DURING Australia’s previous resources boom, the Fraser government paraded regular estimates of an emerging wave of mining and energy projects. At one stage, planned investment reached a staggering $29 billion – about $200bn when scaled up to the size of today’s economy.
You wouldn’t know it from the Rudd government, but Australia’s renewed resources boom is quickly becoming bigger than its ill-fated predecessor, which collapsed along with the Organisation for Petroleum Exporting Countries’ unstable oil price cartel. It will likely also overshadow the late 1960s and early 70s boom that opened up the Pilbara on the back of industrialising Japan’s demand for iron ore.
The assessment comes from the Reserve Bank of Australia’s assistant governor for the economy, Philip Lowe. In a speech yesterday, Lowe estimated that annual mining investment had surged to nearly 5 per cent of gross domestic product. This actual – rather than planned – investment in new mining capacity amounted to a “record by a large margin”.
“While we had booms in the mining sector in the late 1960s and the early 1980s, these look relatively small compared with the current one,” he said. The new mine and port capacity already had delivered a one third increase in iron ore export volumes in the past two years.
Rather than highlighting this, the Rudd government is playing it down in favour of the politics of its budget stimulus. Wayne Swan last week said it was “not true” we had avoided recession because of China’s rebound from the global crisis. Instead, consumer spending stimulated by his budget stimulus had saved the day.
Yet Lowe noted that Australia’s ratio of export prices to import prices – the terms of trade – had held up at a “very high” 50 per cent above the average of the 80s and 90s. Few would have predicted this in the midst of the most severe global recession since the 30s, he said. And it was mainly due to China.
For similar reasons, Australia’s stock of productive capital had kept growing through the severe global downturn at “around its fastest rate in several decades”. And immigration had produced Australia’s fastest population growth – 2.1 per cent – since the mid-60s. This was four times more than the average of the advanced economies, all of which, bar Australia, had shrunk in the wake of the crisis.
Moreover, Lowe said planned liquefied natural gas projects – such as the huge $43bn Gorgon development – meant “very high levels” of resource investment would “continue for some years yet”. And there was a “high probability” that Asia’s rapid China-led growth could continue even while developed economies remained subdued. The US economy had been based on domestic, rather than export, demand for decades. With the right policies, Asia could do the same.
It is one thing for the world’s most populous nation to grow 10 per cent or so a year off a very low per capita base. It’s another to keep doing that after two decades. The compound result is that China’s economy has expanded six-fold since 1990. It produces nearly half the world’s steel, up from 15 per cent a decade ago. It has become our biggest merchandise export market. China, Japan, India and South Korea are now Australia’s four biggest customers, taking 55 per cent of our merchandise exports.
China’s rapid rebound only serves to increase confidence in its durability. But this also means that the sort of capacity constraints that emerged just before the crisis hit will reappear as domestic demand picks up again.
Interest rates will rise because Asia’s demand for our resources translates into a higher return from investing in Australia. As Reserve Bank governor Glenn Stevens suggests, the increased capital inflow could push the Australian dollar to parity with the US dollar for the first time since the Fraser-era boom.
This increased capital inflow will translate into a wider current account deficit on the balance of payments. This magnifies the need to boost national savings, particularly government saving.
Australia’s economy is much better placed to deal with this resources boom than when Malcolm Fraser finally decided that life could in fact be easy. Back then, an inflation-prone and inflexible economy protected an inefficient manufacturing sector, ran a managed exchange rate and was burdened by centralised wage fixing.
These combined to produce a trade union wage blowout that kneecapped the economy just as the collapse of the OPEC cartel brought the resources boom down with it. Encouraged by Fraser’s late-term boosterism, the unions grabbed the resource boom bounty before it had ripened, deepening the ensuing recession.
Three decades on, it has been the government’s budget that has prematurely dined out most on the resource boom bounty. The Howard-Costello government spent too much of the revenue from the pre-crisis spike in commodity export prices. Then the Rudd government delivered one of the biggest budget stimulus responses of any developed economy to the global crisis.
This $88bn budget stimulus may have been fair enough at the time. But the economy is now performing much better than forecast, the Treasury reckons Australia’s recession would have been modest even with no budget stimulus, we’ve become the first Group of 20 economy to raise official interest rates and the dollar is headed towards greenback parity.
In parliament yesterday, Swan did not properly deal with calls from Bob Hawke’s former economic adviser Ross Garnaut to wind back the budget stimulus ahead of schedule. Last night, Garnaut told a Lowy Institute function that “we will need a level of fiscal discipline … that we have very rarely seen in Australia, sustained over a longer period than we have ever had in Australia”.
Former Reserve Bank governor Ian Macfarlane told the same function that Australia’s new found international pin-up status “makes me worry” because “the hardest thing to cope with is success”. We were becoming a target of foreign capital inflow, in part reflecting the massive new gas projects. Our mild downturn meant the economy had modest levels of spare capacity, underlying inflation had not fallen as low as expected, the dollar was rising “very sharply” and the prospect of a private investment surge posed a “big challenge”. “The government will have to make some room for that,” Macfarlane warned.
The elders of Australia’s modern economic success are warning that the Rudd government is in danger of fighting a global financial crisis that is fast receding rather than dealing with the China boom challenges ahead.