Australia's Resources Boom with a Bust

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Australia is currently experiencing the largest sustained boost to the terms of trade in our history, according to the Australian Treasury's Macroeconomic Group. Australia is in the midst of the biggest resources boom in its history, which is pouring tens of billions of dollars into the country.

The resources boom is a good thing. It's a great thing for our country

(PRWEB) April 5, 2011 -- David Gruen, the Executive Director of the Macroeconomic Group, says that this high level of the terms of trade is having a profound impact on the Australian real exchange rate, which is at its highest level, and currently about 35 per cent above its average over the 27 years since the Australian dollar was floated in December 1983. According to a Morning Report issued by The Australian Stock Investment Group on Friday, 1 April 2011, the Australian dollar continued its record run overnight, nudging 104 U.S. cents on the back of rising commodity prices.

“The resources boom is a good thing. It’s a great thing for our country,” says Prime Minister Julia Gillard. And in many respects, she is right. But, The Australian Stock Investment Group believes that recent announcements from Australia's biggest airline, Qantas, point towards how she may also be wrong.

As seen in the news last week, Qantas hiked up prices for its domestic fares – for the second time this year. It also warned that it cannot rule out further increases in the future either. Qantas also announced a series of cost-cutting measures, including reducing capacity on its domestic and international services; retiring some of its aircrafts early; and trimming down on management positions.

Qantas has been badly affected by recent natural disasters – namely the Japanese earthquake and tsunami, and to a lesser extent, the quake in Christchurch and the floods in Queensland. But, more significant impacts have been caused by the sharp rise in the cost of fuel and the strong Australian dollar effecting demand for flights.

The Australian resources boom is built on surging commodity prices, including the price of crude oil. The rising fuel price - up 50% since September to $131 a barrel - leaves Qantas looking at a $2 billion fuel bill for the rest of the financial year. Qantas CEO, Alan Joyce, says that sustained increases in the price of fuel are the most serious challenge Qantas has faced since the Global Financial Crisis. And, while the rise of the Australian dollar against the United States dollar does provide some relief on the oil price, which is priced in USD, the flipside has a more negative impact on the airline.

Travel website, travel.com.au, has reported a stronger customer demand for overseas holidays compared to domestic breaks. "We are attributing the growth in international bookings to a combination of factors, including the Australian dollar performing strongly against numerous foreign currencies," said travel.com.au spokesperson, Lisa Ferrari. While this has a positive impact on international flights for Qantas, their announcement to reduce its domestic capacity from 14% to 8%, clearly indicates the negative impact it is having on the domestic market. This not only affects Australia's domestic airlines, but also the domestic tourism and retail industries.

The Australian Treasury belives that the resources boom, and in turn the strong Australian dollar, is having a profound impact on the structure of the traded sector of the Australian economy. "In particular, those parts of the traded sector not linked in some way to the boom in the production of mining and energy commodities are facing severe and sustained competitive pressure," says Gruen.

The Australian Stock Investment Group believes that this is absolutely true for many Australian businesses, including Qantas. The resources boom is a double-edged sword for the Australian economy, with both positive and negative impacts. As pointed out by the Australian Treasury, “While the direct effect of higher commodity prices is to increase Australia’s national income, natural mineral wealth and increases in such wealth do not always convert into higher sustained growth or wellbeing overall.”

The ASIGroup is an Australian owned company that provides information and research for some of Australia's leading Stock Brokerage Firms, financial information providers and general trading advisors. These companies are located throughout Australia's capital cities and are widely considered the best services available in Australia today. The ASIGroup provides information on all types of Stock Market Trading including Shares, CFD’s, Futures, Futures and Options.

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Richard White
The Australian Stock Investment Group
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