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Australia’s Economy Shrinks Most in Eight Years; Currency Slumps

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Australian business confidence
  • Australia’s Economy Shrinks Most in Eight Years; Currency Slumps

While Australia’s economy shrunk last quarter, it’s probably more of a red flag than a precursor to recession.

One of only four quarterly contractions in the past 25 years, the so-called ‘lucky country’ is unlikely to suffer a second consecutive slump — just as in those prior periods. But it’s a wake-up call for lawmakers that recent political timidity and gridlock is unsustainable, as is reliance on monetary policy to support growth with a 1.5 percent interest rate that may not even fall further.

A growing chorus of high-profile economists and international institutions are calling on Australia to follow U.K. and U.S. plans to use infrastructure stimulus, particularly with global borrowing costs so low. But the government has made clear its priority is returning the budget to balance as it seeks to protect a prized AAA credit rating.

Wednesday’s report showed:

  • Gross domestic product fell 0.5% from previous quarter, when it gained a revised 0.6%
  • Decline was driven by slump in construction and government spending
  • Result was worst since depths of global financial crisis at the end of 2008 and well below economists’ estimates of a 0.1% drop
  • The economy grew 1.8% from a year earlier, compared with a forecast 2.2% gain
  • Australian dollar fell almost half a U.S. cent on the data

Annette Beacher, head of Asia-Pacific research at TD Securities Ltd. in Singapore, summed up the general consensus among economists to the contraction.

“We’re still confident that this is just a perfect storm of negatives and we shouldn’t be talking about technical recessions — we should be talking about what rebound we can expect for the fourth quarter,” she said. “It just seemed like an unexpected confluence of negatives that all happened to be concentrated in one quarter.”

But while growth will probably resume given resource export volumes have further to rise, this requires little labor. Meanwhile, a residential building boom that’s employed many ex-miners is forecast by some economists to peak next year, removing a driver of growth and employment. Balancing that is an unwinding of mining investment, which is forecast to soon stop acting as a drag on growth.

What the economy urgently needs is business investment outside mining, which has failed to emerge despite the best efforts of the Reserve Bank of Australia to talk up the economy and via rate cuts. While the government is betting a proposed cut in corporate tax will encourage firms to spend and hire, opposition parties are blocking the passage of the legislation. Outside of this, there’s little on Prime Minister Malcolm Turnbull’s agenda.

One region where business investment has been strong is New South Wales, running at 10 percent per annum for the past three years. Coincidentally, that’s the only Australian state undertaking meaningful infrastructure investment.

“Effective public investments can boost GDP over the long term by creating demand, boosting business confidence, lifting growth and ultimately reducing, not increasing, the debt-to-GDP ratio over time,” said Andrew Charlton, director of consultancy AlphaBeta in Sydney. “Australia needs a short term plan to increase spending on infrastructure and other productive public assets, especially while interest rates are so low, and a medium term plan to reign in recurrent spending over time.”

His views echo those put forward by the International Monetary Fund and the Organization for Economic Cooperation and Development.

Other Details

Wednesday’s GDP report showed that government spending and resource exports failed to lift growth as they did in the previous two quarters. The slowdown from an annual 3.1 percent rate in the second quarter was dramatic, particularly when the Treasury estimates the economy’s potential at 2.75 percent and central bank forecasts match or exceed that level.
The data also showed:

  • Private investment in new buildings cut 0.3 percentage point from GDP
  • New engineering and new and used dwellings shaved 0.2 and 0.1 percentage points respectively
  • The household savings ratio fell to 6.3% from a revised 6.7%, which helped support household spending
  • The terms of trade, a gauge of export prices relative to import prices, jumped 4.5%
  • Household spending rose 0.4% and added 0.3 point

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Crude Oil

The Drop in US Crude Oil Inventories Boosted Oil Prices on Wednesday

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Crude oil

The Drop in US Crude Oil Inventories Boosted Oil Prices on Wednesday

Crude oil prices rose on Wednesday following a decline in US crude inventories last week.

The American Petroleum Institute (API) had reported that United States crude oil inventories declined by 5.3 million barrels in the week ended January 22, 2021, more than a reduction of 430,000 barrels predicted by a Reuters poll.

The unexpected decline, coupled with slowing new COVID-19 cases in China, the world’s largest importer of crude oil, boosted oil prices on Wednesday.

Brent crude, against which Nigerian crude oil is measured, rose by 41 cents or 0.7 percent to $56.32 per barrel.

The U.S. West Texas Intermediate (WTI) crude oil also gained 56 cents or 1 percent to $53.17 a barrel.

WTI is slightly firmer on the back of a larger-than-expected draw in US crude inventories reported by the API, which is offset by builds in gasoline and distillates,” said Vandana Hari, oil market analyst at Vanda Insights.

The data, however, showed petrol inventories grew by 3.1 million barrels in the week, more than experts projected.

Similarly, API data revealed that distillate fuel inventories that include diesel and heating oil, jumped by 1.4 million barrels, far higher than the 361,000 barrels decline predicted. However, refinery runs declined by 76,000 barrels per day.

Market participants are now in ‘wait and see’ mode, wanting to see how lockdowns evolve in the coming weeks and months, and how successful countries are in rolling out Covid-19 vaccines,” ING economics said in a note.

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Crude Oil

COVID-19 Plunges Nigeria’s Oil Revenue by 41% in the First Nine Months of 2020

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naira

COVID-19 Plunges Nigeria’s Oil Revenue by 41% in the First Nine Months of 2020

Nigeria’s oil revenue declined by 41.44 percent in the first nine months of 2020 to $2.033 billion, according to the latest data from the Nigerian National Petroleum Corporation, NNPC.

This represents a decline of 41.44 percent from $3.47 billion filed in the same period of 2019 when there was no COVID-19.

In the September 2020 edition of NNPC’s Monthly Financial and Operations Report (MFOR), revenue from oil and gas rose by 16 percent to $120.49 million in the month of September, a 66 percent or $234.81 million drop from $355.3 million posted in the same month of 2019.

The global lockdowns caused by the COVID-19 pandemic plunged Nigeria’s crude oil sales and global demand for the commodity. This was further compounded by Nigeria’s high cost of production compared to Saudi Arabia, Russia and others that were offering discounts to boost sales during one of the most challenging periods in human history.

Experts like Prof. Yinka Omorogbe, President of Nigeria Association of Energy Economics, NAEE, were not surprised with the drop in earnings given the effect of COVID-19 on the world’s economy.

She, however, called for the revamp of the nation’s petroleum sector laws and diversification of the economy away from oil revenue dependence. She said “Covid-19 made 2020 a very hot year and it battered the oil industry internationally and we are not an exception; so we could not have been unaffected”.

She also said the effect of the fall “is definitely a wake-up call; we have to diversify, strengthen our other resources and capabilities”.

Omorogbe, a former NNPC Board Secretary, urged the government and the operators in the sector to look inward and think strategically, stating: “think medium term, think of where they want to be and the government, above all, must think of how best we can utilize our resources, so that we can achieve our objectives once we know and define them.

“It is a clear wake-up call, if not we will just sit here and find that we have become one of the poorest nations in the world”, she noted.

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Commodities

Crude Oil, Other Commodities Closing Price for Monday

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Crude oil

Crude Oil, Other Commodities Closing Price for Monday

Brent crude oil, Nigeria’s crude oil benchmark, gained 47 cents to $55.88 per barrel on Monday, while the US crude oil expanded by 50 cents to $52.77 per barrel.

Gold for February delivery fell $1 to $1,855.20 an ounce. Silver for March delivery fell 7 cents to $25.48 an ounce and March copper was little changed at $3.63 a pound.

The dollar fell to 103.80 Japanese yen from 103.83 yen. The euro fell to $1.2139 from $1.2167.

Wholesale gasoline for February delivery rose 1 cent to $1.56 a gallon. February heating oil rose 2 cents to $1.59 a gallon. February natural gas rose 16 cents to $2.60 per 1,000 cubic feet.

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