The challenges of managing Australia’s mining boom Asian Economics The challenges of managing Australia’s mining boom November 2011 Paul Bloxham Chief Economist (Australia and New Zealand) HSBC Bank Australia Limited +61 (2) 435 966 522 paulbloxham@hsbc.com.au Disclosures and Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

The world’s economic centre of gravity is moving east Source: Quah (2010)

Transition from west to east has accelerated

Euro area has substantial divergence across nations

United States faces big challenges Source: Bloomberg

But global growth is now driven by the emerging economies

Asia needs a lot more commodities in order to develop Source: RBA

Australia’s export prices relative to import prices at very high levels Source: ABS; RBA, HSBC estimates

Australia’s mining investment boom is the biggest ever, by a long way Source: ABS; RBA; HSBC

Australian dollar around highest during post-float, but not highest ever Source: Butlin (1977); RBA; HSBC

Not all good news … some sectors have to shrink to make way … Source: ABS, Butlin (1977); RBA; HSBC estimates

… already seeing that some are weak and some are strong Source: Datastream

High AUD has put manufacturers under pressure Source: ABS; RBA

Big swing in tourist numbers partly reflects high AUD Source: ABS; RBA

Retail sales have been weak … although household consumption is stronger

House prices have declined modestly, and mostly at the top end Source: RP Data

There is divergence in jobs growth across industries Source: ABS; HSBC

But, so far, the weak sectors have been offset by the stronger ones … Source: ABS

Unemployment rate is low, though it has ticked up… Source: ABS

The divergence across the states is less than average Source: ABS

But more divergence can be expected … particularly in investment … Source: ABS; RBA

… and profitability Source: ABS

Population growth has slowed Source: ABS

… and productivity growth is very weak Source: ABS

Wages have risen ahead of productivity, driving up unit labour costs… Source: ABS

… but the high exchange rate has kept inflation contained

Underlying inflation was low in Q3, after being high in H1

RBA’s inflation forecasts have been lowered significantly Source: ABS; RBA

But some inflation will persist due to lack of infrastructure

Key global risks include bank offshore funding …

… weaker business confidence … Source: Datastream

… low consumer confidence … Source: Datastream

… as well as declining commodity prices Source: RBA