Friday, June 03, 2011

Australia's golden egg?

Interesting views from Commonwealth Treasury head Martin Parkinson appearing before Senate economics committee in an estimates hearing.

According the report in the Sydney Morning Herald, Dr Parkinson suggested that Australia was about to enter a boom that should last decades. To his mind, it would be a golden age propelled by high export prices, enhanced mining capacity and a once-in-a-century global realignment.

The dollar was unlikely to go back to where it was, and manufacturing would shrink in importance to the economy, perhaps even faster than it has been.

Around $380 billion of mining investment was already under way or committed over the next five years. In the coming year $83 billion would be invested in enhanced mining capacity, up from $51 billion in the financial year about to end.

The report also says:

Dr Parkinson said the discussion about the importance of mining was ''quite bizarre".

"Mining is 8 per cent of gross domestic product … but there's a very important 92 per cent of GDP which is out there which for some reason we have stopped talking about."

I couldn't help being struck by the incongruity between these last words and the emphasis on on Australia's new golden age. Dr Parkinson may be right, but it's a bit hard to avoid getting caught up in the hype.

Another report in the Australian takes a somewhat different approach. There Dr Parkinson is reported as conceding that his department's failure to forecast the strength of the resources boom resulted in opportunities for reform being squandered during the Howard government. Treasury's refusal to believe that increases in commodity prices would be sustained meant that from 2003, the revenue consistently came in ahead of forecasts.

Dr Parkinson said the error was one of two major failings in Treasury's forecasting history.

"One, in the early 1990s, was when inflation started to come down and we didn't believe it and the second, in the period since 2003, when we chased the terms of trade up."

I think that we can add a third to Dr Parkinson's list.

In 1979 and 1980, the rise in international energy prices flowing from the second oils shock led to an investment boom. In 1980, the Treasury driven Economic Strategy Interdepartmental Committee of which I was a junior member representing the Department of Industry and Commerce was greatly concerned with the best way of managing the boom. The issues were just the same as those today.

The problem was that the boom failed to arrive on the expected scale. Higher global energy prices flowed through into an international economic downturn that essentially stopped the boom in its tracks.

Today is a little different. We already have significant productive capacity, while the number of projects actually underway is much higher. However, what happened in 1980-1981 is still a useful corrective.

  It is actually quite easy to think of sets of circumstances that might halt or at least reduce the expected boom. To paint a worst case scenario:

  • The re-balancing currently underway in the Chinese economy might tip over into contraction
  • High Australian costs plus skills bottlenecks slow investment at a time when projects in other places are getting underway, leading to increased global supply
  • Action required to halt global warming leads to longer term downturn in coal demand.

In combination, these things would affect short, medium and long term demand for and supply of Australian resources.

I am not saying that these things will happen. I am simply saying that the time to count the golden egg is when it's been actually laid.


Anonymous said...

Hi Jim

The following is interesting, from an energy perspective. Have no idea as to accuracy or politics of the article.


Winton Bates said...

There must be a lot of people thinking as you are, Jim. Despite all the talk about a mining boom, mining stocks have hardly recovered to pre-GFC levels.