Australia’s future is tied up in big, world class projects where the likes of the huge Gorgon LNG development will be a guideline (but possibly the largest).
These projects are going to change Australia; add to our problems controlling climate change and carbon footprints, and turn us into the only energy major in the world’s 30 biggest economies, located next to the world’s two most important emerging markets in China and India, with energy short Korea and Japan to add extra demand.
There are at least 10 LNG projects in Queensland (coal seam methane) and Western Australia/Northern Territory.
There are numerous coal mining projects in Queensland, NSW and Western Australia, numerous mineral projects, the biggest of which will be Olympic Dam in South Australia, which will dwarf all other projects apart from the Gorgon-sized LNG monsters.
No wonder the Reserve Bank board talks a lot about investment, about labour costs and pressures and terms of trade and their influence on interest rates.
And news Friday morning that the Australian population will be 7 million bigger at 35 million in 40 years time, will add to domestic pressures for more housing, push up labour costs and other inflation.
It could mean interest rates rise to levels higher than they would have been, with the added pressures.
The pressures on investment will now be much greater.
This week’s minutes of the September 1 board meeting had this discussion on investment:
"Members discussed the broader outlook for investment, which – as a share of GDP – was around the highest levels in the 50-year history of the national accounts.
"The capital expenditure survey pointed to some near-term weakness in private investment, though less than expected earlier in the year.
"Developments in the resources sector, especially for LNG, pointed to significant strength in the medium term.
"Public investment would increase because of the fiscal stimulus packages and state government infrastructure plans.
"Members also discussed the trend in dwelling investment.
"They noted that even though the number of new dwellings completed had been lower in recent years, dwelling investment as a share of GDP had held up, due to the trend towards larger and higher-quality homes and an increase in the share of alterations and additions."
And that neatly captures the Australian outlook and the dilemma for the RBA: the investment outlook is rosy, perhaps the best for any country in the OECD.
By around 2020, forecasts have us as the biggest energy exporter in the OECD, which means we will be the safest, most secure destination for foreign investment, especially in energy.
We could end up as the world’s biggest LNG exporter, to go with our status as the world’s biggest coal and iron ore shipper.
Then there’s uranium.
If Olympic Dam is greenlighted by BHP Billiton, we will be the biggest exporter of uranium oxide by around 2025.
A decade ago no one thought we would have such a dominant role, especially in coal and iron ore which were considered to be a bit passé and uninteresting as investment areas.
Yet, in terms of domestic economic activity, housing remains the most important component for consumers, banks and business.
It dominates credit: more money is lent on housing each year than to business.
It’s where the RBA sees the inflation dangers still lurking in the economy, breaking cover and forcing up costs: that is why the central bank has its hand on the rate rise lever and will do so for months to come.
Although housing credit is growing for new homes, it is nowhere near as strong in the boom seven or eight years ago, nor is it as strong as some alarmists claim.
Finance for existing homes is low and slow.
Business credit is weak, barely growing, but expected to rise more strongly in 2010: that could set us up for a clash when housing lending continues to expand by dragging in more interest from investors and home buyers trading up.
But housing remains weak, except for new home building, which is still a long way from being flat out.
The Australian Bureau of Statistics reported this week that house building has a low base from which to grow.
It said this week that the "seasonally adjusted estimate for the total number of dwelling units commenced fell 3.7% in the June quarter which follows a revised fall of 2.1% in the March quarter.
"The seasonally adjusted estimate for new private sector house commencements rose 3.7% in the June quarter following a revised fall of 3.5% in the March quarter.
"The seasonally adjusted estimate for new private sector other residential building fell 22.9% in the June quarter following a revised fall of 1.8% in the March quarter."
So growing demand from private owner home building (which will translate into higher demand for land bricks etc), but nothing from investment projects as developers continue to find it tough to get finance from banks, and with the securitisation markets and alternate finance sector dead and not providing money.
At some stage the RBA will determine that the prospect those inflationary pressures spreading from housing (caused by a shortage of land and production constraints, especially in NSW), is too much and it will start lifting rates, not to kill demand, but to better manage it so as not to damage the viability of the huge slate of big ticket projects.
With labour costs easing (thanks in part to the growing short time deals being agreed to in the private sector, which is offsetting fatter wage deals in the government area), the RBA seems confid
