Qld & Australia exporting lower volumes but earning more, due to higher coal and iron ore prices

The pandemic and China’s trade restrictions have no doubt had some adverse effects on commodity volumes exported from Queensland, but super high commodity prices, associated partly with the war in Ukraine, have more than offset those impacts when it comes to dollars earned. Compare record total values of quarterly exports from Queensland with constant price estimates from the ABS which show a decline in the volume of exports since the start of the pandemic (Chart 1). 

This means we may see a large boost to incomes and royalties, but not necessarily to employment which is more related to volumes exported. A large part of the boost to incomes would ultimately go to foreign shareholders of mining companies, but some of it would go to domestic shareholders and to employees. Last Thursday, the Courier-Mail reported Six-figure salaries, 10k sign-on bonuses as mining jobs boom hits:

Fat signing bonuses are increasingly being offered across the sector, with  mining services firm Thiess promising a $10,000 sign-on bonus for workers who join the company and a $5000 bonus for a successful referral.

This Tuesday, state budget day, we will learn how many extra billions the state government has received through higher coal prices boosting royalties. As I’ve been posting on for a while now, coal prices have been at record, hitherto inconceivable levels (Chart 2). Of course, while this is boosting government revenue, it is increasing electricity prices domestically, I should note. 

Nationally, we’re also seeing higher export earnings but lower volumes, too (Chart 3). 

Nationally, the iron ore price is very relevant and this has been higher on average than what we saw for several years pre-COVID, too (Chart 4). 

N.B. In chart 4, CFR stands for (shipping) cost and freight. That is, the spot price charted is inclusive of CFR. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Japan is Qld’s top export destination once again, but only by a small margin

Thanks to the Japanese Ambassador for highlighting that Japan has overtaken China to return to being the top destination for Queensland exports, as Japan was for several decades prior to 2013 (see the chart below including data up to April 2022). Over the 12 months to the end of April 2022, Queensland exports to Japan were valued at $16.98 billion compared with Queensland exports to China of $16.83 billion (i.e. a lead of 0.9% ahead of China’s exports).

Glen Norris of the Courier Mail’s City Beat column wrote on Wednesday: 

Japanese ambassador Yamagami Shingo told a lunch hosted by the Queensland Japan Chamber of Commerce and Industry yesterday that Japan was Queensland’s number one export destination in the year to April driven by demand for coal, gas and beef.

No doubt this is related largely to China having banned or imposed punitive tariffs on several Australian commodities, including thermal coal, barley, and beef. Another relevant factor would be the composition of exports to the different countries and how the total values have been affected by recent commodity price increases. In recent months, the value of Queensland’s exports to Japan have increased proportionately much more than those to China, probably due to coal and gas being a greater share of total exports to Japan than to China. 

While Japan is once again Queensland’s top export destination, Japan is not once again Queensland’s major trading partner, if you count imports as well. China remains Queensland’s top two-way trading partner. This is obvious from the chart below of Queensland’s imports from China and Japan, with imports from China ($13.9 billion yearly) well ahead of imports from Japan ($5.1 billion yearly).

Check out Queensland Treasury’s briefing on Queensland’s exports for further information. You’ll see how super-high commodity prices have pushed up the value of Queensland’s total merchandise exports to $99 billion in the twelve months to the end of April 2022, compared with $57 billion over the twelve months to the end of April 2021, a stunning 72% increase.   

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Qld has outperformed rest of Australia this decade so far

The May Labour Force data released by the ABS yesterday confirmed Queensland has outperformed the rest of Australia over the last couple of years. My view is that this is due to a range of factors including a surge in net interstate migration, a roaring mining sector in this time of high commodity prices, and rebounding tourism spending. Compared with their levels in March 2020, employment is around 8% higher in Queensland than pre-COVID while it’s around 4% higher nationwide (see the chart below).

Of the additional 206k people employed in Queensland since March 2020, 194k are in full-time employment. As Queensland Treasury’s latest labour force briefing shows, Queensland led the nation in terms of the number of new employed persons (124k out of a total 386k nationwide), with Queensland employment growing at 4.7% through-the-year compared with 2.9% nationwide. WA had the highest growth rate (5.6%). No doubt many new jobs were in the public service or in government-supported health and social services – make of that what you will – so I’ll aim to have a closer look at where employment growth is occurring in a future post.

The May data showed a big uptick in employment in Queensland in May but as always I’m cautious about reading too much into month-to-month movements due to the possibility of sampling error or statistical noise so to speak. After the aberrant April numbers, a correction of some kind was likely to occur, so Queensland’s unemployment rate of 4% is now back to being just above the national average of 3.9% (see chart below). Of course, as I explained in yesterday’s post, we now have to wait and see how consumers and the economy overall respond to the interest rate hikes from the RBA. Early signs are not encouraging, alas.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Consumer confidence indicators are very concerning

As always it’s important not to read too much into one piece of data, and generally I’ve been optimistic about the Australian economy and even more so about the Queensland economy over 2022-23, but the latest consumer confidence figures are very concerning (see chart above). ANZ’s Richard Yetsenga has pointed out that the ANZ-Roy Morgan consumer confidence measure is now at a level you’d expect to see in a recession, (e.g. the 2020 COVID recession which is the only recession the ANZ-Roy Morgan time series includes), although he’s not actually forecasting a recession at this stage.

Are consumers reacting too much to current events and forgetting about the underlying momentum in the economy? Could we actually end up in a downturn much sooner than expected, given we’re still only in the second year of recovery from the COVID-recession? As always, time will tell and I hesitate to give macroeconomic forecasts.

What’s driving the consumer confidence fall? Obviously the following factors are relevant:

  • 0.75 percentage points of interest rate increases since early May; and
  • accelerating inflation (currently 5.1% yearly with predictions it will increase to 7% by year’s end) which is getting ahead of nominal wage increases for many workers.

The big drop in consumer confidence lends credence to previous survey data suggesting a large number of Australian households have taken on too much mortgage debt and will struggle as interest rates increase.

Another possible contributing factor – although this could never be proven – was the negative talk about the economy from our new federal Treasurer Jim Chalmers, who I had hoped would be reasonably sensible, as I told Anthony Fensom who wrote my immediate post-election comments up in his Diplomat article Australia’s New Government Faces an Economic Trial-by-Fire. But Chalmers has had a shaky start and received some stern words from my former Treasury colleague, now AFR economics editor John Kehoe, who wrote earlier this month, in his column Why Chalmers is walking a fine line on the economy, “The new treasurer needs to be careful not to talk down the economy too much, and to be wary of further igniting inflation expectations.” Too right. As then US President Jimmy Carter discovered after his 1979 malaise speech, the public doesn’t react well to its leaders telling them how terrible things are, especially if those leaders don’t yet appear to have a good plan to do something about it.

Additionally, this week has seen concerns over the risk of global stagflation cause falls in stock prices. This will start to adversely impact consumer confidence here to some extent. Offsetting that slightly may be the announced wage increase from the Fair Work Commission. I just hope that the FWC going along with the Government’s suggested wage increase isn’t the start of a wage-price spiral. On this issue check out my latest podcast episode Stagflation: be alert, not alarmed from 28:47.

Regarding the east coast electricity crisis, I don’t think that would yet be reflected in the consumer confidence figures, but surely it will have some sort of an impact. It’s another aspect of our current (and hopefully only temporary) malaise.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Global stagflation risk increasing – my latest podcast episode

Earlier this week, the World Bank cut its global economic growth forecast and warned of the risk of 1970s-type global stagflation, with a coincidence of high inflation and low growth and high unemployment. I had already decided to cover stagflation in this week’s Economics Explored episode, so it was great that the World Bank released its analysis of the risk of global stagflation in time for me and my colleague Arturo Espinoza to review and discuss it on the show. You can listen to my latest episode “Stagflation: Be alert, not alarmed” via podcasting apps such as Apple Podcasts and Google Podcasts, and using the embedded player below in the website version of this post. 

The World Bank report is available via Stagflation Risk Rises Amid Sharp Slowdown in Growth. There are similarities with the 1973-75 period, such as a supply-side commodity price shock, but there are also important differences, as the World Bank sets out in its report and as the BIS also discussed last month (see Commodity market disruptions, growth and inflation).

From 28:47 of my latest episode, you can listen to me discussing the concept of a wage-price spiral – where price and wage increases reinforce each other and wage and price inflation rates accelerate to high levels. I explain why Prime Minister Albanese’s election-campaign comment about how his government would support wage increases to compensate for recent inflation (see the chart below) was of concern to many economists and commentators. Of course, no one wants real wages to fall and the PM’s comment sounded fair enough, but it made economists worry he was moving in the direction of adopting a policy of automatic indexation of wages to CPI. In another BIS publication, Are major advanced economies on the verge of a wage-price spiral?, which Arturo and I discuss in the episode, the BIS warns against automatic indexation of wages to inflation as it can mean that high inflation becomes a self-fulfilling prophecy. The BIS wrote:

Labour market institutions also influence the likelihood of a wage-price spiral emerging. Automatic wage indexation and cost-of-living adjustment (COLA) clauses make wage-price spirals more likely.

In its submission to the Fair Work Commission earlier this month, the new Australian Government recommended wages for the lowest-paid keep up with inflation, which thankfully is something less than full indexation for all wage earners across the economy. I suspect that next year, given it’s now receiving economic policy advice from the Treasury and other central agencies, the Government will be careful not to make bold claims about how much wages should increase as the PM did during the campaign. I’m sure many Treasury and Finance officials would have disagreed with the submission the Government made to the Commission, but because the PM had committed to wages keeping up with inflation during the campaign, they wouldn’t have formally raised any objections. The Fair Work Commission’s decision for 2022 will come out in the next couple of weeks, so look out for that and whether the Commission agrees with the Government or recommends wage increases less than the current 5.1% inflation rate.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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RBA is copying the Fed as Michael Knox forecast

In my previous post, I discussed my latest podcast chat with Morgans Chief Economist Michael Knox who forecast the RBA would today increase the cash rate to 0.85%, as it did. As Michael noted, the RBA has been copying the US Federal Reserve (with a slight lag now) since late 2020. See the chart below comparing the RBA’s overnight cash rate target with the US Effective Federal Funds Rate (currently 0.83%). One reason this is the case is the RBA is wanting to avoid a significant depreciation of the currency which would contribute to inflation through higher prices of imported goods (see my 7 May post Economic update: interest rates, monetary policy, fiscal policy, and coal prices).

The RBA’s cash rate target is tracking the US Effective Federal Funds Rate managed by the US Federal Reserve.

From what I can tell, Michael was the only market economist who forecast a 50 basis points increase in the cash rate to 0.85%, so he’s definitely going into the Economic Forecasting Hall of Fame for this successful prediction. Take a bow Michael Knox. If you’re a QEW reader and you’re not following Michael’s commentary already, you should consider either following his podcast or his YouTube videos on the Morgans channel.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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RBA’s next move: 25, 40, or 50 basis points? Michael Knox says 50 on Economics Explored

Next Tuesday, the RBA will increase the cash rate again, but it’s uncertain by just how much. Reuters is reporting RBA to raise rates a modest 25 bps in June, some call for 40 bps, where bps stands for basis points, which are one-hundredths of one percentage point. For my latest Economics Explored podcast episode, Morgans Chief Economist Michael Knox and I had a great conversation on the US and Australian economic outlooks, in which we considered the next moves for the US Federal Reserve and our RBA. Michael thinks the RBA is basically following the Fed and hence, on Tuesday, will push the cash rate up to 0.85%, a 50 basis points increase from the current cash rate of 0.35%. This will mean our cash rate will be practically the same as the US Effective Federal Funds Rate, currently at 0.83%. Michael is making a big call here. He appears to be the only market economist forecasting a 50 basis points hike. For sure, Michael will enter the economic forecasting hall of fame if he gets this one right.

Sculpture of RBA symbol outside RBA HQ, Martin Place, Sydney.

You can listen to our conversation about future interest rate increases from 15:32 in episode 142 of my podcast via podcast apps, including Google Podcasts and Apple Podcasts, or using the embedded player below. Of course, I’d recommend you listen to the whole episode for a whole bunch of great insights from Michael, who is one of Australia’s top market economists and commentators. You may also be interested in Michael’s recent economic research notes which I’ve linked to in the show notes, one of which is Watch the RBA copy the FED.

Next week’s cash rate increase won’t be the last one. Michael is expecting the Australian cash rate will (or, more precisely, should) end up at 2.6% by the end of the year, to match what he’s forecasting the Effective Funds Rate will end up at (i.e. 2.58%). Incidentally, rising interest rates across the economy will of course impact housing credit and house prices which are already starting to fall, although Brisbane house prices have temporarily defied the national trend for capital cities (see the ABS News report House prices fall for the first time in nearly two years as rising interest rates bite).

Michael Knox, Morgans Chief Economist

Despite rising interest rates, both Michael and I are very optimistic about the US and Australian economies, but it goes without saying that the unexpected can always occur. The so-called east coast energy crisis is something that could compromise the economic outlook if the new federal government can’t come up with a convincing response next week. I’ll aim to cover this issue in a future post, after I’ve weighed up all the evidence and the competing claims from the different sides in the debate.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Super-high coal royalties to help address Qld hospitals crisis

As I predicted earlier this month (see John McCarthy’s 13 May InQld article), the Queensland Government will be boosting health spending in the upcoming budget to deal with the hospitals crisis, and to a large extent it’s able to do this because of booming coal royalties. Nine News last night reported Queensland Premier promises a ‘record health budget’ amid crisis. The Government will also be providing a $175 electricity bill rebate, which doesn’t make sense from an economic perspective, but could be justified as an equity measure (and hence, ideally, it should be targeted at those most in need). 

We’re talking billions of extra dollars to the state government this financial year and next due to higher coal royalties. It’s difficult to quantify precisely because of the uncertainty around how long the crazily high coal prices caused by the Ukraine war will last (see below, noting the ICE Newcastle Coal price is for thermal/steam coal). 

The state budget will also benefit from an economy that is in better shape than anyone would have predicted late last year when the state Treasury prepared the mid-year budget update. In the budget update, Queensland Treasury forecast the state unemployment rate would average 5.25% over 2021-22 and 5% over 2022-23. Currently the Queensland unemployment rate is 4.5% and it’s averaged 4.7% so far this financial year (see chart below). This will mean hundreds of millions of dollars of extra payroll tax revenue. Incidentally, I should note the jump in the state unemployment rate from 4% to 4.5% in April is probably statistical noise rather than signal. 

Additionally, there’s the likelihood that the Treasury substantially under-estimated stamp duty revenue at the time it prepared the mid-year update last year. We know the Queensland property market is being super-charged by interstate buyers who’ve finally realised all the advantages Queensland has to offer – even if we do seem to have recurring crises in the delivery of public services by successive state governments (one of the themes of my 2018 book Beautiful One Day, Broke the Next). Net interstate migration is currently running at around 40k per annum (see chart below).

Finally, we saw signs of state business capital spending picking up in the latest March quarter data released by the ABS yesterday, although business capital spending is still nowhere near what it was during that incredible boom in the first half of last decade when the $70 billion Curtis Island LNG terminals were under construction (see chart below). State business capital spending was up 1.7% in March quarter, while nationally it had a slight fall of 0.3% (see the ABS report).

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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If you’re sick of politics BAU, check out my Pirate Party economics podcast interview

What does the economic policy platform of a Pirate Party look like? What does it say about intellectual property protection (i.e. copyright and patents), the Right to Repair, UBI, taxation, and business support? And what type of pirates are Pirate Parties inspired by exactly: Captain Jack Sparrow or Kim Dotcom? Pirate Party Australia Treasurer John August (a Fusion Party candidate for Bennelong in the 2022 federal election) answers these questions in a conversation with me in the latest episode of my Economics Explored podcast. For a sample of what John has to say, check out the video clip below.

You can listen to the full conversation using the embedded player below or via Google PodcastsApple PodcastsSpotify, and Stitcher, among other podcast apps. A transcript and relevant links are available via the Economics Explored website.

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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Economic update: interest rates, monetary policy, fiscal policy, and coal prices

The election debate would benefit from a clear understanding of the factors affecting interest rates, now that the RBA has increased the cash rate from the “emergency level” of 0.1%, practically the lowest it could go, to the still extraordinarily low 0.35%. First, both actions of the RBA and the government are relevant, although the RBA is the most important actor, as it is responsible for monetary policy, which is the main policy instrument for targeting inflation and keeping it in the 2-3% range, which it has now exceeded (see chart below). Second, both domestic and international factors are relevant, with the exchange rate playing an important role in the impact of domestic monetary policy.

Domestic factors

Inflation is a monetary phenomenon, and, ultimately, what the RBA is doing through manipulating the overnight cash rate is affecting the stock (or supply) of money in the Australian economy. The link between money supply growth and inflation may not be strong in the short-run, but is strong in the long-run, an important lesson from Milton Friedman.

Associated with the accelerating inflation we are now experiencing is the large growth we have seen in the money supply, due both to quantitative easing and the housing credit boom (see chart below). Australian households and businesses have a greater stock of money in their bank accounts (M3 has expanded 20% since March 2020), boosting their real money balances, to use the jargon, and prices have to catch up. There has been too much money chasing too few goods, as Friedman would have described it. Interest rates need to rise to reduce housing credit and money supply growth. Arguably, RBA monetary policy was too aggressive during the pandemic, sparking the housing credit boom and crazy increases in property prices across Australia.   

This is not to say the government is irrelevant. Its fiscal policy stance can certainly contribute to inflationary pressures, through its influence on aggregate demand, which can contribute to the economy overheating, so to speak. The federal budget stance is probably too expansionary given robust economic conditions – i.e. given the robust recovery, the federal government shouldn’t be planning a “cash splash” and expecting to run a $78 billion deficit in 2022-23 (see the 2022-23 Budget). The deficit should be much less, as suggested by the size of the estimated structural deficit (plus temporary measures), which appears to be a bit over 5% of GDP in the current financial year (i.e. over $100 billion) and 4-4.5% of GDP in 2022-23 (see Chart 3.15 on p. 105 of Budget Paper 1).

That said, the federal opposition won’t tighten fiscal policy if it wins the election, so it can’t criticise the government over this. Indeed, it’s being reported the federal opposition will increase budget deficits, although the Australian’s reporting of Labor turbocharging budget deficits appears a bit over the top if they’re talking about $10 billion over four years, which is a fraction of currently projected deficits. The federal opposition is claiming it will relieve inflationary pressures through improving the supply-side of the economy, through investing in education and improving child care support. Such measures may have some small salutary effects but would take time and wouldn’t address the fundamental problem that inflation is accelerating, inflation expectations are rising (see chart below), and there is no alternative but to increase rates. We don’t want to end up with inflationary expectations guaranteeing future inflation through wage and contract bargaining. If that occurs, the RBA may need to increase interest rates to punishing levels to get inflation back into the 2-3% range. Where interest rates will end up is anyone’s guess, but a 2 to 3 percentage point increase seems plausible at this point. 

Given the well known long and variable lags in monetary policy (see Assistant Governor Luci Ellis’s 2018 speech On Lags), the RBA probably should have acted earlier. There is a chance they acted too late, possibly because they were so adamant for so long they wouldn’t raise the cash rate until 2024 and they delayed until the last possible moment. Dennis Atkins at In Queensland and Steve Kates at New Catallaxy have written great articles criticising RBA decision making.

Certainly, other central banks, particularly New Zealand’s, have acted earlier and more aggressively than the RBA (see chart below), and the RBA may have made its biggest monetary policy blunder since the overly-restrictive monetary policy prior to the early-nineties recession – this time in the other direction. Now, the US Fed has shocked financial markets with its recent 0.5% policy rate hike, and there’s speculation of a coming US recession, so, as always, the future remains uncertain, and forecasting macroeconomic variables can make economists look foolish.  

International factors

It’s probably impossible to fully untangle domestic and international factors in influencing inflation and interest rates, because we’re so integrated into the global economy, but let’s think about the linkages. 

First, there is the correlation of economic activity across countries, transmitted via international trade, real interest rates and borrowing costs globally, or via common shocks (e.g. the pandemic). Major economies are rebounding from the pandemic recession and, hence, interest rates are rising at the same time across economies. 

Second, there is the fact that our real (i.e. inflation adjusted) interest rates can’t deviate too far from those in other countries because that will affect capital flows (i.e. if our real interest rate is lower, fewer foreign investors would buy Australian bonds) and this will affect the exchange rate. So if major economies are tightening their monetary policies, and their real interest rates are increasing, and, if we don’t do the same, then we become a less attractive destination to invest in and we experience a real currency depreciation. While good for exporters, this is bad for consumers and would contribute to domestic inflation through higher import prices (and through its impacts on exports it could contribute to over-heating). This means the RBA faces a difficult balancing act. It may not want to increase interest rates as aggressively as other central banks, for fear of slowing the economy too much or crashing house prices, but this would mean a depreciating currency and imported inflation.  

The outlook from here

I expect we’ll have to endure an extended period of much higher inflation than we expected, but output and employment outcomes should remain strong for the next year or so at least. Among other positive contributors, the Queensland economy and state budget are getting a substantial boost from the super-high coal prices we’ve seen (see chart below, noting the ICE Newcastle coal price is for thermal coal). 

This is going to mean billions of extra dollars for the Queensland budget. The state government should use this windfall to reduce its borrowings so it can limit the impact of rising interest rates (see chart below), which will lift its debt servicing costs (the interest expenses line item in the budget) in coming years.

Finally, on the robust economic recovery, John McCarthy has a good report at In Queensland covering the latest retail trade data: Perfect swarm: Consumers head back to the shops as investors target Queensland. People are certainly out-and-about more in Queensland than in southern states, as you can see from Google mobility data (see chart below). There is a big drop in the penultimate data point for Queensland in this chart which is related to the Labour day holiday. Incidentally, even on the days when other states have a public holiday, Queensland mobility is lower on those days, too, probably because of our more restrictive retailing trading regulations. 

Please feel free to comment below. Alternatively, you can email comments, questions, suggestions, or hot tips to contact@queenslandeconomywatch.com. Also please check out my Economics Explored podcast, which has a new episode each week. 

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