Australia: Don’t expect a repeat of the last boom

Gerard Minack, courtesy of Macrobusiness, explains why the recent rise in commodity prices will not result in a repeat of the last boom.

There are two main ways the last commodity boom boosted domestic activity. Neither seems likely to be repeated now. The first is that the mining sector lifted its investment spending as commodity prices increased (Exhibit 5). Now, however, mining investment is likely to continue to fall (although most of the declines have been seen).

The second way the mining boom filtered through to domestic activity was via fiscal policy. The boom provided a windfall for governments. For the Federal Government the windfall was several percent of GDP….Almost all the revenue windfall was used to fund a discretionary loosening of fiscal policy….. With the budget now in deficit I expect the Federal Government to trouser the latest windfall. (Yes, there will be political pressure on a behind-in-the-polls-government to spend more, but the countervailing political fear is that to spend the windfall now would lead to a politically damaging downgrade to Australia’s sovereign rating.)

The unforeseen consequence of this government profligacy was a spectacular rise in the Aussie Dollar and subsequent decimation of the manufacturing sector.

Source: Minack Special Report: Forget rate hikes – MacroBusiness