If you'd asked me 10 years ago what effect a mining boom would have on the Australian economy, I would have responded with an 'all good': more profit, government surpluses, low unemployment and plenty of people with lots of cash to burn. That in turn should, I would have guessed, be good news for Australia’s stock market. Unfortunately, it hasn’t quite worked out that way.
The past seven years have indeed been a bonanza for mining stocks – reinvesting dividends you’d have ended up with a 27% annual return, or more than five times your money in total.
But for the rest of the stock market, life’s been surprisingly tough. The 8% annualised return provided by non-mining stocks (again, assuming reinvested dividends) wouldn’t even have doubled your cash over the same period. Obviously you’d expect mining stocks to perform well in a mining boom, but the fact that industrials have delivered returns lower than the long-term average is surprising. Surely some of the benefits get shared around?
The reason they haven’t been might come down to an obscure economic theory known as the Dutch disease. The phrase was coined in the 1960s to describe the Dutch economy’s unexpected troubles in the decade following a huge natural gas find in the North Sea. The guilder’s subsequent rapid appreciation sent the rest of the Dutch export industry – a large part of its economy – into a tailspin.
Might the rapid ascent of the Aussie dollar be having a similar effect on our non-mining economy? It’s certainly not helping a few of my favourite businesses. Cochlear, Infomedia and ARB Corp. are all making strides on the world stage, but profits are being crunched as they convert their revenues back to the home currency.
It’s not just the exporters that are struggling, though. Record agricultural commodity prices don’t look quite so good in Aussie dollars and, at 7% of GDP, we’re running the biggest current account deficit since statistics began in 1959. Hard to believe given the prices for our commodity exports but, as the Aussie rises, imported competition is having a field day with our locally produced product.
There’s no doubt that, for now, we’re net better off – just take a look at the bulging government coffers. But it won’t be pretty if the mining boom comes to an end and the rest of the economy is in a state of disarray. Dutch disease or not, our world class exporters are worth looking after.
Disclosure: Steve owns shares in Infomedia