost and unsafe coal mines, meaning that recent months saw China become a sudden Australian coal customer on a scale we’ve never seen before," Access Economics says.

Assuming Japan sits on the sidelines for longer, the depth of Queensland’s downturn now rests heavily on China and its coal activity.

"The big coal price falls are now starting to bite anyway, and miners are no longer just laying off contractors, but core employees. Moreover, the resultant weakness in engineering and construction prospects has rapidly infected commercial construction, and the weakening in housing approvals in the State suggests that further bad news lies ahead," the firm says.

Brisbane’s residential vacancy rates are now edging up rather than staying at the lows seen in recent years, and housing prices mostly remain stalled.

Furthermore, Queensland’s robust population growth – traditionally a strong suit of the State – has been increasingly eroded in recent years, with the gap between State and national population growth rates eroding ever since Sydney housing prices stopped rising.

According to the report, Queensland is not in dire trouble, yet a combination of engineering, commercial and housing construction weakness is hitting harder than the State has felt for some time.

Queensland’s housing sector was on a roll heading into 2008, rising solidly against relative national weakness.

Since then, it is has experienced a sharp dive, with starts now running at around half their peak levels.

However, underlying population increases in Queensland (more than 100,000 people each year) mean housing can’t sustain low activity for long.

"These forecasts suggest that 2010 will be a strong year locally, with Queensland again chasing for Victoria for the title of Australia’s best builder," Access Economics says.

Engineering construction in Queensland has been strong in recent years, driven up by solid investment in mining and power projects in particular as the State rode higher global demand for industrial commodities, especially its coal.

However, that strength is now unwinding as coal prices plunge and the global downturn weighs on activity.

Current projects include the $2.5 billion construction of a dam on the Mary River south of Gympie, due to be completed in 2011, and the $2.2 billion second stage of the Yarwun Alumina refinery development at Gladstone.

A number of mining projects remain under construction, including Rio Tinto’s $950 million Clermont open cut thermal coal mine development, Tarong Energy’s $845 million Meandu steaming coal mine expansion and the $690 million Lake Lindsay coal mine development at Bowen Basin.

Commercial construction remains solid in the State but falling approvals suggest activity levels will fall notably through 2009-10.

Recent values of commercial building approvals was the lowest in three years; a forecast of things to come.

Nationally, sectors least exposed to markets are doing best.

Farming is up thanks to better rains, utilities are well protected from cutbacks by consumers and businesses, the public sector is booming and the health sector remains resilient.

Thanks to recent stimulus initiatives, even retail (as opposed to wholesale) is on the road to recovery.

On the downside, many industry sectors are shrinking at the fastest rates ever recorded.

"Manufacturing is hard hit as consumers and businesses stop buying things they can put off to later," Access Economics says.

"Clothes, printing, paper, building products, cars and steel have all taken big hits. And some of the growth stars of past decades - property and business services, as well as finance - are being put through the mill."

Even sectors which usually avoid bigger downturns, such as communications and transport, have been hit.

Despite widespread negativity, the long term will see growth stars bounce back, with better news in property, business services and communications.

Mining is also predicted to recover, and drag metal products along with it.

Access Economics is considered Australia’s premier economic consulting firm. It provides expert advice for business, government, industry groups and not-for-profit organisations.

Subscribe to our newsletter

Sign up to receive the ABC e-newsletter, digital magazine and other offers we choose to share with you straight to your inbox

You can also follow our updates by liking us on Facebook