State of the Australian Economy: Mining Boom. John Freebairn Breakfast with the Melbourne Institute Melbourne, 24 April 2013

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1 State of the Australian Economy: Mining Boom John Freebairn Breakfast with the Melbourne Institute Melbourne, 24 April 2013

2 Issues and Outline Stages of the mining boom: Stimulus: increased demand, supply shift Investment Production expansion Some macroeconomic effects of the current mining boom: Income and its distribution Employment and investment Exports, imports, capital flows and the exchange rate Structural and sector effects of the current mining boom: Mining Other trade exposed Non traded

3 Mining Boom in Context Mining in Australia in the 1990s and turn of century Low commodity prices and slow production growth 10 % of GDP Directly employed < 1.5 % of workforce Stagnant investment at < 2 % of GDP Export receipts of $50 billion per year and 25 % of total exports

4 Mining Boom Stimulus or Drivers Sharp and largely unanticipated increase in demand Much from higher incomes and urbanisation in China and other developing countries Against a low short run supply elasticity, higher commodity prices Supply shifts Offshore gas On shore technology for gas and oil Mining technology generally

5 Demand Boom Stage From about 2004 Three fold jump in mining commodity prices to peak in 2011 Relatively small increase in production before 2011 Large jump in export revenue from $50 billion in 2003 and 25% of all exports to $188 billion in 2011 and 60 % of all exports Increase in national income Approx. 40% to government Company and shareholders (most as retained earnings) Terms of trade gain for people (of 12 15%) Appreciation of exchange rate

6 Investment Boom Stage Time lags for: Approvals Construction Jump in mining investment from < 2% of GDP in 2004 to 4% by , and > 8% now, or over $100 billion. Several further years of pipeline. Funded from retained earnings and increased capital inflow About a half import sourced Draw some Australian labour and capital from rest of economy. Extra income Further appreciation of currency

7 Production Boom Stage Significant output increase starting from about 2011 BREE project increases in quantity from to (% increase) Iron ore 75 Metallurgical coal 50 Thermal coal 90 LNG 460 Production increase period likely to be many decades Large proven reserves (Geoscience Australia) Further global demand increase (Asia White Paper) Low supply elasticity to price falls

8 Production Boom Stage: Export Receipts Production, Q, increase Price, P, likely to fall, but much uncertainty Rest of world as well as OZ investment coming on stream Current prices generally above marginal cost Most project further increases in export receipts = P*Q

9 Production Boom Stage: Exchange Rate Pressures on exchange rate Upward: more export receipts Downward: end of capital inflow for investment; payment of income on non resident investment and return of principle Net effect on exchange rate Increase relative to pre boom Ambiguous relative to investment phase Much uncertainty and volatility over time

10 Production Boom Stage: Some Sector Effects Mining sector and linked input suppliers (for investment and production phases) Good news Other trade exposed sectors Lose from higher exchange rate (but gain on imported inputs), and higher labour costs (small) But, booming number of middle class and demand Non traded sector, including government Share in gains of larger GDP Further income gains from higher terms of trade, but note fall with shift from investment to production phase

11 Concluding Observations The current Australian mining boom is large by historical comparison and it is likely to last many decades Boom brings net gains in national income Exchange rate affected by changes in export income, and by net capital inflows and payments to non residents Higher exchange rate to induce structural readjustment away from non mining traded sector to the mining and non traded sectors

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