WESTERN AUSTRALIA’S iron ore and Queensland’s coal were at the centre of Australia’s recent mining boom, stoked by the red-hot growth of China’s steelmaking industry. At its height about five years ago, mining investment accounted for 9% of national GDP. But as investment started to decline in 2013, Western Australia’s debt soared. At 6.5%, its unemployment is now Australia’s highest. If the pattern of earlier booms had followed, Western Australia’s plight would have reverberated around the country and ended in a national bust. Yet the economy’s growth has stayed intact, notching up 25 years without a recession. How has Australia managed a feat that has defied most other rich countries?

Australia’s mining booms over the past 160-odd years made the country feel rich and confident while they lasted. Workers made big money, and this brought prosperity to far-flung regions producing gold, coal, gas and other commodities. Recessions followed nearly all earlier booms, including the most recent one, in the 1980s, largely because the upheaval proved too big a shock for an economy that was highly regulated. When negative growth was recorded in the third quarter of 2016, some anticipated the start of another recession (technically defined as two successive quarters of negative growth). Yet growth returned in the fourth quarter. The Reserve Bank of Australia, the central bank, forecasts a rate of about 3% this year and next.

The economy has undergone crucial changes since the 1980s. The central bank is now free to set interest rates without political interference and the exchange rate is no longer fixed. As the boom waned, the bank cut its benchmark rate from 4.75% in 2011 to 1.5% last year. The value of the Australian dollar has fallen to $0.76, from a peak of $1.10 six years ago. These factors have allowed the older and more populous states of New South Wales and Victoria to take up the economy’s slack: investment in industries other than mining has been growing by about 10% a year in New South Wales since 2013. Victoria has Australia’s highest population growth, from both internal and foreign migration. Businesses hurt by the highly-valued currency during the mining boom are now finding it easier to export their goods. For tourists and foreign students, Australia is a cheaper place to visit.

This more flexible economy still faces tests. More stable growth in China has helped commodity prices rebound from quite steep falls. But this time, mining companies are unlikely to embark on another investment boom with more jobs. The higher prices may not last. The economic outlook for China, Australia’s biggest trading partner, remains a “key source of uncertainty” for the central bank. So far, though, Australia’s capacity for economic reinvention through peaks and troughs is paying welcome dividends.

The Economist

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