Australia’s ‘Fiscal Cliff’

Australia's 'Fiscal Cliff'

High costs, low productivity and government regulation threaten our future

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published November 19, 2012 10:12 am AEDT

Australia could be facing its version of the US' 'fiscal cliff', once the resources investment boom ends in the next few years.

Michael Chaney, chairman of Woodside Petroleum (ASX: WPL) and National Australia Bank (ASX: NAB) has told the Australian Financial Review (AFR) that the economy is not becoming productive and economic growth was likely to slow to less than 2.5% in 2015, because of lack of workplace flexibility, caused by Labor's industrial relations system and state and federal environmental regulations.

Several prominent business leaders have already suggested that Australia is becoming less competitive due to high costs, and falling productivity. The AFR also reports that Santos Limited (ASX: STO) is expected to warn that investment in Australia's LNG industry is likely to dry up, due to cost overruns. Australian labour is apparently twice as expensive and less productive than many of our competitors, according to the AFR. We have commented previously on warnings that $164 billion of investment in the LNG sector was at risk, as companies look overseas for cheaper, easier projects.

The problem Australia faces is that with much of our labour and investment directed towards the resources industry, other sectors of the economy appear to have suffered, with media, property and retail sectors all struggling. Those sectors are unlikely to be able to make up for the fall in investment capital, as investment in resources tapers off. Expectations that the next boom could be in LNG now appear to at risk, with several LNG projects recently reporting large cost overruns.

Woodside and its partners Shell, BP, BHP Billiton (ASX: BHP), Mitsubishi and Mitsui are due to make a final decision on the $40 billion Browse LNG project early next year, and indications are that it could be at risk of going ahead.

With the mining investment boom slowing and likely to end within the next few years, high costs and low productivity are combining to drive investment offshore. Without that investment, we could face massive falls in our terms of trade, leading to low growth and at worst, risk of recession.

The Foolish bottom line

The good news is that we know what the issues are, and Australia can tackle those challenges now, before we face staring over the 'fiscal cliff' of our own.

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Motley Fool writer/analyst Mike King owns shares in BHP Billiton and Woodside. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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