Friday, March 9, 2012

Graphs that Show a Little Pain: Mining, Manufacturing and Services

In my last post I included a graph showing the high level of mining investment past, current and prospective. The graph was from a speech the other day by Deputy Governor of the RBA Philip Lowe elegantly titled "The Changing Structure of the Australian Economy and Monetary Policy

The happy graph is this one. 

Mining investment is as high as its ever been in Australia, but this doesn't necessarily mean that all is fine in the Australian economy.

Lowe also discusses a range of other graphs that show how some parts of the economy are struggling.

The first graph below uses 2000 as its starting point and considers outcomes since that time.  Manufactured exports were growing substantially until the GFC, with the parts of the sector clearly becoming more export oriented (consider exports in ratio to output). Part of the cost of this transition was a gradual decline in employment. Since the GFC, exports and outputs have recovered somewhat although still well below the pre-crisis peak and well below the general recovery in world manufacturing trade, which has exceeded pre-crisis highs. Unemployment in the sector, meanwhile, has fallen in a hole.

It's harsh to say it, but the survival of the manufacturing sector (and remember that it's a remarkably varied sector) is probably dependent on more job losses as firms restructure and focus on higher value-added activities. Steel production, for example, is not going to survive in its current form. Car production is also probably dead in the water over the longer-term unless the government does something more than simply providing regular gifts to American and Japanese car companies to keep producing cars in Australia.

Just imagine the potential results for Australia's hi-tech manufacturing future if just 10 per cent of that largess delivered to American and Japanese investors had been put into research on new engine technology. Instead we paid the car companies to keep producing cars that fewer and fewer people wanted.

There is some indication that the manufacturing sector is restructuring in a good way in that a greater percentage of firms are embracing new operational processes than in other industries. Once again this means higher productivity and clearly fewer employees as a percentage of output. Currently manufacturing employs about 950,000 people and accounts for about 9% of output. As Lowe argues:

Realistically, Australia cannot hope to be a large-scale producer of relatively standardised, plain-vanilla, manufactured goods for the world market. But what we can be is a supplier of manufactured goods that build on our comparative advantages: our educated workforce; our ability to design and manufacture specialised equipment; our reputation for high-quality food; our research and development skills; and our expertise in mining-related equipment.
Inevitably, the high exchange rate means that the manufacturing industry has little choice but to move up the value-added chain in order to compete. This is, of course, a lot easier to say than to do. It means difficult changes for many firms and those who work for them. It also means ongoing investment in human capital and the latest machinery and equipment and constant attention to improving productivity. One piece of evidence that things are moving in this direction is in the ABS business characteristics survey, which asks firms a series of questions about innovation. In this survey the manufacturing sector clearly stands out as one where firms are actively reviewing their business practices and, over recent times, they have been doing this more frequently.

Two significant sub-sectors that have been growing are "professional and scientific" and "specialised machinery", while cars and metals and construction manufactures are in a dangerous decline. The problem for the car industry is that there is overproduction throughout the world and especially in Europe.

Another sector that has been doing poorly is tourism, although some sectors of the accommodation sector have not been doing so badly, highlighting that there is restructuring going on within sectors, not just between them (as in manufacturing above).

As those of us who live in Queensland will have noticed, tourism is in deep trouble. Sydney, however, is doing well as business travel remains high and as tourists seek city-based experiences rather than coast-based experiences. The floods and La Nina have probably not helped Queensland tourism.

Another sector that is going through a tough time is the real estate industry. Not only are prices in decline, but turnover rates have more than halved from their peak in the early 2000s. The fall over the last few years has also been significant. The trend is clear despite a couple of rises before and after the GFC. I live near a high street that must contain at least 6 real estate agencies on one side of the road over a distance of no longer than 200m. Might be difficult to maintain that sort of penetration of Logan Rd Holland Park if the turnover trend charted below continues.

As with accommodation, retail is a sector with varying fortunes. Clothing, footwear and accessories are doing poorly as are Department stores, but other retailers are doing quite well.

As I argued in The Internet and the Death of Retail the problem for the bricks and mortar part of the sector is not yet because of Internet sales, which are less than 5 per cent of overall sales, with o/s sales even smaller at about 25 per cent of total Internet sales.

Nevertheless, a recent study by the NAB reported that online retail had been growing rapidly, although the rate of growth slowed in the second half of 2011.

Australian retailers are not, therefore, powerless to take advantage of the Internet. Australian businesses, even those with stores, can sell online as well. But a little hint here to Rebel Sports and Super Amart, things have to be cheaper online.

After trying to find some running shoes in the US, I found that many of the cheaper retailers wouldn't sell directly to Australia, although there were companies that would provide you with a US address and then send the goods to your Australian address. This seemed more trouble than it was worth after I found an Australian site - - that sold shoes much more cheaply than the bricks and mortar retailers.

Undoubtedly we live in interesting times and clearly some sectors (and sub-sectors) are doing much better than others.

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