Thursday, March 10, 2011

First the minerals boom, next the food boom. The RBA rings in the changes

Reserve Bank governor Glenn Stevens has raised the prospect of a global food shortage, saying just as China is driving demand for steel it will soon be driving demand for livestock and grain.

Speaking this morning to the Australian Business in Europe Forum in London he said there was already a clear trend towards higher protein consumption in China with major implications for global demand and prices.

"These price rises will be unwelcome for very poor countries whose populations spend much of their meagre incomes on food," he said. "For practical purposes they amount to a supply shock for the advanced countries – someone else’s demand has pushed up the price at which markets are prepared to supply commodities."

"New capacity is being planned in many resource commodities. In Australia, where iron ore shipments are running a little over 1 million tonnes a day, projected capacity expansion will likely take that to about 2 million tonnes within four or five years."

"In the case of foodstuffs, much of the growth in supply will need to come from productivity gains or greater farming intensity. The experts seem to think that such productivity gains are possible but not given... In fact the rates of productivity growth will need to be higher than those actually observed in recent years."

Earlier Reserve Bank assistant governor Philip Lowe told the Australian Industry Group in Sydney some manufacturers may be left behind as Australia increasingly moves towards producing services.

Although made worse by the high dollar manufacturing had been declining in importance since the 1970s.

"It used to be 20 per cent of employment,. it's now down to around 9. There's a long term trend. For the economy as a whole though, income growth is strong, employment is strong and the structure of the economy is evolving."

"This is likely to be with us for quite some time. It presents tremendous opportunities. If we seize them we will do very well, even though at the individual level some firms will not do that well. But for the country as a whole, for the average living standard of 21 million of us, we will do very well."

Published in today's SMH and Age

Philip Lowe Structure of the Australian Economy 9 March 2011

Glenn Stevens The State of Things - 10 March 2011

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