Australia: Terms of trade dipped in the 2Q 2017 - Westpac

Andrew Hanlan, Senior Economist at Westpac, notes that Australia’s terms of trade dipped in the June quarter 2017, representing a break from the recent rebound.

Key Quotes

“Export prices for goods fell by 5.7% in the quarter, meeting expectations (market median -5.5% and Westpac -5.5%).”

“Prior to this, in the year to March, export prices rebounded by almost 32%, up from the lows of early 2016. Annual growth has now moderated to 22.5%.”

“Commodity prices eased back in the June quarter (on a quarter average basis), -10.6%. The falls were led by iron ore, impacted by rising inventories in China, and by coal.”

“Import prices were little changed in the quarter, inching 0.1% lower, and also little changed relative to a year ago, edging 0.3% higher. The June result was softer than anticipated (market median 0.7% and Westpac 0.7%).”

“The Australian dollar weakened in the June quarter, declining by 1% against the US dollar to 75.8¢ and falling by 2.2% on a TWI basis, to 64.5.”

“While the lower dollar tends to make imports more expensive this was offset by falling global energy prices and general softness in world trade prices in the period.”

“The terms of trade for goods rebounded sharply in the year to March 2017, up 30%. There was a partial reversal in the June quarter, down 5.6%, trimming annual growth to 19.3%.”

“The rebound in commodity prices and the terms of trade during 2016 and into early 2017 boosted national income. Company profits, particularly in mining, jumped sharply. However there has been limited pass-through to households with wages growth still weak. The terms of trade pull-back in June 2017 will dent national income and company profits.”

“Going forward, particularly during 2018, we expect commodity prices to trend lower, moving towards cost curves on softer demand and rising supply. However, in recent weeks, prices have been resilient, with spot iron ore up from US$55/t to US$70/t.”