Lower AUD is now supporting the competitiveness of Australia’s services exports - HSBC

Economists at HSBC explain why the service sector is more significant than mining for Australia's economy:

"We have spent a lot of this year writing about the impact of commodities on Australia’s economy. This makes sense. Mining has driven more of the Australian economic cycle in recent years than at any other time in modern history. This has been an unusual period. The recent mining cycle has been three times larger than any other in the past century. But, in reality, the resources sector is less than one-tenth of GDP and, once the big cycle is over, which we think is about now, the economic story will be more about other things. Services are over 70% of GDP and are driving more and more growth. Services are also generally quite poorly measured in the statistical frame. Don’t forget services."

"It’s easy to see why Australia is seen as a commodity-economy. Resources account for 65% of Australia’s exports and because commodity prices are volatile, the cycle in Australia’s export income is largely driven by commodities. Export income then, in turn, drives large movements in the Australian dollar, which affects financial conditions and feeds back into interest rate settings. Add to this, Australia has just been through the largest cycle in commodity prices and mining investment in at least a century. Mining investment, which is typically 2% of GDP, and has peaked in previous mining booms at 3% of GDP, rose to a massive 9% of GDP in 2012 and has fallen right back to 3% of GDP since then. The mining cycle was three times larger than anything Australia has had to absorb in the past century."

"So you would be forgiven for thinking that the story has been all about mining. But the bulk of Australia’s economy is outside the mining sector. Although commodities loom large in Australia’s trade, exports are only around 20% of GDP. In terms of gross value-added, mining is only 6% of the economy. By comparison, the services sectors account for over 70% of GDP. The mining sector is also highly concentrated in certain geographies. Mining accounts for around one-quarter of gross state product in Western Australia and less than one-tenth in Queensland, but barely registers in New South Wales or Victoria, where over half of the overall economy and population reside."

"Tight financial conditions when the mining boom was at its peak, held back the services sectors. The high AUD was limiting the tourist numbers, encouraging Australians to spend more money offshore and discouraging international students from coming to Australia. High interest rates were holding back consumer spending, including on services. The much lower AUD is now supporting the competitiveness of Australia’s services exports, while lower interest rates are supporting consumer spending as well as the housing sector. Tourism and education exports have become key drivers of growth."