Australia’s Surging Terms of Trade Delivers Boost For Economy

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Australia’s surging terms of trade -- a measure of export prices relative to import prices -- is set to deliver a much-needed windfall for government coffers while posing a currency headache for the Reserve Bank.

Export prices jumped 5.5% in the final three months of last year, reflecting surging demand for iron ore from China’s recovering economy, government data showed Thursday. That came in the face of a higher currency that compressed import prices by 1% in the period.

Australia’s Surging Terms of Trade Delivers Boost For Economy

Iron ore, Australia’s largest export, soared more than 70% last year as stimulus-aided demand in China helped drive steel production to an all-time high. It has edged back a little in recent days, but is still trading at over $160 a ton, levels unseen since Australia’s last mining-investment boom at the beginning of the last decade.

Australia’s government persistently lowballs its budget estimate of the metal’s price in an effort to avoid repeating past downside fiscal surprises. It forecasts a return to $55 a ton by the end of September, so the excess will bring a windfall to government coffers through company tax payments and associated charges. The Aussie dollar, meanwhile, has surged 33% since its March nadir when it hit 55 U.S. cents.

The typical complication of a higher currency is muted at present with restricted international people movements due to Covid-19. Yet, Thursday’s data highlighted the negative currency impact on commodity lines such as meat, where competition is greater in the global market.

Previously, the RBA estimated a 10% gain in the real exchange rate could cut export volumes by 3% and increase import volumes by 4% after two years, implying a net drag on gross domestic product of 1.5 percentage points. For a recovering economy, these sorts of calculations are going to count.

©2021 Bloomberg L.P.

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