Commodities boom could spark Australian economic `miracle'
Sydney — ``G'day,'' booms Brian J. Hurley into the telephone. And he means it. ``I don't remember the last time it was this good. We're in grave danger of making some money,'' chortles the senior general manager of the Perth-based Western Mining Corporation, a major exporter of nickel, aluminum, and gold.
The biggest commodities pricing boom of this decade is in full swing. In the past 15 months, for example, the price of a pound of nickel climbed from US$1.55 to nearly US$11. The prices of some metals, such as nickel, have slipped a bit lately. Still, aluminum, lead, and copper prices have seen double-digit percentage gains. Gold prices are holding up remarkably well.
Of course, as raw material costs rise, so do sticker prices on finished products. If they aren't already, consumers worldwide will soon pay more for new homes, cars, and appliances.
But you're not likely to hear Australians complaining. Few, if any, countries in the world reap the benefits of a commodities boom like this South Pacific nation.
``An Australian economic miracle, a truly Lazarus-like recovery is now a clear possibility,'' says the Confederation of Australian Industry (CAI) in a newsletter this month.
A more restrained report from the Sydney-based Westpac Bank Corporation predicts that ``buoyant commodity prices'' will fuel economic expansion through the rest of 1988.
Mineral resources pull in about 40 percent of Australia's export earnings. And wool, yet another high-flying commodity, is expected to be the biggest export earner for the country this year. It's a potent mix: The Westpac index of Australian commodities shows a 13 percent jump from December to March. By comparison, The Economist magazine's world commodity index shows only a 5 percent rise for the same period.
The CAI notes that rises in commodity prices are taking place against a backdrop of falling interest rates, a beefier Aussie dollar, real wage reductions, and a federal budget surplus, courtesy of Treasurer Paul Keating's hard-nosed policy of fiscal constraint. Perhaps most important, the gap between what Australia pays for imports and what it earns from exports is closing.
The annual current-account deficit was reduced from $14.7 billion (Australian; US$11 billion) to $12.4 billion last year. Expectations are for another $2 billion to $3 billion drop this year. The total foreign debt is still growing, but the economy is growing faster. Overseas debt has dropped from 6 to 4 percent of gross national product. ``Commodity prices could be the foundation stone'' of further reduction of the current-account deficit, a Westpac report says.
What is fueling this commodities boom?
The simple answer: a shortage of these raw materials. Demand (and prices) for commodities for several years had been flaccid. But about mid-1987, manufacturing picked up.
The weaker American greenback enabled exports to grow and the United States ``rust belt'' companies ``burst into life,'' says John Macleod, chief economist at CRA Group, a major Australian mining company. Also, the Japanese efforts to stimulate domestic production (through housing and construction programs) began to hit their stride. Already-low commodity inventories were depleted.
But it looked as if the boom was over when world stock markets plunged in October. Gloom-and-doom economic scenarios were pervasive. In post-October surveys, both here and in the US, people said they were going to be tightening their purse strings. But actual spending behavior did not change, notes Dennis Mahoney, senior economist at Westpac. ``At no stage, the world over, did that pessimism get built into household spending habits. Consumer spending steamed right through the crash.''
``In retrospect, we can now see the crash never dented economic growth,'' Mr. Macleod agrees. Looser monetary policy ensured that economies of the US, Japan, Britain, and others continued chugging briskly along even after the stock market tumble.
But Mr. Mahoney at Westpac doesn't think the commodities bonanza is going to last beyond 1988: ``We've been given a year of breathing space.'' He ridicules the CAI prediction of ``an Australian economic miracle'' as ``extravagant'' and ``quite false.''
Mahoney, and many other economists, believe that by 1989 the US economy will slow significantly. President Reagan's successor is likely to tackle the budget and trade deficits with budget cuts, tax increases, or both early in his term. Or there's the possiblity that as these rising commodities prices pump up inflation, the US Federal Reserve Board will clamp down on credit, thereby squeezing economic growth.
Meanwhile, Mahoney is concerned that the Australian economy could expand too quickly. As consumer and business spending picks up, foreign purchasing increases. Already, purchases of imports are rising at a rapid clip as the Australian dollar strengthens. If the trend continues, says Macleod, imports could eclipse exports, thus reversing recent progress in reducing the current-account deficit.
But Australians shouldn't count on Western Mining Corporation or CRA Group to push more minerals out the door. ``We're flat out - 100 percent capacity - and so is most of the rest of the [mining] world,'' Macleod says. ``After six years of inadequate profits, this cheers us up quite a bit.''