Edwards Says Mining Boom Yet to Come as Output Set to Rise

Reserve Bank of Australia board member John Edwards said higher mining output may support gross domestic product growth even after resource investment peaks.

“We haven’t actually had the mining boom yet,” he said in an interview in Sydney today. “It makes quite a big difference if, say, we had an increase in mining output of 10 percent over the next year or two. That makes quite a big difference to a GDP outcome.”

The central bank, which reduced the benchmark interest rate by 1.75 percentage points since late 2011, on Feb. 8 lowered its growth and inflation forecasts as investment outside mining remains elusive, the labor market softens, and a high local currency contains prices. While the RBA noted the global outlook has been “more positive in recent months” and China’s economy has stabilized, it also said it expects the mining-investment boom to crest in coming quarters.

Edwards, a former economic adviser to and biographer of Labor Prime Minister Paul Keating, said it’s “quite remarkable” that mining as a share of the economy “in volume terms” is the same as it was 30 years ago.

Christopher Kent, assistant governor responsible for the RBA’s economics department, echoed those sentiments in a speech in Perth today.

‘Operational Phase’

“As mining investment tails away, we’ll increasingly move into the operational phase of the mining boom,” Kent told a Committee for Economic Development of Australia forum. “This is when exports will increase significantly in response to all of the investment that’s been undertaken.”

Edwards also said today the government’s attempts to curb spending were appropriate.

“If you are in a circumstance where you think you can have growth not very far below trend, you can have unemployment that is not very much higher than it is now, then in my view it’s difficult to seriously argue that we need a huge kind of impulse from government spending,” he said. “Now probably is a good time to continue to work to bring budgets back into balance.”

Prime Minister Julia Gillard’s Labor government in late December abandoned a pledge to return the budget to surplus this financial year, citing the sustained strength of the nation’s currency that’s curbed tax receipts. The local currency traded at $1.0368 at 4:29 p.m. in Sydney, extending its longest stretch above parity since it was freely floated in 1983.

Currency Puzzle

“There’s a general sense that it would be useful if the exchange rate was a bit lower,” said Edwards, a former chief economist in Australia for HSBC Holdings Plc who joined the RBA’s nine-member board in 2011. “It’s puzzling that given what’s happened to commodity prices we didn’t see it coming off a bit more.”

Traders are pricing in a 43 percent chance the RBA board will reduce rates by a quarter percentage point to a record 2.75 percent when it meets next month, according to swaps data compiled by Bloomberg.

“There are reasons to think that we will, in my view, be able to make the transition from the mining investment boom that we’ve had over the last two years to a still reasonable rate of growth,” Edwards said. “It’ll be supported by a bit of an upswing in housing construction, which is employment intensive, and also a bit of an upswing in mining output.”

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