CANBERRA OBSERVED: News Weekly
Tougher times ahead as commodity boom falters
, August 30, 2008
Kevin Rudd will have to ditch his current superficial policies of keeping watch on fuel, grocery prices and bank margins, and start making the hard decisions in Australia's national interest.In the lead-up to the last election, Kevin Rudd repeatedly warned that Australia had to prepare itself for a post-commodity boom economy.
The warnings were vague and never spelled out properly, and were used as an argument in favour of embarking on his so-called "education revolution".
Unfortunately for the Rudd Government, that reality (a post-commodity boom economy) may have arrived sooner than he had anticipated.
The Opposition frontbench sees a possible economic slowdown as their opportunity to win back power without needing to do any serious policy work.
This is a serious mistake on their part because the Australian people are likely to return the Rudd Government unless there is an utterly calamitous economic collapse.Big decisions
In all likelihood, the coming big decisions will have to be made by the Rudd Government.
Economists have begun raising concerns that the golden years of high commodity prices, which have propped up the Australian economy, are fast coming to a close.
Over recent weeks, the price of oil, gold, copper and other metals have declined markedly - more sharply than a normal market correction.
Ironically, the falls came at the same time as BHP Billiton announced an extraordinary $17 billion profit - perhaps a record which will not be repeated for many years.
Fortunately for Australia, huge iron ore and coal contracts are locked in for at least the next 12 months, but after that there may be price declines in those important commodities as well.
As a consequence of this sudden decline in commodity prices, coupled with the Reserve Bank's flagging of several interest rate cuts, the Australian dollar has toppled off its high perch, dropping more than 10 per cent against the US dollar.
Only a short time ago, analysts were speculating that the Australian dollar would soon reach parity and then eclipse the greenback.
Economist Chris Richardson, whose Access Economics group does not have to "gild the lily" as some bank analysts are required to do, warned recently that the coming shock could be nasty.
"Commodity booms end ugly; they always do and there has never been an exception," he told The Australian
"The commodity markets are more central to Australian national income than either credit markets or share markets."
The Rudd Government is still in the fortunate position of having a large surplus and money in the bank left by the previous government.
But if the commodity boom is indeed coming to an end, that surplus could disappear rapidly as tax receipts dry up and social security bills for unemployment relief begin to climb.
Mr Richardson warns that all previous commodity busts have been precipitous, and says the most worrying impact will be on Australia's current account deficit.
This has only been in positive territory for a couple of months at the very peak of the boom.
Australia has borrowed literally hundreds of billions of dollars during the boom, but most of this has been for housing and consumables rather than for long-term investment.
All eyes will continue to be on China after the Olympics and on whether a predicted post-Games slump - as previous host nations have experienced in the past - will impact on the world economy.
Already, Japan, the United Kingdom, Ireland, much of Europe and the United States are in a state of semi-recession.
But if financial markets are any guide it is now expected that this slowdown will widen and deepen.
China reportedly spent as much as $40 billion on the two-week Beijing Olympics to showcase itself to the world. How Beijing has paid for this is anyone's guess.
But if China is forced to raise interest rates to rein in inflation, there could be serious trouble ahead.
Clearly, the Rudd Government and its Treasury advisers do not believe (yet) that Australia's good times are at an end.
But they are probably realising that economic problems will dominate the agenda for at least the next year or two.
Mr Rudd's "solution" to a post-resources boom economy - education - is worthy but too slow.World class
It would take a decade or more for Australia's education system to be seriously reformed so that Australian children were getting an education on a world-class scale, as Mr Rudd envisages.
And it would take even longer for the benefits of this investment to be realised.
In any event, the urgency of introducing the "education revolution" appears to have waned since the election anyway.
If a serious economic slowdown does occur, Mr Rudd at some point will have to ditch his current superficial policies of keeping watch on fuel, grocery prices and bank margins, and start making the hard decisions in Australia's national interest.