Saturday, July 18, 2009

Where are out export prices heading?

Australian export prices "fell off a cliff" in the June quarter in the biggest slide since 1974, heralding the start of the much anticipated collapse in Australia's terms of trade.

Export prices slid 21 per cent in the quarter, after sliding only 5 per cent in the preceding quarter.

Leading the index down was a 37 per cent collapse in the prices received for coal, coke and briquettes and a 23 per cent drop in the prices of metal-producing ores including iron ore.

The slide was worsened by a 12 per cent appreciation in the Australian dollar.

"We had the last gasp of the good times in 2008," said TD Securities economist Annette Beacher...

"Now our terms of trade have fallen off a cliff."

"This is a real loss of income. So far we have escaped a technical recession by spending, but we can't indefinitely ignore income."

"While no Armageddon, this lost income will eventually hurt our broader economy. We can't have continued expenditure without income."

ANZ economist Riki Polygenis said the lower prices would hit corporate profits, national income and government revenues. "But this was widely expected," she added. "The real question is what happens from here?"

Most of the slide is the result of sharply lower coal and iron ore prices negotiated earlier in the year. Those lower prices will remain in force for 12 months.

But the Commonwealth Bank believes their weight on Australia's terms of trade may be less extreme than had been thought.

"The peculiarities of the Australian pricing system are smoothing out the cycle," said economist Michael Blythe. "Large price rises for coal and iron ore were locked in early in 2008, offsetting the subsequent slump in broader commodity prices. Now large falls in their prices are in place. But other commodity prices are rising as global growth expectations improve. So we have managed to top and tail the extremes of the commodity price cycle."

"There are indications that the global economy is bottoming out and some of the key commodity-consuming nations are picking up," said Mr Blythe.

"Trends in the Chinese economy are particularly encouraging. Commodity prices will, on average, be lower in 2009. But they should rise in 2010."

Import prices also fell sharply in the quarter, losing 6.4 per cent mainly as a result of the stronger dollar. The slide is the biggest since import price records were first collected in the early 1980s.

When the collapse in import prices is offset against the collapse in export prices, Australia's terms of trade fell an estimated 15 per cent after sliding 2 per cent in the March quarter.

"We are expecting worse ahead," said JP Morgan economist Helen Kevans. "We had been expecting the terms of trade to fall at least 30 per cent from top to bottom, although it now looks like it will be more than that."

Commonwealth Bank economist Michael Blythe said a silver lining was the likelihood of further falls in import prices.

"Declining activity in the major economies means a sizeable output gap is opening up. At the same time, the lift in the Aussie dollar – with more to come – will keep downward pressure on local-currency import prices."

"It will help offset some of the damage from lower export prices."

Published in today's SMH and Age

Graphic: Wikimedia Commons