As this week's business investment survey reminded us, the mining boom is the biggest economic event in Australia for decades. The last quarter of the calendar year was weaker than expected but if the survey is right, business investment this financial year as a whole will be more than a third higher than last year, and next year it will be higher by another third. Already much bigger than usual, business investment will soon account for nearly one-fifth of Australian output.
Roughly half of the planned investment is in mining, and is largely driven by expectations about the growth of China. Very few long-term economic issues therefore matter to Australia as much as how fast China will grow, for how long, and in what pattern. On those key questions, this week's China 2030 report by the World Bank is both illuminating and challenging.
It expects that, in a favourable scenario, GDP growth in China will slow from the current rate of over 9 per cent to 5 per cent by 2026. Within that overall growth, industrial output will slow more rapidly. The report implies that industrial output growth will slow to under 6 per cent over the next decade, as services account for a larger share of China's GDP. Within industrial output, the intensity of energy and metals use will also fall. In the following decade the trends will become more pronounced, with industrial output growth falling to around 3 per cent.
These are not alarmist or pessimistic predictions. Indeed, Australia's ABARE made many of the same points in the middle of the last decade. Carried out jointly with the Development Research Center of the State Council of the People's Republic of China, the forecasts reflect widely accepted facts of demography and the arithmetic of productivity.
China's labour force is growing only very slowly – much more slowly than Australia's. Within four years, China's labour force will start to shrink. At the same time, China is exhausting some of the sources of huge gains in output-per-worker evident over the last thirty years. Much of the gain arises when subsistence peasant farmers move to manufacturing jobs in the cities. That migration is not over, but it is slowing down.
With rising manufacturing wages, China is moving up the production chain to products requiring higher levels of skill. Now the world's largest exporter of manufactures and the world's second largest economy, China is losing the advantages of coming from behind, particularly the advantages of applying cheap labour and cheap capital to readily available technologies.
There is still plenty of scope for China to find good productivity growth. Since employment will be shrinking, labour productivity growth will be higher than GDP growth itself. But the World Bank and the Chinese authorities want growth to come more and more from the production of services, and the production of more elaborately transformed manufactures. The growth of metals and energy inputs into production will accordingly fall.
These are the numbers that will ultimately cap the growth of Australian minerals and energy exports to China. There is little doubt that Australia will see very big increases in coal, iron ore and LNG exports over the next five to seven years. In the longer term, however, growth in mining output is far more likely to revert to the average of the last quarter-century or so.
In the case of iron ore, the volume of exports has grown at an annual average under 4 per cent in the last thirty-five years. It is growing faster now and will accelerate as new production comes on stream. But in a decade or so, the growth of iron ore exports will likely be not much faster than the long-term growth rate of the Australian economy itself, about 3.5 per cent.
Coal exports have on average grown faster, and are not nearly as dependent on the China market as is iron ore. But coal has its own problems and it is difficult to imagine it sustaining the 6 per cent volume growth averaged in the last three decades. LNG exports will by contrast boom, but off a small base. Ultimately LNG exports will be constrained by slowing growth of energy consumption in China, and more importantly the large number of alternative sources.
It surprising but true that the mining industry in Australia is today not much bigger in relation to GDP than it was ten, twenty or even thirty years ago. Iron ore and coal output is much higher, but gold and oil have contracted and metal ores like copper or bauxite have not grown as quickly as other industries. Mining, in other words, has grown at much the same rate as the rest of the economy over the last three decades.
The mining workforce certainly doubled in the last decade (sharply cutting mining output per worker) but even so the mining workforce is still only 4 per cent of the workforce. The mining sectors now expanding most dramatically and receiving most of the mining investment – iron ore and LNG – will employ only 0.4 per cent of the workforce.
A reasonable guess is that, over a decade or so, the growth of mining output and exports will slip back to the average rate of growth of the Australian economy as a whole. It is a great industry and a source of immense strength for Australia but it may never employ a substantially higher share of the workforce and as a share of GDP it is difficult to think of it getting to more than around 15 per cent of GDP, from 10 per cent today.
The arithmetic tells us that Australia does not, cannot, and will not 'depend' on mining any more than it 'depends' on finance or manufacturing. It also tells us that, for all the investment in mining, for all the excitement, in a decade 95 per cent of us will still be doing something other than mining.
As last year's Australian government budget papers argued, the long-term advantage to Australia of China's increasing weight in the global economy may not be its appetite for iron ore and LNG, welcome as it is, but in the possibilities offered by the new Chinese economy depicted in the World Bank's China 2030 report – a China that is the world's biggest economy and getting bigger, focused more on services, consumption, technologically advanced goods and investment abroad.
Australia has had several hundred years of experience exporting minerals, energy and farm products. Finding our role in the new China economy will be an altogether more challenging undertaking. The insignificance of Australian non-commodity exports to Japan, Korea and Taiwan attest to the difficulty, which is no doubt now being pondered by Ken Henry and his Asian Century White Paper team.
John Edwards is a Lowy Institute Visiting Fellow, an adjunct professor with the John Curtin Institute of Public Policy at Curtin University and a member of the board of the Reserve Bank of Australia.
Originally published by The Lowy Institute publication The Interpreter. Reproduced with permission.