RDP 2013-03: Implications for the Australian Economy of Strong Growth in Asia 4. Conclusion

Strong growth in Asia is expected to continue to provide significant benefits for the Australian economy. Most notable so far has been the resource boom. The first phase of this saw commodity prices and hence Australia's terms of trade rise significantly over a period of a number of years. This phase appears to have passed, with the terms of trade having peaked in late 2011, although they remain at a high level. The second phase, the surge in investment in the resource sector, has been in progress for some years and still has some way to run, with resource investment expected to peak as a share of GDP sometime over the course of this year, but remain quite high for a time. The third phase of increased production and exports of resources has also commenced but has much further to run, especially in the case of LNG, for which investment takes place over a number of years before production comes on stream.

The pattern of structural adjustment to the rise in the terms of trade has, to date, proceeded broadly in line with that suggested by a simple theoretical model. In particular, relative wages and prices have adjusted in a way that has facilitated the reallocation of labour and capital towards the resource sector. While not all parts of the economy have benefited from the boom, the process of macroeconomic adjustment has occurred relatively smoothly compared to previous booms; inflation has been consistent with the target, unemployment has remained relatively low and output has grown at close to trend rates. This stands in stark contrast to some earlier episodes of terms of trade booms in Australia. One critical element to the adjustment this time around has been the timely appreciation of the nominal exchange rate as the terms of trade were rising. The adjustment has also been helped by the anchoring of inflation expectations and the operation of the labour market, whereby wage pressures in industries or regions experiencing strong conditions associated with the resource boom have not spilled over to parts of the economy experiencing weaker conditions.

A significant proportion of the employment growth in the resource sector over recent years has been driven by the relatively more labour-intensive activities associated with resource investment. Once resource investment peaks, demand for labour in the resource sector is expected to decline and the contribution of resource investment to output growth will turn around. Part of this will be replaced by increased production and export of resources. The extent to which a pick-up in other activity requires a shift in relative prices, including through the exchange rate, remains to be seen.

Looking further ahead, there will come a time when the demand for commodities will ease as the development of economies in the Asian region continues and the focus of consumption shifts away from goods and towards services. Such a transformation might appear to be disadvantageous for economies such as Australia that have hitherto been focused on supplying these economies with commodities. However, rising demand for household, business and financial services in Asia has the potential to be relatively advantageous for the Australian economy, in part because it is closer to this region than it is to most advanced economies, but also because of its well-developed and relatively open services sector.