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Billions in iron ore boost saving Morrison as economic winds worsen

But the domestic and global economies have deteriorated to the point the Reserve Bank has cut official interest rates to an all-time low of 1 per cent, with expectations it will be forced to cut them to 0.5 per cent by February.

The RBA has also downgraded its own forecasts for the economy, even taking into account ultra-low interest rates.

Its latest forecasts, released on Friday, are now much more pessimistic about wages, unemployment, the public sector’s contribution to growth, household consumption and inflation than Treasury.  On wage growth alone, the RBA is almost a full percentage point below Treasury.

According to the Reserve, the lift in iron ore prices has delivered up to $10 billion a year in extra revenue to the federal government and households via their holdings of mining company shares.

But on the back of the escalating US-China trade war, and increasing supply out of Brazil, iron ore prices have just suffered their largest one-week correction, dropping 23 per cent over a six-day period.

A downgrade by Treasury to any of the major key indicators underpinning the budget would threaten the expected $7.1 billion surplus.

AMP Capital chief economist Shane Oliver said the Reserve had been able to update its forecasts to take into account changing economic circumstances, while Treasury and the Morrison government were stuck in the past.

AMP Capital chief economist Shane Oliver says Treasury's forecasts are now ancient history and at odds with how the economy is now performing.

AMP Capital chief economist Shane Oliver says Treasury’s forecasts are now ancient history and at odds with how the economy is now performing.Credit:Louie Douvis

“When you look at everything in the budget, Treasury is far more optimistic and that also goes to the surplus projections,” he said.

“Treasury and the budget are stuck in the past, which is a lot different to what we know now and what’s likely to happen.”

Dr Oliver said even though iron ore prices were still higher than what was forecast in the budget, they were going in the wrong direction, while other commodities such as coal were selling at lower prices than had been predicted in the April budget.

“The iron ore price could rapidly fall. You’ve got coal lower than what was forecast. That’s got to put some doubt over the surplus,” he said.

The darkening global economic outlook has been reflected in the way a string of central banks, led by the US, have cut official interest rates in the past six weeks.

At the weekend, the International Energy Agency again downgraded its forecast for global oil. Expected demand was reduced for the third time in four months with demand through the January-May period at its weakest since 2008.

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The agency warned the ongoing trade war between the US and China was hitting demand for oil and economic growth.

“The situation is becoming even more uncertain: the US-China trade dispute remains unresolved and in September new tariffs are due to be imposed,” it said.

All of this predates the possible fallout from Brexit. Figures released at the weekend showed the British economy contracted in the June quarter, the first time GDP had fallen in more than six years, with fears the nation may have already fallen into recession.

The mid-year budget update, at which Treasury’s next forecasts will be released, is not expected until December.

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