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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