How low for our economic growth post the mining boom?

This (now heavily politicized) question is crucial for Australia. The Grattan Institute* produced an excellent paper in July, entitled “The Mining Boom – Impacts and Prospects”. The three major concerns Australians have about the mining boom (generally 2000-2012) and their responses are summarised below: 

1. The boom has been great for miners but has left many behind. Whilst the boom was indeed great for the mining industry, it did substantially increase the size of the Australia’s Gross National income benefitting a wide range of Australians and although non-mining states and non-mining industries did not grow as fast, there was some real growth in all sectors (although manufacturing growth was quite anaemic compared to other sectors). Some manufacturing and tourism jobs were lost in certain regional areas but it was only a minority of these that total employment declined as a percentage of population. Surprisingly, income inequality rose with higher paid workers experiencing the largest growth in earnings over that period.
2. Australia became a “quarry economy” with the high dollar permanently damaging other industries. The report states “We find the main trade-exposed sectors, notably manufacturing, tourism, education of overseas students, and agriculture, have survived in reasonable shape.” It argues that the longer term structural decline in manufacturing has more to do with the typical decline in manufacturing as a percentage of the economy for most higher-income economies. Over that period the trade exposed, non-resource sectors did decline as a percentage, however, total volumes still increased. The other important point is that typically for developed economies manufacturing does bounce back after the exchange rate re-adjusts after the boom (see chart 2 below).
3. We are very vulnerable once the boom ends, particularly if the Government hasn’t saved some of the windfall. Certainly countries with very large resources sectors have more fluctuations in their economy and Australia now has a resource sector much larger that the average OECD economy has (around 11% of GDP compared to under 2%). Despite this, the balance of the Australian economy and overall economic growth has been remarkably stable over time so perhaps this can also be managed well in the future. We must also remember that the volumes of exports will begin to increase dramatically, particularly in LNG where volumes will triple from 2010 levels by 2018. Clearly the Government did not save enough of this windfall and the risk of a downturn cannot be ruled out.

I must admit I was a bit more positive about our post-mining economy post the boom, although we need clear leadership to help ensure we have the right mix of skills and competitive industries to ensure we can absorb the mining shock and continue to steadily grow our wealth per capita into the future.

CHART 2: Comparing 13 countries through similar exchange rate shocks
Year 1 is the year after the steepest depreciation in the currency.

Source: Grattan analysis of data from BIS (2013) and the World bank (1960 - 2011).
Estimated constant-price values, median country, per cent of GDP.

Indices:

The Australian All Ordinaries Index has moved up increasing by +0.3% since closing last Friday to 02:50 pm today.

 
The rest of the world as measured by the MSCI index decreased -2.0% in A$ from closing last Friday to end of trade Thursday.

Have a great weekend,

The team at IPS