Australian policymakers face new challenge as they stimulate economic recovery: confrontation between Saudi Arabia and Russia has driven down oil prices and grazed the world’s third largest export .
The cost of crude oil – which liquefied natural gas is generally sold at a reduced price – fell by almost two-thirds in the first three months of this year. While cheaper gasoline can help households, the rapid growth of the LNG industry in Australia now means that lower oil prices are not as positive for the national economy as they once were.
This is another headwind that the Reserve Bank must take into account as it tries to cushion the economic impact of the coronavirus. On March 19, Governor Philip Lowe lowered the cash rate to 0.25%, started buying bonds to reduce yields, and set up a financing mechanism for small businesses.
Lowe and the board are unlikely to make any changes at Tuesday’s meeting as they continue to monitor the impact of the emergency measures. The spot rate is at the effective lower bound and the financial markets have calmed down in the middle of the RBA, increasing liquidity and buying government securities. The central bank released its semi-annual review of the country’s financial system on Thursday.
A number of economists predict that unemployment will exceed 10% and expect a sharp contraction in GDP. The government and the central bank triggered a budgetary and monetary injection of around 320 billion Australian dollars (194 billion dollars), or 16.4% of the GDP.
In the midst of the health crisis, the Saudis and the Russians – two hydrocarbon superpowers – crossed swords over oil production, prompting the former to increase production and drive down the world price.
Australia is the world’s largest LNG exporter, after overtaking Qatar, shipping approximately 77 million tonnes worth 49 billion Australian dollars in 2019. It was Australia’s third largest export, about 2.5% of GDP, but it will suffer a price blow linked to oil.
What Bloomberg Economists Say
“Falling oil prices are harming the Australian economy more than helping them. This may come as a surprise, given that Australia is a net importer of oil. But the transformation of the Australian economy over the past decade into the world’s largest LNG exporter means that falling oil prices could more than halve the value of Australian LNG cargoes landing in Japan, endangering exports representing 2.5% of GDP. “
James McIntyre, economist
The usual boost to household budgets stretched from cheaper gasoline will also be canceled in the current climate, with non-essential travel prohibited.
The collapse in fuel prices comes as Australia’s fourth and fifth largest exports – tourism and education – were already in shock with the first viral epidemic that stopped arrivals from China. As for iron ore – the country’s largest export – futures contracted for a third weekly decline starting Friday afternoon as the spread of the virus hits steelmakers worldwide.
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