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'Mountain of good luck': Optimistic sign for economy

Stephen Koukoulas
·3-min read
Image: Getty
Image: Getty

Commodity prices are in a frenzied boom and with that, the Australian economy is experiencing a mountain of good luck.

The commodity boom is delivering a major income boost that is helping to support growth and jobs in these otherwise troubling times.

It is important to recall that changes in commodity prices are outside the control of any Australian policy maker – when they rise strongly, it is sheer dumb luck; when they fall sharply, it is sheer bad luck.

As the Australian economy emerges from recession and there is an uneven patchwork of strength and weakness across industries and regions, it is benefiting from the fact that global markets have pushed the prices for raw material and commodities Australia produces and exports to near record highs.

In January, the Reserve Bank of Australia index of commodity prices, which is based on the export weights of Australia’s commodity exports, surged to its highest level since September 2011.

It is extraordinary to note that the RBA index has been higher for just seven months in Australia’s history – three months in period from June to September 2011 and four months in the period from September to December 2008.

It is a fabulous boom.

Since early 2016, commodity prices have risen a staggering 80 per cent in Australian dollar terms as global demand relative to supply has diverged in favour or shortages and price rises.

The rare boom in commodity prices is one of the less obvious reasons why the economy has outperformed most expectations since last year. While easier fiscal and monetary policy has helped support jobs and growth, the income boost from this surge is substantial.

An improvement in global economic conditions and the spectacular snap-back in the Chinese economy in particular have been critical in driving demand for commodities. The broad consensus for Chinese GDP is for growth of over 8 per cent in 2021 and 6 per cent in 2022, results if realised that will support commodity prices.

As things stand, the boom is providing a windfall of cash to commodity producers and suggests that the Australian dollar, currently around 77 US cents, is significantly undervalued.

Indeed the relative weakness of the Australian dollar is a free kick for the price gains for local producers.

The big question is will it last?

Historically, commodity prices are fickle. Supply can be ramped up quickly, demand can be impacted by swings in the global business cycle and levels of stockpiles from users of things like iron ore and coal.

With the global economy seemingly dealing with the pandemic and with significant policy stimulus globally, there are grounds to be optimistic about the outlook for commodity prices through 2021, even allowing for an increase in supply as global production levels recover.

For now, commodity price levels are delivering a fabulous boost to the Australian economy and are delivering a dose of good luck as the recession ends.

It is to be hoped this price boom continues for some time.

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