MAKING NEWS

Sat, 03 May 2008
$A, rates, surpluses up for years


A RENEWED surge in commodity export prices is set to keep the economy bubbling along, interest rates high, the dollar strong and federal budget surpluses fat "for years to come", analysts say.

The Reserve Bank's commodity price index yesterday posted a 10.2 per cent increase in the month of April alone, resulting from jumps in contract prices for coking coal, iron ore and thermal coal.

And the index is almost certain to surge further as the RBA said that only about one-third of the latest "large increases" in commodity contract prices had been accounted for in April.

Commonwealth Bank chief currency strategist Richard Grace said the flow-on effects from the surge in commodity prices, including a tripling of coal prices at the last contract negotiations, would cement the economy's strength, pushing the dollar higher and delivering budget surpluses.

"I can't see the budget surplus disappearing for years to come," Mr Grace said yesterday. "Because the income is going to come in and that's going to mean increased company profits which means increased company tax, which goes to the government," he said.

"We've still got a labour shortage in this country so unemployment is not going to rise and plenty of people are also going to be paying income tax to the government."

The lag effect of the mining boom would also mean higher interest rates would be around for some time, despite the signs of a slowing economy.

"The government, with all that money, delivers income tax into the economy but what tends to happen with this virtuous circle is it puts upward pressure on inflation and then pressure on interest rates," Mr Grace said.

"Because this (price spike) will last for years, this is why interest rates are likely to remain high for years and hence why the Aussie is going to remain strong for years."

Mr Grace estimates that the stimulus from the commodity price surge was equivalent to about 2 per cent of GDP.

"And that's a massive income injection and this is the main reason why the government is running such large budget surpluses," Mr Grace said.

NAB Capital economist David de Garis said the commodity price index spike would significantly boost Australia's national income.

"The tripling in coking coal prices would alone mean that export receipts would jump from $15.5 billion up to $45 or $50 billion, so that's another $30 billion plus rise on coking coal receipts alone -- so that alone is 2.5-to-3 per cent of GDP," Mr de Garis said.

"And because of the greater exports out of Australia, that will mean a lot more corporate income and more wage rises and more government revenue."



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