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The mining boom’s final days may come quicker than expected

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A once-in-a-lifetime mining boom led to unprecedented prosperity for the Australian economy. But how much did we benefit? And what can we expect as the boom begins to unwind?

According to Reserve Bank of Australia research, the mining boom increased Australian living standards significantly over the past decade. The boom has resulted in a vast shift in the allocation of resources and the composition of Australian production and employment.

Businesses exposed to China and the resource sector have enjoyed a remarkable period of growth; nevertheless, the boom has proved costly for other segments of the Australian economy such as manufacturing and agriculture.

The analysis, by economists Peter Downes, Kevin Hanslow and Peter Tulip, required constructing a counterfactual — basically an alternative history in which the mining boom did not occur. They approach this problem by representing the mining boom as “the confluence of several large distinct shocks hitting the Australian economy”.

By unwinding these shocks the researchers created a baseline by which they could measure the impact of Australia’s mining boom on a variety of economic variables. This process required three major adjustments — an assumption that global trend growth since 2002 was slower, commodity prices were lower and the response by mining investment never happened.

They estimate the mining boom has increased real per capita household disposable income by 13 per cent, real wages by 6 per cent and lowered the unemployment rate by about 1.25 percentage points. A higher dollar also increased a household’s purchasing power, resulting in much stronger spending.

Of particular interest are their forward estimates through to 2025. As always, forecasts of this nature should be treated with some scepticism — particularly over such a lengthy period — but they provide an interesting assessment of the net long-term effect of the boom.

So far Australia has only experienced the upside of high commodity prices and strong global growth but as we shift towards the final stage of the mining boom — the production stage — the economic impact of the boom will begin to fade, particularly if China continues its transition towards a more consumption-focused growth model.

For example, the boom has increased employment by about 3 per cent but the expected net effect through to 2025 is negligible and matched by population growth. The mining boom’s contribution to income and wealth will also ease somewhat over the next decade – although, on net, the research indicates that we still end up better off.

Business Spectator

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