Australia, economy, boom--Australia enjoying economic boom

SYDNEY - Australia is in the midst of a modern gold rush as voracious Asian demand for resources stokes a boom in mining investment that should last years, setting it far apart from much of the rest of the developed world.

And since the sea change is being driven by export prices and incomes, brisk growth in GDP actually understates the true strength of the $1.14 billion economy.

"For the resources sector, things look resplendent," says Paul Boxham, an economist at HSBC who until recently worked at the central bank. "And global fears of a double-dip notwithstanding, there are few clouds on the Australian horizon."

"Many of the projects that are expected to support investment growth are multi-year projects and have already commenced," he explains. "And the level of mining-sector engineering work yet to be done is positively stratospheric."

That is a major reason why he expects the Reserve Bank of Australia to raise interest rates to 5.75 percent by the end of next year, from 4.5 percent now.

To say Australia is rich in resources would be a gross understatement.

It is the world's largest exporter of coal and iron ore, the biggest producer of bauxite and alumina, second in uranium and fourth in black coal. It has the largest reserves of lead, nickel, uranium and zinc and is a major producer of gold, gas, oil, beef, wheat, wool, copper and cotton.

And it happens to be in a region where the largest urbanisation in history is underway in China and India. In the past decade, 400 million Chinese have moved to cities, and a similar trend is expected in the next 10 years.

That requires a lot of the resources Australia has, driving prices sharply higher for many of them. The resulting numbers are staggering for a country of just 23 million people.

Export earnings from food, minerals and energy are expected to reach a record A$215 billion in the year to June 2011, a jump of 26 percent from the previous year.

Miners, confident the industrialisation of over two billion people will suck in resource exports for years to come, have embarked on a record investment binge.

The value of engineering work yet to be done has more than doubled in the past year to top A$86 billion, while firms plan to expand overall investment by a fifth in 2010/11 to A$123 billion.

GUSHER OF INVESTMENT

The Gorgon liquefied natural gas (LNG) project alone will cost A$43 billion over four years. Australia is the sixth-biggest exporter of LNG worldwide, and projects worth A$200 billion could take it to second place within five years.

Analysts at JPMorgan estimate that total resource projects underway, planned or under consideration amount to A$725 billion, or nearly 60 percent of Australia's annual GDP.

Once embarked on, such large multi-year projects are rarely abandoned no matter how external circumstances change in the short-term. That was a point underlined by the RBA's chief economist, Philip Lowe, just last week. "The investment that's taking place in the resources sector is motivated by the long-term growth of Asia, and most of it has a horizon of decades," Lowe told a conference.

"There's continuing uncertainty about the strength of the global economy . . . but for those business focused on China, on India and Asia, that's driven by the medium-term outlook." Thus, while a government plan for increased tax on iron ore and coal profits produced much hand wringing by miners in recent months, not a single major project was cancelled.

Instead, new spending plans are announced almost daily. Rio Tinto this month said it would spend A$803 million to expand its Argyle diamond mine, in part to meet demand from newly rich Chinese.

PEOPLE LIVE IN A NOMINAL WORLD

While all this investment will support growth, the flood of money from exports has already made itself felt. Indeed, because headline GDP data is "real," or adjusted to remove inflation, much of the boost from export prices is understated.

Real GDP grew by 3.3 percent in the second quarter, compared with the same quarter a year before, a decent enough performance in the developed world. But growth in nominal or current price GDP was an astonishing 10 percent for the year, a pace normally enjoyed by developing countries. In the second quarter alone, nominal GDP outstripped real by A$30 billion. For the year to June, the gap was A$77 billion, or A$3,483 for every person in the country.

Nominal growth in the United States was 3.9 percent for the same period, only modestly ahead of the real 3.0 percent. In typical recoveries, nominal growth is double or triple the adjusted pace, perhaps one reason the economy feels so sluggish.

That's still a lot better than Japan, where years of falling prices had dragged nominal GDP to levels seen in the early 1990s. For Australia, a better measure of its fortunes right now is real gross domestic income since it adjusts GDP to account for the jump in the terms of trade. This climbed 4 percent in the second quarter, from the first, the biggest rise since 1973 and left it 8.2 percent higher for the year.

This shower of cash showed up in company profits, which climbed 20 percent for the year, while wages and salaries increased by almost 6 percent even as employment surged.

Households responded by spending big on new cars, travel, culture and leisure, much to the chagrin of the central bank which had been hoping that a more cautious consumer would make room for the mining sector to boom without stoking inflation.

"Key parts of the Australian economic story look set in stone," says Commonwealth Bank chief economist Michael Blythe.

"And it's double-digit growth in nominal GDP that matters in driving profits, investment, hiring and tax revenues," he added. "It's like having rivers of gold flowing into the country."

Source: TorontoSun.com