Australia: Terms of trade increased during 2016 and into early 2017 - Westpac

Andrew Hanlan, Senior Economist at Westpac, notes that the Australia’s terms of trade increased during 2016 and into early 2017 as global commodity prices rose sharply, rebounding from historic lows.

Key Quotes

“In the March quarter 2017, the terms of trade for goods increased for a fourth consecutive quarter, rising by 8.2%, to be 30.5% above the low of a year ago but still 21% below the peak of September 2011.”

“The export goods price index climbed 9.4% in the March quarter, exceeding expectations (mkt median 8% and Westpac 6%). Over the past year, the export price index is some 29.1% higher.”

“Commodity prices rose 12.3% in the quarter to be 43.9% higher than the low of a year ago. That follows a downward trend over the previous four and a half years. Commodity prices are now 19% below the historic high of Q3 2011.”

“The import goods price index advanced by 1.2% in Q1, surprising to the high side (mkt median -0.5% and Westpac -0.4%). Import prices are now 0.6% lower than a year ago.”

“Fuel and food import prices were key areas of upside in Q1, outweighing the downward impact from the stronger currency. The Australian dollar rose by around 2% in the March quarter to be almost 7% higher over the past year, on a TWI basis.”

“The turnaround in Australia’s terms of trade is providing a positive shock to national income, with mining profits moving sharply higher.”

“However, we expect the jump in commodity prices to be short lived, with recent strength underpinned in part by temporary supply disruptions, as well as a speculative element.”

“Lending support to this view, the spot iron ore price has retraced since mid-March, with further downside. The price has declined from a little over US$90/t to $66/t currently, which is still up from the lows of $40/t at the end of 2015, early in 2016.”