Do we have Dutch disease?

Well, obviously. But exactly what form it takes is open to question and fresh from the farm, Paul Bloxham of HSBC, takes the question on in a comprehensive new report. According to Bloxham, we aren’t ill at all (just as we have no housing bubble). However, we do face the following challenges:

First, through banking offshore funding, although it is worth noting that Australian banks are significantly less exposed to offshore markets than they were during the global financial crisis. Most of the growth in activity in Australia over the coming years is also expected to be driven by mining investment, which is funded outside of Australia’s banking sector. So that even in the event of increased bank funding costs, this investment would occur.

Second, would be the impact on local confidence, particularly if a fall in confidence affected employment decisions by firms. Of particular concern would be if a negative global financial shock saw a substantial decline in business confidence and caused labour market retrenchment.

Third, and the most significant concern, would be a global event that significantly affected growth in China and demand for commodities. This would substantially change the story for Australia, given Australia’s increased dependency on China.

All of which sound like Dutch disease to me, which is never much of a problem until the marginal buyer that is driving the commodity boom disappears and you find yourself hollowed out. Anyways, lot’s of work in this and it is worth a look.


Houses and Holes
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  1. We were on the road to being hollowed out in any case.

    The current strength in the resources sector highlights the increasing weakness in other sectors.

    The high AUD has become an issue only in recent times – our manufacturing base already in terminal decline. High AUD will simply hasten the demise – a pity there was no concern for this sector 10 or 20 years ago. It has been systematically destroyed.

    It is interesting to consider where we would be if the credit binge was still in full swing…BoomBoom

    • Coincidence again! Bloxham quotes from the Jeffrey Sachs (and Warner) paper showing that countries with more natural resources grew more slowly in the period 1970-1990 and I’ve linked to him above.

  2. He suggests a greater tax impost and SWF, the former is being implemented and the latter has been ruled out by Shorten who assures us of sufficient national savings via superannuation. Also remain cognisant of Do You Feel Lucky Punk’s rebuttal of the SWF proposal…

    Politicians have said the additional revenue raised from the MRRT will (in part?) be put toward infrastructure projects – whether this is code for NBN or indeed whether it occurs will hopefully be something the media keep track of. It is very likely to be absorbed into general revenue and not utilised as either infrastructure spend or savings at hand for ‘shovel ready’ projects should China demand decrease significantly.

    Yes, of course there is a risk when all is tied to China. I have yet to see any alternative to this ‘marriage’, one that may broaden to include other Asian region partners. The resources boom is here to stay as long as the China story holds. The AUD rate is determined by the global market – we have little control in that regard.

    And again yes, if the boom continues it is going to be difficult for those sectors affected by the high AUD. That in conjunction with general stagnation in retail and housing is going to make it a difficult period ahead.

    • And again yes, if the boom continues it is going to be difficult for those sectors affected by the high AUD. That in conjunction with general stagnation in retail and housing is going to make it a difficult period ahead.

      So, most sectors stagnating — a difficult period ahead — how exactly is this boom a good thing then?

        • Potentially?

          Yes I know we can’t fight the world. Yes I’ve read the report. What we can do is tax the bejesus out of the miners while they’re raking in the cash, and save for a rainy day via a SWF. Even Bloxham agrees with this.

          What alternative do we have? Do we allow the non-mining economy to be obliterated, and then have no means of reviving it when the boom ends?

          What’s your plan Fanboy? Miners get rich, the rest of us get shafted. Tough.

  3. Yes lots of work, all desperately trying to prove that:

    a) We really don’t have Dutch Disease
    b) Even if we do, we can’t do anything about it anyway

    Very reminiscent of the climate change debate methinks.

    • Only in the sense that The Greens would like to see an end to climate change and an end to mining.

      • The Greens are well underway in dismantling mining in Australia. Most people have their head in the sand on this issue.

      • Oh my! Why on Earth would anyone want to stop the climate going haywire? Silly Greens. Its not like they have science on their side or anything. Fanboy has experts like Lord Monckton on his side.

        As for an end to mining, I don’t believe this is Greens policy, except perhaps uranium. Vastly better environmental controls perhaps, but not a total end. But why let the environment get in the way of making a buck?

        Bob Brown has often pointed out the hypocrisy of exporting vast amounts of coal, while introducing policies to reduce carbon emissions at home. However, I don’t believe it is official Greens policy to end coal exports immediately, but if it is, its a good one!

        • Hey Lorax, funny you should mention Lord Monckton, invited to a presentation of his a few weeks back – very entertaining, thought provoking even. Make sure you catch one of his lectures.

        • Kind of like the hypocrisy of stopping a major hydro electric dam so that a coal fired power station can replace the generation capacity.

      • Lead story on ABC TV news in NSW tonight:

        Gas protesters warn ‘don’t frack with us’

        Another of the intruders, 72-year-old Hunter Valley farmer Ted Finney, says it was the first protest he has ever attended.

        Farmer Rosemary Nankivell, from the Liverpool Plains region in the state’s north-west, says she attended the protest because she is angry at what she sees as a lack of community consultation.

        “We asked them to give us a written guarantee that they would not impact on the productivity of the Liverpool plains and our water resources underneath. We are still waiting,” she said.

        “This is the sort of nonsense that [miner] Santos dishes up to farmers.

        “Shame on this government for not coming out and asking communities what we want.”

        Farmers and Greens in an unholy alliance against the miners. Love it.

  4. 3d1k, I had posted the same FT link in the Karl Marx thread (as the comments discussion there was more relevant). At least in some respects, we think alike.
    We could have fought the world with MRRT and the resulting investment. MRRT was more of retaining Economic Value Added for the nation. In this case, it is more of a tax on economic value NOT added by the mining sector.

    • Mav – I agree that the FT link has relevance to the Karl Marx thread – my point in linking it here was to illustrate my view that the globalisation model we have adopted only ‘works’ until the point of debt saturation and/or end of free-flowing credit.

      Most developed economies have already hollowed out their economic base, we are no different, primarily due to offshoring of production and industrial capabilities to the cheapest provider. This is barely noticed in times of financial prosperity but when conditions deteriorate we realise what we have given up it’s too late – we no longer produce much at all.

      Mining is not the cause of the hollowing out – it happens in countries with no resources sector – however external global forces push the AUD higher in commodity based economies and this is taking a toll.

      We’ve tied ourselves to China, firstly because there is demand and global economic forces come into play; and secondly, we have few, if any, other options.

  5. 38 pages of Bloxham? id rather cut off my left testicle!

    its not the resources boom that has driven our growth anyway its the unprecedented credit fuelled residential housing construction boom that has seen us increase our housing stock by about 20% in a decade. that ended just last year. Commodities boom gets far too much credit in my veiw. These miners will pack up shop, shelve projects and lay off staff on a massive scale the second china sneezes, just like they did during the GFC.

    • +1 But I’m going for the right one….

      and +1 on the miner layoff and I heard it from a miner MD yesterday. Miners will still work, but not in Auatralia id China sneezes.

      • Working Overseas. I guess that’s what youre saying.

        Lots of my fellow bogans talk about it but in reality the majority of us are unwanted OS. We expect too much both in wages and conditions compared to the opposition we face.

        I would say there would be no more than 5-10% of the industry that have desired skillsets. The rest of us are nothing more than glorified tradies.

        • Probably, as the MD’s spoke of geologist, mining engineers, and metallurgists on the move OS. At the sites I guess they would employ locals on the rigs, and trades.

    • Thats the nature of mining. It always has, was and will be a boom bust game. That hasn’t changed in 1000s of years. Its the massive efficiency gains in the bust that drive the booms. Examples like the KCGM super pit, automated longwalls, truck/shovel size increases and changes in IR were all driven in the 80s 90s tough times not the booms.

      The biggest danger with giving the governement mining money is what happens when it runs out. You can’t prop up mining, like you can other industries.

  6. Is it just me or is the spin and focus on “confidence” getting on other people’s nerves.

    The meme that we’re talking ourselves into an economic slump and just need to brighten up and realize how great we have it is really giving me the sh!ts.

    • Agree bubblelicious…when I hear MSM commentators like Pascoe adn Gittins talk – my skin crawls. I honestly cannot listen to them as it stresses me out. They are so out of their depth its insane

    • Yep, it’s pissing me right off as well. If only we could forget about our massive household debt and be positive, we’d all be OK.

  7. If, during the last 50 years we had concentrated on having a balanced economy, including the external account, not running a massive continuous CAD, we would now still have something of a manufacturing industry and we would not have totally destroyed the social structure of our rural communities.

    The mining industry is not the cause of our hollowing out. The hollowing out has been going on for 50 years in one form or another. What has caused the hollowing out is too high a dollar over the whole period. This, in turn, has been supported by foreign borrowing, sales of every industry and asset to any foreign buyer we could flog it to, and a stupid, stupid lot of academic economists teaching trash at Universities such that our whole public service and banks etc are now riddled with it.

    • “The mining industry is not the cause of our hollowing out.”

      Flawse, I have been trying to get this point across for ages, you’ve said it so well – the hollowing out has been going on for decades.

    • Mining may not be the cause, but they would like the status quo to continue or rather the mining bosses would like to make hay while the sun shines. The boom will end one day and who will take care of you guys then? Not the mining bosses – they will cut loose and run.

  8. Can we have done with this stupid bourgeois dogma of having mining ‘bosses’ (what the hell is that?) portrayed as some sort of great conspiracy!!! It hardly contributes to rational debate???????
    Cut loose and run? You mean pick up their giant loaders and D10’s? Dozey!

    Further many mines in this country have operated at losses and minimum profits for decades, certainly not providing a decent return on capital to their investors. Sure they are now profitable as long as the ‘boom’ continues.

    We Australians have had the choice over many decades to control our outrageous over-consumption, to save, and to invest in our own country. We have chosen not to. Instead we have chosen to sell each other coffee and feed each other in restaurants, build flash over-size houses and imported everything in them, and, when we needed something like a car, we sold off a bit of our nation and bought a lovely German or Japanese one. We didn’t want to venture into a harsh outback so we collected ourselves into cities gathered around the coast and again, when we needed something we imported it again selling off our mines and industries to do so.
    When we needed economic growth, instead of saving and investing in production, we simply imported some more people, to consume more, and parked them in the same cities producing nothing.
    We chose this position! We have thought it is wonderful! We are so prosperous! We are so clever…ask Wayne Swan or peter Costello!

    Now, like the spoiled brat of a population we are, when we are starting to realise the horror of what we have created, we are throwing a tantrum and seeking revenge on the people who have been doing the investing.

    What a proud industrious nation we have become!!!!

    • Mining bosses are those who try to influence political debate and elections by spending big on ad campaigns. Because of them, we can’t even have a rational debate about resources super tax and climate change.
      Oh.. And the giant loaders and D10′ would have depreciated long ago. They can abandon (along with their operators) that and run.

      • Mav to be fair – there’s been plenty of attempted debate on both – and both have been attempted to be forced onto us with as little debate as possible.

        • Yeah.. right.. H&H highlighted what is going at the Diggers and Dealers conference – Is that an attempt at rational debate????
          That is an attempt at personal/political vilification.
          And Mr Twiggy does not even spare the members of the judiciary.

    • Actually the bulk of the capital is tied up in ‘development’ (a technical term for tunnels, and haul roads). The lack of the mobility / alternate use for invested capital in mining is one the the key reasons it is so boom bust. You can’t retool a nickle mine to produce gold when prices change. (unless you are greenbushes’ tin)

      I agree though I hate the term mining bosses, but I suppose its the industry’s turn to be villified after Beer Baron, Cardboard King, Apartment … etc etc.

      • Tall poppy syndrome…when in reality mining has been ticking over at one pace or another since goldrush days.

        Miners are not going to extract resources that have no market, so yes they mothball or shut up shop completely (BHP Ravensthorpe 2009, did eventually sell on at massive loss)