Wednesday, May 11, 2011

Budget 2010-11: In some ways the economic picture is bleak

By numbers:

Mining investment in the pipeline: $380 billion
Mining exports to jump 20% in two years
Jobs growth to slow to 1.75% per annum
Unemployment to fall very slowly to 4.5% by June 2013
Inflation to climb to RBA ceiling of 3% by June 2013
GDP growth of 4% in 2011-13, 3.75% in 2012-13

Australia is about to be showered in more mining income than ever before, but relatively little of it will flow through into jobs according to budget papers.

The volume of Australian minerals shifted offshore should climb 20 per cent over the next two years. The mining industry is set to invest record a record $76 billion in 2011-12, around eight times what it did before the boom. In the pipeline is $380 billion of resources investment.

Rural exports will soar 13.5 per cent this financial year despite Cyclone Yasi and remain high for the next two years.

But when it comes to jobs the gains will be minimal by recent standards. Australia’s unemployment rate is at present 4.9 per cent. Treasury forecasts no improvement by June and then a minimal slide to 4.75 per cent a year later, inching down to 4.5 per cent by June 2013.

The rate of job creation will slow from more than 300,000 this past year to 250,000 in each of the next two years - and it will do it at a time when Australia’s economic growth rate explodes from 2.25 per cent this financial year to a blistering 4 per cent in 2011-12 and 3.75 per cent in 2012-13.

Treasury says this mining boom won’t generate as many jobs as the last one, in part because Australia is running low on skilled workers. As it puts it: “The starting point of the economy is now different, with the economy operating closer to full capacity at the start of Mining Boom mark II, indicating less room for above-trend growth without generating wage and price pressures”.

Put more brutally... Treasury thinks unemployment can’t fall much lower without igniting wages and inflation and inviting retaliation from the Reserve Bank.

Treasury has reestimated the so-celled non-accelerating inflation rate of unemployment (NAIRU) and found it be between 4.5 and 5 per cent, meaning that from here on gains in employment will invite higher interest rates choking off further gains.

As evidence that it means it, it has plugged in an unemployment rate of 5 per cent to calculate its economic projections for 2013-14 and 2014-15.

Away from products that can be imported Treasury says inflation is already 4 per cent, well beyond the Reserve Bank’s 2 – 3 per cent target zone. It expects overall inflation to climb to the top of the band by mid 2013.

The non-mining economy will suffer as much as it benefits from the mining income flowing into Australia. Non-mining businesses have to live with higher interest rates and a contractionary budget (“tightened macroeconomic policy settings”); increased competition for workers; unusually cautious consumers, and a historically high dollar.

Tourism and education exports will remain weak. Services exports will slip 0.5 per cent this financial year and 3.5 per cent in 2011-12 before climbing back 1.5 per cent in 2012-13.

Employment will be patchy. Figures presented in the budget documents show that while regions such as Whyalla in South Australia and the Hunter in NSW more than halved their unemployment in the past mining boom, the Western Mallee in Victoria and central western Sydney boosted their unemployment rates 50 per cent.

The floods and cyclone ripped $9 billion out the Australian economy earlier this year, almost certainly pushing economic growth negative in the March quarter and in combination with Japan’s disasters slicing 0.75 per cent off annual economic growth.

Treasury sees that effect fading quickly. It believes it will have to deal with effects of the mining boom for years to come.

Published in today's SMH and Age

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