Over the weekend, Wall Street finished down 1.19 per cent or 122 points to 10,136, while the S&P 500 lost 13 points to 1089.
It was Spain that provided the ‘el scaredo’ moment for investors when Fitch, a ratings agency, took the country’s credit rating down a notch to AA+. And part of the reason was because the Spanish parliament only passed the austerity measures by one vote. A lack of commitment to fiscal responsibility underlines how leadership is hurting share prices like never before in my market watching lifetime.
The mining effect
Fortunately, our leaders are at least talking compromise with our miners and a more palatable tax might result. That would help take out the Rudd Government’s contribution to the recent share sell off. However, the new tax will have to get consensus support from miners if we want foreign investors to pile back into our mining shares.
This mining tax has hurt the investment potential of the mining sector and this could affect overall mining investment and the country’s GDP. Government decisions that hit one sector can affect related businesses. For example, the Australian Constructors Association has said the tax, in derailing some mining investment, will mean less work for their members. Miners can go elsewhere.
“There is no shortage of minerals in the world,” said Wal King, the CEO of Leighton Holdings. “What has always favoured Australia over other potential locations has been a commercial and regulatory environment that has equitably balanced risk and reward.” (AFR, 29-30 May 2010)
Decisions to delay or can investments by miners will hit all manner of business, and even bank, profits.
The Henry view
And on this knock on subject and the role of miners in our economy, I have to have a shot at Treasury Secretary Ken Henry, who is a bright guy, but he made a big mistake in defending his resource tax and I even saw economics writers I respect swallow his dumb point of view.
In trying to counter the miners’ rhetoric, which also has been a bit fast and loose, Henry tried to debunk the miners’ claims that they were a key factor in keeping Australia out of recession.
Mining is seven per cent of GDP and only responsible for about 1.6 per cent of the workforce. Miners were really hard hit by the GFC because they sell their stuff overseas where recession was everywhere. Capital expenditure fell by 13 per cent in 2009 and employment in the 12 months to September last year dropped by 5.6 per cent. Meanwhile employment in related heavy and engineering construction fell by 7.6 per cent. Against this total employment in the country was 0.3 per cent lower.
Henry tried this spurious line, which showed his logic is being affected by the attack on his tax:
“Had all industries behaved the same way (and assuming no fall in the rate of participation in the labour force) the unemployment rate would have increased from 4.6 per cent to 19 per cent in just six months.”
The miners know their employment shedding did not save the economy from recession and I can’t believe that journalists bought this dumb argument.
Four reasons for recession dodge
We were saved from recession by the RBA’s 4.25 per cent cut in interest rates, the Rudd Government’s stimulus package, the stability of our banks and something else. Now, what was it? That’s right, China — our links to China. Because China was quick to stimulate, we recovered more quickly than economists thought, including Ken Henry, who tipped unemployment would go to 8.5 per cent, we were helped out of the downturn.
Our link to China primarily is through mining and so when China gave us hope we could avoid a recession, it was our mining potential that also gave us hope.
Without mining we would have been like New Zealand, which went into recession. As I have said, at least four things explained why we dodged a recession — the RBA, the stimulus, the bank’s solidity and China.
Confidence was the key — both business and consumer — and without China and mining I reckon we would have gone into recession.
Anyone who denies this is thinking as a politician rather than an economist.
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