“AUSTRALIA will face ”significantly” bleaker economic prospects when the resources boom ends unless it reverses a damaging slump in productivity, a new report has found.”
To avoid this fate, the report from the Grattan Institute calls on the government to revive the economic reform agenda, with a focus on better training and promoting innovation.
If the China-led resources boom were to come to a halt, the economy’s prospects would ”deteriorate significantly,” as occurred when export prices slumped in the mid 1970s and early 1980s.
Government agencies have played down the slump in Australia’s productivity by arguing that it is concentrated in mining and utilities – where massive investments have yet to bear fruit. Source (1) Sydney Morning Herald
The problem with natural resource dependence
Western Australia has become China’s ore mine. China is using all those Wall-Mart bucks that Americans have spent on cheap Chinese manufactured goods to finance their buying up of resources around the world, including tar sands oil. There are predictions that China’s boom could pop over massive stock piles of resources and goods that are currently unused, but moreover if the US dollar loses its reserve currency status and becomes a liability rather than an asset, China’s ability to trade paper for product will evaporate along with it. They will have to provide some good or service in exchange for that ore, or coal or gas. If they have nothing to trade than Western Autralia’s boom will shrink considerably and likely they will become the resource base for Australia’s manufacturing base again. There is more going on with the greater forest than this cluster of trees and it wise to see all of the big picture than merely focus on a temporary growth spurt for this region.
It is called “boom and bust” but it should be called plain “stupid” because while the boom is sweet the bust more often than not just continues.
Worries about wage inflation are red herrings that melt when the resource runs out along with the rest of the veneer of boomdom the media just can’t seem to leave alone.
The real issue in Australia is the power grab taking place by resource industry types who forget it is public resources that makes them wealthy and requires a fair return in royalties.
Australia raised interest rates
The Reserve Bank of Australia, which had held rates since May, warned the country’s economy was “subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity”.
Seventeen out of 24 economists surveyed by Bloomberg had expected rates to be held steady although many had predicted an increase before the year end.
The central bank has now raised rates seven times since October last year when they hit a 49-year low of 3 per cent. Australia stood alone among the developed world by narrowly avoiding technical recession during the global financial crisis and its central bank was the first among the Group of 20 nations to begin raising rates in the aftermath of the downturn.
Canada, Norway, New Zealand and other nations have since tightened monetary policy, although not as aggressively as Australia which is enjoying boom conditions in its mining industry. (3) Source: FT
What does this mean?
And so it begins. As one major economy raises rates, other debtor nations (that’s all of the industrialized West) will have to follow suit in order to finance their debt.
The government will not be able to shield the domestic economy any longer because Canada needs to go to the same debt markets as every other country in order to finance deficit spending. Those markets will demand a higher interest rate.
This will then translate into the domestic debt market in the form of higher consumer borrowing costs. All that cheap mortgage money that has allowed real estate bubbles to form in Vancouver, Calgary and Toronto will dry up. Those who have bought at the peak of the market with 5% down and 35 year amortization will find themselves under water with no buyers and no equity.