RDP 2011-07: Australia's Prosperous 2000s: Housing and the Mining Boom 1. Introduction

At the start of the 2000s Australia was derided by some for being an ‘old economy’. It lacked a substantial information and communications technology sector and was seen to be overly dependent on the extraction of resources, an activity that was not going to be enriching due to the declining relative value of commodities and weak potential productivity gains. However, by the end of the 2000s Australia was once again seen as the Lucky Country, riding on the back of rapidly rising commodity prices and having experienced only mild downturns at the time of the two international recessions that bookended the decade.^[1] Overall, it was indeed another prosperous decade; the unemployment rate fell and incomes rose strongly. The 2000s was the first decade since Federation in which the annual growth rate of real GDP in Australia remained positive throughout the decade.

The 2000s will be remembered for the mining boom and closer trade links to China. In 2000, Australia had a growing economic relationship with Asia, but most eyes were still focused elsewhere, particularly on the United States. For example, in the volume from the Reserve Bank's Conference in 2000 reviewing the 1990s (Gruen and Shrestha 2000), the words ‘China’ and ‘Chinese’ do not appear, but the ‘United States’ is mentioned 93 times. The focus has now changed dramatically, with significantly increased attention paid to the extent to which Australia's economic fortune is tied to that of Asia. The most visible manifestation of the increasing development of Asia was the surge in commodity prices and the terms of trade; in SDR terms the average level of the Reserve Bank's commodity price index at the end of the decade was almost two and a half times its average in 1999.^[2] This increase led to a significant policy debate about how to deal with the boom in the terms of trade, both regarding what to do with the increased government revenue and how to accommodate the resulting structural change in the economy.

While the commodity boom and the global financial crisis were dominant themes over the second half of the decade, in the first half it was strong growth in household spending and substantial increases in household borrowing and house prices that dominated the discussion. Despite household spending having since moderated, there have been lasting effects on the household sector's balance sheet. A related major policy debate of the decade concerned the causes and consequences of this housing boom.

A third theme of the decade surrounded developments in the labour market. At the start of the decade the unemployment rate was around 6½ per cent. Gruen and Stevens (2000) noted that stable growth and a long expansion meant that maintaining the unemployment rate below 6 per cent seemed ‘only slightly ambitious’ whereas earlier in the 1990s it would have ‘seemed ludicrous to many’. In the end, the unemployment rate was below 6 per cent for two-thirds of the 2000s, and reached a trough of 4 per cent, a rate not seen since the mid 1970s. This impressive performance raised an important question: below what rate of unemployment would inflation accelerate? In the quest to enhance the functioning of the labour market there were substantial debates regarding the form of regulations that would achieve the best employment and social outcomes. This issue is considered in detail in Borland (2011) and so is not pursued further here.

Over the decade, growth in employment was strong relative to that in output, with labour productivity growth slowing markedly from the rates in the 1990s. The capital stock also grew more rapidly in the 2000s than in the 1990s, so that the slowdown in multifactor productivity was more pronounced. The issue of weak productivity growth periodically surfaced, but was to some extent hidden by reasonable growth in output as a result of greater factor usage and by a boost to real incomes from the rise in the terms of trade. These trends are discussed in more detail by Eslake (2011b).

In this paper we provide an overview of the Australian economy in the 2000s. The paper begins with a comparison of the performance of the Australian economy in the 2000s to that in previous decades. Sections 3 and 4 then consider the implications of the two driving forces for the two halves of the decade: the changes to household balance sheets and the impact on Australia of rapid development in Asia. Sections 5 and 6 discuss the major debates regarding monetary and fiscal policy. While the role of policy has generally been less topical in the 2000s than was the case in the 1990s, there were nonetheless active debates regarding the role of asset prices in monetary policy settings, and how fiscal policy should respond to a rising terms of trade. Finally, in Section 7 the paper considers how Australia might best take advantage of the new opportunities offered by the transformation of the global economy, while at the same time managing the risks that come with this transformation.

Footnotes

This change in fortunes is highlighted in a comparison of The Economist (2000) which summarises the argument at the time that Australia was an ‘old economy’ and Grimond (2011) which highlights Australia's recent success. [1]

Commodity prices have increased further since then, so that the average value of the commodity price index in the first half of 2011 was four times that in 1999. [2]