Pete Wargent blogspot

PERSONAL/BUSINESS COACH | PROPERTY BUYER | ANALYST

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Tuesday 5 March 2019

Animal spirits and minerals

Prices surge

The partials are in, and tomorrow's national accounts will show that the economy slowed badly in the second half of 2018. 

Gloomy headlines aplenty to follow, and deservedly so!

No surprise there based on past releases, but there's often a twist in Australia, and this time around it may prove to be nominal GDP growth surging towards 6 per cent per annum in early 2019. 

The Reserve Bank released its index of commodity prices - which naturally received zero fanfare on the day it announced interest rates on hold - and it showed that commodity prices surged another 4.8 per cent higher in February 2019 on a monthly average basis (and 5.7 per cent higher if using spot prices). 


In Aussie dollar terms the index was up some 15.4 per cent over the past year.

The surge has mainly been due to LNG and iron ore prices, and the above chart alone shows how hard (i.e. impossible) it is to forecast 'Australia' over the near term. 

Quick explainer

Nominal GDP readings refer to growth in the economy inclusive of price movements, and strong results tend to boost business profits, tax receipts for the government, and, hopefully, wages. 

As ever, the Scutt missile provides a terrific explainer here, which there's no need to repeat here, showing how the extra revenue, if nothing else, puts the government in a more robust position to provide fiscal stimulus. 

The flip side to this is that if commodity prices start falling again, then this can pull the economy into a hole. 

Impacts on investment

What else might this mean? 

For one thing, it'll be a boost to the mining sector, and exploration spend already lifted by another 18 per cent in 2018, to be 63 per cent above the 2015 lows. 


Big gains were seen in exploration expenditure for gold, the base metals, and coal, while copper is beginning to make news again after a lowly half decade. 


Strength in commodity prices tends to be good news for Western Australia and Queensland, in that order - and so it has been - but another big winner in terms of investment could well be South Australia as copper drilling and exploration finally ramps up again. 


The wrap

Very good, but tomorrow is reserved for forensic analysis of how and why the economy slowed in the second half of 2018.

There's no doubt to my mind that the Royal Commission and associated slowdown in money growth and now building approvals played a very significant role.