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Australia’s ‘Fiscal Cliff’

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.

Related: LNG cost blowouts jeopardise Australia’s future

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.

If you only invest in one company this year, make it our “Top Stock for 2012-13”. Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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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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