A Simple Explanation For Why Australia's Economy Didn't Tank At The End Of The Mining Boom

BREE is forecasting coal export volumes to overtake value.

Conventional wisdom – and the RBA – says Australia needs to make a transition from the mining boom to growth spread more evenly throughout the economy.

It’s a situation that has had many, including Treasury Secretary Martin Parkinson last month, worried about the risk of recession in the Australian economy after 23 years of uninterrupted growth.

Paul Bloxham, HSBC Australia’s Chief Economist, is not worried. He told Business Insider this morning that “the mining boom might be over but mining is still a strong positive contributor to economic growth in Australia.”

Bloxham adds there is another, much under-appreciated, part to this story which explains why the latest mining boom – unlike those that have come before it – has not, and will not, lead to a mining bust.

Bloxham believes the lens through which the market and economic forecasters are viewing commodities prices is wrong. He says the period in the 1980s and 1990s when commodity prices were weak (the blue box) are a misleading reference point.

On that basis Bloxham says commodity prices are at present values “around the long run average of the past 150 years”.

Many have expected commodity prices to fall sharply over the past year. But that hasn’t happened. Bloxham explains that to understand this you need to take a much more long-term view of commodity prices.

Equally as volumes start to pick up for mining production after the investment of the past decade the mining “Super Cycle” looks like “more super and less cycle” Bloxham says.

Add in a domestic economy that is clearly, in his view, recovering with monetary policy and interest rate sensitive areas of the economy picking up, he sees a need for interest rate hikes later this year.

When you put these two things together – commodities are actually reasonably priced, and mining continues to be a significant contributor to growth – you see why some of the fear-mongering that was going around last year about the mining boom ending was overblown.

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