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2 Apr 2015
Australia: Effects of cheaper iron ore yet to be felt - Capital Economics
FXStreet (Bali) - Paul Dales, Chief Australia & New Zealand Economist at Capital Economics, notes that the full effect on the revenues of Australia’s iron ore producers and the Australian economy from last year’s iron ore price fall has yet to be felt.
Key Quotes
"While it is certainly not good news, a fall in the iron ore price to US$50 a tonne or below is neither here nor there when compared with the drop from $US130 to $US70 last year. What’s more, the full effect on the revenues of Australia’s iron ore producers and the Australian economy from last year’s price fall has yet to be felt. We estimate that the cumulative revenues in 2014, 2015 and 2016 will be $11bn (0.7% of GDP) lower than if the price had stayed at US$130."
"The direct impact on GDP from falls in iron ore investment, employment and dividend payments will be small. Instead, it is the indirect impact from lower tax revenues and reduced activity in the industries and areas that previously benefitted from the mining boom that will be more significant. "
"The big question for this week is whether the Reserve Bank of Australia (RBA) follows February’s rate cut with another reduction at Tuesday’s policy meeting or whether it keeps its powder dry until May. It’s a very close call, but we think the RBA will decide to cut rates from the current level of 2.25% to a new record low of 2.00% at April’s meeting. Either way, a cut to 2.00% is unlikely to mark the end of the loosening cycle. We think rates will fall to 1.5% by December."
Key Quotes
"While it is certainly not good news, a fall in the iron ore price to US$50 a tonne or below is neither here nor there when compared with the drop from $US130 to $US70 last year. What’s more, the full effect on the revenues of Australia’s iron ore producers and the Australian economy from last year’s price fall has yet to be felt. We estimate that the cumulative revenues in 2014, 2015 and 2016 will be $11bn (0.7% of GDP) lower than if the price had stayed at US$130."
"The direct impact on GDP from falls in iron ore investment, employment and dividend payments will be small. Instead, it is the indirect impact from lower tax revenues and reduced activity in the industries and areas that previously benefitted from the mining boom that will be more significant. "
"The big question for this week is whether the Reserve Bank of Australia (RBA) follows February’s rate cut with another reduction at Tuesday’s policy meeting or whether it keeps its powder dry until May. It’s a very close call, but we think the RBA will decide to cut rates from the current level of 2.25% to a new record low of 2.00% at April’s meeting. Either way, a cut to 2.00% is unlikely to mark the end of the loosening cycle. We think rates will fall to 1.5% by December."