Australia’s ‘terms of trade’ most likely hit a new high in the June quarter as export price growth soared past prices paid for imports, figures show.
The terms of trade is an index of the ratio of export prices to import prices. High export prices boost domestic income and encourage investment in export industries, while lower import prices mean the buying power of the nation’s income is boosted even more.
The figures from the Australian Bureau of Statistics (ABS) on Friday showed the export price index rose by 6% in the June quarter while import prices rose by 0.8%. Over the year to June, the export price index was up by 10.5%, while the import price index actually fell back by 1%.
While rising terms of trade reflect a strengthening in Australia’s purchasing power, there are a couple of stings in the tail of such a surge.
It typically comes with a soaring exchange rate, crushing the competitiveness of trade-exposed industries such as exporters, businesses competing with imports and domestic tourism operators. And it can generate inflationary pressures that often prompt the Reserve Bank of Australia (RBA) to raise interest rates, adding to the pain.
Both effects suppress economic activity outside the sector enjoying high prices – mining in this case – for its export commodities.
And when the terms of trade heads south again, the economy can find itself in trouble, with suppressed sectors ‘hollowed out’, lacking the capacity to respond to a falling exchange rate. But in the short term, a new record high for the terms of trade means the RBA will still be expecting the economy to accelerate and, eventually, need to be retrained with higher interest rates.
The term of trade export and price index measures are compiled on a different basis than the the method used to put together the price measures – implicit prices deflators – behind the terms of trade measures in the quarterly national accounts. Even so, the index numbers suggest strongly that the terms of trade did, as the RBA forecast earlier this week in the minutes of its latest monetary policy meeting, hit a new record high for the period covered by the quarterly national accounts, which go back to 1959.
The terms of trade spike of the early 1950s, related to the Korean war wool boom, has probably not yet been eclipsed, but the latest increase has been sustained for longer. For how much longer is unknown.
“There have been a number of big booms. They all ended,” RBA governor Glenn Stevens reminded us in a speech back in February.
For the time being, though, the RBA will be expecting the latest terms of trade peak to push the economy along over the coming year or two. Hopefully the central bank will be mindful of those stings in the tail.
AAP
