The November 01, 2016 board meeting by Reserve Bank of Australia (RBA) indicated positive sentiments on the Australian economic growth which has got a boost from the resurging commodity prices. RBA has specified that the country’s growth outlook has improved since the beginning of 2016 with increase in Australia’s terms of trade. Latest data figures have been provided herein below:
Decreasing trade deficit: Australia’s trade deficit was noted to be at the 20-month low level due to the rise in the commodity price. The data from the Australian Bureau of Statistics (ABS) reported that the trade deficit in September 2016 fell 35% to AUD 1.23 billion, from a downwardly revised AUD 1.89 billion deficit in August and was below market expectation of an AUD 1.70 billion difference. This is mainly due to the surge in coal and metal prices. It was considered the smallest trade gap since December 2014 and indicated for a positive momentum for the Australian economy. The exports rose 2.0 percent to AUD 27.25 billion while the imports fell 1.0 percent to AUD 28.48 billion. As per the ABS, the data did not yet fully reflect the surge in commodity prices and the exports were likely be revised higher, which means that the trade deficit will lower down further, in the future releases. Therefore, if the commodity price increases are sustained, then it could help Australia to completely wipe out the trade deficit in the coming months.
Rising coal prices: Coal accounts for a tenth of exports at around A$2.8 billion or about $2.1 billion every month. The spot price of the Australian hard coking coal has risen 230 percent in 2016 to a high of $258 a tonne as China’s production curbs increased the reliance on supplies from other nations. Moreover, as per Bloomberg Intelligence forecast, the majority of sales is based on quarterly contracts, and is set about 90 percent below the current spot price. The producers of the commodities are now in better position to negotiate higher prices for future rates. On the other hand, almost all the commodities were up this year including zinc and silver up about 40 percent and iron ore up 33 percent but the extensive rise of coal prices has overshadowed other commodities gains. The RBA’s index of commodity prices rose in October and it was highlighted that spot prices for coal, iron ore and LNG led to a rise of over 34% on the same month last year. Meanwhile, the gains of coal and iron ore required to make steel might lead to China softening their policy on working days in mines to ease the pressure that higher coking coal prices have on steel industry. But, there is a risk of a pullback in the coal price advance movement and there are speculations that the rally might not be sustained over the medium-to-longer term. Additionally, Bloomberg New Energy Finance expects that there may be an impact on rate of building of power stations by China in the next five years (from building two new coal-fired plants a week to a state wherein only one is built).
Possible monetary policy changes: The surge in commodity prices has led to an increase in the national income as the corporates’ profits have surged leading to growth in the wages and increased tax revenue. This could lead to change in the monetary policy of Australia and the decision on cutting the interest rate any further from the current record-low 1.5 percent.
While the country’s underlying inflation has met expectations recently, challenges related to impact from Australia’ largest trading partner, China’s economic growth position, Australian labor market wherein wage growth has fallen to record lows, and complicated housing market, do prevail.
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