It's not all doom and gloom for the Australian economy in early 2019

James D. Morgan/ Getty Images
  • Pessimism towards the Australian economy appears to be growing, especially in relation to the housing market.
  • Meanwhile, prices for Australia’s key commodity exports hit the highest level in over six years last month in Australian dollar terms.
  • HSBC says this is likely to flow through to government revenues, particularly if sustained, potentially allowing for additional fiscal stimulus to help support the broader economy.

Pessimism towards the Australian economy appears to be growing, particularly in relation to the housing market.

Whether that’s justified or not remains an open question, but if the recent performance from Australia’s key commodity exports is anything to go by, perhaps those concerns are overblown.

Helped by recent weakness in the Australian dollar and gains in iron ore and coal prices, commodity export prices in local currency terms jumped to the highest level in over six years last month.

“If you were just watching the headline commodity price indices, which have looked dismal in the past couple of months, you would be concerned about Australia,” says HSBC’s Australia and New Zealand Chief Economist Paul Bloxham.

“As it turns out, the commodities that are most important for Australia — coal and iron ore — have actually shown price gains!”

Should those trends continue in the months ahead, Bloxham says that will help to support nominal economic growth, helping to boost mining sector profits and, as a consequence, tax revenues for the Australian government.

“There is a strong positive relationship between commodity prices and nominal GDP,” Bloxham says, pointing to the chart below.

HSBC

“This boost to nominal growth has been a key support for government tax revenues, which has supported improving budgets, which, in turn, is feeding through in more public service hiring and spending on infrastructure.

“With an election due in Australia by mid-May, we expect more spending yet.”

Nominal GDP is the broadest measure of income in the economy, and therefore has implications for government tax revenues.

Additional fiscal stimulus for the economy, potentially helping to alleviate downside risks, including from the property market.

But will prices for Australia’s key commodity prices continue to boost the government’s coffers?

Bloxham says there are two things working in Australia’s favour on that front, although he admits there are potential downside risks.

“First, China’s environmental policy seems likely to remain a high priority, constraining onshore supply and favouring the Australian products,” he says.

“Second, in response to weakening onshore growth, one of the expected responses is more infrastructure building, which is typically quite commodity-intensive.

“Of course, a sharper downturn in China remains a risk to this story, as it could mean weaker demand for coal and iron ore.”

Bloxham says that and the outlook for Australia’s housing market remain key downside risks this year. However, given the raft of negative views out there, he says recent strength in Australia’s key commodity prices means there’s no need to get too worried just yet.

“Before you get too worried, keep in mind that the commodities story is still offering a local growth tailwind,” he says.

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