A Bigger Longer Boom
The Reserve Bank Deputy Governor Ric Battellino commented that the present resources boom may be the longest running of the past 160 years.
Much of the discussion of the impact of the boom has focused on the benefits for the resources sector. However, when commentary has shifted to the impact on the rest of the economy it has tended to take on a more negative tone, with a focus on the various stresses the economy faces.
This unduly negative focus misses the broader effect that the resources boom is having on the Australian economy and the prospect for strong growth in the years ahead. The key components of medium-term economic growth are: capital accumulation (how much we invest), labour force growth (how many people we employ) and productivity growth (how smart we work).
"The economy will grow faster and longer than predicted, thanks to China and India, writes MARK RIDER."
Emerging market economies, such as China and India, are growing much faster than developed economies such as the US and Europe for three reasons. Their working-age population growth of 1.8 per cent in 2009 is much faster than the 0.3 per cent in the developed countries. And their young populations, in contrast to the ageing developed world, are saving and investing at a high rate. In developing Asia, the national savings rate is 48 per cent of GDP, compared with 11 per cent in the US.
Australia is caught in the slipstream of this rapid investment. Emerging markets have driven the past decade's strength in capital accumulation, in contrast to modest gains in the developed economies. As one of the world's major raw material producers, Australia is helping the world build and run its economic infrastructure by exporting commodities such as iron ore, coal and gas.
And this rapid growth phase, focused on Asia, has a long way to run. If we compare the trajectory of China and India with that of Japan and Korea, they are well short of the $US15,000 per capita GDP level (on a purchasing power parity basis) that these developed economies reached before growth slowed. With China about $US6500 per capita and India only half this, at an 8 per cent pace these economies won't reach that level of income until 2021 and 2031, respectively.
"The next phase of burgeoning Asian demand is likely to be energy related. With Australia the world's largest exporter of coal, potentially the largest LNG exporter by mid-decade, as well as having the world's largest uranium reserves, the country is well positioned to exploit this demand."
The overinvestment story is not quite the threat it is sometimes painted to be. These economies only grow rapidly by investing huge amounts over a sustained period. While we are likely to see a cyclical slowdown in investment, a look at the intensity of use of a number of commodities suggests demand should continue to move higher in the medium term.
China's steel consumption per capita in 2009 was 430kg, well up from 108kg a decade earlier, but still below Japan's 450kg per capita average of the past few decades. India's demand for steel is presently 50kg per capita.
"The next phase of burgeoning Asian demand is likely to be energy related. Chinese electricity consumption per capita is one third of Japan's. With Australia the world's largest exporter of coal, potentially the largest LNG exporter by mid-decade, as well as having the world's largest uranium reserves, the country is well positioned to exploit this demand."
Rapid Asian growth and rising demand for raw materials is expected to be sustained, and this has significant implications for the broader Australian economy, not just the resources sector.
This is already evident in the economic data. The 6 per cent pace of growth in Australia's capital stock (excluding housing) is not just in mining. In the rest of the economy it has averaged almost 5 per cent per annum over the past 5 years, the strongest period of sustained growth since the late 1960s.
The resources sector is the entry point, but not the end point, of the growth for our commodities. The boost to national income from higher commodity prices and tonnes exported has a multiplier impact with stronger demand spilling over into the non-traded part of the economy.
If we sum up the sources of economic growth, in the medium term if we sustain capital stock growth of 5 per cent, combined with working age population growth of at least 1.5 per cent, GDP growth of about 3.25 per cent is possible. And this is before we consider productivity!
"It's not only miners but domestic-focused sectors that will benefit, from building material and transport companies to banking and retailing."
Most expectations are that potential growth is about 3 per cent, but this looks short of the mark. Productivity has been the missing component from growth in the past four years but this is not unusual given the investment boom underway.
In the late 1960s and early 1980s we had similar poor phases of productivity and both were during a mining boom. Both episodes eventually saw a rapid phase of productivity catch-up. A return to the four-decade trend in productivity requires productivity growth of 1.7 per cent per annum in the period to 2015.
This, along with the strong growth in capital and labour, points to trend real GDP growth well above 3 per cent, closer to 5 per cent. The economy in the medium term has the potential to grow a lot faster than generally assumed without additional inflationary pressures.
It's not only miners, but domestic-focused sectors that will benefit, from building material and transport companies to banking and retailing. Government budget bottom lines will be better due to stronger growth.
