Australias two-speed economy rides commodities boom

Sydney, May 17 | Updated: May 18 2006, 05:30am hrs
A commodities frenzy has propelled Australias growth, leading to a two-speed economy as resource-rich states streak ahead of the countrys financial and manufacturing heartland in the east.

But the benefits of a boom in states such as western Australia are starting to feed through to other states in the country, supporting their growth, analysts say.

Higher corporate taxes from the flourishing mining and energy sectors are already flowing into the pockets of consumers via cuts in personal taxes. Every commodity boom is different and it looks like this one is stronger for longer. In an 18-month time frame it looks pretty good, said Jeff Oughton, head of economics, Australia and industry, at National Australia Bank.

Western Australia is going faster, but its dragging the rest along, Oughton said. The second-round effects of that boom in resources will start to feed back into the east and thats why the east looks like its bottoming and starting to improve again. Western Australias economic growth jumped in the fourth-quarter by 4.5% from the previous quarter, while New South Wales, the countrys richest state, crawled along at a pace of just 0.7% after contracting in the third quarter.

Demand for Australias commodities has surged in line with rapid global economic expansion, which the International Monetary Fund says will top 4 percent in 2006 for the fourth year running. The country is the worlds biggest exporter of coking coal, number two for steaming coal, gold and uranium, and the third-largest exporter of aluminum and iron ore.

Australia is also a heavyweight exporter of wool, sugar, grains and meat, but the biggest gains have been in non-rural commodities. Prices of base metals in the central banks commodity price index were 50 percent higher in April than a year earlier in US dollar terms.

Speculative buying has fueled a rally in commodity prices as Asian giants such as China, India and Japan expand.

Warren Hogan, head of research at ANZ Investment Bank, said corporate taxes pouring out of the resource-rich states of Western Australia, Northern Territory and Queensland would help boost household spending in the states with slower growth, particularly New South Wales and Victoria.

In last weeks budget, Australian treasurer Peter Costello unveiled A$36.7 billion ($28.2 billion) of personal income tax cuts over four years and a bigger-than-expected 2005/06 underlying budget surplus of A$14.8 billion. Burgeoning corporate profits thanks to the mining boom have left the federal government with an embarrassment of riches, which it is passing on to voters, said Eric Betts, head of strategy at Nomura Australia. The government also upped its 2006/07 gross domestic product forecast to a rise of 3.25% from a rise of 3%.

Private spending on staff and heavy machinery to dig more wealth out of Australias rich seams of metals and minerals has been the fastest-growing component of overall business investment.

Overall profit growth is likely to remain robust, commodity prices are likely to remain high and the macro background of good economic growth, benign inflation and reasonably stable interest rates is supportive, said Shane Oliver, head of strategy and chief economist at AMP Capital Investors.