Australia has been prone to booms and busts since it was founded, partly because it’s a commodity economy, and commodity prices are much more volatile than prices for industrial products; and partly because we tend to go overboard on property during the boom times and amass too much debt to buy the property, which becomes a drag on growth after the boom ends.

The most recent boom lasted more than a decade and it was driven by a huge surge in Chinese growth. Over the last 30 years, China has gone from being an insignificant economy in the world context to the largest economy in the world (or second largest, depending on how you calculate it.) But it is in the nature of emerging economies that after a spell of rapid growth, after they first start growing, their growth rate slows to something much more sedate.   This is what’s happened to China.

The first chart shows the year-on-year change in Chinese industrial production (IP), smoothed and unsmoothed (it’s very “spiky”—the smoothed version is a better guide to what’s going on.) Before the GFC (in 2008) growth was around 17%. After the GFC, there was at first a rebound to previous levels, but since then growth has steadily slowed. Of course, 9% is still a high growth rate—it’s just a lot less than 17%.

The chart below shows China GDP, also as a year-on-year percent change. This has also slowed back from boom levels. The Chinese government’s GDP growth target is 7.5%. The reason they have not targeted a higher growth rate is because it was found during the boom that there was runaway property speculation and corruption, and the regime is wary of both, for obvious reasons.

This downward shift in growth has huge implications for Australia’s mineral exports, especially since there have been big increases in the supply of coal and iron to world markets, coming ironically from Australia.   Even though volumes of coal and iron ore are likely to hold up and improve, the prices we receive for them are not. Indeed, both iron ore and coal prices have halved over the last four years as Chinese growth has slowed. LPG volumes are rising as are prices and this will provide some offset. However, the Australian Dollar has remained strong because of safe haven demand from overseas, so the impact on our incomes and our economy of this overall slowdown in mineral export prices has been sharpened. Boom risks turning to bust unless government policy is very deft.