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What surging commodity prices mean for the Aussie economy

If you blinked you might have missed it. Commodity prices are surging and this is great news for the Australian economy.

Back in January, when irrational markets and some new year fear was leading some economists to recommend “sell everything”, commodity prices crashed to their lowest levels in about a decade.

With the global economy expanding at a decent, if not spectacular pace, and many of the mining companies scaling back output which is dampening fresh supply, it was always inevitable that merchants of gloom would be wrong and prices would rebound.

To be sure, commodity prices are well down on the peak levels in the frenzy of the commodity price boom, but some of the price increases from the early 2016 lows are spectacular.

In US dollar terms, the price of oil has risen 55 per cent; iron ore is up almost 60 per cent; gold up 18 per cent; copper up 10 per cent; even the beleaguered coal price is up around 15 per cent.

These are impressive increases and are well above the levels assumed by Treasury in the Mid Year Economic and Fiscal Outlook and in the RBA’s most recent forecasts.

High commodity prices, if sustained, will help most mining companies return to decent profit and incomes in the economy will riser. It will also halt the phenomenon of mine closures and capacity reductions which is clearly a positive for the economy more generally.

If, as is most likely, commodity prices continue to move higher in the months ahead, albeit at a less rapid speed than the period since January, the boost to the economy will extend to an upturn in business investment and employment.

Vitally important for the commodity price cycle will be the performance of the global economy which on most recent readings, is doing well.

To be sure, global GDP growth in the 3.25 to 3.5 per cent range for both 2016 and 2017 is not all that strong, but it is sufficient to underpin growth in demand for commodities which in itself helps explain the recent price rebound.

As drivers of commodity demand, it is encouraging to see the Chinese economy growing at around 6.5 per cent with India above 7 per cent.

In terms of the large industrialised economies, the Eurozone is expanding moderately, the US is on track for another year of 2.5 per cent growth and even Japan is set to register some growth.

If commodity prices were to rise at even half the recent pace over the remained of 2016, the gloom and pessimism that has framed a lot of the economic discussion of recent years will quickly be superceded by issues of a strong economy, the rekindling of inflation pressures, a stronger Australian dollar and the need for interest rate hikes.

Australia is not at this point yet. But with every uptick in commodity prices, that day is getting closer.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.

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