Box C
Imports and Investment
Import volumes have grown very strongly over recent
years (Graph C1). While this partly reflects a recovery
in demand following the global financial crisis, an
unusually large proportion of the recent increase in
demand has been met with higher imports, rather
than domestically produced goods, with this trend
particularly pronounced for investment goods.
Accordingly, the average import intensity of demand
has risen sharply in real terms. At the same time, the
value of imports as a proportion of nominal GDP
has actually declined, because import prices have
fallen sharply over recent years (Graph C2). Indeed,
overall import prices in Australian dollar terms are
now lower than they were more than 20 years ago
(Graph C3).
There are a number of factors driving these trends.
First, Australia’s trade openness has been trending
higher for several decades, in line with the rise
in world trade as a share of global GDP. This trend
reflects lower trade barriers, falls in transport costs,
and the growth of low-cost manufacturing in
Graph C1
Volumes, year-ended change
%
16
16
8
8
0
0
Aggregate demand*
Imports
-8
-16
-8
1991
1995
1999
2003
2007
Imports as a per cent of nominal GDP
%
%
24
24
22
22
20
20
18
18
16
16
14
1991
1995
1999
2003
14
2011
2007
Source: ABS
Graph C3
Import Prices and the Exchange Rate
2009/10 = 100
Index
Index
100
100
Real trade-weighted index
75
75
Index
Index
Imports and Aggregate Demand
%
Graph C2
Import Intensity
-16
2011
150
150
Relative price of imports*
100
Index
100
Index
Import prices
120
120
100
100
80
1991
1995
1999
2003
2007
2011
80
* Imports implicit price deflator divided by GDP implicit price deflator
Sources: ABS; RBA
* Gross national expenditure plus exports
Sources: ABS; RBA
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emerging economies. As a result, import volumes
have tended to grow more quickly than aggregate
demand for an extended period (Graph C1). While
this long-run trend has continued, it has recently
been amplified by several other factors. The most
obvious of these is the sharp appreciation of the
exchange rate over recent years, which has lowered
the Australian dollar price of imports (Graph C3).
In particular, firms and households switch towards
imports as they become cheaper relative to similar
goods and services produced domestically, while
the increase in real purchasing power as a result of
lower import prices boosts domestic demand more
generally.
Another key driver of the recent strength in import
demand is the current boom in mining investment.
Mining investment is significantly more import
intensive than other forms of spending, and has
therefore contributed to a sharp rise in imports
(particularly of capital goods) as it has surged as a
share of GDP (Graph C4). Liquefied natural gas (LNG)
projects, which have accounted for a very large share
of recent project commencements, are particularly
import intensive.
Graph C4
Mining Investment and Capital Imports
Volumes, 2000/01 = 100, log scale
Index
Index
Mining investment*
400
400
Capital imports
200
GDP
100
50
200
01/02
03/04
05/06
* Annual; RBA estimate for 2011/12
Sources: ABS; RBA
07/08
09/10
100
11/12
50
The import intensity of current mining investment
projects is also higher than in earlier years. One
aspect of this is a global tendency for greater use of
off-site ‘modular’ construction processes as opposed
to the traditional on-site ‘stick-build’ processes.
Developers of LNG and magnetite iron ore projects
are increasingly modularising their processing
plants, making it easier for them to be built offshore
and then installed in Australia. In addition, a range
of inputs to mining projects that have historically
been sourced locally are now often being imported.
This includes, for example, rail wagons and track,
chemicals, container housing for construction
workers, and engineering services. This change
in large part reflects the same factors boosting
import penetration in the economy more generally
– namely, the trend rise in import intensity and the
more recent significant decline in the relative price
of foreign goods and services as a result of the
appreciation of the exchange rate. In addition, the
sheer scale of current mining investment projects
has meant that local industry does not always have
the capacity to service the large contracts being
tendered by project managers. Further, the infancy
of the LNG industry in Australia has meant that local
firms are sometimes at a competitive disadvantage,
due to a perception that they lack the same
experience as foreign suppliers.
With the ongoing boom in mining investment –
particularly in import-intensive LNG projects – and
the high level of the Australian dollar, strong growth
in demand for imports looks set to persist for the next
few years. While the high exchange rate will involve
difficult adjustment for some domestic importcompeting industries, other industries are benefiting
from lower-cost imported capital and intermediate
goods, which should help boost productivity over
time. More generally, the increased use of foreign
sources of supply is an important mechanism for
reducing pressures on overall capacity and inflation
in Australia when demand is growing rapidly. R
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