Out of all the casualties of sub-prime, only Australia managed to register growth and its dollar went up. But as usual, just around the corner, things can just about turn awry. And it is with Australia as they experienced a record export price slump from April to June 2009.This will certainly be a threat to its economy in coming months, providing one reason for interest rates to stay at record lows for some time to come.
The 20.6 per cent tumble was driven by a 36.8 per cent loss in the price of coal, coke and briquettes while metal ores fell 23.5 per cent, a chilling reminder of what the slump in global demand has done to Australia's two biggest exports.
Reuters in its report on 17 July 2009 believes this bodes ill for the country's terms of trade — what it gets for exports compared to what it pays for imports. The Reserve Bank of Australia (RBA) had already flagged a fall of around 25 per cent, but some analysts now fear it could be worse.
Helen Kevans, an economist at JPMorgan, estimated the terms of trade to fall by least 30 per cent, draining national income.
"It now appears the squeeze will be worse than we currently forecast," she said. "Indeed, it looks likely that the decline also will be larger than the RBA currently predicts."
Australia's terms of trade had climbed by a third in 2008 to a record high, as the country rode a resources boom. Much of that came courtesy of huge annual contract increases for coal and iron ore, set back in April 2008 when commodities were red-hot.
Since then global trade has fallen off a cliff and major customers have won, or are pressing for, steep cuts in this year's contract deals. Chinese steelmakers are hoping for at least a 40 per cent cut in iron ore contract prices, while Australian miners haggle for a more modest reduction.
A drop in the terms of trade eats into corporate profits, investment, dividends, wages and tax receipts.
"This supports an RBA that is likely to stay sidelined," said Su-Lin Ong, senior economist at RBC Capital. "We expect it to retain an easing bias for much of this year although we do not think that the RBA will exercise this bias."
The central bank slashed rates by 425 basis points between September and April, but has been on hold since.
Yet not all is dark on the trade front.
"There are indications that the global economy is bottoming out and some of the key commodity-consuming nations are picking up," said Michael Blythe, chief economist at Commonwealth Bank.
"Trends in the Chinese economy are particularly encouraging for commodity producers like Australia. Commodity prices will, on average, be lower in 2009. But they should rise in 2010."
And while export prices were down, so were the cost of imports. Import prices dropped 6.4 percent in the second quarter, helped partly by a rise in the Australian dollar and lower prices of iron and steel imports.
The consumer price index for the second quarter is out next week and annual inflation is expected to slow to 1.6 per cent, from 2.5 per cent the quarter before and under the RBA's 2 to 3 per cent target band.
Yet underlying inflation will likely remain above 3.0 per cent as the cost of services like education and healthcare stay stubbornly elevated.
"It (the CPI) won't be enough on its own to bring on another rate cut given that the RBA has already cut pre-emptively and very aggressively, and given that the underlying measures of inflation are still relatively high," said Shane Oliver, chief economist at AMP Capital Investors.
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