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Australia gears for another resources boom -

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Australia gears for another resources boom

Broadcast: 15/03/2010

Reporter: Greg Hoy

Australia is gearing up for another resources boom as china warns that the global economy may yet
turn sour again.

Transcript

KERRY O'BRIEN, PRESENTER: The Chinese Premier Wen Jiabao has sent shivers through Western financial
markets with his warning that the global economy may yet slide into a double dip recession, which
could create problems even for China, which so easily shrugged off the Global Financial Crisis.
Notwithstanding Premier Wen's prediction China remains in an incredibly strong position to weather
any storm coming from the West, which is good news for Australia if the worst happens, and we'll be
talking about that shortly with a leading China expert.

Australia in fact is gearing up so much to meet China's ongoing hunger for raw materials that we're
heading rapidly back into the two speed economy that was creating giant headaches for government
and the Reserve Bank before the global crisis hit. In Western Australia particularly and to a
lesser extent Queensland the resources boom is accelerating towards high growth and a significant
labour shortage which has big ramifications for the rest of the economy. Business editor Greg Hoy
reports.

GREG HOY, REPORTER: Two worlds that seem so far apart, but remain intertwined. On one side of the
globe in Beijing yesterday, the Chinese Premier gave his sobering view there's a risk the world
will slide back into recession.

WEN JIABAO, CHINESE PREMIER (voiceover translation): In spite of the overall recovery, the major
challenges and problems in the global economy have yet to be fully addressed.

GREG HOY: Which would not bode well for Australian exports. But across the world a very different
story is unfolding Down Under.

Treasure Island: 130 k's off the north western Australian coast, the largest single resource
project in Australia's history is now underway. From the seabed surrounding Barrow Island, 40
trillion cubic feet of gas, equivalent to 6.7 billion barrels of oil will be extracted and
processed, most of it already pre-sold for export as liquid natural gas. The goldmine of Gorgon
alone will bolster Australia's GDP by around $64 billion.

KEVIN RUDD, PRIME MINISTER (1 Sept., 2009): Which means jobs, which means growth, which means new
opportunities for Australia.

GREG HOY: All up, 10,000 workers will be required for its construction and the gargantuan Gorgon
project is just the beginning. With the nation's resource companies investing a record $50 billion
in new projects in the next year alone, heralding a new golden era for Australian resources.

GRAHAM BRADLEY, PRESIDENT, BUSINESS COUNCIL OF AUST: We've got a tremendous opportunity right at
the moment. We're at a stepping-off point, I believe, that could actually secure another decade or
more of very strong growth and prosperity for Australia.

JAMES PEARSON, WA CHAMBER OF COMMERCE & INDUSTRY: I think Australians need to realise that
something quite extraordinary is starting to happen in Western Australia. We predict that the
demand for labour alone over the next seven years will be at least 400,000 workers. Now on current
projections we're gonna fall 150,000 people short of meeting that demand. There is around $200
billion worth of capital projects in the pipeline cued to go ahead in WA. That's an extraordinary
situation for any economy to be in.

GREG HOY: So, what's the catch? Some say in surviving the global financial contagion the Federal
Government's $52 billion stimulus package did the trick, stimulating domestic demand, insulating
the Australian economy. Of course, that ignores the US$586 billion stimulus spending by China that
helped to keep the luck in the lucky country, by helping deliver $284 billion in resource exports
during the two years since the GFC started. With that total expected to double beyond $600 billion
in the next two years, as the Government's stimulus spending budget continues to run its course. So
which was the biggest stimulus for Australia's economy?

MICHAEL KNOX, CHIEF ECONOMIST, RBS MORGANS: We were saved by the best government in the world, and
it was Chinese. If you look back at the national accounts of the period, what we see, it was the
improvement in real net exports rather than domestic demand that saved the Australian economy from
going into recession.

GREG HOY: And already the Australian Bureau of Resource Economics has reported the volume of coal
and iron ore shipments in the last quarter hit a record high amidst predictions global prices for
coal and iron ore could soar by more than 60 per cent in the next month. Together with new project
investment, it raises the prospect: if China's resolve and Australia's luck holds that we are
facing a resources boom beyond any previously seen in Australia.

JAMES PEARSON: When people think about booms, they think about something that's going to get a few
people rich and get them rich quickly. I'm talking about a sustained period of high rates of
economic growth that should be of benefit to the whole nation, not just West Australia. That
requires sensible policy decisions in the near future by Perth and Canberra to make the most of
this opportunity.

GREG HOY: One bellwether of the Australian economy's prospects is the value of the dollar, which
has soared to record levels against most other world currencies. But opinions vary as to whether
the Aussie will continue its ascendency against the US Greenback.

RICHARD GRACE, CHIEF CURRENCY STRATEGIST, CBA: We're not expecting to reach parity, because we
think the US dollar will firm, preventing the Australian dollar from getting to parity.

MICHAEL KNOX: The US dollar will go down this year and next year and the Australian dollar will go
up relative to the falling US dollar. Right now we think that fair value of the Aussie dollar is
about 95 cents, but we think that fair value's gonna will drift up as we go through the year and
perhaps be over parity next year.

GREG HOY: But like China's political leaders, currency strategists must identify potential threats
to the confidence of the global economy, like a looming deadline at the end of March for the US
Federal Reserve to get out of the habit of buying toxic mortgage debt to prop up the huge US
government lending agencies Freddie Mac and Fannie May, which in turn prop up the US housing
market. It's a process soothingly called quantitative easing, and it must stop, analysts believe,
to increase confidence in the global economy.

RICHARD GRACE: You could envisage that scenario where the Fed comes in and has to undertake more
purchases of agency dead, so in a sense undertake more quantitative easing. Now the announcement of
that would be very negative for the US dollar and it would certainly be very positive for the
Australian dollar and you could envisage that would push the Australian dollar up towards parity.

GREG HOY: To fortify the Australian economy against such worst case scenarios and to even out the
boom and bust cycles, Australian business is calling for a list of significant reforms to maximise
benefits of the looming resources boom, commencing by diverting some of the remaining government
stimulus spending budget to deliver essential infrastructure.

GRAHAM BRADLEY: We need to have and build on the reforms of the last 30 years, which have opened up
our economy to trade, made our businesses more competitive.

GREG HOY: That means fundamental tax, labour and other reforms, business says, a view that is
shared in Western Australia, where the prospect of acute labour shortages across the economy looms
large as workers are increasingly lured by lucrative jobs in the resources sector.

JAMES PEARSON: West Australia needs more people and it needs them now. That means that the overall
migration intake for the nation might have to be changed. Certainly it has to be changed for
Western Australian because we have to have those people if we're going to turn these planned
projects into reality.

GREG HOY: It's the price of success in hitching a ride on the tail of the dragon economy and other
resource hungry nations of Asia, however long that ride may last this time.

KERRY O'BRIEN: Business editor Greg Hoy.