Last week the Organisation for Economic Co-operation and Development (OECD) revised down projections for China’s growth over the next two years, and the price of our major exports has fallen 30% in the past year. Despite this the governor of the Reserve Bank, Glenn Stevens, remains upbeat about Australia’s economy. One of the reasons is the performance of the services sectors – notably the tourism industry. With a falling dollar, Australia has again become a good place to visit – and an expensive place to leave.

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It’s always a bit of a shock to note just how much the prices of iron ore and coal have risen and then fallen in the past decade.

The RBA’s index of bulk commodity prices (iron ore and coal) went from 54 in 2006 to 169 in 2011, and is now back at 54:

In the past year the index has fallen 30%; in the past two years, nearly 50%.

That is a massive collapse. And while many saw it coming – and indeed knew it had to come because the increase in production of iron ore meant that prices would have to fall – it’s standard economics that an increase in supply, leads to a fall in prices.

But the slowdown in China exacerbated the fall. Suddenly the chief buyer of our bulk commodities wanted to buy less than we had hoped and this also caused a fall in prices, because again it is standard economics that a fall in demand leads to a fall in prices.

And the bad news for us is that the slowing in China has not finished.

Last week the OECD revised down its prediction for China’s GDP growth in 2015 from 6.8% to 6.7% and for 2016 from 6.7% to 6.5%:

The OECDstill believes the world’s economy next year will grow by 3.6%, but that is 0.2% points less than it was expecting in its previous update.

The good news is that while the OECD may have become a bit more pessimistic, it still does see the overall world economy and areas like the US and the eurozone doing better in 2016 than they have for a number of years.

But the fall in commodity prices is going to hurt our economy and there is no getting away from it. Stevens, in his appearance last Friday at the House of Representatives standing committee on economics noted that the drop in investment in the mining sector would end up being in the order of “5% of GDP”.

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But among his assessment of the economy he noted that with the fall in commodity prices has also come a fall in the value of the Australian dollar.

Stevens noted that the fall was “starting to have more discernible effects on the pattern of spending and production” in Australia.

He noted that our dollar had fallen 25% against the US dollar and 18% again the trade weighted index (that is, against a basket of currencies based on our trade levels). Among the industries he singled out as being the main beneficiaries of this fall was the tourism industry.

Tourism, unlike manufacturing and other industries that also benefit from a falling dollar, has very little lag time. People do make decisions on where to holiday some time into the future but nowhere near the length of time taken to organise export contracts with suppliers overseas as is the case with manufacturing and other industries.

Thus a falling or rising dollar has a pretty quick impact on tourism.

Most of our tourists come from New Zealand, which is less subject to changes in currency:

But after that, China, the UK and US are the main conduits for tourism to Australia.

A falling dollar can make travelling here much more attractive. Consider that at US$0.95 which is where the currency was in the middle of last year, a $200 a night hotel room costs US$190, but at US$0.72 which is where the currency is now, that same room is just US$144 a night.

Little wonder that in the past year there has been a significant rise in the value of “travel” exports – which includes spending by foreign visitors to Australia:

But while international tourism is a vital export market, the falling dollar also helps by making it more attractive for Australian to holiday at home rather than away.

Australians holidaying at home spend about $53bn a year – well above the $30bn spent by international tourists.

Given a US$200 a night hotel room in the USA costs A$210 when the value of our dollar is US$0.95 but rises to US$277 a night at the current exchange rate, that makes holidaying at home rather more attractive.

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A recent speech given by the deputy governor of the RBA, Philip Lowe noted this factor. He observed that “as the relative cost of overseas travel has increased, more Australians are holidaying domestically and more people are visiting our shores.”

He also noted that this was leading to “a pick-up in investment in the tourism industry” with the value of building work to be done on hotel and related accommodation soaring recently:

However, the improvement in the tourism sector – and the services sector generally – highlights the difficulties with the changing economy out of the mining boom.

The accommodation and food services sector is in economic terms almost the mirror of the mining industry.

The mining industry is roughly 8% of our entire GDP, but employs just 2%; whereas the accommodation and food services industry accounts for about 2.5% of Australia’s GDP but employs 7% of all workers:

So a growing tourism sector is good for jobs, but is unlikely to fuel masses of GDP growth.

Over the past 15 years, the mining industry has on average contributed 0.34 % points to annual GDP growth, compared to just 0.05% points by the accommodation and food service industry:

That doesn’t mean it is an unimportant industry, but that it is not the type of industry that leads to a boom – rather it benefits from economic good times rather than drives them.

The transition from the mining boom is as much as anything about shifting from overdependence upon one industry for economic growth onto depending upon a number of them. The tourism sector after three years of being hammered by the high Australian dollar is now set to reap some benefit that has come via the collapse in commodity prices. It won’t fill the entire whole left by the end of the mining boom, but it is one of a number of services sector industries that needs to pick up if we are to keep our economy and jobs growing.