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RBA Commentary on the Investment Boom in the Resources Sector

In his speech today to the Committee for Economic Development of Australia, RBA Deputy Governor Philip Lowe gave some interesting commentary on recent developments within the Australian economy. Specifically interesting were his comments regarding the indirect effects of the investment boom in the resource sector:

The indirect effects come through a variety of channels. Day to day, they can be hard to see but they do percolate through the economy. In effect, there is a chain that links the investment boom in the Pilbara and in Queensland to the increase in spending at cafés and restaurants in Melbourne and Sydney. This chain starts with the high terms of trade that has pushed up the Australian dollar. In turn, the high dollar has meant that the prices that Australians pay for many manufactured goods are, on average, no higher than they were a decade ago, despite average household incomes having increased by more than 60 per cent over this period. The stable prices for many goods, combined with strong disposable income growth means there is more disposable income to be spent on services in the cities and towns far from where the resources boom is taking place. As I said, this chain can be hard to see, but it is real, and it is one of the factors that have had a material effect on the Australian economy over recent years.

At the same time he recognises the difficulties that the high AUD is placing on sectors such as manufacturing and tourism. The exchange rate is currently at around its highest level since the early 1970s.

There are clearly winners and losers with the two-speed economy in Australia.

Source: The Forces Shaping the Economy Over 2012 – Philip Lowe, Deputy Governor – RBA