Australian commodity prices should remain 'well supported' despite the slowdown in China's economy

Clive Mason/Getty ImagesDaniel Ricciardo of Australia celebrates on the podium during the Formula One Grand Prix of China.
  • Chinese policymakers will likely roll out additional stimulus measures this year, helping to underpin demand and prices for Australia’s key commodity exports, according to the Commonwealth Bank.
  • It says that should help to bolster fiscal revenues for the government, potentially paving the way for tax relief in April’s federal budget.
  • With the federal election fast approaching, the bank says the probability of either tax cuts or a mini “spending spree” in the budget have increased.

Chinese policymakers will likely roll out additional stimulus measures this year to support economic activity, according to the Commonwealth Bank.

For Australia, a major commodities exporter whose largest customer is China, that’s likely to be good news for the domestic economy, potentially providing the government with the ammunition to deliver fiscal stimulus of its own.

“China is the key to commodity demand. And although growth in the Chinese economy has slowed, we remain relatively upbeat on the near-term economic outlook for the world’s second largest economy,” says Gareth Aird, Senior Economist at the Commonwealth Bank.

“Our optimism largely stems from our expectation that Chinese policymakers will respond to the slowdown with targeted policy measures to support lagging sectors. Some of these policy measures have already been announced. And more look probable.

“As such, we see Australia’s key commodity prices remaining well supported in 2019.”

Here are the Commonwealth Bank’s year-end forecasts. The bank also expects commodity export volumes will also lift relative to 2018.

Commonwealth Bank

At a time of heightened concern about the Australian economy, primarily focused on the downturn in the housing market and the subsequent potential negative spillover effects to areas such as consumer spending, such a result may provide the government with the fiscal firepower to support parts of the economy that need it, should that be required.

“Nominal GDP growth, which is heavily influenced by commodity prices, is forecast to remain around the 5% per annum mark,” Aird says. “Such a result would generate decent growth in government revenue given the strong correlation between nominal GDP, the terms-of-trade and the tax take.”

Nominal GDP measures changes in output, including price movements. It’s regarded as the broadest measure of income in the economy, and hence influential on the government’s tax-take.

The relationship between nominal GDP and government revenues can be seen in the chart below, also from the Commonwealth Bank. From the revenue side of the ledger, the improvement in nominal GDP growth in recent years has contributed to the improvement in the budget seen over the same period.

Commonwealth Bank

With uncertainty towards Australia’s economic outlook elevated compared to periods in the past, and with the federal election fast approaching, Aird believes the government will likely use the improvement in the budget to deliver targeted fiscal easing.

“The probability of either tax cuts or a mini ‘spending spree’ in the April Budget have increased,” he wrote following the government’s mid-year economic and fiscal outlook released in December.

“The Government has set aside $9.2 billion in the Treasury portfolio over four years under the banner of ‘decisions taken but not yet announced’. This portfolio is where changes to income taxes are booked.”

In other words, household budgets could be set for some relief thanks in part to the commodity price windfall.

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