christopher kent : after the boom speech by mr christopher kent, assistant governor ( economic ) of the reserve bank of australia, at the bloomberg breakfast, sydney, 13 september 2016. * * * introduction today i want to talk about some important developments shaping the australian economy, focusing on the sharp fall in commodity prices over the past few years. in 2012, just after taking on my current role, some colleagues and i were looking at how the australian economy had been adjusting to the unprecedented boom in commodity prices. 1 by the time i presented that work, prices of australia ’ s key commodities had begun to turn down and mining investment had just peaked at a record level. 2 since then, commodity prices have fallen much further and so australia ’ s terms of trade ( the price of our exports relative to imports ) have fallen significantly. the fall was more than we, and most others, had expected. more recently, though, commodity prices have risen. and more than three - quarters of the anticipated decline in mining investment is now behind us. the adjustment of the economy to the decline in the terms of trade and the large fall in mining investment has been a drawn out process, adversely affecting a range of industries and regions. but growth in the economy overall has been close to trend, and while the unemployment rate rose, it reached only a little above 6 per cent in 2015. 3 more recently, inflation has declined. before talking about the period after the boom, i want to set the scene. first, i ’ ll briefly review the boom years. second, i ’ ll describe what we anticipated four years ago would be likely to happen after the boom. the boom years the rapid industrialisation and urbanisation of the chinese economy underpinned the strong rise in commodity prices from around the mid 2000s. as global demand for commodities began to outstrip supply, the prices of australia ’ s key commodity exports rose dramatically. australia ’ s terms of trade rose by 85 per cent from the average of the early 2000s to the peak in late 2011 ( graph 1 ). that implied a significant boost to the real purchasing power of domestic production. some of those gains were retained by foreign owners of mining assets, but a share of the gains stayed at home in the form of higher wages, tax revenues and profits for australian owners of mines and of firms supporting mining activity. 1 / 16 bis central banker's speeches the rise in australia ’ s terms of trade was associated with a large appreciation of the nominal exchange rate (

demand, we thought that commodity prices and, therefore, australia ’ s terms of trade would decline ( but remain higher than their preboom levels ). that would normally be associated with a depreciation of the australian dollar. we anticipated that demand in the non - mining sectors would pick up and that labour and capital would be drawn back to that part of the economy. any depreciation of the nominal exchange rate would facilitate that transition by improving the competitiveness of the ‘ other tradable ’ sector. the movement of labour would also be facilitated by some decline in wage growth, as the labour shed by companies that had undertaken the mining investment looked to move back into the nonmining sectors. in other words, we thought that the requisite real exchange rate depreciation would occur largely via the nominal exchange rate, but might also be assisted by a decline in domestic cost pressures. these developments were expected, at least in part, to reverse some of the effects on consumer price inflation seen during the investment phase of the boom. in particular, a gradual depreciation of the exchange rate would put upward pressure on tradable inflation for a time, while a reduction in wage growth and domestic costs more generally would put downward pressure on nontradable inflation. these opposing effects could potentially result in little net change to overall inflation, but given that inflation had been above average during the boom, it would not be surprising to see inflation below average after the boom. but having made some predictions about the direction of some key variables, we also noted the considerable degree of uncertainty, including that related to the global economic outlook. after the boom – what actually happened? many of our predictions have been borne out. mining investment declined significantly and resource exports grew strongly. mining investment has further to fall, although the largest drag on gdp growth from that source is likely to have come and gone over the financial year just passed. the decline in mining investment from 2012 led to lower growth in overall mining activity ( mining investment plus resource exports ; graph 2 ). more recently, growth of mining activity has picked up. mining activity is set to continue to grow for a time as the drag from mining investment wanes and production of liquefied natural gas continues to ramp up. 3 / 16 bis central banker's speeches as had been anticipated, mining - related employment has contracted and wage growth in those industries has declined to be noticeably below that of other sectors. 6 in the non - mining sector, growth in activity