Wednesday, February 24, 2010

Could our mining boom last another 10 years, another 20?

The IMF has issued a plea to countries considering unwinding their economic stimulus measures - don't do it quickly and most probably don't do it now.

In a staff paper entitled "Exiting from Crisis Intervention Policies" released early this morning Australian time the Fund says the key lesson from earlier crises is that premature withdrawal of stimulus measures can be "very costly, particularly if the financial system is weak".

It says only Australia among the advanced G-20 countries has lifted official interest rates and that for most, "current conditions do not justify a significant rolling back of macroeconomic stimulus or financial policies in 2010".

While acknowledging that too long a period of low interest rates and fiscal stimulus could feed inflation and further damage government balance sheets it says "in the current context, the potential risks associated with an early withdrawal of policy stimulus seem to outweigh the risks of maintaining it for longer than possibly needed".

While most IMF members should "draw up plans" improving fiscal balances they should keep them on ice until recovery is "entrenched".

Earlier in a speech to the Sydney Institute Reserve Bank Deputy Governor Ric Battellino stressed that Australia was in a special position... saying it was in the midst of a mining boom set to last at least another 10 years.

"Judged by the pattern in mining investment and commodity prices, the start of this boom can be dated from around 2005," he told the Institute.

"By 2007 and early 2008, it was severely testing the productive capacity and flexibility of the economy. That all changed in the second half of 2008, as the effects of the mining boon were offset by the impact of the global financial crisis. However, now that this has passed, the underlying dynamics of the resource boom are starting to re-appear."

Mr Battellino said past booms did "not seem to have lasted more than about 15 years" but, "on this occasion, the growth potential of countries such as China and India suggests that the expansion in resource demand could continue for an extended period."

Although previous mining booms had brought with them double digit inflation the current boom was the first to take place with a floating exchange rate and with more soundly-based fiscal and monetary policies.

"This gives grounds for confidence that we can do better this time," said the Deputy Governor. "But the task will not be without challenges."

Published in today's Age

Mining Booms and the Australian Economy - 23 Feb

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carbonsink said...

There is no Plan B if China falters.

- 70% of our iron ore now goes to China
- China was the only source of growth for our exports in 2009
- Commodities now represent two-thirds of our exports
- Economic diversity in Australia is vanishing due to the strong dollar and our increasing focus on resources.

The RBA is betting everything, and I stress everything on China.

Lets look at some China numbers:

- New lending expanded 3-fold in 2009 to 10 trillion Yuan. The target for 2010 is 8 trillion Yuan, still twice 2007-08 levels.
- China's fiscal stimulus of $586 billion USD is around 13% of GDP, much larger than the US, Australia or Europe (closer to 5%)
- China's exports were down 20-25% during most of 2009, and are only now recovering slowly
- During the same period China's imports of raw materials soared (iron ore, coal, and copper. i.e. the stuff we export)
- 90% of the economic growth in China in 2009 was due to investment, mainly fixed asset investment.
- The investment share of GDP in China is at unprecedented levels for any country, developed or developing.
- The consumption share of GDP is now around 35% and falling.

I'll spell it out for you: THIS IS NOT A SUSTAINABLE RECOVERY.

Even if import volumes of iron ore return to the pre-GFC trend, Australia is in trouble. God knows what will happen if China needs to slam on the brakes and draws down on her commodity stockpiles for a while.

Earth to RBA: China does not owe Australia a living.

carbonsink said...

My God, I'm going to quote McCrann...

And then there's us. We are at exactly the same inflection point, but for us it looks entirely positive, thanks to China.

The old -- 20th century -- paradigm had it that if America sneezed we caught a cold. Yet over the past two years America had full-on flu and we barely sniffled.

True, we were helped by our own extraordinary fiscal and monetary stimulus, but we also owe thanks to the unique munificence bestowed on us by the Middle Kingdom.

What's not well-recognised is that China delivers a double benefit: its direct demand for our resources, especially coal and iron ore, boosts both volume and price; and, crucially, it boosts the prices paid by everyone else.

In the half-decade to last year, our exports to China quadrupled from just $10 billion to $39bn. Our total exports of coal and iron leapt, though, from $16bn to $89bn.

So what happens if -- when -- China sneezes, or worse, catches a cold? In a broader world economy which won't look like the comfortable, manageable prosperity of the pre-Lehman noughties?

The impact would be devastating. Our entire economy now pivots on just two pillars: resources and property. Not just any property, but second-hand property -- albeit increasingly million-dollar second-hand.

At the intersection of these two pillars is the the original "four pillars": the big banks.

In the mid-1990s the banks were lending around $4bn a month for housing. For every dollar spent on a new house, three went on a second-hand one.

Today they lend around $19bn a month. Today, for every dollar that goes on a new house, five go on second-hand ones, and we all feel richer, including the banks.

Take another statistic. In 1989 the banks had $53bn in home loans on their books. Commercial lending was more than 50 per cent higher at $90bn.

Now it's reversed. Bank commercial loans of $630bn are swamped by home loans of $910bn.

That's so much safer for the banks. Commercial loans are difficult and all too often go bad. Hardly anyone defaults on a home loan.

And where exactly do the banks get the money for their lending? Mostly from you as depositors, but nearly $500bn has come from foreign investors.

Some of that is part of the $150bn raised in barely a year under the government -- Triple A sovereign -- guarantee, as the banks set about devouring their free lunches.

This is not to suggest China is going to turn feral in our immediate future.

It is to highlight, how we have now built our prosperity on an extraordinarily narrow base: China directly and indirectly, and lending for increasingly expensive second-hand homes.

That lending is funded in very significant part at the all-important margin set by foreigners prepared to lend to us, as a proxy for investing in the China success story.

The RBA's vision for Australia:
- Plan A: Profit enormously from a 20 year boom in China
- Plan B: There is no plan B.

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