Asia’s building boom = Australia’s benefit

May 15, 2011 / By

I am off down to Canberra this month for the Australia Property Council conference, where I am giving a talk on the economic outlook to 2020 and what that might mean for Australia. So naturally I have been doing a bit of research. The big story is the change in what matters to Australia on the global stage. What used to matter was want went on in the US. Now what matters is emerging Asia.

Over the last 10 years for both Australia and New Zealand, trade with emerging Asia has risen to where almost 60% of exports from Australia- mostly commodities go to the region. For New Zealand the figure is 30% of exports and 40% of imports are to and from Asia. For the last two years Australia has been running a trade surplus against China in particular, now at A$22 billion on a 12 month rolling basis. Not many countries can say they have a surplus against China.

The driver for this is the continuing urbanization and industrialization of China and India. With 30 million people a year moving to cities- that takes a lot of hard commodities including iron ore and coal to make steel required for the buildings.

Recent research from the IMF shows the mathematical relationship in the change of Australia’s GDP output being more closely tied to Asia’s and no longer the US. From 1991 to 2000, a shift in US GDP by one percent had a 0.4 percent effect on Australia GDP. This would have occurred through transmission channels of trade and finance. From 2000 to 2010, that effect had completely disappeared. It has instead been replaced by an effect from emerging Asia. A one percent shift in emerging Asia GDP shifts Australia growth by a third of a percentage point.

The good news for Australia is that at present there is no sign of any great slow down in the rate of urbanization and hence the demand for commodities.  That makes Australia likely to continue to thrive and enjoy its 20 year run of uninterrupted growth,  as emerging Asia continues to spend its savings and build homes to live in and offices and factories to work in.  This should make for a happy conference.

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