Resource rich Australia grapples with a two speed economy

Last month GE reported a 26% rise in revenue from Australia. The resource rich nation exceeded China revenue by US$100 million, and the company expects Australia will surpass China again in 2012. According to the Wall Street Journal GE expects that the price of minerals will remain strong and support Australia’s burgeoning mining sector.

For GE, this presents an immense growth opportunity fuelled by sales of industrial equipment to nations that produce healthy amounts of oil, gas and iron ore.

Alongside Australia, GE CEO Geoff Immelt pointed at Canada, Peru and Mongolia as other targets for the firm. He noted that these nations are more or less geographically equal in size to China, but are “not as hard” to do business in. The challenge for these countries is to develop economies which holistically benefit from a boom in one sector.

Much is being made of Australia’s “two speed economy”. Its fully-fledged mining boom is pushing the resources sector far ahead of the rest of the economy, which is flagging under the weight of an increased trade deficit. The strong Australian dollar is the culprit for these woes.

Then again, ask any European finance minister to consider a job swap, and I am sure you’ll get no complaints about taking on the role in Australia – low unemployment, low inflation and low interest rates are not to be scoffed at.

There is some heavy work going on in Australia to align the economy. Budget cuts were unveiled last week and the Government announced they are aiming at going from deficit to a surplus of AUS$1.5 billion for 2012-2012.

There are, of course, a couple of issues GE and other companies in a similar position need to be mindful of.

The incoming Minerals Resource Rent Tax (MMRT) is a tax levied on 30% of the “super profits” from the mining of iron ore and coal in Australia. The tax kicks in at profits of $75 million and while 320 companies could potentially be affected, it will certainly raise the cost of doing business with these firms. The Government expects the tax will raise around AU $10.5bn.

Furthermore, the labour market is very tight and companies looking to work within the sector will be competing for experienced staff. This will cause further wage inflation and a tighter market than already exists.

The challenges and problems are there, but in looking at the global economy, I would rather be a finance minister wrestling with sustainability issues rather than existential issues. A two speed economy is certainly preferential when your only other option is a one speed economy heading downwards.



Jean M Stephens
Chief Executive Officer