RESOURCES BOOM A BLESSING AND A CURSE

Written on the 17 June 2011

RESOURCES BOOM A BLESSING AND A CURSE

ST George Bank chief economist Besa Deda (pictured) has labeled the resources boom a ‘blessing and a curse’.

Deda likens the Australian economy to a Gouldian Finch – a beautiful, rare, but vulnerable bird. She says a once in a century economic event is occurring and that is the rising terms of trade.

“The terms of trade is the ratio of export prices to import prices, but the way I like to explain a rising terms of trade is that it represents a net transfer of income from the rest of the world to Australia. It provides an extra boost to incomes in Australia and underpins economic activity,” she says.

“The terms of trade has been rising, driven by the transformation of China and India and their hunger for our commodities and without this rise, Australia would have witnessed a decline in its standard of living as productivity would have weakened.”

Deda says that over the past decade, there has been a significant shift in economic weight from the advanced economies
to those in the emerging world, especially in Asia.

“Around 400 million people in China have urbanised, another 400 million people will do so in China within the next 20 years and then there’s India, with 20 per cent of the world’s population in its borders,” she says.

“Urbanisation and industrialisation have resulted in strong demand for Australia’s energy and mineral resources and China and the rest of Asia have more urbanisation and industrialisation to do.

“Past resources booms don’t seem to have lasted more than 15 years before resource depletion or developments acted to slow economic activity and put an end to a boom, but this boom may last longer because of the growth potentials of China and India.”

She says the resources boom has been accompanied by resources pressure on the productive resources of the economy.

“The economy is facing capacity constraints due to high population growth creating a need for more dwellings – for the first time since World War II, the population is growing faster than the stock of homes,” says Deda.

“But it’s tough for the economy to increase dwelling construction when investment elsewhere in the economy is also high. If housing construction is strong when the resources sector is booming, there will be competing demands for a range o f skilled and specialist workers.

“Managing the competing demands is a challenge and one way it can be corrected without construction rising, is a lift in house prices and rents – pricing is the correcting mechanism.”


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