Posts Tagged ‘Australia’

Commodity Currency – Aussie dollar overvalued.

May 12, 2016 Leave a comment

Below is a video from the FT that I showed my A2 class this morning. The significance of it is the Australian dollar and how its value is strongly linked to iron ore prices. Recent growth in China has exceeded expectations and this has led to a rebound in commodity prices especially iron ore. The belief is the AUS$ is higher than the equilibrium level suggests and that this rate will not be sustainable. There are two reasons for this:

  1. Commodity prices have accelerated which has led to more demand for AUS$ which might not be sustained.
  2. Higher relative interest rates has made the AUS$ strong as ‘hot money’ has been attracted in the country. The Reserve Bank of Australia (central bank) has recently cut the cash rate (interest rates) to 1.75% and there is talk of a further cut this year.

Australia v New Zealand – on the same track.

October 13, 2015 Leave a comment

Here is graph from the recent Westpac Bank Economic Overview. It shows how closely correlated the New Zealand and Australian economies are with regard to the % of GDP from the quake related reconstruction in New Zealand and the iron ore boom in Australia.

The Canterbury rebuild will peak around late 2016 and into 2017 although growth after this point will be fairly subdued. The falling exchange rate and lower interest rates will act as a buffer but the dwindling rebuild with become a drag on GDP in New Zealand.

Australia has also experienced a slow down with a reduction in mining construction amid falling iron ore prices. To stimulate growth the Reserve Bank of Australia has cut the cash rate from 4.75% to 2.0% and the Australian dollar has fallen about 30%. However high unemployment and low business and consumer confidence have been prevalent in the economy and growth prospects are very modest for the next few years. This is similar to what New Zealand can expect.

NZ v Aus GDP

Categories: Growth Tags: ,

Aussie trade deficit increases

August 16, 2015 Leave a comment

From the National Australia Bank – The slowdown in China and weak bulk commodity markets has seen Australia’s trade deficit blow out again in recent months, hitting a record in April but remaining very high at a deficit of $2,750mn in May under pressure from Australia’s declining terms of trade from the softening in Chinese import demand (and higher export supply) for Australia’s major bulk resource commodities. Interesting to note the importance of China as an export destination

Aus Exports 2000-16

Categories: Trade Tags:

Aussie v NZ – Iron Ore v Dairy

January 6, 2015 1 comment

Both Australia and New Zealand face the worrying prospect of the impact of lower commodity prices. For Australia it is iron ore whilst across the Tasman it is the dairy industry. So how will each economy be affected by this?

NZ Dairy

The whole milk price has fallen from:

US$4999/tonne on 18th February 2014 to US$2270/tonne on the 16th December – a 54.6% decrease.

This downturn in prices will have a significant impact on the rural economy of NZ. The lower prices will not only reduce dairy farmers’ incomes, but there will be a knock on effect in other parts of the local economies as farmers and contractors will be less inclined to spend or invest in anything but necessities.

Short-term credit facilities will be able to help farmers with their costs but permanent lower returns would cause a rethink regarding production capacity and economies of scale.

Aussie Iron Ore

For Australian the iron ore prices have fallen from US$136 a tonne December 2013 to US$68 a tonne December 2014. This will have a major effect on their economy for the following reasons:

Iron ore represents 25.5% of exports from Australia
Iron ore producers are significant tax payers to the Australian Government. The drop in prices = AUS$18 billion loss of revenue
Lower prices mean less investment in capital – this sector has been a major part of the Aussie economy over the last few years

Who will take the biggest hit?

It is expected that Aussie will take the biggest hit mainly because of the tax revenue lost through lower iron ore prices. In NZ dairy farmers are not big tax payers and the NZ government are not expecting a big fall in tax revenue. Furthermore overall economic activity is largely unaffected as milk production is likely to continue in the short-term. However the falling unemployment rate in NZ and a rising level in its Trans Tasman neighbours suggests NZ is in a much better state to weather the storm. Other indicators below favour NZ. These include GDP growth and consumer confidence as well as having the ammunition of being able to cut interest rates further, a situation that Australia might find difficult.

Aus v NZ Commod









Source: NZ Herald December 20, 2014

Non-mining sectors holding Aussie economy together

December 1, 2014 Leave a comment

From the National Australian Bank – non-mining GDP growth is already running at around or slightly above trend at around 2.75%. This improvement accords with the message of sectoral business conditions in the NAB survey. In 2011, interest rate markets ignored the strength in mining and correctly priced off the weakness in the non-mining economy. Non-mining GDP growth is already running at around or slightly above trend at around 2.75%. This improvement accords with the message of sectoral business conditions in the NAB survey. In 2011, interest rate markets ignored the strength in mining and correctly priced off the weakness in the non-mining economy. While it’s much too early to make the reverse conclusion, especially given the pick up signalled is only very mild, it’s certainly a scenario worth monitoring as it would be a major surprise for Australian rate markets.

Aussie mining non-ming

Categories: Growth Tags: ,

Real Income vs Real GDP in Australia

October 15, 2014 Leave a comment

I was surprised to read in the NAB Australian Markets Weekly that for the past three years real income per person in Australia has been falling and is now back to levels that were evident in late 2008. The graph shows the level of real income per person with the recessionary periods marked in grey. From the last recession in 1991 up to the Global Financial Crisis in 2008 Australians have experienced a continued rise in the level of their real incomes. Nevertheless how can it be that with GDP growing at about 3% a year real levels of income have been falling?

1. Growth in aggregate real GDP has been boosted a great deal by the sharp growth in the population – Australia’s population grew 1.7% in 2013.
2. While Australia are seeing good growth in the “volumes” of GDP, particularly as some of the new mining capacity has been coming on stream, they are receiving lower prices for this output due to falling commodity prices.

As a nation, they are working harder for less income.
Aus Real Income - 1975-2014

Categories: Growth Tags: ,

Aussie still relying on consumer sector

August 17, 2014 Leave a comment

The graph from National Australia Bank below shows the components of Australian GDP March Quarter 2014. This is particularly useful when doing GDP Expenditure approach in Unit 5 of the A2 Cambridge course where you can breakdown the equation C+I+G+(X-M).

C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports

Consumption is still the largest contributor to Australia’s GDP. Over the next couple of years GDP  is expected to grow around 3% but key to meeting that target is a solid consumer sector. Household consumption growth in recent quarters has been solid, contributing 0.3 percentage points to growth in Q1 – only exports have contributed more to growth over the past year. However sustaining solid consumption growth in years ahead requires the labour market to improve and consumer confidence levels to recover from their recent lows.

Aus GDP Components

Categories: Growth Tags: ,

Aussie GDP – from Consumption to Net Exports

March 22, 2014 Leave a comment

Below is an interesting look at the components of GDP in Australia. Capital intensive and net exports are the mainstay of growth this year. However it wasn’t always like this and notice the changes in consumption that reflect the GFC and the role of net exports in the recovery. Remember the equation:

AD = C+I+G+(X-M)

Aus - growth

Categories: Growth Tags: ,

Commodity prices drop but Aussie dollar holds firm

January 5, 2014 Leave a comment

Aus dollar Commod PricesSince the Aussie dollar was floated in 1983 its value closely followed that of its commodity exports – see graph from The Economist. However since 2003 commodity prices have increased 400% but the dollar rose by much less and no longer had a direct relationship to commodity prices. There are 3 possible reasons for this:

1. The deregulation of financial markets which facilitates the ease of currency trading
2. The current account deficit in Australia which got to 6.2% of GDP in 2007
3. Interest rates in Australia up to the GFC were realtively low compared to other developed countries

2011 saw commodity prices drop but the Aussie dollar has remained strong. As most economies employed a lose monetary policy and proceeded to drop interest rates aggressively after the GFC, the Aussie economy didn’t in fact go through a recession and its interest rates remained relatively strong – see below.

CB Interest Rate Nov 13

Although a weaker exchange rate could help the Aussie economy especially as it has been susceptible to the resource curse – the strength of the exchange rate and higher interest rates is already putting pressure on some industries, particularly the tourism, manufacturing, education exports and retail industries.

Aussies still looking at strong export sector

December 18, 2013 1 comment

The graph from National Australia Bank below shows the components of Australian GDP from 2007-2013 with forecasts for 2014 and 2015. GDP consists of C+I+G+(X-M) so from the graph you can see that:

C = Private Consumption
I = Business Investment
G = Government Demand
(X-M) = Net Exports

* There is anticipated an increase in non-mining investment with investment in the mining sector slowing down as completion nears.
* An increase in private consumption as well as net exports holding its own.
* The relationship between business investment and the increase in net exports
* Pace of growth is below the trend over 2014-2015 which means that that population growth will be greater than the number of new jobs created.

Aussie Resource

Categories: Growth, Trade Tags: , ,

Aussie Exports likely to be unaffected by US Fiscal Standoff

October 9, 2013 1 comment

The standoff between the President and the US Congress continues after the Government was forced to shut down non-essential services and stand down more than 800,000 employees.
US politicians appear no closer to resolving the deadlock. But while markets remain frustrated with the current situation, a resolution is hopefully not too far away. For Australia, the impact on the local economy is unlikely to be significant if the issue is resolved before too long. With over 80% of Australia’s exports destined for Asia, any hit to Australia’s trade accounts will likely be undetectable. Source: BNZ Australian Markets Weekly

Australian Exports

Categories: Trade Tags:

Aussie employers prefer part-time workers.

August 20, 2013 Leave a comment

Here is a graphic from the National Australia Bank which shows a good correlation between the demand for full-time and part-time workers and business confidence. In Australia for five of the last six months, full time employment has fallen. This is a sign that employers lack of confidence in the outlook makes them reticent to hire on a full time basis. Instead they are preferring to hire people on a part time or casual basis which gives them a lot more flexibility in uncertain times.
Aussie part time full time workers

Credit Rating Agencies – how countries stack up.

March 8, 2013 Leave a comment

Rating Agencies Feb 2013Here is a list of the latest ratings by the three main rating agencies. Notice that Australia and the three Scandinavian countries have top ratings. The UK lost its top rating from Moody’s but maintained the top rating from the other two. New Zealand comes in further down with a top rating from Moody’s but has lost its top grade from the other two. When you get to B status your are talking high risk or junk status and this is quite evident with the PIGS counties.

If you have watched the movie documnetary ‘Inside Job’ you will remember that these 3 credit rating agencies also rated high risk investments – sub-prime mortgages – as AAA, up to a week before they failed. The same could be said about their rating of investment company Bear Stearns.

Ultimately they could have ‘stopped the party’ but delayed ratings reports and made junk status investments AAA rated. But as they testified in front of congress their advice to clients are opinions ‘just opinions’ – I wonder do they share the opinions of those that lost huge amounts of money, including sovereign investments. Recently they downgraded Greece and Spain in the knowledge that the servicing of the debt would now become more costly for those countries and stifle any sort of recovery in the near future.

Aussie dollar – Pacific Peso to Swiss Franc of the South

November 27, 2012 Leave a comment

A little over a decade ago the Australian dollar was being dismissed as the Pacific Peso but today some are referring to it as the Swiss Franc of the south. This is an indication of its safe-haven status as central banks worldwide start to diversify their reserves away from US dollars and Euros into Aussie dollars.

The IMF recently announced that they intend to make the Australian dollar and Canadian dollar Global Reserve Currencies. Both will be included in the COFER (Currency Composition of Official Foreign Exchange Reserves) surveys, which currently consists of the:

U.S. dollar
Swiss franc
pound sterling
Japanese yen.

The IMF is asking member countries from next year to include the Australian and Canadian dollar in statistics supplied by reserve-holding nations on the make-up of their central banks’ foreign exchange reserves. In previous years the world has had just two reserve currencies:

1. Sterling up to 1914
2. US dollar since the WWI

Notice the drop in the Australian dollar during the start of the financial crisis but its strengthening since 2009. Australia is just one of only seven countries in the world with a AAA-rating from all three global credit ratings agencies – Moodys, Standard & Poors, and Fitch.

Do Aussies have fiscal tightening at euro-zone austerity levels?

October 25, 2012 Leave a comment

The table below from the Australian Markets Weekly (Published by National Australia Bank) shows the fiscal position of euro-zone and other developed nations. As you can see the PIIGS (Portugal, Ireland, Italy, Greece, Spain) of the euro-zone countries have very high gross debt to GDP levels except for Spain. Japan has the highest but is also the only economy involved in fiscal loosening – see column 4. Notice the severity of tightening in some euro-zone countries as austerity measures start to be implemented. It does seem a little strange that Australia’s tightening in fiscal policy is greater than that of the UK and the US and not that far from the IMF‟s estimate of “austerity” announced for Italy.

The memo items are also of interest in that they show the nominal GDP, debt and budget balance in $USbn. In nominal GDP you have USA, China, Japan, Germany as the leading economies by output levels. China overtook Japan this year.

Reserve Bank of Australia likely to ease cash rate

September 27, 2012 Leave a comment

With continued global weakness the RBA is becoming increasingly worried about the prospects for the Australian economy. According to the National Bank of Australia there are 3 factors that the RBA are concerned with:

1. Although house prices are stabilising there are some sectors of the economy that remain in a depressed state – residential construction has a record low capacity utilisation (see graph).
2. A tightening of state and federal fiscal policy has meant that there is less aggregate demand in the economy.
3. The high value of the AUS$ affects the competitiveness of exports. However business now see the high AUS$ as permanent rather than cyclical. This is important as the RBA is not expecting lower rates to significantly lower the AUS$ but rather is trying to offset some of the economic damage to the economy.

It could be that a rate cut by the RBA is an insurance policy in an environment where inflation appears stable. The graph below looks at the RBA Cash Rate and the Taylor Rule.

The Taylor Rule

This is a specific policy rule for fixing interest rates proposed by the Stanford University economist John Taylor. Taylor argued that when:

Real Gross Domestic Product (GDP) = Potential Gross Domestic Product and
Inflation = its target rate of 2%,

then the Federal Funds Rate (FFR) should be 4% (that is a 2% real interest rate).

If the real GDP rises 1% above potential GDP, then the FFR should be raised by 0.5%.
If inflation rises 1% above its target rate of 2%, then the FFR should be raised by 0.5%.

This rule has been suggested as one that could be adopted by other central banks – ECB, Bank of England, etc for setting official cash rates. However, the rule does embody an arbitrary 2% inflation target rather than, say 3% or 4%, and it may need to be amended to embody alternative inflation targets at different times or by different central banks. The advantages of having such as explicit interest rate rule is that its very transparency can create better conditions for business decisions and can help shape business people’s and consumers’ expectations. Central banks prefer to maintain an air of intelligent discretion over the conduct of their policies than to follow rules, but to some extent they do unwittingly follow a Taylor rule. This makes the rule a useful benchmark against which actual policies can be judged.

China’s mining issues in Australia

July 14, 2012 1 comment

For many years China has been trying to guarantee resources for its growing economy. The FT in London recently looked at the Chinese mining company Citic Pacific which has invested huge funds into the Sino Iron mine in Western Australia. Originally hatched in 2006 the level of expenditure has gone significantly higher than expected – from US$2bn to US$7.1bn today. However some have suggested that a US$10bn will ultimately be the cost and this is especially prevalent in that they are two years behind schedule.

It seems that Citic Pacific have put down too much money to pull out – barriers to exit. China imports about 60% of its iron ore and the Sino Iron mine is an attempt by the Chinese to break away from the dependency of foreign suppliers, which Chinese steelmakers accuse of driving prices too high. However Chinese companies have found it difficult to adjust to the foreign working conditions compared to the protected environment in China. Chinese enterprises are often unprepared for the rigours of foreign competitors especially with regard to employment laws and the nature of contracts. China’s mining plans involve the use of Chinese labour as they are cheaper and have a higher productivity. However, overseas labour laws and visa requirements make the use of Chinese labour all but impossible. In Australia truck drivers can earn US$2000,000 a year with three-home housing, free home leave. By seeking control negotiations can become confrontational.

The Chinese were desperate for iron ore when the demand for steel was very high. However Chinese developers realise now that the demand for steel has dropped and prices have fallen. In 2010 China imported less iron ore than the previous year and by 2011, higher interest rates and strict restrictions on property and construction continued to put downward pressure on steel prices. Also for Citic Pacific miscalculations over currency have played a role in increasing costs. The AUS$ has appreciated over the life of the project and controversial hedges that Citic bought went wrong causing a $2bn loss.

Yesterday official GDP figures out of China showed that growth has slowed to 7.6% for the second quarter. This was predicted but as building and infrastructure development accounts for 55% of China’s GDP growth this has a significant impact on demand for iron ore which is a key ingredient in steel.

China and Aussies joined at the hip

July 5, 2012 Leave a comment

Further to Jim O’Neill’s talk at the Tutor2u conference one wonders how the Chinese economy is going to land over the next few months. According to the National Australia Bank most believe it is going to be a soft landing given that:

1. The slowdown is desired
2. Policy makers are looking at an expansionary policy to ease the fall
3. Policymakers have a lot of ammunition left to stimulate growth – currently high interest rates (which can be cut) and large surpluses.

Australia’s links with China

The National Australia Bank’s markets weekly looked at the how Australia and China have been closely linked over the last 10 years. They have come up with the following:

Australia is joined to the hip (see graph – Australian GDP Growth – Correlations
Rolling correlations of real quarterly growth) with China given they are its largest export destination. China growing at 8% or 7.5% is probably inconsequential and to materially change the direction of the Australian economy China would need to land so hard that commodity prices would fall sufficiently to turn off many of the big resource projects that are underway. It is naive to think that a recession in China will bring a similar scenario in Australia.

In a small open economy like Australia, the floating $A exchange rate is arguably the most important macro stabilising tool – more so than interest rates. So a Chinese hard landing should mean lower commodity prices and a much lower $A which in turn would help promote growth in some sectors (like tourism) just as the high exchange rate is now curbing these sectors.

Central Bank Policy Rates – China cuts for first time since GFC

June 14, 2012 2 comments

The Chinese authorities have cut interest rates for the time since the Global Financial Crisis (GFC). One year lending and deposit rates were cut by 0.25%.

Lending rate – 6.31%
Deposit rate – 3.25%

Although this should encourage spending with an increase in the money velocity in the circular flow some commentators are concerned that the Chinese authorities know something about their economy that the rest of world is in the dark about.

It is interesting to see the reaction of main central banks in the aftermath of the GFC and how aggressive they were in cutting rates – US, EU, UK – relative to the other countries on the graph, namely China, India and Australia. Furthermore notice that some economies seem to have been at a different part of the economic cycle namely Australia, India, and the EU as their central bank rates have risen in order to slow the economy down. This is especially in India as they have had strong contractionary measures in place but have now started to ease off on the cost of borrowing.

Indian growth has slowed to 5.3% this year and although this seems very healthy it is the lowest level in 7 years. A developing nation like this needs higher levels of growth to create the jobs for their vast working age population and without employment there could be a situation not unliike that of Spain where over 50% of those under 25 don’t have a job. The main cause of the slowdown seems to be from a lack of private investment.

Also look how low rates are in the US, UK, and EU. With little growth in these economies the policy instrument of lower interest rates has been ineffective and they are in a liquidity trap. Increases or decreases in the supply of money do not affect interest rates, as all wealth-holders believe interest rates have reached the floor. All increases in money supply are simply taken up in idle balances. Since interest rates do not alter, the level of expenditure in the economy is not affected. Hence, monetary policy in this situation is ineffective.

Kangaroo economy needs a bit of a jump start

May 7, 2012 Leave a comment

Last week the Reserve Bank of Australia cut interest rates by 50 basis points. They cut rates from 4.25 per cent to 3.75 per cent – the biggest move since the peak of the global financial crisis in early 2009. This is a rather large cut by international standards as increases and decreases in the rates of central banks worldwide tend to be 25 basis points. However the RBA is worried about the lack of impact on domestic demand and confidence that cuts had last year. Therefore they felt that a more significant cut was warranted to stimulate more growth in the economy.

Also the RBA are worried about the strength of the AUS$ and the impact it is having on manufacturing and service exports. Although the mining sector is going along quite nicely there is concern about the domestic service and non-mining sectors as investment has been quite weak. Other data has showed that house prices have fallen 1.1% in the first quarter of 2012 and that lending rates have risen 0.1% and the cut in the cash rate will probably not be passed on to those borrowing.

Although some say that the RBA might be ‘behind the play’ you do have to remember that in Australia (unlike NZ and other economies) they don’t have monthly CPI figures but quarterly. Therefore they have to wait for a quarterly result to have any idea of where inflation is heading.

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