A once-in-a-lifetime mining boom led to unprecedented prosperity for the Australian economy. But how much did we benefit? And what can we expect as the boom begins to unwind?
According to Reserve Bank of Australia research, the mining boom increased Australian living standards significantly over the past decade. The boom has resulted in a vast shift in the allocation of resources and the composition of Australian production and employment.
Businesses exposed to China and the resource sector have enjoyed a remarkable period of growth; nevertheless, the boom has proved costly for other segments of the Australian economy such as manufacturing and agriculture.
The analysis, by economists Peter Downes, Kevin Hanslow and Peter Tulip, required constructing a counterfactual -- basically an alternative history in which the mining boom did not occur. They approach this problem by representing the mining boom as "the confluence of several large distinct shocks hitting the Australian economy".
By unwinding these shocks the researchers created a baseline by which they could measure the impact of Australia’s mining boom on a variety of economic variables. This process required three major adjustments -- an assumption that global trend growth since 2002 was slower, commodity prices were lower and the response by mining investment never happened.
They estimate the mining boom has increased real per capita household disposable income by 13 per cent, real wages by 6 per cent and lowered the unemployment rate by about 1.25 percentage points. A higher dollar also increased a household’s purchasing power, resulting in much stronger spending.
Of particular interest are their forward estimates through to 2025. As always, forecasts of this nature should be treated with some scepticism -- particularly over such a lengthy period -- but they provide an interesting assessment of the net long-term effect of the boom.
So far Australia has only experienced the upside of high commodity prices and strong global growth but as we shift towards the final stage of the mining boom -- the production stage -- the economic impact of the boom will begin to fade, particularly if China continues its transition towards a more consumption-focused growth model.
For example, the boom has increased employment by about 3 per cent but the expected net effect through to 2025 is negligible and matched by population growth. The mining boom’s contribution to income and wealth will also ease somewhat over the next decade – although, on net, the research indicates that we still end up better off.
Mining investment -- the second stage of the boom -- was a key channel through which the Australian economy benefited. Stronger global growth -- particularly in China -- was the primary cause for the investment boom; although higher commodity prices were also a notable reason. The graph below estimates mining investment under several different scenarios.
Also worth noting is that their modelling indicates that mining investment will collapse by about 4 percentage points over the next few years and by 5 per cent over the next decade. These estimates are consistent with my own assessment for investment (The RBA is stuck in policy limbo, August 19).
According to the researchers, "the real exchange rate is estimated to be 44 per cent higher in 2013 than it would have been in the absence of the boom". This would have supported demand for manufacturing and agricultural sectors, as well as net exports. Nevertheless, on balance the Australian economy has benefited from a higher dollar through a higher terms-of-trade and stronger household spending and incomes.
A key concern regarding mining booms is that they can sometimes result in deindustrialisation -- the so-called "Dutch disease" -- where a resource boom results in a much stronger currency and erodes the competitiveness of other export industries.
The authors argue that evidence of "Dutch disease" has "not been strong". The manufacturing sector has been supported by the mining boom to some extent, acting as a supplier of intermediate goods to the resource sector. Nevertheless, output in the manufacturing sector is estimated to be 5 per cent below where it would have been in the absence of the boom.
Output in the manufacturing and agriculture sectors is expected to fall further relative to the baseline scenario over the next decade. The authors may not be concerned about "Dutch disease" yet but it remains a potential long-term consequence of a persistently high dollar and narrow growth model.
The author’s analysis suggests a relatively gradual and orderly unwinding of the mining boom. Income and wealth will ease and that will weigh on employment and real GDP. But more timely data indicates that the mining boom may be unravelling at a more rapid pace.
The RBA offers a damning assessment of the resource sector in its most recent Statement on Monetary Policy, noting that "at current prices, there is a sizable amount of coal and iron ore production that is unprofitable"; furthermore, "the outlook for prices will depend on what proportion of these mines is shut down" (Prepare for more Australian miners to crumble, August 11).
Australian producers continue to flood iron ore and coal markets with fresh supply, forcing commodity prices to decline by around 15 per cent over the past six months. At the same time, the Chinese property market appears to have progressed from bad to worse and Chinese authorities are looking to ease excess capacity.
Australia benefited greatly from a once-in-a-lifetime mining boom but as its effects begin to ease Australian households and businesses will be forced to tolerate softer income growth than they have become accustomed to.
The research suggests that the mining boom will unwind in a gradual and orderly fashion but that assumption is being tested by recent developments in commodity prices, which continue to weigh on margins and pose an existential threat to many Australian miners. Unfortunately, the export stage of the mining boom may not be as lucrative as commonly believed.