Remember the bonkers iron ore rally? It might explain Australia's huge GDP print

The biggest economic news in Australia this week was the stunning GDP print which showed the economy growing at a rate of 3.1% in the year to June.

This was way above what the market was expecting at 2.8%. The Australian dollar rallied and the government, currently campaigning for re-election, was quick to claim credit for it.

Net exports, which should typically be a tiny contributor to overall GDP growth, were a huge surprise, contributing 1.1%.

Here’s one theory to explain it, from the Credit Suisse FX team. Australia’s biggest export, iron ore – worth a total of $55 billion in 2014-2015, saw a huge spike in its price in the first three months of the year. Here’s a chart showing that rally, along with the subsequent spike in April.

When you put that March spike alongside the export volumes, you get an interesting picture, as Credit Suisse does here:

Source: Credit Suisse

The implication is that the spike in prices for Australia’s biggest export combined with a seasonal spike in volumes meant an unusually strong confluence of simple factors that contributed to a better-than-expected GDP result.

In the first four months of this year, China’s appetite for commodities saw an upturn that markets were not expecting, because the general trend has been for softening demand for years now as the world’s second-largest economy slows. Iron ore prices have also recently become the subject of increased speculative trading, leading to more volatility in prices.

Credit Suisse’s observation, in a note to clients, is that “the better-than-consensus-Q1 GDP print was driven by a temporary boost in prices and volumes of iron ore exports, which should not be expected to repeat.”

As for an update on where the iron ore price is up to, here’s the Thursday chart:

NOW READ: Here’s what economists are saying about Australia’s bumper GDP report

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