1MacroEconomics – AustraliaNovember 2012
Two major forces have affected Australia’s economy in recent years. High global commodity priceshave driven a massive mining boom, supporting growth, while at the same time households haveincreased saving, which has been a drag on growth. But Australia has been lucky. The net result of these opposing forces was around trend growth, close to full employment and low inflation. Growthhas been uneven across sectors, with a strong mining sector and weaker conditions elsewhere, but theoverall story has been positive.
Now that commodity prices have peaked and the mining investment peak is also in sight – expectedaround mid-2013 – the true test is coming. Can Australia see growth rebalance away from mining andtowards other sectors? Or, does Australia have a ‘resources curse’ that has ‘hollowed out’ itseconomy and will constrain its ability to continue to grow?
Last year we wrote a report tackling this question and concluded that ‘while not everyone would benefit from the mining boom, the overall economy is expected to be significantly better off thanotherwise’ (see
,18 August 2011). We retain this view.Australia’s economy has absorbed a ‘once-in-a-generation’ mining boom successfully, with few signsof ‘irrational exuberance’ and inflation remaining low. The high AUD and above average interestrates in 2011 held back some sectors to make way for the mining expansion.
Looking ahead, we expect recent cuts in interest rates to below average levels to drive a rise inhousing construction and house prices, which should also support retail sales. Gradual recoveries arealso expected in a number of the sectors that have been held back by the high AUD, includingtourism, as the effect of the high AUD on growth ‘wears off’ and Asian incomes continue to rise.Given that mining investment is still expected to rise until around mid-2013, there is time for theseother sectors to gradually recover.
We remain optimistic that Australia will see a smooth rebalancing of growth for a number of reasons.First, Australia’s financial system is in good shape, so monetary policy still works. Second, previousfinancial imbalances are well on the way to correcting. Households have increased saving and paiddown debt ahead of schedule for a number of years and local banks have been shifting away fromreliance on foreign wholesale funds towards domestic deposits. Lastly, government debt is low andAustralia does not have sovereign debt problems.
Critically, our positive outlook relies on ongoing growth in Asia, supporting commodity prices andfurnishing Australia with other opportunities. As the Asian middle classes expand and spending patterns shift, demand for education, tourism and other services will grow. The benefits Australiacould reap from the Asian Century should extend well beyond the mining sector.