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.