An interesting point in the the Financial Times (gated, but can be read with a free registration): Bank of Canada rate cut necessary as pre-emptive strike
Its written by Alex Bellefleur, global macro strategist at Pavillion Global Markets, and he says of last week’s Bank of Canada surprise rate cut:
- We are of the view that the cut is needed as a pre-emptive manoeuvre to counter private sector deleveraging
- Deleveraging processes tend to begin with asset price or income shocks … Canada is currently undergoing an important income shock thanks to the collapse in the oil price
- Will probably give way to an asset price shock
- If history is any guide, this scenario will trigger a deleveraging process, which will represent a significant structural change for the Canadian economy
If you accept his thesis you might very well ask if a similar pre-emptive cut might come from the RBA?
My immediate reaction is that Australia isn’t Canada (Australia is a net importer of oil, for one thing).
BUT … One of Australia’s great hopes is the export, and increasing export, of Liquefied natural gas (LNG) … and this could well be adversely impacted y the huge fall in the price of oil. On the Australia Day holiday here the Australian Financial Review ran a piece on this (the article made it to the print edition on the following day, though): Oil price dive may wipe $30b off LNG exports (article is gated).
In brief … According to Westpac economists … new modelling by the bank:
- If oil prices follow the forward curve, Australia’s export earnings from LNG will total just $36 billion in 2017-18, rather than the $67 billion that could have been expected if prices had stayed at 2013-14 levels
- However, using analysts’ consensus forecasts for Brent oil prices, which are more optimistic than the forward curve, the impact on LNG export earnings is not so large, with the 2017-18 revenues figure at $51.6 billion
- Still represent a huge increase from the $16 billion of LNG export revenues in 2013-14… start-up over the next few years of the $200 billion of projects under construction around the country, which will more than treble Australia’s production capacity
- According to the modelling, LNG export value for Australia is now likely to triple over the next four years, if the Brent consensus estimates are correct, instead of quadrupling under the 2013-14 pricing scenario. But if the futures curve is correct, LNG export values would little more than double.
- The dive in (oil) prices accelerated in November to December, meaning the worst of the hit to LNG prices has yet to flow through
- The bank labels recent media reporting suggesting that Australia’s new LNG projects may be at risk from the collapse in prices as “sensationalistic”, noting that LNG prices would still be about 30 per cent above the average over the past decade, and that oil prices are expected to recover while demand should improve.
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It would seem that while the impact of oil is a net positive for Australia, some sectors are going to be hit (of course), but Australia still isn’t Canada.
The next Reserve Bank of Australia meeting is next week, February 3.
