Commodity boom could be blessing and curse: Henry

TICKY FULLERTON, PRESENTER: Australia's mining boom was one of the key reasons for the country's strong economic position during the global downturn.

With demand from China for natural resources waning, though, there has been concern about the future.

Now Australia's major trading partner is picking up speed again.

China's latest growth rate is almost 9 per cent, but Treasury Secretary Ken Henry has warned it could be both a blessing and a curse for Australia.

Phillip Lasker reports.

PHILLIP LASKER, REPORTER: The Chinese economy marches on powered by a massive $630 billion in government spending.

LI XIAOCHAO, BUREAU OF STATISTICS: Investment played an important and positive role in maintaining relatively fast growth and reversing the slowdown.

PHILLIP LASKER: Since the first quarter of this year, economic growth has picked up from 6.1 per cent to today's number of 8.9 per cent - the fastest pace in a year.

It's well short of the dizzying 13 per cent growth recorded just over two years ago but strong enough to raise concerns about too much government spending.

MICHAEL PETTIS, PEKING UNIVERSITY: So the debate continues raging and that is whether the fiscal stimulus package is going to resolve China's problems in the short and medium term or exacerbate them.

PHILLIP LASKER: But for now even cautious Treasury officials are looking to Australia's recovery being given a leg-up by the re-emergence of China.

KEN HENRY, TREASURY SECRETARY: Our re-emergence which, because of its implications for global commodities demand, has conferred on this country a very considerable boost to its real wealth, but which, at the same time poses a set of structural adjustments that will challenge Australian policy-makers for decades.

PHILLIP LASKER: The Treasury Secretary warned it would mean a current account blowout as Australia borrowed money from overseas to fund much needed investment. Although some suggest China's hunger for commodities, like its growth-rate, may be built on shaky foundations.

MICHAEL PETTIS: There is evidence that there has been a huge amount of stockpiling of commodities, not just at the corporate level but a lot of individual investors, a lot of wealthy investors have been stockpiling chemicals and commodities as a form of investment.

So if there is a slowdown and there is also pressure to run off those stockpiles, then commodity imports will be even lower than we expect.

PHILLIP LASKER: But China's recovery gives those calling for a faster wind-back of the Government's stimulus spending some ammunition. Although when questioned, Dr Henry maintained the balance was right.

KEN HENRY: It boosts growth in the current year, it actually detracts from growth in 2010.

You refer to the action of the central bank, the Reserve Bank in lifting in the cash rate. I can tell you that fiscal policy will have a contractionary effect, a contractionary effect on Australia's growth long before monetary policy does.

PHILLIP LASKER: And the Treasury Secretary accused those pushing for a faster withdrawal of stimulus spending of condemning Australia to an even higher unemployment rate.

KEN HENRY: I don't think there's anybody in Australia today who doesn't think that by this time next year the Australian unemployment rate will not be larger than it is today, notwithstanding the fiscal stimulus package.

PHILLIP LASKER: But there are plenty of people who think Australia will at least be out of the woods by then.

Article source: http://www.abc.net.au/lateline/content/2008/s2721886.htm