Why the collapsing iron ore price matters less than you think
ADAM CARR BUSINESS SPECTATOR APRIL 15, 2015 12:00AM
The economy didn’t boom when iron ore prices were high, so there’s no reason it should slump when prices are low. Source: News Limited
The problem with history is that people never pay much attention to it. Economists especially, and it’s a wonder they’re not more frequently likened to the proverbial goldfish — with a memory span as long as it takes to swim to the other side of the fish bowl.
It’s unfortunate, because history can teach us a lot, including how concerned we should be about the iron ore slump. Standard & Poor’s are of the view that the “severe supply and demand imbalance” could last another two years and they’ve warned of possible ratings downgrades for Australia’s biggest miners.
Even so, there is a sizeable inconsistency when it comes to the iron ore price and the alarm surrounding it. The big question that economists should ask, but obviously don’t, is: if the iron ore price didn’t cause an economic boom on the way up, why would it all of a sudden cause a slump on the way down? Come to think of it, where was the budget surplus?
Consider that the iron ore price peaked in early 2011 at just under $US200 a tonne. From about mid-2009, that’s a spike of nearly 200 per cent. Yet a budget surplus still proved elusive — and an economic boom we most certainly did not see, even after it became quite clear that a global depression and deflation had been avoided. The US economy itself was soon in the midst a very strong V-shaped recovery, with above-trend growth. In Australia by contrast, growth was weaker and actually below trend.
How is it possible — if iron ore prices are so important to the economy — that a 200 per cent surge couldn’t even lift growth above trend when the US, the cause and epicentre of the GFC, was experiencing above-trend growth? If it’s so important to the budget, where was the surplus?
This fact doesn’t seem to fit very well with the consensus view that we should be concerned about the current iron ore slump. In fact it very seriously begs the question: why would anyone expect the slump in the iron ore price to cause a downturn, or even weak economic growth?
Sure, this line of reasoning goes against the common wisdom, and in our increasingly intolerant society that can make some people angry. While blind intolerance and an unquestioning approach to life is fine for some, investors and policymakers don’t have room for such conceit, or at least they shouldn’t. Testing the consensus and what appears to be true is an essential exercise.
When you do that, it’s quite clear that the iron ore price isn’t as important as many think.
To see this, take a look at how things evolved when prices came off from the peak. After that point, iron ore prices fell about 26 per cent over the next 12 months. Admittedly that still left prices at a very elevated level. But it’s the rate of change that matters, right?
That being the case, it’s quite puzzling that economic growth actually accelerated. Growth over the next four quarters annualised to about 4.4 per cent following the price slump — markedly above the 2.4 per cent pace seen as the iron ore price peaked. What’s even more intriguing is that this growth spurt occurred while the Australian dollar was partying above parity, averaging about $US1.04.
What was noticeable about that period, was the sharp drop the nation saw in consumer spending, especially in the latter part of 2011 and through 2012 and 2013. This was preceded by solid rates of growth. It’s inexplicable, given the low unemployment rate of about 5 per cent and solid jobs growth at the time.
For my money, the cause of that slump it’s quite clear: the RBA panicked consumers when it cut rates into what was otherwise a very healthy economy. It spooked consumers, who saw officials slashing rates and thought something must be wrong. The response was they quickly closed their wallets, and it has taken years for that confidence shock to even get back on the path to recovery, and we’re not there yet.
The bottom line is that the iron ore price matters, but only to a degree. The government is finding it hard to balance the budget and falling iron ore revenues don’t help, but we shouldn’t be deluded into thinking that the nation’s entire economic prosperity relies on the iron ore price. Even the federal budget doesn’t. The budget’s problems are to do with excessive spending, not weak revenues. Iron ore is not the be all and end all. If it was, then we would have seen an economic boom in the wake of the GFC, following the 200 per cent spike.
Faces of Australia's next export boom
Services trade Greg Earl
742 words
18 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Forget about FIFOs and driverless mining trucks, Natsuko Ogawa and David Miles are the new faces of an export bonanza that should carry Australia out of the slump in national income after the end of the commodities boom.
The Melbourne-based Japanese legal specialist and the region-trotting aviation troubleshooter are at the front line of a little-appreciated services export trade, which a newly released study says is already more valuable than mining exports.
The study uses new statistical analysis to reveal that services accounted for 41 per cent of exports in 2013, compared with 37 per cent for minerals, despite record-high commodity prices at that time, and about 23 per cent for manufacturing and agriculture products combined.
And foreign branches of Australian services companies such as Qantas, Westfield and ANZ might be generating as much again in services turnover offshore, with financial benefits flowing back to Australia, although this is not directly comparable with exports.
The study, commissioned by ANZ, PwC and Asialink Business and launched in Melbourne on Friday, is designed to promote better understanding of the full extent of services exports and the potential for faster growth, as Asian countries shift to more consumption of services products.
"An immense prize awaits Australia with the growth that is occurring on our doorstep. We believe that with a better understanding of the role of services, a sharper focus by business on the opportunity and a supportive public policy environment, we can realise that prize," it says.
ANZ chief executive Mike Smith said while launching the report: "If we want to participate in the global economy we have to be where the customers are, offering services in China, India and south-east Asia. We need Australian-headquartered companies present in the markets of their customers."
Ms Ogawa, an Ashurst partner, helped establish the first Australian law firm office in Tokyo in 2010, and has been deeply involved in the increased cross-border investment between the two countries since then, which is expected to increase under last year's trade deal.
She says having a presence on the ground in Tokyo is not crucial to legal services export success, but has made it easier to service clients. "It helps provide that level of quality we are aiming for," she says.
Mr Miles says he is more comfortable running his aviation, telecommunications and infrastructure consultancy Ambidji from Melbourne after experimenting with physical offices in some Asian countries, both because new technology makes this possible and he likes to draw on partnerships in countries where projects are based.
He says it is important for Australian services exporters to evolve with the opportunities in the fast-changing region, citing how he started out as an aid project contractor, progressed through working for government agencies wanting to modernise and is now working on public-private partnerships.
"Some of our partners in Asia now have deep expertise and we like to draw on this across our regional business," he says.
While minerals exports to Asia still exceed services because of the demand from China despite its recent slowdown, the Asialink study forecasts that by 2030, services exports can dominate and support more jobs than all other export sectors combined.
The study comes amid concerns about what will drive the economy, and particularly exports, after the end of a decade-long commodities boom, which pushed the terms of trade to the highest level in a century and made some other exports uncompetitive because of the high dollar.
While it acknowledges minerals and manufacturing will remain the cornerstone of Australian exports, the study says services will grow in their own right as regional economies mature and as the full extent of services embedded in other exports is recognised.
The study draws on new research from the Organisation for Economic Co-operation and Development, which shows how conventional trade statistics don't account for the services buried in goods exports, and United States research about the benefits back to home countries from the offshore activities of services companies.
Traditional trade data shows that Australia exports services are valued at about $50 billion a year, dominated by education, business services and transport. But this figure more than doubles when embodied services in other goods exports are included.
On top of this, the foreign arms of the Australian services companies are generating an additional more than $100 billion abroad.
Fairfax Media Management Pty Limited
Document AFNR000020150417eb4i0000t
Bonds print first negative rate
Jonathan Shapiro
571 words
17 Apr 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Australia has this week joined the illustrious list of governments that have been able to borrow money at negative interest rates.
The Australian Office of Financial Management, which manages the government's debt programme, sold $200 million of inflation-linked bonds maturing in 2018 to 13 investors on Tuesday at a yield of -0.0763 per cent. It was the first time the government set the price of a new bond that implied a negative return for investors.
At Tuesday's auction of 2018 bonds investors bid the bond price up so that the implied rate was slightly below zero. This meant investors were paying up because they expect the Reserve Bank of Australia to cut the current cash rate of 2.25 per cent to below inflation, which is currently at 1.7 per cent.
Investors pay a price to own the bonds and in return get a rate of 1 per cent plus a rate linked to the Consumer Price Index, which they receive when the bond matures in 2018. Excluding the gains tied to the inflation rate, they would get back less than their initial investment.
The "inflation-linked bonds" are distinct from more common nominal bonds and reflect expectations of "real", or inflation-adjusted rates available in the market. These bonds, known as "linkers" pay a fixed rate of interest, but subsequent rates, and the final amount due to investors on maturity is adjusted periodically to reflect moves in the consumer price index measure of inflation.
Westpac's head of bond and inflation trading Andrew Barrelle said that the negative yields on inflation-linked bonds are a reflection of "very low cash rates and easy monetary policy".
"It's a reflection that the market expects the cash rate will go to 2 per cent and possibly below. If you take the 2018 nominal bond yield of 1.80 per cent and an inflation expectation of 2 per cent - which is the bottom of the [Reserve Bank's target] band, you will end up with a negative real yield of -20 basis points," he said.
"If the RBA does ease rates to 2 per cent or below and inflation expectations went up you could get a situation where the real yield moves more negative."
Tamar Hamlyn, principal of specialist inflation bond fund Ardea Investment Management said that with the market forecasting an inflation rate of 2 per cent and a Reserve Bank cash rate of around 2 per cent over five years, it summed to a "real" rate of zero in the inflation linked bond market.
"The biggest factor that has changed has been the cash rate. When you look at the main contributor [to real rates], it's not inflation, it's just that rates across the economy have fallen," he said.
The government has about $25 billion of inflation-linked bonds on issue compared with $330 billion in nominal bonds. Australia's nominal bond rates are still in positive territory and though they're near all-time low rates, are substantially higher than yields of other highly rated governments, particularly shorter-term rates which are close to zero or negative in Europe, the US and Japan. "Australian real yields have been very high in comparison with the US and UK over recent years, but as the RBA lowers the cash rate, the yields are converging," Mr Barrelle said.
Fairfax Media Management Pty Limited
Document AFNR000020150416eb4h00018
Interest cut ‘on the table’: Glenn Stevens
JAMES GLYNN THE WALL STREET JOURNAL APRIL 21, 2015 12:00AM
Rate cut ‘on the table’: Stevens
Glenn Stevens: ‘The government has little choice but to accept the slower path of deficit reduction over the near term.’ Source: News Corp Australia
Reserve Bank governor Glenn Stevens has paved the way for a cut in interest rates as early as next month, telling an audience in New York that commentary on the state of the economy was “too focused” on soaring Sydney house prices.
Mr Stevens told a conference convened by Goldman Sachs early this morning that the question of an even lower cash rate target “has to be on the table” given low inflation risks in Australia.
“Inflation is forecast to be consistent with the 2-3 per cent target,” Mr Stevens said. “Interest rates should be quite accommodative and the question of whether they should be reduced further has to be on the table.”
The RBA last cut interest rates in February, surprising financial markets by cutting the cash rate to 2.25 per cent, from 2.5 per cent.
It warned then that growth was slowing and there remained scope to support the economy further if needed.
Start of sidebar. Skip to end of sidebar.
MOREChina easing stirs bubble fear
End of sidebar. Return to start of sidebar.
Since February, the price of iron ore, Australia’s biggest export, has fallen sharply, delivering a shock to the economy. Meanwhile the Australian dollar has remained elevated. In trading late last night it was hovering near one-month highs, at US77.8c, supported by news over the weekend of more stimulus for China’s economy.
The RBA confounded market expectations this month by keeping rates steady. But at its May 5 policy meeting, a week before the federal budget, it will have considered another quarter of inflation data, and further reviewed its growth expectations against a backdrop of hefty falls in export prices. Economists expect inflation to be benign in the first quarter, leaving room for lower interest rates.
The strength of house prices, partly driven by record low interest rates, is being watched by the RBA, but Mr Stevens played down the importance of housing market pressures, saying it was now mostly a Sydney problem.
“Popular commentary is, in my opinion, too focused on Sydney prices and pays too little attention to the more disparate trends among the other 80 per cent of Australia,” Mr Stevens said.
House prices in Sydney have grown by about 15 per cent in the past year, twice the national pace. Mr Stevens’ comments chime with those of RBA board member John Edwards, in an interview with The Wall Street Journal last week, that the house price surge in Sydney was “not sinister”.
While it was still too soon to say if the introduction last year of new regulatory clamps on banks to stymie lending for housing investment, Mr Stevens said it was reassuring that credit growth for housing was not accelerating.
Still, Mr Stevens said, he recognised that lower interest rates would lack the punch that they might have had in previous economic cycles, and consumers remained reluctant to spend, watchful of a soft job market, falling commodity prices and bad news from overseas.
“The board has been proceeding with a degree of caution that is appropriate in the circumstances,” the RBA governor said. “It also has, I would say, a realistic assessment of how much monetary policy can be expected to achieve in supporting the adjustment the economy needs to make.”
The slow pace of growth and falling commodity prices would mean Treasurer Joe Hockey would need to accept that restoring the budget to surplus will take longer, Mr Stevens said.
“The government has little choice but to accept the slower path of deficit reduction over the near term,” Mr Stevens said.
Still, attention has to be paid to a structural problem in the budget, which can be fixed over the longer-term horizon.
The Wall Street Journal
I agree and think this is a very apt conclusion that I observe... to be fair most countries are like this but Australia tends to be bit more extreme in this sense. They have ride through bad times really well, from being highly correlated to US economy to now China economy.
The Economist magazine to summarize: “If you look at history, Australia is one of the best managers of adversity the world has seen -- and the worst manager of prosperity.”
http://www.bloomberg.com/news/articles/2...appens-now-
(Bloomberg) -- Even for a country with a history of commodity booms, this one was gargantuan.
Over the decade to 2013, Australia racked up $1 trillion in extra exports from the previous 10 years, thanks largely to
China’s once-insatiable demand.
Despite the opportunity of funding infrastructure to meet the needs of millions of new citizens, the nation largely blew
the extra cash on month-to-month spending. The added A$300 billion ($232 billion) in government revenue generated from the
boom went to things like tax cuts and subsidies.
Aussies taking the Sydney-to-Melbourne trains can think over what might have been as they trundle along for 11 hours --
about the same time that the trip took their grandparents. By contrast, China’s Beijing-to-Shanghai express takes five hours
over a longer distance.
Iron ore, coal prices drive trade deficit
Australia recorded a bigger than expected trade deficit in March, largely due to sagging prices for iron ore and coal exports.
In seasonally adjusted terms, the balance on goods and services was a deficit of $1.32 billion in March, following a revised deficit in February of $1.61 billion.
The deficit was larger than the $1.0 billion economists had predicted for March.
Exports fell two per cent, while imports were also down two per cent, according to official data out Tuesday.
------------------------------------------------------------------------------
RBA cuts rates to new historic low in May
Home loan borrowers will be cheering after the Reserve Bank of Australia cut the official cash rate to a new record low of two per cent.
The RBA trimmed the cash rate by 0.25 of a percentage point at its monthly board meeting on Tuesday.
The cut was in line with the expectations of the market, which had forecast a 76 per cent chance of a rate cut.
The RBA's decision will mean repayments on a $300,000 mortgage will drop by more than $40 a month if retail banks fully pass on the cut.
Commonwealth Bank of Australia senior economist Michael Workman said soft investment outside the mining sector had probably been a key factor in the RBA's decision.
"It remains quite weak and business surveys are telling people that there's quite low confidence among the private sector," Mr Workman told AAP.
^^ my friend said drop in petrol prices helped him
save a hundred a$ more per month. More than the mortgage savings
above.
Ya but 50% drop in oil not gonna happen again soon while Aussie interest rate been coming off from 4.75% since 2011 and substantial accumulatively if A$40 savings per 25bps cut.
RBA cut was a ‘waste of a bullet’
DAVID ROGERS AND ADAM CREIGHTON THE AUSTRALIAN 10:00 PM
Adam Creighton
Economics Correspondent
Sydney
Record rates forced upon the RBA
Markets.Markets. Source: TheAustralian
Financial markets snubbed the Reserve Bank of Australia’s latest attempt to weaken the dollar after the central bank signalled it could be near the end of its rate-cutting cycle.
The RBA, as widely expected, cut official cash rates, although the move has stoked further concerns that record low mortgage rates could increase the risk of a housing bubble.
After keeping interest rates on hold for the past two months as it assessed the impact of previous cuts, the RBA said it would lower its overnight cash rate to 2 per cent, from 2.25 per cent.
In doing so the RBA noted inflation was low enough to provide “the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand”.
But it surprised financial markets by dropping a previous assessment that further rate cuts may be “appropriate”.
Start of sidebar. Skip to end of sidebar.
MOREBank risk rules for retirees
MOREElement of urgency in currency concern
End of sidebar. Return to start of sidebar.
RBA annotated statement
Despite efforts to talk the dollar down, this spurred a rally in the currency, which rose nearly US1.5c, and bond yields jumped to five-month highs, while the sharemarket pared intraday gains after the RBA appeared to indicate that it would not cut rates further.
“Today’s cut is not only a waste of a bullet, it has the potential to merely exacerbate the existing imbalances in the economy,” said Annette Beacher, chief Asia-Pacific macro strategist for TD Securities.
Joe Hockey said the cut would help stimulate the economy and create more jobs. “Now is the time to borrow and invest ... invest in the things that help to create jobs,” was the Treasurer’s message for the nation.
There were many green shoots in the economy, he added.
“This interest rate cut will help to facilitate those green shoots,” Mr Hockey said.
“It’s as much about putting fertiliser on the green shoots as anything else.
“I would say to the business community, ‘go out and invest and create more jobs’.”
Nevertheless, the widely expected decision — almost all economists surveyed by Bloomberg in advance of the decision expected the bank to cut — risks fuelling further investor demand for housing, pushing prices even higher in the hot Sydney and Melbourne markets.
“Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities,” the RBA statement said.
“The bank is working with other regulators to assess and contain risks that may arise from the housing market.”
Ratings agency Fitch warned the record low rates could add to soaring house prices and growth in potentially higher risk interest-only and investor loans.
ANZ passed on the full interest rate cut to borrowers with a standard variable mortgage, but Commonwealth Bank, the nation’s biggest mortgage lender, passed on just 20 of the 25 basis point cut.
The RBA acknowledged improved trends in household demand over the past six months and stronger growth in employment, but warned that weak capital expenditure by business was likely to be a key drag on private demand over the coming year.
RBA governor Glenn Stevens has repeatedly stressed the need for a lower Australian dollar to help the economy adjust to weaker commodity prices and investment after the mining boom, and the bank warned yesterday that, “further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices”.
But analysts said the RBA would be disappointed by the subsequent rise in the currency, which marked the strongest intraday reaction to a domestic interest rate cut since 2011.
“This is clearly the market response to the final paragraph which signals an end, at this stage, to the easing cycle,” Westpac chief economist Bill Evans said.
He added that the absence of an easing bias and Australia’s ongoing yield advantage over other countries could frustrate the Reserve’s ambitions to see a substantially lower Australian dollar.
JP Morgan chief economist Stephen Walters said a key aim of yesterday’s interest rate cut would have been “to get the unco-operative Australian dollar to behave”.
“But the unit is trading more than half a cent higher since the rates announcement, so the plan hasn’t worked out too well thus far,” Mr Walters said.
“We argued that an easing bias probably needed to stay, to help prevent this from happening.”
Still, while most economists said yesterday’s interest rate cut would probably be the last in the current business cycle, another cut was widely considered to be more likely later this year.
Citi economists said another interest rate cut was likely to occur in August.
“The RBA has tried to signal confidence in the economic outlook with references in the statement to ‘encouraging trends in household demand’ and ‘stronger growth in employment’, but it still cut rates based on the opportunity provided by the inflation outlook,” Citi chief economists Paul Brennan and Josh Williamson said in a report.
“This suggests to us that the next live meeting will be August following the second quarter inflation result. We suspect the RBA then will likely face the same issues it is grappling with now; still below trend economic growth and low inflation, which would see the bank reluctantly cut again to 1.75 per cent.”
Interbank futures projected a cash rate of 1.85 per cent by year end, suggesting that market still saw some chance of cuts.
Economists were turning their attention to Friday’s release of the quarterly statement on monetary policy by the Reserve Bank, with yesterday’s decision to abandon the policy easing bias causing a lot of uncertainty as to whether or not the RBA would adjust its economic growth forecasts.
“We had believed that the GDP forecasts for December 2015 and June 2016 were scheduled to be revised down by a quarter of a percentage point,” Citi economists said.
“This may no longer be the case. However, if the GDP forecasts are revised lower despite today’s cut in the cash rate target, there will be questions over the appropriateness of moving the policy stance from dovish to neutral.”
Meanwhile, RBA board members would have been relieved by the lack of unusual trading in the Australian dollar moments before the interest rate decision was released yesterday.
The Australian Securities and Investments Commission said this week it was continuing to investigate the swings in the Australian dollar in the seconds before the RBA’s previous three interest rate announcements.
Nice picture of the bear, me likey. No wonder RBA did rate cut yesterday, they have insider info.
CBA leads $40b wipeout in ASX 's biggest rout in two years
[Image: 1430896433184.jpg]
Australian shares lost close to $40 billion in value in their biggest slump since February 2013, as poor profit results from Commonwealth Bank and Woolworths sparked a major bout of selling in the banking and consumer staples sectors and throughout the broader market.
The local market got a poor lead from the US, with the Dow Jones down 0.8 per cent after a surprisingly wide March US trade deficit, and then plummeted after Commonwealth Bank of Australia and Woolworths released their results.
The market stayed in the red for the whole day and closed at the session's lows, with the All Ordinaries finishing 2.1 per cent lower at 5690.9 and the ASX200 2.3 per cent lower to 5692.2 – its first close below 5700 since February.
Commonwealth Bank, which fell nearly 6 per cent, and Woolworths were responsible for more than one-third of the loss on the ASX200. If the other three banks and Wesfarmers are included, the combined declines of all six stocks added up to more than half of the slide in the index.
============================================
Woolworths to axe 800 jobs as weak food, petrol lead to sales fall