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Australia’s policy makers face a new challenge as they pump stimulus into a faltering economy: the Saudi Arabia-Russia clash that’s sent oil prices plummeting and belted the third-largest export Down Under.
The cost of crude — which liquefied natural gas is typically priced off — fell by nearly two-thirds in the first three months of this year. While cheaper gasoline may help households, the rapid growth of the LNG industry in Australia now means lower oil prices aren’t the positive for the domestic economy they once were.
It’s another headwind for the Reserve Bank to consider as it tries to cushion the economic impact of the coronavirus. Governor Philip Lowe on March 19 cut the cash rate to 0.25%, launched bond buying to lower yields, and set up a small business funding facility.
There is little expectation that Lowe and the board will make any changes at Tuesday’s meeting as they continue to monitor the impact of the emergency moves. The cash rate is at the effective lower bound and financial markets have calmed amid the RBA boosting liquidity and buying government securities. The central bank on Thursday releases its semi-annual review of the nation’s financial system.
A number of economists predict unemployment will surge beyond 10% and forecast steep contractions in GDP. The government and central bank have unleashed a fiscal-monetary injection of about A$320 billion ($194 billion) — or 16.4% of GDP.
Amid the health crisis, the Saudis and Russians — two hydrocarbon superpowers — crossed swords over oil output, prompting the former to ramp up production and send the global price tumbling.
Australia is the largest LNG exporter in the world, having surpassed Qatar, shipping an estimated 77 million tonnes worth A$49 billion in 2019. This was Australia’s third-largest export, equivalent to around 2.5% of GDP, but will take a hit from the oil-linked prices.
What Bloomberg’s Economists Say
“The slump in oil prices hurts Australia’s economy more than it helps. That may come as a surprise, given Australia is a net oil importer. But the transformation of Australia’s economy over the last decade into the world’s largest LNG exporter means that the slump in oil prices could more than halve the value of Australian LNG cargoes landed Japan, placing exports worth 2.5% of GDP at risk.”
James McIntyre, economist
The usual boost to strained household budgets from cheaper gasoline will also be negated in the current climate, with non-essential travel banned.
The collapse in fuel prices comes as Australia’s fourth and fifth largest exports — tourism and education — were already reeling with the initial viral outbreak halting arrivals from China. As for iron ore — the nation’s biggest export — futures were headed for a third weekly decline as of Friday afternoon as the virus spread hits global steel makers.
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