After ripping higher in the second half of 2016, prices for Australia’s key commodity exports enjoyed another showing in the first quarter this year, particularly iron ore, the nation’s largest commodity export by dollar value.
And that looks to provide another windfall for the economy, says Vivek Dhar, mining and energy commodities analyst at the Commonwealth Bank.
According to modelling conducted by Dhar, Australia’s terms-of-trade — simply the value of its exports divided by its imports — jumped by 7.7% in the March quarter following an even larger increase in the previous quarter.
It’s an outcome that bodes well for the outlook for national incomes given Australia is now receiving more for its exports than what it’s paying for its imports.
The recovery has been spectacular, as shown in the Commonwealth Bank’s terms-of-trade “Tracker” below.
Given it tracks closely to official data released by the ABS, the surge in national incomes looks set to boost nominal GDP growth, budget revenues and corporate profits in the near-term, along with providing support for the Australian dollar.
And, as the chart shows, the pickup in Australia’s terms-of-trade in now fast approaching the levels seen just before and after the global financial crisis, a period when the Australian economy was truly humming.
It’s little wonder that the RBA pointed out in its April monetary policy statement that “the improvement in the global economy has contributed to higher commodity prices, which are providing a significant boost to Australia’s national income”.
The question many are now asking is will the pickup in terms-of-trade herald the start of a recovery in the broader Australian economy, as was the case previously?
While no one knows that answer for sure, and it will be largely determined by policy decisions in Australia’s largest trading partner, China, Dhar suggests that there’s grounds to believe that this time will be different.
Borrowing the well-worn catch phrase used by Homer Simpson, “D’oh”.
“The recovery in commodity prices over the last year is unlikely to see Australia return to mining investment and employment in a meaningful way,” says Dhar.
“While mining employment has turned a corner with the recovery in bulk commodity prices, employment levels are still around 35% lower than a few years ago.
“Tighter labour markets are the primary mechanism for the income effects from high commodity producer margins to translate through the rest of the economy.”
With Australian employment growth largely concentrated in part-time roles, and with underemployment currently sitting at record highs, it suggests that there’s an abundance of labour market slack that exists at present, making this period of term-of-trade strength vastly different to those seen in the past decade.
So anticipating faster wage growth is probably wishful thinking, but will commodity prices strength to increased mining sector infrastructure investment.
It has in the past, why not now?
Again, Dhar says a ramping up of investment is unlikely to take place.
“Mining investment should continue to fall and RBA governor Lowe signalled in late-February that we have around 10% more contraction in investment before we approach sustainable levels,” he says.
“While producer capex guidance from companies like BHP and Rio Tinto have improved over the next few years, they still remain tepid, and highlight investment in current assets as opposed to new assets.”
Dhar says that the the lack of investment on this occasion reflects caution over the Chinese economy, with many producers taking the view that the recovery in China’s industrial and construction sectors over the past year was due to a temporary, policy-driven factors.
It is unlikely to last, in short.
That’s not to discount that the boost in national incomes won’t have an impact on the economy — it will in the short-term — but it’s unlikely that boost will be around long enough to make a meaningful impact on the broader economy on this occasion.