Do we face recession and an iron ore plunge?

With serious recessions in Victoria and NSW, we could be in for an interesting time if history repeats itself and commodity prices plunge.

The latest Reserve Bank commodity index shows a sudden sharp drop in August.

Oh dear. Just when we thought the only thing we had to worry about were the lockdowns in NSW and Victoria which have thrown their states into recessions every bit as bad as the June quarter last year and dragged the rest of Australia into milder recessions behind them.

That is, with the possible exception, as some readers keep telling me, of WA – which seems to have crafted something of a workable model of keeping ‘foreigners’, widely defined, out while continuing to ship off a billion tonnes of the state north every year.

That’s, the “oh dear”.

I doubt there’s an economist in the land who would have predicted a few years back that Australia would ever see a current account surplus of the size of the $68bn that we actually got in the 2020-21 financial year. Indeed, I doubt there’d been too many who would have predicted a CAS – that’s, “current account surplus” – of any size.

Heck, before the immediately preceding CAS in 2019-20, we hadn’t had one since all our recent treasurers were boys – back in the mid-1970s.

We had become so accustomed to deficits that the acronym CAD had almost become a word signifying current account balance. They most certainly would not have predicted such a huge CAS in the same year we also had the biggest budget deficit ever, and biggest by a factor of close to three at around $150-160bn.

The latest Reserve Bank commodity index shows a sudden sharp drop in August.

Whatever happened to the twin deficits theory? Answer: taken a Covid holiday like so much else of supposed rock solid economic theory and policy certainty. Well, the basis of the record CAS – which measures all our money flows in and out - was a record basic trade deficit. That’s tangible goods and services exports and imports, not investment flows.

That surplus was an even more astonishing $90bn in 2020-21. And the reason of course was iron ore, the sales of which approached another staggering figure of close to $170bn – all on its own damn close to 10 per cent of the entire Aussie economy.

Well, has the bell just been rung on all that?

For most of the 1990s and early 2000s commodity prices ran pretty much comfortably steady: we were riding the first stages of the China boom. Then the prices started to accelerate, more than doubling to an unprecedented peak – just before the GFC.

Down they plunged, but to a level still 50 per cent higher than that earlier trend. Why did they hold up? China.

The spending that China unleashed stopped the fall and sent them rocketing higher again, to peak at a level some three times that of the earlier trend level,

Yes iron ore was the main driver, as China set out to become the maker of well over half all the steel in the world. But other commodities rose with it.

In both cases, almost the instant they hit their peak, they started to drop – indeed, plunge.

After 2012 our commodity prices more than halved, to approach the long term trend.

Then they started to rise again, and as shareholders of BHP, Rio Tinto and Fortescue – and the private Hancock Co of Gina Rinehart – have been experiencing – hit lush record high prices.

But now the latest Reserve Bank commodity index shows a sudden sharp drop in August from that peak.

Is history about to repeat itself – and specifically the history of 2008 and 2012 when commodity prices didn’t just drop, they plunged - and quickly.

Hmm, that could make for an interesting combination for the rest of the year.

Serious recessions in Victoria and NSW and the great prop for the economy – and that pours billions into the WA budget and tens of billions into the federal budget - suddenly evaporating?

Just noting, not predicting.