Commodities look set to take up the slack from Australia's housing slowdown

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The price surge in commodities couldn’t have come at a better time for Australia according to Nikko AM.

Just when building approvals are tapering off, higher commodity prices will support the economy, corporate profits and wages, Nikko’s portfolio manager Chris Rand says. That will ease the pressure on the RBA, keeping rates on hold for the rest of the year.

The Australian economic outlook should see a change to the trends in place for the past four years – a rise in building approvals and falling commodity prices – culminating in a “slow but robust” growth, Rand says.

This chart shows the recent slip in building approvals

The Reserve Bank of Australia slashed interest rates to a record low to support the economy’s transition from mining investment boom. That spurred construction of houses and apartments especially in Sydney and Melbourne. Now concerns of oversupply are leading to a slowdown in residential construction, removing one of the supports for the economy.

And this charts depicts the boost to national income from the trade surplus

On the flip side, rebounding commodity prices should provide some benefit to the economy after falling in 2014 and 2015. While it will lead to higher profits for miners and boost anaemic wage growth, the addition will be felt more in gross national income rather than gross domestic product, Rand said.

As such the RBA will most likely stay on hold with rates for the rest of the year and probably into 2018, he said.

Soaring prices of iron ore, the nation’s primary export, spurred Australia‚Äôs trade surplus to a record high in December.

According to the Australian Bureau of Statistics (ABS), the surplus swelled to $3.511 billion in seasonally adjusted terms, smashing market expectations for an increase to $2.2 billion and beating the previous record high of $2.236 billion set in February 2009.

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