How The Mining Boom Lifted Living Standards

In the RBA Bulletin for December 2014, there is a detailed analysis and modelling to show how the mining boom impacted the Australian economy. This is important because as we know the boom is fading, and the RBA has been looking for the housing sector to take up the slack.

The world price of Australia’s mining exports more than tripled over the 10 years to 2012, while investment spending by the mining sector increased from 2 per cent of GDP to 8 per cent. This ‘mining boom’ represents one of the largest shocks to the Australian economy in generations. This article presents estimates of its effects, using a macroeconometric model of the Australian economy. It summarises a longer research paper, which contains further details and discussion of the results (see Downes, Hanslow and Tulip (2014)). The model estimates suggest that the mining boom increased Australian living standards substantially. By 2013, the boom is estimated to have raised real per capita household disposable income by 13 per cent, raised real wages by 6 per cent and lowered the unemployment rate by about 1¼ percentage points. However, not all parts of the economy have benefited. The mining boom has also led to a large appreciation of the Australian dollar that has weighed on other industries exposed to trade, such as manufacturing and agriculture. However, because manufacturing benefits from higher demand for inputs to mining, the deindustrialisation that sometimes accompanies resource booms – the so-called ‘Dutch disease’ – has not been strong. Model estimates suggest that manufacturing output in 2013 was about 5 per cent below what it would have been without the mining boom.

Graph 3 also shows an estimate of the increase in the volume of goods and services produced arising from the boom. Higher mining investment directly contributes to higher aggregate demand. Furthermore, higher national purchasing power boosts consumption and other spending components. Higher mining investment also increases the national capital stock and hence aggregate supply. There are many further compounding and offsetting effects. The estimated net effect is to increase real GDP by 6 per cent.

RBABoom1The mining boom raises household income through several different channels within the model (Graph 8). As of 2013, employment was 3 per cent higher than in the counterfactual, largely due to the boost to aggregate demand. Real consumer wages were about 6 per cent higher, reflecting the effect of the higher exchange rate on import prices. Property income increased, reflecting greater returns to equities and real estate. A larger tax base led to lower average tax rates, all of which helped raise real household disposable income by about 13 per cent. As can be seen in Graph 8, household consumption is estimated to initially rise more slowly than real household disposable income. That is, the saving rate increases. This reflects inertia in consumption behaviour, coupled with a default assumption that households initially view the boom as temporary. In the medium to long run, as it becomes apparent that the change in income is persistent, savings return toward normal and consumption rises further. In the long run, consumption will adjust by about the same proportion as the rise in household disposable income.

RBABoom3Changes in the composition of consumption are an important determinant of how the mining boom affected different industries (Graph 9). Demand for motor vehicles and other consumer durables are estimated to have increased strongly, reflecting lower import prices and strong income growth. Relative price changes for most other categories of consumption were smaller, with consequently less effect on their relative demand.

RBABoom4 The mining boom can be viewed as a confluence of events that have boosted mineral commodity prices, mining investment and resources production. This combination of shocks has boosted the purchasing power and volume of Australian output. It has also led to large changes in relative prices, most noticeably an appreciation of the exchange rate. The combination of changes in income, production and relative prices has meant large changes in the composition of economic activity. While mining, construction and importing industries have boomed, agriculture, manufacturing and other trade-exposed services have declined relative to their expected paths in the absence of the boom. Households that own mining shares (including through superannuation) or real estate have done well, while renters and those who work in import-competing industries have done less well.

Author: Martin North

Martin North is the Principal of Digital Finance Analytics

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