Implications for the Australian Economy of Strong Growth in Asia
AbstractStrong growth in Asia, particularly in China, has had a profound impact on the Australian economy over the past decade. Most notable so far has been the boom in the resource sector, with commodity prices and hence Australia's terms of trade rising to historically high levels over a number of years. This has been accompanied by a sizeable appreciation of the exchange rate. While the terms of trade have passed their peak, the substantial investment in productive capacity of the resource sector in recent years is expected to provide a large boost to the production and exports of resources in coming years. In this paper we describe how the pattern of structural adjustment to the positive terms of trade shock has, to date, proceeded broadly in line with that suggested by a simple theoretical model that distinguishes between three broadly defined sectors: the resource sector, the 'other tradable' sector and the non-tradable sector. In particular, relative wages and prices adjusted in a way that facilitated the reallocation of factors of production towards the resource sector. While not all parts of the economy have benefited, the process of adjustment thus far has occurred relatively smoothly in a macroeconomic sense; inflation has remained within the target range, or not too far from it, unemployment has remained relatively low and output has grown at close to trend rates. This stands in stark contrast to some earlier episodes of terms of trade booms in Australia. We argue that macroeconomic adjustment to the current terms of trade shock has been facilitated by the appreciation of the exchange rate, the anchoring of inflation expectations and labour market dynamics whereby wage pressures in industries or regions experiencing strong conditions associated with the boom in resource investment have not spilled over to parts of the economy experiencing weaker conditions.
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Bibliographic InfoPaper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2013-03.
Date of creation: Mar 2013
Date of revision:
Find related papers by JEL classification:
- E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
- E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
- N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East
- N17 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Africa; Oceania
- Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)
- Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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- Scott Bowman & Patrick Conway, 2013. "China’s recent growth and its impact on the New Zealand economy," Treasury Working Paper Series 13/15, New Zealand Treasury.
- Daniel Rees, 2013. "Terms of Trade Shocks and Incomplete Information," RBA Research Discussion Papers rdp2013-09, Reserve Bank of Australia.
- Tim Robinson, 2013. "Estimating and Identifying Empirical BVAR-DSGE Models for Small Open Economies," RBA Research Discussion Papers rdp2013-06, Reserve Bank of Australia.
- Tim Atkin & Ellis Connolly, 2013. "Australian Exports: Global Demand and the High Exchange Rate," RBA Bulletin, Reserve Bank of Australia, pages 1-10, June.
- Sean Langcake & Tim Robinson, 2013. "An Empirical BVAR-DSGE Model of the Australian Economy," RBA Research Discussion Papers rdp2013-07, Reserve Bank of Australia.
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