As H&H reported yesterday the iron ore price has continued its twirl towards freedom and away from fundamentals which ,if sustained, will provide a much needed boost to the government’s coffers over the next few quarters. It is, however, possible that this is simply a speculative bull trap which will unwind over the coming months leaving prices back in the doldrums and the Australian government again wondering where all its revenue has gone.
But for now, at least in the short term, the prices are on the up and it’s time to be thankful, especially if you’re a member of the incumbent government.
Surging prices for Australia’s most important export commodities will lift the economy from its doldrums in the new year but will not be enough to rescue the government’s budget surplus.
Growing confidence in China’s economy under its new leadership has boosted the iron ore price by more than 50 per cent since its low point in September and coal prices are also recovering.
The improvement could boost tax revenue by about $1 billion but the monthly budget figures released last week highlight the daunting task the government faces in closing the gap, with the deficit reaching $18.5bn in the first three months of the financial year.
The strengthening in China’s economy will reduce the pressure on the Reserve Bank to cut interest rates and means the government is less likely to be fighting the 2013 election in a downturn amid rising joblessness.
So much like H&H said yesterday, if the prices stick then by mid-2013 we’ll see a reversal of the current cycle in everything but the dollar.
It’s not hard to see from the susceptibly of the government’s fortunes to commodities prices why we’re being referred to as a “one-trick pony” economy and, as I mentioned yesterday, the structural changes in other revenue streams is leading to a stoush between the states and the feds over who gets their piece of the newly structured pie. That scuffle is on-going.
The Gillard government may have to legislate to protect its mining tax after Western Australia refused point blank to agree to a compromise that would stop federal revenue being gouged by state government royalty increases.
At a meeting of state and federal treasurers in Canberra yesterday, it was agreed to refer the problem with the minerals resource rent tax to Treasury officials for further discussion. But Western Australia’s Treasurer, Troy Buswell, said the federal government was wasting its time.
“There’s absolutely no way that WA will give up one cent of its mining royalties nor its right to continue to apply mining royalties,’’ he told The Australian Financial Review after the meeting. “Once you give up money to the Commonwealth, getting it back can be problematic. Given royalties are 20 per cent of our state revenues, the last thing we need is the Commonwealth to become another complicating factor.’’
This week the UN’s Economic and Social Commission for Asia and the Pacific (ESCAP) released its economic and social survey of Asia and the pacific 2012 – year end report (available below) which again highlights these issues. From BusinessDay:
The downturn in China’s economy since 2011 has sliced $US2.4 billion ($2.3 billion) off Australia’s economic growth and led to a slide in export income of $US2.6 billion, according to a United Nations report.
The report by the UN’s Economic and Social Commission for Asia and the Pacific (ESCAP) found the cost to the region was $US49 billion in growth with $US76 billion lost in export income.
The slowdown in China’s economy was a direct result of the recession in Europe and anemic growth in the United States economy.
‘‘An added concern is that a significant portion of the slowdown in China is related to domestic factors. Investment in the economy has slowed due to monetary policy tightening over the past months in an effort to reduce inflation and in particular to tame increases in property prices,’’ the review adds.
We’ll find out in the new year exactly what the Chinese economy has in store for us, but ESCAP also highlights that the Australian economy, and government, is highly reliant on China recovery because the high dollars has left other tradable sectors unable to compete to fill the gap.
The impact of China’s downturn comes as key sectors in the Australian economy, especially tourism, manufacturing and exports, are being hit by the Australian dollar’s strength.
Anis Chowdhury, director of ESCAP’s Macroeconomic Policy and Development Division, says the Australian economy is facing ‘‘serious problems’’ largely because of the strong Australian dollar.
‘‘With the exchange rate appreciating, that has affected your tourism and your manufacturing very seriously,’’ Dr Chowdhury said.
He said the impact on manufacturing means it is unable to compensate for the losses in income from minerals and energy sector exports.Dr Chowdhury said Australia needed to do ‘‘something very drastic on the exchange rate and productivity side’’.
Nothing new here …. Sell ’em dirt !
ESCAP’s report below.
Economic and Social Survey of Asia and the Pacific 2012: Year-end Update