Should you be worried about the iron ore price?

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Source: ABS, ANZ Research

Downside risk to income growth if commodity weakness persists 

National accounts data revealed this week that growth in the Australian economy slowed in the second quarter, following strong growth earlier this year.

"Further falls in the terms of trade are anticipated and present a headwind to the outlook."
ANZ Research

The slowdown was expected, however, given the large contribution from exports in the first quarter was not repeated. Moreover, year-ended GDP growth of 3.1 per cent was a solid result, given the headwinds the economy is currently facing.

Measures of national income growth and nominal GDP were flat to lower, due to the decline in the terms of trade. Further falls in the terms of trade are anticipated and present a headwind to the outlook.

There is little urgency for the Reserve bank of Australia to hike rates and ANZ Research considers the tightening phase will not commence until May 2015. 

The RBA does appear a little more upbeat about prospects for non-mining business investment following CAPEX intentions data last week and a bounce in business confidence and conditions.

That said, further sharp falls in iron ore prices suggest downside risk to the terms of trade and national income growth. The price of iron ore just hit a five-year low.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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