A couple of weeks ago I wrote a piece on what I thought was a surprising fact: the correlation between the Australian and Chinese economies has been essentially zero over the last seven years. In fact, co-movement was only strong during the Global Financial Crisis. Apart from that, there isn't much of a story to tell.
Another surprising fact is that the correlation between the Australian and US economies is high, and remains so. This has been one of the features of the Australian economy that has left policy-makers scratching their heads for decades, particularly in the 1990's when the correlation was extraordinarily high. Perhaps financial linkages help drive this, because trade linkages can't explain it. But really, we don't know.
Does this mean that Turnbull and Xi don't really have that many economic issues to talk about during the Prime Minister's visit to China later this week? Does the Chinese economy have no effect on Australia? Well, I didn't quite say that. The composition of the economy has clearly been affected. Look at the below graph of mining investment as a share of GDP for Australia:
And in some respects, this understates the importance of mining investment. There was some investment classified as investment in other industries that clearly was mining related. In fact, the distinctions can get mind-numbingly complex. What about a port that is used for shipping our coal? Does that go under transport or mining? Thankfully there are bureaucrats out there who know the details so the rest of us don't have to. I used to be one, and once upon a time I did know where that port got classified – I think it depended on who owned it and how many different mines used it…or something. [fold]
In any case, we also have seen the effects on our exports. Look at this graph from the RBA:
Iron ore, coal and LNG volumes have grown impressively. Services and manufacturing have been relatively more subdued. And those resource lines haven't finished going up. Here is what the RBA has to say:
Exports of iron ore are expected to continue to grow over the next couple of years, albeit at a slower pace than over the past few years, as production from the larger, low-cost producers continues to expand. Liquefied natural gas (LNG) exports are expected to increase substantially over the next few years as a number of LNG projects currently under construction begin production.
That green line should start going crazy soon. Australia will become the world's largest exporter of the stuff, overtaking Qatar, perhaps some consolation for missing out on hosting the World Cup.
This all sounds like a substantial effect on the Australian economy. Why is the mining boom hard to see in the top line numbers? One reason is that the Australian dollar plays a remarkably good stabilising role.
For example, as Australia's terms of trade (the price of our exports relative to the price of our imports) has fallen since 2011, so has the value of our dollar, cushioning any adverse impacts on economic activity. You can see this clearly in service imports, again courtesy of the RBA:
The RBA note that the decline in services is in large part due to a decline in tourism and business service imports. Tourism imports are just Australians taking a holiday overseas. So with a lower value of the dollar, fewer Australians are going abroad to sun themselves – they are staying at home and visiting the lovely beaches on their own shores.
So, yes, the China boom has affected the Australian economy. It's just the economy looks like it has been flexible enough to deal with it without large effects on aggregate activity. Although for a slightly contra view, see this paper by Peter Tulip, Peter Downes and Kevin Hanslow who find that the rise in commodity prices increased GDP by 6% in 2013 compared to a counterfactual.
That paper makes a further point that there is a difference between activity and what we can afford. The terms of trade boom means we could buy a lot more with our output. The authors show that increase in purchasing power was also worth around 6% of GDP. That boom may have passed.
One important place where the terms of trade effects show up is in taxation receipts. The mining boom led to nice juicy profits for the miners, and high wages for those working for them, and those proceeds got taxed. Also, those same patterns would have been seen in other mining related sectors. One of the best graphs I've seen on this effect comes from the Grattan Institute, who show how the terms of trade boom has affected the budget (ignore the other bars this time):
So the terms of trade boom helped prop up the government budget. We probably can't rely on that forever.
And then there is the investment angle. My colleague, Steve Grenville, discussed that earlier in the week, in the context of what the rules of the game look like. Notably, on Monday, KPMG and Sydney Uni released a report saying that Chinese investment grew by 60% in 2015. Yikes! There's no need to panic though. That kind of investment is needed in our economy.
So the effects of the Chinese boom have been there to see. However, it doesn't mean that if China enters a downturn, we are destined to follow.
Photo courtesy of Flickr user Konrad Lembcke.