Tuesday, March 27, 2012
It could be a valuable lesson for the Gillard government - which desperately needs to reconnect with the voters and economic reality - for its advisers, for the Reserve Bank, for the federal opposition, now in effect a government-in-waiting, and for all of us.
A day after Queensland's electoral massacre, Treasurer Wayne Swan began his weekly note with another enthused spiel on how good things are - ''an economy that is growing solidly, low unemployment, very low debt, sturdy public finances, and contained inflation'' - and above all, '' a resources sector that is going from strength to strength''.
''New (resources) investment has risen from $47 billion in 2010-11 to $95 billion this year, and will rise again to an expected $120 billion in 2012-13'', he said, momentarily confusing facts and forecasts. ''The boom in investment isn't surprising given the boom in exports ? (which) are likely to reach nearly $200 billion this financial year, and climb to around $258 billion in five years.''
And all this is good for us? Remember the property boom in Ireland, and how rich it made the Irish feel - until it bust?
Our boom, too, is likely to bust: most booms do. The bigger the boom, the bigger the bust.
Don't worry about it, officials say. This time is different. This boom will last for years, maybe decades. The growth of China and India will see to that.
Uh-huh. Take a look at the graph, produced by the Reserve Bank. The terms of trade is a measure of export prices, expressed as a ratio to import prices. As you see, this is not the first big boom in our export prices. There was one in the 1920s, which ended in the Great Depression. There was one in the Korean War, which ended with 20 per cent inflation and recession in 1952-53.
As the graph shows, those booms ended with a hard fall, and prices then resumed their long-term trend decline (the blue line slanting downwards). This is our third export price boom: how will it end?
Frank Gelber, director of Sydney economic consultants BIS Shrapnel, has been thinking about that. BIS Shrapnel has had an outstanding forecasting record, winning the Palme d'Or as the best tipster in The Age midyear survey seven times since 1993.
Gelber has looked on with alarm as mining investment has risen from 1 per cent of GDP to 4.4 per cent last year, and perhaps 7 per cent by 2012-13. He sees at least five years of strong mining investment ahead. He has seen the Reserve Bank jack up interest rates in response, to rein in the economy so that this boom doesn't lead to an inflationary breakout. And he's seen the dollar soar to its new peaks in response to the mining investment, the high interest rates and the uncertainty over the big Western economies.
But if mining investment is booming by 50 per cent a year, and the economy's growth is held to slightly above trend, that means other sectors of the economy have to shrink to make way for it. Long-established businesses are dying, factories closing, jobs going overseas - all to accommodate a boom that is only temporary and will give way to a bust.
''The boom will end when the supply of minerals catches up with the demand,'' Gelber says. ''I don't know when that is. We've now locked in projects that will underpin investment activity for the next five years, so the question is: what are the probabilities that it will proceed beyond that?
Gelber and BIS Shrapnel estimate a 25 per cent probability that the boom won't continue once these projects are built. They estimate an almost two-in-three probability that the boom will end within 10 years, and 90 per cent that it will be over within 15 years. Whenever it ends, he warns, Australia faces a major recession.
Why? Because the real boom is not in mining, a capital-intensive sector, but in mining investment, which reaches out far more into the economy. Treasury deputy secretary David Gruen estimates that while mining is only about 10 per cent of GDP, the ''mining-related'' economy is now about 20 per cent of GDP. That puts far more jobs at risk when the boom goes bust.
''Half of all the office space in Perth is now tied up with people servicing mining investment,'' Gelber says. ''The same is true for a quarter of the office space in Brisbane. Think of all the jobs in the construction sector, the back-line employment. The fall in investment will see a major decline in growth.''
But can't we then just bring back the industries now shrinking because of the high dollar? No, says Gelber. ''We're burning our bridges. We are losing the skills, the equipment and the markets. When the Australian dollar collapses, we won't have the industries any more. We will have to go through a total reversal of the process of structural change we are seeing now. We will see a big drop in our standard of living.''
What can we do to avert it? Gelber is pessimistic. The mining tax has been neutered. He sees value in governments investing in ''productivity-enhancing infrastructure'', such as the NBN, and in ''soft infrastructure'' such as research and development, and skills training.
But he warns: ''This is a long war of attrition.'' Firms in trade-exposed industries will be fighting for survival. Gelber wants policy makers to grasp that this boom, too, will end, and Australia will need a very different economy then. ''We've got to have an eye to what will happen after the mining boom. I'm aghast at how we are walking over the cliff, like lemmings.''