From Ross Gittins:
The economist who’s long made a close study of Australia’s commodity booms, past and present, and the problems they’ve caused when they bust, is Dr David Gruen, now deputy secretary, economic, of the Department of Prime Minister and Cabinet.
In a speech he gave last week, Gruen reviewed the progress of our transition phase.He started by reminding us of just how big an “economic shock” to our economy the resources boom has been. The size of the improvement in our terms of trade (export prices relative to import prices) makes it easily the biggest sustained boom in our history.
Since their peak in September 2011, however, they’ve deteriorated by more than 30 per cent.The boom in mining construction saw it increase from less than 2 per cent of GDP to a peak of about 9 per cent in 2012-13.
This resulted in something like a quadrupling in the mining industry’s stock of physical capital, and a tripling in its production capacity, in the space of a decade.”The largest investment was in liquefied natural gas production capacity, with Australia on track to overtake Qatar as the world’s largest sea-based exporter of LNG,” Gruen said.
The economic activity and employment that accompanied the investment boom caused a significant re-allocation of labour across industries, but this has now been largely unwound as mining projects reach completion.
The improvement in the terms of trade caused sustained growth in real income per person (much of it coming in the form of lower prices for imports and overseas travel).
Since their peak in 2011, the terms of trade have subtracted from income growth by so much that, even with reasonable improvement in the productivity of labour, real gross national income per person has been falling.
“This is reflected in gradually falling real average earnings per hour over the past four years – for the first time in living memory,” Gruen said.
With an end to the trend deterioration in the terms of [trade] now in prospect – they’ve been improving for the past three quarters – it shouldn’t be long before real incomes start growing again, with the size of that real growth strongly influenced by the rate of improvement in labour productivity.
What surprised me about the successful adjustment — to the the dramatic fall-off in mining investment — was that the Australian Dollar has not fallen further, holding above 70 cents.
Considering that commodity prices, depicted here by the DJ UBS Commodity Index, fell further than in both 2001 and 2008.
Source: Now the economy’s transition phase is ending, wages can start rising
Thx Colin. Understanding the big cycles helps make me a better investor/trader.
Agree, an almost billionaire (rare at this time) told me in the seventies that an understanding of cycles was necessary to gather riches. How true. It’s made me a fortune from investing only in hundreds back then
That’s a good correlation there. By what I read there’s more to it though. Unfortunately I know just enough to be quite confused, not enough to understand!
How much does importing money chasing our higher interest rates (to fund our policy induced housing obsession) account for AUD levitation? Likewise how much is attributable to us selling off the family silver in the form of farms, infrastructure & the deluge of foreign money imported & stored in the form of dwellings in select areas of the cities?
I appreciate this is more policy oriented & I’d ask Mr Gittins or Mr Gruen, but I’d be blinded for life by the amount of dust they’d kick up so I couldn’t see anything ever again……. They are AUD related though.
Is there more to come out in the wash? What’s our future besides mining? Globalisation, automation & the high AUD killed manufacturing & the expertise are now driving Taxi’s. If we don’t have anything else to sell overseas, how can we improve our lot? Mowing each others lawns while drinking each others latte’s using imported mowers & imported coffee beans? It’s unsustainable. What’s the vision?
The old productivity chestnut –
How much are excess 457’s taking away from real incomes as they’re said to be doing jobs that could be done by locals, raising the UE rate? Also a matter of more than a few shown to be being underpaid, undermining wage claims…… thus improving productivity for tax avoiding corporates……… And then there’s apparently robots coming for everyone’s jobs. That’ll help productivity (company’s bottom line), but how will it help unemployment? It didn’t in manufacturing!
Falling real gross national income Per Person (living standards) could also be attributed to the planeloads of immigrants diluting our natural endowment, while clogging our very backward looking infrastructure? Not that they’re not welcome, we’re nearly all blow in’s, but the unrelenting pace is causing some congestion! Where’s the honest discussion about a big Australia Vs a Sustainable one? Ecologically, Economically, Socially…..
I’m asking in earnest here, because I know I’ll receive a more balanced answer than some of the sites I frequent, as no one seems balanced, just righteously dogmatic while pretending to be pragmatically balanced…….
Australian banks funding mortgages with offshore borrowings is asking for trouble.
So is the C’mon over to Chinese investors to revive the property bubble.
Also both sides of government spending the short-term gains from the Resources boom on pork-barrel policies with an eye on the next election, rather than salting it away in a sovereign wealth fund — as wiser nations like Norway, Chile, even Mongolia have done — caused the demise of Australian manufacturing.
Productivity is measured as output per worker. Rising productivity requires investment. Investment requires a competitive economy that can match costs per unit of output with other economies. Australia just doesn’t cut it. Take the cost of electricity: almost 3 times that of Canada, US or Mexico let alone India & China. Wages? Cost of living? I think I have made my point.
Read Mancur Olson’s The Rise and Decline of Nations, we are pretty far along the curve but still some way behind Greece.
Thanks Colin, I appreciate the clarity.
All that mis-allocated capital is causing plenty of obvious pain already & yet they still pretend they care……. Probably why the WA LIbs have just preferenced One Nation for the WA elections. Better to keep them in the tent & stay relevant while keeping their self importance intact.
I’m sure it’ll be a painfully mixed bag, but shorting the AUD might be good for my pocket as well as for the country.