RBA Sees Boost to Economy as Prospects in Mining States Improve

Updated on
  • Recovery would boost inflation pressures: Assistant Governor
  • State-by-state breakdown shows reversal of two-speed economy

Australia’s economy may get a boost from mining states as the drag from falling resource investment eases and higher commodity prices bring windfall cash.

Nominal demand in Western Australia and Queensland is set to improve, providing support to the national economy, Reserve Bank Assistant Governor Christopher Kent said in a speech in Sydney on Tuesday.

“That would contribute to a rise in domestic inflationary pressures and a gradual return of inflation to more normal levels,” Kent said in the address to economists. “If our forecasts are right, the terms of trade will shift from the substantial headwind of recent years to a slight tail breeze providing some support to the growth of nominal demand.”

Kent provided a state-by-state breakdown of the economy’s performance during the post-mining boom reversal of the two-speed economy to the nation’s southeast. Victoria state, rebounding along with New South Wales on low interest rates and a weaker Aussie dollar, is benefiting from population inflows as property prices in its capital are cheaper and commuting times shorter than in Sydney.  

The mining capital of Perth, in contrast, is seeing falling house prices as increased supply came on line just as population flows eased.

Better Shape

Of the two mining states, Queensland is in better shape as the unwinding of resource investment is more advanced and its services economy more developed thanks to its sizable tourism and education industries. At a national level, Kent said the mining investment adjustment is about 80 percent done.

Kent also broke down non-mining investment, and the mystery of why it’s been anemic since the end of the resource boom. In New South Wales, such investment has risen at an average 10 percent a year for the past three years and Victoria has seen “some growth of late,” said Kent, who is the chief economist at the RBA. Queensland has been little changed, while non-mining investment has declined in Western Australia since the resource boom peaked.

On the labor market, Kent acknowledged that the half a percentage point fall in unemployment from its 2015 peak “is likely to have overstated the extent of the improvement” as part-time jobs accounted for the growth. As a result, under-employment has increased over the past year. Kent also noted the fall in the participation rate, which has been particularly pronounced in mining areas.

“Population growth slowed quickly in the mining states from what had been quite rapid rates,” he said. “Some of that slowdown was the natural result of temporary workers –- who had helped to build the new mining infrastructure –- taking their skills elsewhere as projects were completed.”

The upshot, he said, is the slowdown in population growth in the mining states has meant their unemployment rates have increased less than would otherwise have been the case.

But it’s the recovery in the terms of trade, or export prices relative to import prices, and the looming end of the fall in mining investment that provide grounds for optimism.

“There are reasonable prospects for stronger growth of nominal demand in the mining states and, by extension, for the economy overall,” Kent said.

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