Insight into Australia’s commodity forecast in a global context
Commodity markets sit at the heart of the global economy, providing the raw materials that make everything else work. This means commodity markets are subject to an unusually large number of influences, being connected to almost every significant change in the global economy. Each March the Department of Industry, Innovation and Science publish an extended (five rather than two-year) recourse and energy outlook, which tries to draw out some of the longer-term, structural changes in commodity markets, and unpick the many linkages to the global economy at large. We summaries the reports key findings on Australia’s macroeconomic and major resource commodities outlook.
Global GDP growth appears to be slowing in both advanced and emerging economies. The International Monetary Fund (IMF) has recently downgraded its forecasts of global GDP growth by 0.2 percentage points for 2019 and 0.1 percentage points for 2020, citing the likely impact of trade tensions between the US and its trading partners. These tensions are likely to persist in 2019 and 2020, and any escalation presents significant risks to the global economy.
The US Administration is reviewing its trade policy on automotive imports, and there is potential for higher import tariffs or lower quotas to be applied. Any change on this front is likely to affect large automotive exporting nations, such as Germany and Japan, and have secondary effects among countries connected to automotive supply chains. The United Kingdom is set to officially leave the European Union however, uncertainty about the prospects of an exit deal or date between the two sides has impact on consumer and business confidence, investment and economic growth in the UK and Europe as a whole.
The global manufacturing Purchasing Managers Index (PMI) declined to 50.7 in January 2019 — the lowest level for 29 months. The US, Japan and the EU all have manufacturing PMIs above the 50 level (which indicates expansion), but downward movements are evident. However, China’s manufacturing activity has contracted, with the country’s PMI falling below the 50 level in December 2018, January 2019, and February 2019, as the US tariffs impacted on Chinese exports.
Falling PMIs have adverse implications for global commodity demand. Global industrial production grew at the slowest pace in 2.5 years in the December quarter 2018, rising by only 2.7 per cent year-on-year. Growth in industrial production is forecast to decelerate further in the short term, reflecting a slowdown in manufacturing output. Lower industrial production is likely to slightly constrain demand for iron ore, steel, and associated materials over the first half of the 5-year outlook period. However, technological change and a need for less polluting energy sources are likely to drive growth in demand for copper, lithium, rare earths, and other critical commodities.
Core inflation currently remains within central bank targets in the US and UK, but below target in other advanced economies such as Japan. Although GDP growth rates are expected to decrease in advanced and emerging economies, ongoing capacity constraints are likely to put upward pressure on inflation in the US. Tight labour markets and increased wages in some major economies — such as the US — are expected to support global consumption but may add to inflationary pressures.
A moderation in economic growth in the US will improve the prospects for steady US interest rates in 2019 or 2020, with potentially favourable results for countries with large current account deficits. Trade tensions between the US and China may create business opportunities for other economies, including those of emerging Asia. These economies have lower labour costs than China, and a shift of production by firms seeking to avoid tariffs may boost their prospects and change the map of crossborder supply chains.
Geopolitical risks may further destabilise a global economy already facing weaker growth prospects. In Asia, the territorial disputes in the South China Sea are unlikely to be resolved soon. The Korean peninsula is likely to remain a hot spot, and in the Middle East, the Syria civil war and the Gaza conflicts are unlikely to end soon.
- The global economy is forecast to grow by 3.5 per cent in 2019, and then by 3.6 per cent a year between 2020 and 2024. Near term global GDP growth is likely to be affected by trade tensions between the US and its trading partners and an economic slowdown in China. The outlook is also impacted by the risks of a potential no-deal withdrawal of the United Kingdom from the European Union.
- Economic growth in the United States is expected to moderate from the very strong growth rates in 2018, due to tightened monetary conditions. In China, domestic economic growth is expected to decelerate, due to ongoing trade tensions with the US. The UK and Eurozone economies are forecast to slow, due to Brexit uncertainty and fiscal policy issues in Italy.
So how does this impact Australia’s outlook?
The prices of Australia’s major resource commodities have recently hit 7-year highs but are likely to drift lower after 2018–19 due to softer demand and rising supply.
- Supply problems — primarily in other producing nations — have pushed up commodity prices in 2019. The price gains are such that, combined with a weaker than expected exchange rate, Australia’s resource and exports are set to hit a new record of $278 billion in 2018–19, before falling back over the next 5 years. Volumes of Australia’s resource and exports are forecast to level out after 2021–22.
- The world industrial production cycle slowed sharply as the year turned. The extent of the likely down-cycle in resource commodities depends on whether China can maintain recent rates of economic growth, and a resolution of trade disputes of the US with its trading partners.
Need more? Check out the full report by the Department of Industry, Innovation and Science here.