Australian mining booms have traditionally been followed by bust, but when the current cycle fades, the floating currency will insulate the economy from a hard landing, according to a research note from HSBC.

HSBC’s chief economist for Australia and New Zealand, Paul Bloxham, says that the current mining boom – which he says has some distance still to run – “should be different” to earlier ones.

“Why? Simply put, any irrational exuberance has not spilled over into the broader economy this time around, as it had previously,” says Bloxham.

“The floating Australian dollar has been a key part of this story. Rising commodity prices were matched by a large Australian-dollar rise, rather than rampant inflation as happened before.

“The Australian dollar has held back other sectors of the economy and contained inflation. When the mining story fades, which is not yet, there will be room for other sectors to pick up and for growth to rebalance.”

Inflation contained

Bloxham agrees that commodity prices have peaked, but said that the long-term investment in resource projects, in particular the new liquefied-natural-gas industry, means that investment will still rise through 2013.

The key to insulating Australia from a bust, he says, is that inflation has been contained.

“Previously, rising commodity prices boosted incomes, which saw greater spending and too much demand chasing too few goods,” he says.

“This time around, much of that demand has leaked offshore.”

The levers of monetary policy, according to Bloxham, could be pulled to mitigate the impact of falling commodity prices and limit the sharpness of any downturn.

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