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Thursday 31 January 2019

Budget surplus hoves into view

Surplus in plain sight

There's been a bit of speculation that the Coalition won't be able to deliver a Budget surplus on a weakening economy. 

Well, try again!

The main driver of the looming surplus will be ongoing employment growth and the unemployment rates falling to the lowest level in at least four decades in New South Wales and Victoria.

That means more tax receipts from employees, and fewer unemployed persons claiming benefits. 

But an unexpected turn of events will also drive record mining profits in the period ahead. 

A recent and tragic tailings dam failure at the Córrego do Feijão mine in Brazil means that major producer Vale is set to report production cuts of around 40 million tonnes as upstream tailings dams are decommissioned. 

Meanwhile as China gets set to stimulate its own slowing economy the Fe 62% benchmark spot price has blazed to its highest level since March 2017 at US$82.53/dry tonne.

Analysts have variously predicted a triple digit spot price in the months ahead, with the spot price possibly set to spike as high as as ~US$120/tonne according to more bullish analysts. 

Either way in Aussie dollar terms this is going to deliver rivers of gold to Australia in the form of royalties, record mining profits, and company tax receipts. 

Origin Energy reported this morning that Australia Pacific LNG also recorded its highest ever quarterly revenue of $745 million, up 45 per cent on the prior corresponding quarter, while Beach Energy also upgraded its production guidance for FY2019. 

Nominal GDP growth should accordingly continue to track at 5 per cent or above over the year to December 2019. 

We might even see a bit more sprightly wages growth, but let's see.