A new study released by the Grattan Institute is giving hope to the ailing Australian manufacturing industry after it has found that manufacturing has the capacity to bounce back from the mining sector boom.
The report titled Mining Boom: Impacts and Prospects says that overall, the boom has been good for Australia, helping the country during the global financial crisis and funding various government initiatives. Although the boom has made it difficult for other industries to compete internationally, the authors of the report said trade-exposed industries such as manufacturing, tourism and international education will bounce back quickly after the boom, citing history as their basis.
The report acknowledged that while there is a risk of a downturn, “recession is far from inevitable” because Australia has already demonstrated that it has the capability to avoid big traps of mining booms, including high inflation.
The strong dollar has provoked fears that the boom has permanently changed the manufacturing landscape, with the high exchange rate putting pressure on businesses that export or compete with imported products. However according to the report, the mining boom is actually not the main cause of manufacturing’s decline, rather it has just hastened a decline that has been taking place for decades.
“Manufacturing has declined as a proportion of the economy in Australia and most other high income economies for decades,” says the report. “The shift to an open Australian economy with lower tariffs that began in the mid-1970s has also played a role. As well, the global manufacturing sector has relocated much of the manufacture of less complex goods to China and other economies where costs are lower.”
The report says the boom has even helped some parts of Australian manufacturing particularly the demand from the resource sector for Australian manufacturing sector output which has risen by about 0.6 percent of GDP in the last ten years. Australian production and export of “sophisticated manufactures” which include technical equipment and pharmaceuticals have also increased during the boom.
“The experience of other countries that have been through a big shift in exchange rates suggests that Australian manufacturing is unlikely to have suffered permanent damage. If exchange rates decline, manufacturing is likely to bounce back to trend within a few years,” according to the report.
In the meantime, the authors of the report recommend that Australian governments should tighten their budgets so that they can react strongly in difficult times.
“Governments should resist temptations to protect industries, but continue to invest in skills and education to help workers and citizens respond to the changing risks and opportunities of a globalised economy. These will be even more important as the longest and largest mining boom in 150 years winds down,” says the report.