Lunatic RBA celebrates iron ore boom as it busts

To describe the Lunatic RBA as slow moving would be to do a disservice to the tortoise. From today’s SoMP:

Stronger mining firm profits will also boost household sector incomes via shareholdings. Estimates suggest between a fifth and a quarter of the Australian iron ore mining industry is owned by the Australian household sector (either through direct holdings or via intermediaries such as superannuation funds), with most of the remainder owned by foreign investors. Market expectations and guidance from mining firms suggest that much of the increase in profits could be returned to shareholders. The distribution of higher profits will increase household income, which in turn could be used for household consumption. A lift in household wealth because of higher mining company share prices may further support household consumption.

Higher iron ore prices are therefore likely to increase nominal incomes in the Australian economy for a period. Given the recent strength in prices, and assuming prices gradually decrease in line with the path suggested by market expectations, nominal household disposable income and government revenue combined could be around A$5–10 billion higher each year on average over the next few years, relative to a scenario where prices had evolved as was expected in early 2019.

Focusing just on this flow through of higher prices to the household and public sectors, the effect on the economy could be fairly small. The effect would be a little larger if households or the public sector spent more of the extra income or if iron ore prices stayed higher for longer than currently expected, but smaller if the exchange rate appreciated in response to higher commodity prices. However, the ultimate effect on the economy is difficult to predict, given the uncertain outlook for iron ore prices and that, as other episodes of commodity price strength have demonstrated, higher prices and incomes could affect the economy through other channels.

It would be nice if, just for once, the Bank drove with one eye looking forward instead of both eyes backwards:

More pain today:

Moreover, it’s coking coal:

And thermal coal:

Indeed, the terms of trade are in free fall and we expect this to turn into a GFC scale income shock (though not other dimensions of that event):

The RBA is right about one thing. The shock is mostly going to fall upon governments, making it harder not easier to spend, and leading to weaker than otherwise economic growth and wages.

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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