The growing rebound in global commodity prices – led by iron ore, coal, sugar and oil and gas (to name a few) – looks set to produce the first annual rise in our terms of trade for five years or more.
And that in turn will build on the first rise in national income seen in the year to June for several years, when the September quarter national accounts are issued in early December.
Aided by a 1.5% rise in the value of the dollar, and higher export prices, our terms of trade will continuing improving into 2017.
On top of the small rise in headline inflation in the September quarter, and rising house prices in Sydney and Melbourne, the improvement in the terms of trade will see the Reserve Bank remaining on the sidelines well into the New Year.
Preliminary price data for imports and exports issued yesterday by the Bureau of Statistics suggests that our terms of trade grew by a large 4.5% in the September quarter – the biggest quarterly rise in five years.
Coming on top of the 2.4% rise in the June quarter, the data suggests that we will notch up a rise of around 1.5% in our terms of trade in the year to September, after a fall of 5.4% in the year to June.
The rise will help the Federal Government as it prepares its mid-year economic update to be delivered in December.
The strong rise in our terms of trade will boost nominal GDP and tax revenues, especially if it starts flowing through to wage rises. Rising export volumes in the September quarter is also seen helping boost GDP.
The improvement will finally kill off all that rubbish in the past couple of years about a national income recession that some shrill commentators and economists tried to promote, even though the economy saw overall growth.
Those comments were simply designed to find the bad news from what was a sluggish economic performance as GDP edged higher at less than trend pace thanks to the prevailing weak export prices in the global slowdown led by a stuttering performance in China).
But because of stimulus in China aimed at the property sector and moves to cut coal and steel capacity this year and improving growth in the US and Europe, global commodity prices have kicked higher in the past four to five months.
Import prices fell 1% in the third quarter (and for a 4th straight quarter), while export prices rose 3.5% (for a second successive quarter), producing the 4.5% rise in the terms of trade (on a preliminary basis). While the drop in import prices was mainly due to falls in prices for telco goods and electrical machinery, helped by that 1.5% rise in the Australian dollar over the quarter, export prices received a big boost from the recent rally in key bulk commodities.
Spot coking coal prices have surged 150% since the end of July to $US249 a tonne on Wednesday, while iron ore, Australia’s biggest export item, has also strengthened of late, hitting a fresh six-month high of $US63.07 a tonne on Wednesday.Thermal coal is around $US92 a tonne, against a price of $US49 a tonne mid year. Sugar and nickel prices are up sharply as well, while beef export prices are around all time highs.
The full impact of the rise in coal and oil and gas has yet to be felt, suggesting the December quarter and the March quarter next year could see a sharp improvement in the terms of trade.
But oil prices could rise even further (adding to upward pressure on import prices) over the next few months if the November 30 OPEC meeting sees a credible cap on output, and as weak prices a year or so ago fallout of the comparative base.
