australian commodities june quarter 07.2 GPO Box 1563 Canberra 2601 Telephone +61 2 6272 2000 www.abareconomics.com ABARE is a professionally independent government economic research agency editor andrew wright ABARE project 1163 © Commonwealth of Australia 2007 Selected passages, tables and diagrams may be reproduced provided due acknowledgment is made ISSN 1321-7844 abare contents economic overview 269 outlook for Australia’s commodities sector 279 commodity outlook crops wheat 281 coarse grains 284 oilseeds 288 cotton 291 sugar 294 livestock sheep industry 297 wool 299 beef and veal 301 dairy 304 energy oil and gas 307 thermal coal 313 metals steel and steel making raw materials 317 gold 323 aluminium and alumina 328 nickel 333 copper 336 zinc 339 articles drought and irrigation in australia’s murray darling basin 343 tim goesch, ahmed hafi , mark oliver, sharon page, dale ashton, simon hone and brenda dyack lupins – australia’s role in world markets 353 leanne lawrance minerals and energy – major development projects – april 2007 listing 357 alan copeland and commodity analysts, resource markets and infrastructure section statisical tables 371 abare management 408 australian commodities > vol. 14 no. 2 > june quarter 2007 267 economic overviewcontents > jammiecontact penm > +61 > +61 2 6272 2 6272 ???? 2030 > [email protected]> [email protected] economic overview prospects for world economic growth jammie penm » World economic growth is assumed to average 4.5 per cent in both 2007 and 2008, compared with 5.4 per cent in 2006. » While economic growth has been easing in the United States, in China it has remained strong. Continued high rates of economic activity in China are expected to provide support for economic growth in neighbouring countries, including the Republic of Korea, Chinese Taipei and many south east Asian countries. » In Australia, under an assumption of a return to average seasonal conditions, economic growth is assumed to be around 3.75 per cent in 2007-08, compared with an estimated 2.5 per cent in 2006-07. world economic outlook world economic performance has been strong Despite weaker economic performance in the United States in early 2007, the global economy remains on track for continued robust growth in the next eighteen months. More importantly, downside risks to the economic outlook appear less threatening than they were at the beginning of 2007. While signifi cant volatility continues, world oil prices have declined from their highs in mid-2006. Favourable conditions in global fi nancial markets have helped to limit the spillover effects from a slow- down in housing activity in the United States. world economic growth Against the backdrop of global economic buoy- ancy, world economic growth has become more broadly based. In particular, robust economic perfor- mance continues in China, with year on year growth 5 of 11 per cent recorded in the March quarter 2007. In Japan, economic activity slowed in mid-2006, but 4 has regained momentum. In the euro area, growth has accelerated to its fastest pace in six years, as domestic 3 demand has strengthened in response to increasing business confi dence and improving labour markets. 2 In other parts of the world, the expansion in India’s 1 economy strengthened during the course of 2006, with economic growth averaging around 9.2 per cent for the year. Supported by strong commodity prices % and favourable fi nancial conditions, economic growth 19881992 1996 20002004 2008 australian commodities > vol. 14 no. 2 > june quarter 2007 269 economic overview has also been sustained at robust rates in the Russian Federation, central and eastern Europe and many Latin American countries. robust world growth to continue The world economy is expected to continue to grow robustly in the remainder of 2007 and 2008 but with a modest deceleration from the rapid pace of 2006, bringing growth more in line with potential and helping to contain infl ationary pressures. World economic growth is assumed to average 4.5 per cent in both 2007 and 2008, compared with 5.4 per cent in 2006. The assumed rates of world economic growth in 2007 and 2008 remain relatively high from a historical perspective. For example, world economic growth averaged around 4.0 per cent in the fi rst half of the current decade and 3.7 per cent in the second half of the 1990s. In the OECD region, the easing in economic activity in the United States is likely to be more regional economic growth pronounced than previously anticipated, although the expected recovery should gather momentum 2006 toward late 2007 and into 2008. Economic 10 2007 growth is also assumed to ease in the euro area 2008 and Japan, refl ecting in part a gradual withdrawal 8 of accommodative monetary policy and some fi scal consolidation. 6 Emerging markets are expected to be the major contributor to world economic growth in the short 4 term, drawing continued support from global investment and favourable fi nancial conditions. 2 Economic growth in China is assumed to ease only moderately in 2007 and 2008 from its high % in 2006. The pace of expansion is also likely to OECD non-OECD Latin Russia, China world ease in India, refl ecting in part policy tightening in Asia America Ukraine, response to concerns of possible ‘overheating’ of eastern Europe the economy and higher infl ation. Commodity rich countries in central Asia, the Middle East and Latin America are expected to continue to prosper. Despite the spillovers from assumed slower growth in western Europe and the United States, countries in eastern Europe, including the Russian Federation and the Ukraine, are expected to continue to achieve relatively strong economic growth in the next two years. risk factors in the outlook While the strong pace of world economic growth is assumed to continue in the remainder of 2007 and 2008, there remain a number of risk factors that could signifi cantly affect world economic prospects. On the downside, risks related to the US housing sector, supply bottlenecks and infl ationary pressures appear to have receded in recent months, but they remain of concern. Similarly, there continues to be upside potential for world economic growth. Specifi cally, demand growth in emerging markets could be signifi cantly stronger than currently assumed. In addition, there remains a distinct possibility that growth in domestic consumption and investment could be higher than expected in Japan and western Europe. 270 australian commodities > vol. 14 no. 2 > june quarter 2007 economic overview downside risks from US housing market developments The housing market slowdown in the United States has led to a signifi cant decline in resi- dential investment. Over the past few months, there have been some tentative signs of improvement on the demand side, as sales of existing homes, mortgage applications and potential homebuyer intentions have improved. On the supply side, however, housing starts and permits are still relatively low, while inventories of unsold new homes remain high. Recently, there has been concern in fi nancial markets about the subprime sector of the housing market — which key macroeconomic assumptions represents about 12 per cent of the total mortgage market — in the form of sharp increases in delinquency and World 2005 2006 2007 f 2008 f default rates. Although delinquencies in prime mortgages Economic growth OECD % 2.6 2.9 2.3 2.5 remain well contained, there is concern that problems in United States % 3.5 3.3 2.1 2.7 the subprime mortgage market could start to affect the Japan % 1.9 2.2 2.2 2.0 housing market and hence the economy as a whole. Western Europe % 1.6 2.6 2.3 2.3 – Germany % 0.9 2.7 2.0 2.0 Such a development, if it were to happen, could lead to a – France % 1.4 2.0 2.0 2.2 deeper and more prolonged economic slowdown in the – United Kingdom % 1.8 2.7 2.8 2.6 United States, with potential spillovers to other countries. – Italy % 0.1 1.9 1.8 1.5 Korea, Rep. of % 4.0 5.0 4.4 4.6 New Zealand % 2.2 1.5 2.3 2.6 upside potential from emerging markets Developing countries % 6.9 7.2 6.7 6.4 Over the past few years, economic forecasts have – Non-OECD Asia % 8.1 8.4 7.9 7.7 consistently underpredicted demand growth in emerging South East Asia a % 5.3 5.7 5.3 5.4 markets, as the economies of China and India have China b % 10.2 10.7 10.3 9.7 Chinese Taipei % 4.0 4.1 4.3 4.6 continued to outperform expectations. Consequently, India % 9.0 9.2 8.0 7.8 there remains a distinct possibility that demand growth – Latin America % 4.2 5.5 4.9 4.2 in emerging markets could prove to be more resilient Russian Federation % 6.4 6.7 6.4 5.7 Ukraine % 6.0 6.0 5.8 5.5 than currently expected. In particular, there is consider- Eastern Europe % 5.3 6.0 5.5 5.3 able uncertainty over whether demand growth in China World c % 4.9 5.4 4.5 4.5 will slow as a result of measures introduced in 2006 and Industrial production early 2007 aimed at moderating economic activity. Simi- OECD % 2.4 3.1 2.6 2.7 Inflation larly, demand growth in India could strengthen despite United States % 3.4 3.2 2.1 2.3 recent tightening of monetary policy. Interest rates Many other emerging markets are commodity US prime rate d % 6.2 8.0 8.3 8.3 exporters.