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Saturday, 28 January 2017

Export prices lift off

Terms of trade jump in Q4

We saw earlier in 2016 a huge rebound in the spot prices of Australia's key commodities, iron ore and coal. 

It takes time for spot prices to be reflected in Australian export prices, but we can see that his has now begun to happen, with the exports index having been driven higher by mineral export prices. 

The export price index jumped by 12.4 per cent in the December 2016 quarter, while the import price index has also declined by 4.6 per cent over calendar year.

The quarterly gains the export price index were largely driven by a huge 59.9 per cent leap in the prices received for coal, coke, and briquettes.

So, it's a surprisingly strong improvement for Australia's terms of trade. 

As you can see in the chart above, Australia hasn't benefited from such a strong improvement in its terms of trade since 2010.

Much energy will be directed to guessing the result of GDP for the fourth quarter after the negative print in Q3. 

I'm not inclined to humiliate myself by 'guesstimating' the result now, but the improving terms of trade do suggest that nominal GDP and national income should present well, even if the headline GDP result is weak.

In essence, this is the opposite of what we have been seeing in recent times, which has been strong GDP but weak income growth.