ABARE bets on US stimulus

The ABARE quarterly update of commodity prices for the year ahead is out today. First, the key macroeconomic assumptions:


God knows, it’s no easy job putting that lot together but let’s unpack a couple of assumptions. US growth projected at 2.9%, hmmm…well, maybe. The first quarter of this year was 1.8% and the economy has slowed since then. ABARE own description of the state fo the US economy says it all: 

This easing of economic growth in the reflects slow growth in private sector demand and the effect of a withdrawal of fiscal stimulus. 

The slow recovery of private sector demand, particularly consumer spending, reflects largely subdued consumer confidence and weakness in the labour market. The unemployment rate was at 9.1 per cent in 

Improvement in housing activity has been slow, with new home construction at an annualised pace of 523 000 units in April 2011, compared with 478 000 units in April 2009 at the height of the global financial crisis. 

Inventory rebuilding and exports, supported by a sharply weaker supporting economic activity. Industrial production expanded at a year-on-year rate of 5 per cent in April 2011, following growth of 5.3 per cent in

Although growth in the manufacturing sector has been robust, it has not been sufficient to significantly improve the labour market. In the first five months of 2011, only 16 per cent of the 783 000 jobs created were in manufacturing.

On ABARE’s own description, the 2.9% GDP projection for 2012 looks heroic.

Next is China:

Economic growth in China remained strong in early 2011, with real gross domestic product expanding at a year-on-year rate of 9.7 per cent in the March quarter 2011, following growth of 9.8 per cent in the December quarter 2010.

Domestic demand was the main driver of economic growth in recent months, while strong external demand also made a significant contribution. Growth in consumer and business spending remains solid, albeit at a rate marginally slower than that achieved in 2010. Retail sales rose at a year-on-year rate of 16.9 per cent in May and 17.1 per cent in April 2011. Growth in fixed asset investment increased by 25 per cent year-onyear in the March quarter 2011, compared with growth of 26.4 per cent for the same period a year earlier. Exports continue to grow strongly, rising at a year-on-year rate of 30 per cent in April and 36 per cent in March 2011.

In the face of continued strong economic growth, the monthly consumer price index has risen year-on-year by more than 5 per cent since February. In particular, food prices have risen markedly since early 2011, with year-on-year increases of 11.7 per cent in May and 11.5 per cent in April 2011.

The sharp rises of food prices have led the Chinese Government to implement a number of measures to ease inflationary pressures. Since August 2010, interest rates have been raised four times, to 6.31 per cent in late May 2011, and bank reserve ratio requirements have been increased five times

Judging by 2012’s projected 9% growth, we’re in for a soft-landing. Fact is, though, that the only way I can see US growth returning to trend levels is through further stimulus measures. If they be monetary, then China will be wrestling with a lot more rate hikes and the soft-landing looks problematic, though we will hit higher commodity prices before it blows up. If US stimulus is fiscal, then perhaps the ABARE scenario is more plausible. If there is none, then that will drag down world growth via insipid US demand and a long term equity bear market.

The Japanese recovery looks fair at 2.2% growth. And a decelerating Europe also is also sensible, with the exception of the UK, which is somehow going to ride austerity to an accelerated 2.1% growth rate.

You can’t, of course, forecast on the basis of oncoming crises. So, I can’t blame ABARE for assuming there’ll be no European accident. But if there is, these forecasts will go out the window.

All things being equal, however, Europe isn’t going to matter all that much for commodity forecasts.

So, let’s take a look at those:

One word pretty much covers it: Up. The big gains in iron ore and coal are not as aggressive as they appear. For iron ore, the growth in large part arises from a full year of contract prices around current levels. For coal, it’s the same, but without a big dent arising from floods.

Even so, in my view, without some new round of US stimulus, we will not hit these projections.

David Llewellyn-Smith
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  1. ABARE’s record with commodity price prediction is poor. And deficit terrorists hold the reigns in the USA with no sign of that changing with an election on the way. Private sector demand will continue to weaken.

    And I note that they project 4% GDP growth here in 2012. …hang on I need to go and close the window to keep the flying pigs out …

    • Queensland budget (last week) has projection of 5% growth for the next 2 years.

      Catch up and recovery growth for 11/12, then the big investments in LNG pipe and plant are supposed to keep things pumping.

      I can’t wait for all that prosperity to flow down to me.

  2. Given the current US political dynamics, there cannot be any US fiscal stimulus until well after the 2012 election. I expect a fiscal contraction instead, as spending cut will be a pre-requisite for lifting the debt ceiling. On the other hand, since growth is measured in US dollar, the US can attain further ‘growth’ with a boost export via further depreciation of the Greenback.

    Japanese growth depends on whether TEPCO will reveals more ‘surprises’ in Fukushima. First it was contained, then it’s a ‘meltdown’, then it’s a ‘melt-through’. There is now over one hundred thousand tonnes of highly radioactive water to dispose of, yet TEPCO’s executives believes their stock prices requires more urgent attentions. The rebuilding of Northern Japan may not happen at all.

    Chinese growth can be summed up with one word : “Pork”. It may not make any sense to the Westerner, yet it remains the single most important price index for China. Oil and rice are regulated through price control and subsidies, so pork will become the battleline between the reformers and those who prefer the ‘old ways’, even if the ‘old way’ leads to price control, rationing, and mass shortages.

  3. Further stimulus in the US wont be effective, just as the current and previous rounds of stimulus have not been effective in spurring growth.

    All it has done is keep the US in some kind of zombie state where unemployment keeps edging up (despite the officials figures; the true picture is far worse and they are still losing over 400k jobs a month) and the economy goes nowhere while the debt burden continues to increase and the dollar devalues.

    The China soft landing projection has big implications for us. Hitching our wagon to the resources boom (and the hell with other industries) leaves us very exposed. Not just in terms of figures, but in terms of confidence as well. How will the public react if the all-conquering mining boom starts to stall?

  4. RE: ABARE’s comments on China…

    – Retail sales growing at 17%
    – Fixed asset investment growing at >25%
    – Exports growing at >30%

    Come on China fanboys, explain to me how this is indicative of an economy transitioning from investment & export led growth to domestic consumption led growth.

      • You ain’t the only one here mate.

        Oh, and where’s your explanation about how China is becoming a consumption-led economy?

          • Rightio then, so China just keeps building things it doesn’t need, and selling stuff to Westerners who borrow money from China?

            We tried this idea once before. It didn’t end well.

  5. Alex Heyworth

    Wool exports steady at $3.0b. Good thing we’re not still riding on the sheep’s back,.

  6. I dont think there will be anymore stimulus. The govt cant afford it and with inflation rearing up there wont be anymore printing.

    Here are some interesting stats for you. I am in recruitment here in Australia and the US. Alot of my recruiting friends in the US are busier than they have ever been and I have tons of work over there in IT (Mainly Developers) and Engineering/ Mining. Last year everyone was dead in the water.

    Although the pace of US job growth appears to be slowing for most sectors, hiring demand for recruiters by corporate HR departments and staffing agencies has boomed this year, up 64% since January. On a year-over-year basis, demand was up 36% over May 2010, with over 10,100 new job ads posted. Hiring by direct employers made up the bulk of this activity, with over 6,600 ads or 66% of overall demand. Demand by direct employers has also increased at a faster pace, up 44% over May 2010 vs. a 24% increase for staffing agencies.

    I understand that unemployment for degreed candidates over 25 yrs of age is at 4% (and 3% is apparently considered “full employment”.)