First there was the surprise boost to estimates for new private capital spending for 2008-09, now we’ve got confirmation that national income (measured by the terms of trade) is going to rise to record levels over the 18 months, thanks to a renewed surge in export revenues from our resources boom.
Sounds wonderful, but I reckon ABARE’s forecast went down like a lead balloon at yesterday’s Reserve Bank board meeting.
The last thing the RBA wants is a flood of new cash into an already stretched economy, driving demand higher. It has been worrying about that for some months.
That surge in world commodity prices Monday night emphasises just how well placed we are to rise this global commodity boom that’s coming to resemble a bubble. Commodity prices have risen the best part of 18% so far this year.
But that was reversed in a flood of profit taking Tuesday night on world markets as gold, copper, wheat, oil and a host of other commodities fell in prices.
But they remain at high levels and it was against this backdrop that the Reserve Bank met yesterday to consider interest rates: many of the price rises on world markets will end up in Australia in higher food and energy costs or more export returns (even after the rising Aussie dollar takes its cut).
The RBA is fearful that a strong rise expected later this year in our terms of trade, will deliver another inflationary surge of cash into the economy.
And that’s exactly the picture that was painted by ABARE.
In its first look at 2008-08 returns for our resource and rural exports, ABARE forecast a massive 33% jump to a record $189 billion, from the $145 billion expected in the current year which ends June 30.
The growth in export earnings forecast for 2008-09 mainly reflects increased shipments and prices of iron ore, coal, gold, LNG, grains and oilseeds in response to strong demand in overseas markets.
ABARE said that assuming ‘average growing conditions in 2008-09, the value of farm exports is forecast to be $31 billion in 2008-09, up 18% on this year, with higher earnings forecast for grains and oilseeds, cotton, sugar, wine, beef and veal, lamb and most dairy products.
Grains, oilseeds and sugar prices are booming on world markets at the moment because of the impact of the drought in Australia, low stocks and rising demand from China for food and especially for protein.
ABARE said one country was the cause of this big increase: "Continued strong economic growth, industrialization and urbanization in China are putting pressure on domestic resources.
"This has the potential to make China a strategically important player in global markets and to provide increased export opportunities for Australia’s commodity industries.”
Now that’s the most important factor the RBA can’t control in its quest to bring inflation under control.
ABARE reckons there’s a good chance the wheat harvest will double from the drought affected 13 million tonnes this year to around 26 million tonnes in 2008-09, if the growing conditions continue the recent improvement
The exact level of returns for the bush will depend on the season in 2008-09 and there are signs that the winter grain plantings on the East Coast and in WA will be up substantially on the last two years which were hurt by drought.
But the real surge will come in returns for minerals: especially iron ore, coal and oil and gas.
ABARE said the total value of Australia’s minerals and energy exports is forecast to rise by 33% to a record $153 billion in 2008-09, following a forecast rise of 7% to $115 billion in 2007-08 (which is better than forecast six months ago).
ABARE said that iron ore will be Australia’s largest export commodity (in value terms) next year, followed by metallurgical (coking) coal, thermal coal, gold and crude oil.
For energy commodities, ABARE said export earnings are forecast to increase by 54% to $66.8 billion in 2008 09, driven largely by higher export volumes and forecast strong prices for oil and coal.
"For metals and other minerals, export earnings are forecast to rise by 21% to $86.7 billion in 2008 09. A forecast increase in export volumes and prices for Australian iron ore is expected to account for the majority of this increase,” BARE said.
These forecasts sit well with those from the first estimate of private capital spending issued last Thursday by the Australian Bureau of Statistics. That forecast is a first estimate for 2008-09 capex of $78 billion, but based on projected increases in estimates over the past five years, the figure could hit a massive $107 billion by June 30, 2009.
These estimates make it clear the boost to our terms of trade, which the RBA says will happen in the current six months to June, will continue well into the following year.
It’s all very bullish, but at the moment the RBA is not into being bullish: it’s all very hawkish and bearish because of its concerns about inflation, as we saw with yesterday’s second rate in a row.
Because of the sharp rise in world prices for many commodities, ABARE is also forecasting a significant rebound in returns from the sharp slowdown happening this year.
"The index of unit export returns for Australian commodities, in aggregate, is forecast to rise by nearly 20% in 2008-09, following an estimated rise of 4% in 2006-0," ABARE said yesterday.
"For farm commodities, the index of unit export returns is forecast to increase by 1.7% in 2008-09, following a forecast rise of 10% in 2007-08.
"Although export prices are forecast to average lower in 2007-08 for wheat, wool, sugar and dairy products, the e
