Deutsche Bank’s Phil O’Donaghoe believes China’s economic measures will reduce Australia’s budget deficit as rising iron ore prices translate into higher tax revenues.
China, which consumes more than 76 percent of the world’s iron ore transported by sea, has a direct impact on the Australian economy as the world’s largest exporter of the commodity – Australia accounted for 56 percent of the total of global maritime exports in 2023, of which 82 percent. is imported by
China.
O’Donaghoe forecasts iron ore to rise from US$106 to US$130 per tonne next year, driven by GDP stimulus measures recently announced by Chinese authorities.
In a recent market note, the economist highlighted historical data that shows iron ore prices generally rise following Chinese stimulus announcements, with a rule of thumb indicating that for every 1 percent of GDP stimulus China, the average price of iron ore increases by 3.5. percent the following year.
“Applying this measure to the 6 percent GDP stimulus (DB estimate) announced by the Chinese authorities a few weeks ago suggests an average iron ore price of US$130/tonne in 2025, in up from the current price of US$106/tonne” says O’Donaghoe.
Although US$130 might be the upper limit, he remains confident that prices will continue to rise as iron ore prices have never fallen following major Chinese stimulus measures.
For Australia, the main impact will be an increase in national income, stronger-than-expected federal tax revenues and, therefore, a stronger-than-expected fiscal outcome, he said.
“Achieving a third consecutive budget surplus in 2024-25 will be difficult, but a lower-than-budget deficit of $28.3 billion (1 per cent of GDP) seems eminently achievable,” Mr O said. ‘Donaghoe.
Treasurer Jim Chalmers recently announced that Australia recorded an underlying cash surplus of $15.8 billion, or 0.6 percent of GDP, in the 12 months ending June 30, instead of the initially forecast deficit of $13.9 billion, with economists attributing this positive budget result in part to fluctuations. in iron ore prices.
Indeed, at the time of Chalmers’ announcement, AMP chief economist Shane Oliver said the government had been able to take advantage of the unexpected rise in iron ore prices to strengthen its credentials in terms of economic management.
Looking ahead, the government projects a likely deficit of $28 billion this financial year and $43 billion next year, after taking into account falling iron ore prices in its budget planning.
While he remains optimistic about China’s upcoming stimulus measures, unlike O’Donaghoe, he expects them to mainly stabilize iron ore prices rather than significantly drive them up.
This expectation, he explained, stems from the likelihood that stimulus measures will only maintain current growth levels rather than trigger a robust rebound, with a greater emphasis on consumer spending, which is less dependent raw materials.
“I am optimistic that China will provide details of a meaningful stimulus package, but I think it is more likely that it will keep iron ore in a range around current levels rather than push it much higher “Oliver said.
“That said, the stimulus should help keep iron ore prices above the federal government’s budget assumptions, even if the budget is boosted. [via stronger mining profits] will not be as strong as it has been in the last two years”
“This likely means a smaller deficit than the $28.3 billion forecast in the May budget, rather than another surplus.”
