Australia’s commodity-led income surge slowed in the June quarter

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Australian terms-of-trade (ToT) weakened in the June quarter, thanks largely to weaker commodity prices.

And that means the income surge seen in Australian corporate profits and government revenues earlier this year now looks set to slow.

The Commonwealth Bank’s Terms-of-Trade (ToT) tracker, a model that aims to mimic the official figure released in Australia’s national accounts, fell by 7.5% last quarter on the back of weaker iron ore prices.

Source: CBA

Terms of trade is simply the value of a nation’s exports divided by its imports, then multiplied by 100.

While a noticeable decline, the tracker still sits 15% higher than the recent cyclical low struck in the March quarter last year.

Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank, says that while Australia’s ToT is likely to weaken further over the next year on the back of continued declines in commodity prices, he doesn’t think it will hit the lows seen early last year.

“The message is that nominal GDP growth, or income, is slowing after the rapid acceleration through much of 2016/17,” he says. “While we see Australia’s ToT broadly tracking lower to mid-2018 as commodity prices weaken, we don’t expect to mark a new low.

And, as such, he suspects the impact on national incomes will not be as severe as it was in the past.

“The income recession associated with falling commodity prices is over,” he says.