New boom 'could last for years', says a bullish RBA

David Uren

AUSTRALIA is rapidly emerging from the downturn into an economic boom the Reserve Bank believes could last for years, powered by the resource industry and rapid population growth.

The bank's quarterly review of the economy, published yesterday, has sharply upgraded its short-term economic forecasts and presented a radical rethink of Australia's growth potential.

It believes the economy is about to overcome the infrastructure bottlenecks that held back resource exports during the boom which preceded the financial crisis.

The Reserve Bank suggests that boom will be dwarfed by the developments to come.

The Reserve Bank has sharply upgraded its short-term outlook, with growth to average 3 per cent in 2010-11, which is slightly more optimistic than Treasury's tip of 2.75 per cent, published in the budget update released on Monday. The bank expects the revival in the resource industry to start taking effect over the next year, with the big iron ore and coalmine firms expected to win price rises of 10 to 20 per cent in the next round of contract negotiations, and Australia's terms of trade set to start rising again.

Start of sidebar. Skip to end of sidebar.
Related Coverage

* TURNBULL: Rudd 'wastes' economic crisis
* MICHAEL STUTCHBURY: Michael Stutchbury:: Bottlenecks choking recovery
* PAUL KELLY: Challenge of prosperity
* LENORE TAYLOR: Spending curbs an election conundrum

* China looms large for Aussie loan holders The Australian, 12 Nov 2009
* SUDDENLY, ECONOMY'S GROWTH POTENTIAL HAS GROWN The Australian, 11 Nov 2009
* Stuck in slow lane on road to riches The Australian, 9 Nov 2009
* Budgets to be on tighter rein The Australian, 21 Oct 2009
* Reserve wary over inflation The Australian, 20 Oct 2009

End of sidebar. Return to start of sidebar.

While iron ore exports have risen by 70 per cent over the past five years, the bank notes that coal exports have been held back by problems with shared rail and port infrastructure in Queensland and NSW.

"Over the next two years, if capacity comes on line as planned, production of these bulk commodities could increase by around one third, with further significant increases possible over the remainder of the decade."

LNG exports will grow three or four times once the $43 billion Gorgon project starts to come on line, and the Reserve Bank believes there is scope for more LNG expansion.

It says that there have been previous periods when many large resource projects were under consideration but the optimism faded and expansion plans were scrapped. However, it believes this is less likely now.

"This reflects three important considerations: the prospect of continued strong growth in China, India and other emerging economies in Asia; the fact that confirmed reserves of gas, iron ore and coal have already been discovered; and, for LNG, that projects generally lock in multi-decade contracts with buyers before construction commences."

Until now, both the Reserve Bank and Treasury have believed that ageing of the population and low productivity growth meant that Australia could no longer expect to grow at rates above 3 per cent without risking inflation.

"It will be less, and our growth aspirations would have to be adjusted accordingly," Glenn Stevens said in a speech shortly after being appointed Reserve Bank governor in 2006.

However, the bank said yesterday that the fastest population growth since the 1960s and rapid growth in business investment meant growth potential could now be much higher.

Business investment is building Australia's stock of plant and buildings at a rate of 5 per cent a year, double the rate of the 1990s and much higher than in any other advanced country.

The population is rising at more than 2 per cent a year, which is its fastest growth rate since the 1960s.

Even if productivity improvements are only modest, "growth in potential output in the immediate period ahead is likely to be above the standard estimates of recent years", the bank said.

The Reserve Bank's review follows comments on Wednesday by Mr Stevens to the Road to Recovery conference, presented by The Australian and the Melbourne Institute, that the growth in mining investment, which has risen from 1.5 per cent to 5 per cent of GDP over the past five years, could be eclipsed over coming years.

Mr Stevens suggested Australia might need to follow Norway in establishing an offshore fund to invest mining tax payments to minimise disruption to the economy.

Treasury shares the Reserve Bank's optimism about the long-term future for the resource sector, however the bank believes the upturn is more imminent and is also more confident about the rest of the economy.

Its quarterly review says business investment is turned around everywhere except commercial property, while Treasury says it remains weak outside the resource industry.

"Business investment is no longer expected to fall sharply, with spending supported by the improvement in business conditions, growth in Asia, the positive outlook for the resources sector and the fiscal stimulus measures," the Reserve Bank says.

Although it does not provide a forecast on unemployment, the Reserve Bank says its liaison program with private business shows that hiring is increasing, suggesting it believes there may be little if any further rise in the number of jobless.

The bank's central forecast is the economy can make the transition from downturn to resources boom without inflation breaking out of its 2 to 3 per cent target band, however it says investment could turn out to be even stronger than it expects.

"While this would have positive implications for longer-term potential growth of the economy, the higher level of investment spending and flow-on to the broader economy could see capacity pressures re-emerging in the near term, and a further appreciation of the exchange rate.

"In this event, underlying inflation would be expected to decline by less than in the central forecast."