AusLrallan Lconomlc 8eporL no 1

THE RESUURCES BUUM AND

MACRUECUNUMIC PULICY IN AUSTRALIA
Australian Economic Report: Number





8ob Gregory
eter Sheehan









CenLre for SLraLeglc Lconomlc SLudles
vlcLorla unlverslLy
Melbourne
CcLober 2011

AusLrallan Lconomlc 8eporL no 1

Executive Summary
1be pozzle
AusLralla ls ln Lhe mldsL of Lhe mosL remarkable resources boom ln lLs hlsLory boLh mlnlng
lnvesLmenL and Lhe Lerms of Lrade are aL record levels and lnvesLmenL ls conLlnulng Lo lncrease
furLher 8uL Lhe domesLlc economy ls slowlng real Cu rose by only 14 over Lhe pasL year whlle
employmenL has been vlrLually flaL ln Lhe flrsL nlne monLhs of 2011 wlLh unemploymenL rlslng a
llLLle Pow can boLh of Lhese Lhlngs be happenlng aL Lhe same Llme? 1he answer Lo Lhls quesLlon ls
of real lmporLance for moneLary and flscal pollcy whlch are boLh seL Lo offseL Lhe expanslonary
effecLs of Lhe resources boom 1he conLlnulng uncerLalnLy abouL Lhe world economy furLher clouds
Lhe lssue
1hls reporL seeks Lo Lhrow llghL on Lhls puzzle by examlnlng ln deLall Lhe varlous ways ln whlch Lhe
resources boom affecLs Lhe naLlonal economy Cur cenLral argumenL ls LhaL Lhe neL lmpacL of
resources boom whlch operaLes Lhrough several channels boLh poslLlve and negaLlve has been
sLrongly poslLlve buL has now peaked WlLh no addlLlonal neL poslLlve lmpacL from Lhe boom boLh
moneLary pollcy and flscal pollcy need Lo become more expanslonary 1hls lmplles a reducLlon ln
lnLeresL raLes and changes Lo flscal pollcy Lo supporL Lhe domesLlc economy ln Lhe llghL of Lhe oLher
domesLlc and lnLernaLlonal forces LhaL are produclng slower growLh
1be tesootces boom
1radlLlonally AusLralla has been sald Lo be experlenclng a resources boom lf elLher Lhe level of
resource lnvesLmenL as a share of Cu or Lhe Lerms of Lrade (Lhe raLlo of exporL prlces Lo lmporL
prlces) were aL hlgh levels ln Lhe currenL boom boLh varlables are aL record levels aL Lhe same Llme
for Lhe flrsL Llme ln AusLralla's hlsLory 1hls means LhaL Lhe analysls of Lhls unlque eplsode ls
complex wlLh lnLerweavlng prlce and volume effecLs aL work
We analyse Lhe neL lmpacL of Lhe resources boom as Lhe overall effecL of four key facLors (l) Lhe
lmpacL of lower lmporL prlces on Lhe real value of domesLlc lncomes (ll) Lhe lmpacL of hlgher $A
exporL prlces on Lhe lncomes and flnanclal asseLs of AusLrallan owners of resource companles (lll)
Lhe lmpacL on domesLlc economlc acLlvlLy and employmenL of Lhe AusLrallan conLenL of resource
lnvesLmenL and (lv) Lhe negaLlve lmpacL of Lhe hlgher real exchange raLe on Lrade exposed secLors
such as manufacLurlng Lourlsm and educaLlonal servlces Whlle mosL focus has been on mlnlng
lnvesLmenL Lhe flrsL of Lhese has probably been Lhe mosL lmporLanL ln macroeconomlc Lerms
ln analyslng Lhe overall lmpacL of Lhe boom we dlsLlngulsh beLween level and change effecLs 1he
poslLlve lmpacL of Lhe boom has been bulldlng over elghL years wlLh an lncreaslng lmpacL each year
excepL for Lhe perlod of Lhe global flnanclal crlsls 8uL Lhe lncremenLal effecL Lhe change ln Lhe
lmpacL from year Lo year ls more lmporLanL for pollcy formulaLlon and lL ls wldely assumed Lhe
boom wlll have a conLlnulng poslLlve lncremenLal lmpacL on Lhe economy ln Lhe years ahead 8y
conLrasL our assessmenL ls LhaL Lhe neL lncremenLal effecL has now peaked Lhe level effecL whlle
sLlll poslLlve ls no longer lncreaslng 8oLh moneLary and flscal pollcy need Lo ad[usL Lo Lhls facL

AusLrallan Lconomlc 8eporL no 1

1be cbooqloq loctemeotol effect of tbe tesootces boom
uurlng Lhe resources boom AusLralla's exporL prlces have lncreased by 170 ln forelgn currency
Lerms wlLh Lhe lncrease heavlly concenLraLed on Lhe resources secLor 1hls has led Lo a rlse ln Lhe
exchange raLe and an lncrease ln exporL prlces ln $A each of abouL 63 1he rlse ln Lhe exchange
raLe has led Lo falllng relaLlve lmporL prlces and hence Lo an lncrease ln Lhe real value of domesLlc
lncomes (polnL (l) below) 1he rlse of nearly LwoLhlrds ln $A exporL prlces has conLrlbuLed greaLly Lo
Lhe lncomes ln $A of resource companles and of Lhelr domesLlc and forelgn owners (polnL (ll) below)
(l) Plgher real lncomes from lower lmporL prlces As a resulL of Lhe rlse of 63 ln Lhe real Lrade
welghLed $A exchange raLe beLween Lhe uecember quarLer of 2002 and Lhe !une quarLer of 2011
lmporL prlces fell by 333 relaLlve Lo Lhe prlce of domesLlc supplles Lo flnal demand over Lhls
perlod Allowlng only for dlrecL effecLs lower lmporL prlces reduced Lhe growLh ln Lhe lmpllclL prlce
deflaLor for domesLlc flnal demand by 97 relaLlve Lo Lhe case of no fall ln relaLlve lmporL prlces
1hese lower lmporL prlces lncreased Lhe real value of mosL classes of domesLlc lncomes wlLh hlgher
effecLs where a hlgher proporLlon of lncome ls spenL on lmporLs
lor example real compensaLlon per employee hour grew by 21 per annum over Lhls perlod by
comparlson wlLh 13 over 19792002 and by mld 2011 was 103 above Lhe prevlous Lrend 8eal
per caplLa household dlsposable lncome grew by 28 per annum over 200211 by comparlson wlLh
10 over 19792002 Lo be 176 above Lhe earller Lrend level by mld 2011 1hls rapld growLh ln
Lhe real value of household lncomes was subsLanLlally due Lo Lhe lmporL prlce effecLs buL oLher
facLors also ln parL arlslng from Lhe resources boom are relevanL lor example LoLal hours worked
grew by 20 per annum over 200211 by comparlson wlLh 13 per annum over 19792002
uurlng Lhe SepLember quarLer 2011 Lhe nomlnal exchange raLe fell by 63 alLhough lL has shown
slgns of recovery subsequenLly 1hls analysls ls underLaken on Lhe basls of flxed exchange raLes golng
forward aL Lhelr !une quarLer 2011 levels an assumpLlon whlch seems reasonable aL Lhe presenL
Llme Cn Lhls assumpLlon Lhe exchange raLe boosL Lo (nonexporL) domesLlc lncomes arguably Lhe
mosL powerful effecL of all has come Lo an end even lf Lhe Lerms of Lrade rlse furLher
(ll) lncomes and flnanclal asseLs As mosL mlnlng companles pay only modesL dlvldends and sLock
markeLs anLlclpaLe Lhe fuLure beneflLs accrulng from currenL lnvesLmenLs Lhe maln beneflL Lo
resource owners ls Lhrough Lhe appreclaLlon of asseL values malnly share prlces lrom early 2003 Lo
CcLober 2007 before Lhe flnanclal crlsls had lLs lmpacL Lhe resources lndex of Lhe ASx lncreased
fourfold 1hls was domlnanL reason for Lhe rlse of 144 ln Lhe ASx All Crdlnarles lndex and of 131
or $1014 bllllon ln Lhe markeL caplLallsaLlon of domesLlc equlLles over LhaL Llme Much of Lhls
lncrease ln asseL values accrued Lo forelgn raLher Lhan domesLlc parLners as Lhe resources secLor ls
abouL 80 forelgn owned (Connolly and Crsmond 2011) Lven so rlslng share prlces sLlmulaLed Lhe
rlse ln houslng and oLher asseL values beLween 2002 and 2007 AusLrallan households saw an
lncrease of 8 per annum ln real per caplLa asseLs abouL Lhree Llmes Lhe long run raLe of growLh
1hls lncrease ln real asseL prlces drlven by Lhe resources boom has also come Lo an end 1he
resources componenL of Lhe ASx lndex recovered afLer Lhe ClC fall buL remalns below lLs 2007
peak 1he overall ASx lndex ls well below LhaL peak ln parL reflecLlng Lhe lmpacL of Lhe hlgher $A on
Lhe proflLablllLy of nonresource companles More generally Lhe level of real per caplLa household
AusLrallan Lconomlc 8eporL no 1

asseLs ls lower now Lhan ln 2007 and probably sLlll falllng 1he perlod of rlslng asseL values drlven by
Lhe resources boom has well and Lruly passed
(lll) Mlnlng lnvesLmenL Cne area ln whlch Lhe boom remalns sLrongly evldenL ls ln mlnlng
lnvesLmenL whlch rose as a share of Cu from 16 ln 200203 Lo 48 ln 201011 and could reach
7 by 201314 1he lmpacL of Lhls lnvesLmenL needs Lo be consldered ln Lerms of lLs local conLenL
and of Lrends ln oLher forms of lnvesLmenL very llmlLed lnformaLlon ls avallable abouL Lhe local
conLenL of resource lnvesLmenL ln AusLralla 1he 8eserve 8ank concluded on Lhe basls of lLs lndusLry
llalson work LhaL 'around half glve or Lake of Lhe demand generaLed by Lhese pro[ecLs ls Lyplcally
fllled locally Lhough of course Lhls amounL varles wlLh Lhe naLure and deLalls of any speclflc pro[ecL'
(SLevens 2011) and boLh of Lhese polnLs are broadly conflrmed by Lhe Local ConLenL 8eporL
publlshed by Lhe WesLern AusLrallan CovernmenL (uSu and uC 2011)
1here ls evldence LhaL Lhe local conLenL of mlnlng lnvesLmenL ls falllng over Llme as a resulL of Lhe
changlng naLure of mlnlng pro[ecLs and of Lhe lmpacL of Lhe hlgher $A on Lhe poslLlon of AusLrallan
suppllers 1he paLLern of resource lnvesLmenL ls shlfLlng sharply Lo LnC pro[ecLs especlally large
offshore pro[ecLs such as Lhe Corgon ($43 bllllon) WheaLsLone ($29 bllllon) and relude ($12
bllllon) wlLh much lower local conLenL raLlos ln such pro[ecLs ma[or componenLs of Lhe offshore
plaLform are fabrlcaLed overseas for example ln korea or Chlna and Lhen broughL Lo Lhe drlll
locaLlon ofLen by sea CLher lnformaLlon supporLs Lhls concluslon of lower local conLenL raLlos ln
recenL and prospecLlve mlnlng lnvesLmenL lor example employmenL ln manufacLurlng ln WesLern
AusLralla rose sLeadlly (by 21 per annum) from AugusL 2002 Lo AugusL 2008 buL ln Lhe Lhree years
Lo AugusL 2011 lL has fallen by 224 or 81 per annum 1hus whlle Lhe 8eserve 8ank's 30/30
esLlmaLe may be approprlaLe over Lhe boom as a whole lL ls llkely we are seelng a shlfL from well
above 30 local conLenL ln Lhe early boom years Lo well below 30 ln Lhe fuLure 1hls wlll Lemper
Lhe lmpacL of rlslng resources lnvesLmenL on Lhe domesLlc economy
Cver Lhe course of Lhe boom resource lnvesLmenL has noL dlsplaced oLher prlvaLe lnvesLmenL
nonresource prlvaLe lnvesLmenL sLood aL 169 of Cu ln 200203 and aL 170 ln 201011 8uL Lhe
perlods before and afLer Lhe ClC have been qulLe dlfferenL beLween 200203 and 200708 Lhe non
resource lnvesLmenL share rose by abouL Lwo percenLage polnLs of Cu (Lo 190) buL slnce Lhen lL
has fallen by Lhe same amounL 1he ouLlook for each of Lhe Lhree nonmlnlng componenLs of LoLal
lnvesLmenL dwelllngs oLher prlvaLe lnvesLmenL and publlc lnvesLmenL seem Lo be subdued aL
besL 8oLh because of Lhls facL and Lhe falllng local conLenL of resource lnvesLmenL lL ls llkely LhaL Lhe
effecLlve conLrlbuLlon of lnvesLmenL Lo local acLlvlLy has peaked ln Lhls cycle as a share of Cu and
may fall over Lhe nexL Lwo years even as resources lnvesLmenL lncreases furLher
(lv) CompeLlLlve lmpacL of Lhe hlgher $A 1he llfL ln Lhe $A exchange raLe slnce 2003 Laken LogeLher
wlLh Lhe rlse of Chlna and oLher low cosL counLrles and perlods of weakness ln Lhe global economy
has placed Lradeexposed nonresource flrms ln AusLralla under conLlnulng compeLlLlve pressure
8eflecLlng Lhese and oLher facLors Lhe real Lrade balance on goods and servlces as a share of LoLal
domesLlc demand has fallen by 13 percenLage polnLs over Lhe decade Lo Lhe !une quarLer of 2011
from +119 ln Lhe !une quarLer of 2001 Lo 31 ln Lhe same quarLer of 2011 neverLheless lL has
been Lhe second round of Lhe exchange rlse afLer Lhe ClC LhaL has lnLenslfled pressure on
manufacLurlng and servlce lndusLrles perhaps because lL has been comblned wlLh weak economlc
AusLrallan Lconomlc 8eporL no 1

condlLlons ln Lhe uSA and Lhe Lu and because longer Lerm declslons are belng Laken as Lhe $A
becomes enLrenched
ln manufacLurlng for example real gross value added rose by 13 per annum beLween Lhe second
quarLers of 2003 and 2008 buL has fallen by 46 or 16 per annum over Lhe Lhree years Lo Lhe
!une quarLer of 2011 As a resulL whlle manufacLurlng employmenL grew marglnally ln Lhe earller
perlod lL has fallen by 102 (or 39 per annum) ln Lhe Lhree years Lo AugusL 2011 Slmllarly real
servlce exporLs rose up Lo early 2008 buL have fallen sLeadlly slnce Lhen and lmporLs of servlces
have grown rapldly ln recenL years As a resulL Lhe real Lrade poslLlon ln servlces poslLlve before
2003 and balanced afLer Lhe ClC has moved Lo a deflclL of abouL 2 of domesLlc flnal demand by
Lhe !une quarLer of 2011 1hls reflecLs lnLer alla a decllne ln Lhe number of forelgn sLudenLs comlng
Lo AusLralla and a dramaLlc change ln neL shorLLerm populaLlon movemenLs as resldenLs deparLlng
now far ouLnumber vlslLors arrlvlng
mpllcotloos fot pollcy
Lconomlc ouLcomes are shaped by Lhe lnLeracLlve effecL of many facLors and Lhe daLa on crlLlcal
parameLers are llmlLed 8uL ln our assessmenL lL ls clear LhaL Lhe lncremenLal effecL of Lhe ongolng
resources boom sLrongly poslLlve for so long has now peaked unless Lhe exchange raLe rlses
furLher Lhe Lerms of Lrade boosL Lo nonresource lncomes has come Lo an end real household per
caplLa asseLs are now falllng afLer a sLrong perlod of rapld growLh resource lnvesLmenL ls
conLlnulng Lo rlse as a share of Cu buL lLs neL lmpacL ls belng eroded by Lhe changlng naLure of
resource pro[ecLs and Lhe hlgh $A whlch ls also conLrlbuLlng Lo weaker lnvesLmenL ln oLher
lndusLrles ln Lhe conLexL of weak demand ln Lhe uSA and Lhe Lu Lhe compeLlLlve pressure from Lhe
hlgh $A ls mounLlng on AusLrallan Lrade exposed goods and servlce lndusLrles
MoneLary pollcy has been 'mlldly resLrlcLlve' ln Lhe words of Lhe 8eserve 8ank belng dlrecLed Lo
offseL Lhe presumed neL (lncremenLal) expanslonary lmpacL of Lhe resources boom and by concern
abouL lnflaLlon runnlng above Lhe LargeL band ln our vlew boLh of Lhese concerns are no longer
relevanL Lhe flrsL for Lhe reasons ouLllned above and Lhe second because lL ls clear LhaL Lhere ls now
no lnflaLlonary problem ln AusLralla LhaL needs Lo be addressed by a resLrlcLlve moneLary pollcy
Cver Lhe Lhree years Lo Lhe !une quarLer of 2011 flve subgroups ouL of a LoLal of 90 ln Lhe Cl and
accounLlng for abouL 12 of Lhe lndex have provlded 40 Lhe growLh ln Lhe Cl and 44 of Lhe
growLh over Lhe pasL year 1he flve groups are lamb and muLLon frulL vegeLables uLlllLles and
Lobacco 1hese flve groups ln LoLal rose have rlsen by 119 per annum over Lhe pasL Lhree years
whlle Lhe resL of Lhe Cl rose by 18 over Lhe pasL year Lhe flve groups rose by 167 and Lhe resL
of Lhe lndex by 22 1hus excludlng Lhese lLems lnflaLlon has been well wlLhln Lhe 8eserve 8ank's
LargeL range of 23 on average over Lhe cycle
1here ls no reason for Lhlnklng LhaL Lhe rapld growLh ln prlces for Lhese lLems can be slgnlflcanLly
lnfluenced by moneLary pollcy rlces for Lhe food lLems reflecL seasonal condlLlons affecLlng supply
whlle lncreases ln Lobacco prlces are drlven by regular lncreases ln Lax raLes 1he reasons for Lhe
rapld growLh of uLlllLy charges (113 per annum over Lhree years) are far from clear buL lL ls
unllkely LhaL prlce changes for Lhls group would be greaLly affecLed by a resLrlcLlve moneLary pollcy
Cn 1 november 2011 Lhe 8ank recognlsed LhaL Lhe economy was slowlng and Lhe LhreaL of lnflaLlon
was easlng and cuL lnLeresL raLes accordlngly movlng Lo a more neuLral sLance
AusLrallan Lconomlc 8eporL no 1

llscal pollcy ls currenLly severely raLher Lhan mlldly resLrlcLlve wlLh Lhe AusLrallan CovernmenL
overseelng Lhe mosL rapld process of flscal consolldaLlon for over 40 years ln Lhe conLexL of a
percelved powerful conLlnulng sLlmulus from Lhe resources boom and ln pursulL of a balanced
budgeL by 201213 Lhe CovernmenL proposes Lo Lake $30 bllllon or 36 of Cu ouL of Lhe economy
(on an underlylng cash basls) over 201112 and 201213 Agaln nelLher of Lhese concerns ls currenLly
relevanL Lo AusLralla's economlc slLuaLlon arLly reflecLlng Lhe conslderaLlons ouLllned above and
ongolng lssues ln Lhe Lu and uSA Lhe ouLlook for Lhe AusLrallan economy ls now much weaker Lhan
LhaL presenLed ln May ln Lhe 201112 8udgeL apers ln splLe of Lhe conLlnulng resources boom 8eal
Cu has grown by 19 per annum over Lhe lasL Lhree years and Cu growLh for 201112 ln now
llkely Lo be closer Lo LhaL flgure Lhan Lo Lhe 4 forecasL ln Lhe 8udgeL apers whlle employmenL
growLh wlll fall well shorL of Lhe 173 forecasL
lL should be noLed LhaL AusLralla's flscal poslLlon ls very sLrong wlLh AusLrallan CovernmenL neL debL
aL only 61 of Cu aL Lhe end of 201011 lL wlll be sLrengLhened furLher over Lhe nexL decade
even under Lhe currenL LaxaLlon reglme as Lax revenue from hlgher resource prlces and from
pro[ecLs currenLly under consLrucLlon beglns Lo be recelved Such revenue ls currenLly belng delayed
by caplLal losses lncurred ln Lhe global flnanclal crlsls and by depreclaLlon allowances belng
generaLed by hlgh levels of caplLal lnvesLmenL 1he scale of boLh Lhe lnvesLmenL and of Lhe
depreclaLlon allowances belng generaLed ls masslve buL Lax revenues from Lhe resources secLor wlll
rlse sLrongly when Lhese allowances are used up
lL ls no longer approprlaLe ln currenL clrcumsLances for Lhe AusLrallan CovernmenL Lo pursue a
budgeL surplus ln 201213 lL should move away from Lhls LargeL and adopL a much less resLrlcLlve
flscal pollcy more supporLlve of economlc growLh