Well, there’s no pleasing some. The sharp 2.7%, or $40 billion, slide in the value of the ASX 200 on Wednesday and Thursday this week is completely at odds with the flow of quality economy data. This week we had low inflation data from the Bureau of Statistics, especially around the Reserve Bank’s preferred measures. And yesterday’s data from the Bureau of Statistics on our export and import prices revealed the big rise in our terms of trade and the possibility of the second annual rise in a row in the September quarter.
Preliminary price data for imports and exports issued yesterday by the Australian Bureau of Statistics suggests that our terms of trade grew by 4.5% in the September quarter — the biggest quarterly rise in five years. Coming on top of the 2.4% rise in the June quarter, the data suggests that we will notch up a rise of around 1.5% in our terms of trade in the year to September, after a fall of 5.4% in the year to June.
Thanks to stimulus in China aimed at the property sector, and moves to cut coal and steel capacity this year, as well as improving growth in the US and Europe, global commodity prices have kicked higher, led by a solid iron ore price from the first quarter, a rebound in oil and gas prices from five- and six-year lows in January and February, higher nickel and aluminium prices and a rise in sugar and some other rural commodity prices. The most spectacular price rises have happened in the prices of coking (steel-making) and thermal coals where the prices have more than doubled in the case of the former and almost doubled in the case of the latter in the space of four months.
[What the jobs numbers really say about the Coalition’s economic management]
True, it also means no more rate cuts from the Reserve Bank (unless the Chinese economy slides or is gripped by a debt crisis, which is the RBA’s biggest fear). Perhaps this is why the market spat the dummy and inflicted huge losses on bewildered investors. But it will help the government as it prepares the Mid Year Economic and Fiscal Outlook update to be delivered in December — which a couple of months ago was looking sickly indeed — by boosting nominal GDP and tax revenues, especially if it starts flowing through to wage rises. That offers the tantalising possibility of an end to the apparently endless cycle of revenue write-downs that have plagued four treasurers in a row — though watch spending ministers start to lay claim to any “additional” revenue that might be flagged in the media from the terms-of-trade improvement.
The improvement should also finally kill off the “national income recession” claims that we’ve been seeing for two years or more, which missed the point that despite below-trend economic growth and falling terms of trade, our labour market continued to perform strongly, trading off lower wages growth for higher employment, while the government pumped lots of stimulus into the economy via the deficit.
Who knows? In years to come, the history of the economy in recent years might focus on how, between Wayne Swan’s spending restraint, Julia Gillard’s industrial relations system and Joe Hockey’s deficit spending, Australia navigated a historic terms-of-trade surge and then a years-long decline without either an inflation explosion or a breakout of unemployment.