Scan through Australia’s Terms of Trade Data; NSW T-Corp's stance on Fiscal Stimulus

AU's Terms of Trade

The Australian Import price index Rose 0.7% during the December quarter and 1.4% through the year. On the other hand, the Export price index of Australia dropped 5.2% during the same quarter but showed a rise of 4.1% over the year.

The Australian Bureau of Statistics has released the data regarding the International Trade Price Indexes in Australia for the December quarter 2019.

The upward effect on import and export prices this quarter was seen as the effect of the depreciation of the Australian dollar against the US dollar contributing to a small and widespread increase across the machinery and transport equipment division.

Based on the data showing a fall in export prices and a rise in import prices, the Commonwealth Bank of Australia forecasted a substantial fall in the terms of trade for the fourth quarter.

The terms of trade for Australia is calculated as the ratio of export prices to import prices, where

• If the index increases, it implies that Australia is receiving relatively more for its exports;
• If it decreases, then Australia is receiving relatively less;

Moreover,

• An increase in export prices relative to import prices implies that Australia is better off;
• Thus, an increase in the terms of trade is sometimes referred to as a favourable movement in the terms of trade;

However,

• A fall in the terms of trade means that Australia must export more goods and services to maintain the same level of imports;

The Australian Bureau of Statistics calculates the Australian terms of trade as:

“The implicit price deflator for the export of goods and services divided by the implicit price deflator for the import of goods and services, multiplied by 100”

Wherein the export and import implicit price deflators are indexes which show how export and import prices respectively are different from the base year defined as 100.

Import Price Index

Source: Australian Bureau of Statistics

The Import price index rose for the December Quarter with an increase in the following main contributors:

• Petroleum, petroleum products and related materials (+3.8%) due to increased global demand amid OPEC-led supply constraints as well as easing trade tensions;
• Machinery specialised for particular industries (+1.6%);
• Road vehicles (including air-cushion vehicles) (+0.4%);

Through the year, the Import Price Index rose 1.4% with main contributors being the following:

• Gold, non-monetary (excluding ores and concentrates) (+26.5%);
• General industrial machinery and equipment, n.e.s., and machine parts, n.e.s. (+6.3%);

On the contrary, the counterbalancing followed due to the following reductions:

• Fertilisers (excluding crude) (-6.5%) due to a fall in global demand amid unfavourable planting conditions.;
• Plastics in non-primary forms (-5.5%) driven by global market slow down and price falls in base materials;

In addition to this, price movements for Australia's major import products for the December quarter are as follows:

• Electrical machinery, apparatus and appliances, n.e.s. (+0.8%)
• Telecommunications and sound-recording equipment and reproducing apparatus and equipment (+0.4%)
• General industrial machinery and equipment, n.e.s., and machine parts, n.e.s. (+0.2%).

Export Price Index

The export price index rose due to the major increase of 6.9% in the meat and meat preparations because of increased global demand for Australian beef and lamb, but only to compensate a part of the fall in the following:

• Metalliferous ores and metal scrap (-9.1%) due to the increased global supply for iron ore and subdued demand from China;
• Coal, coke and briquettes (–14.7%) due to abundant global supply of thermal and coking coal amid subdued demand;
• Gas, natural and manufactured (-2.3%) due to falls in crude oil prices in the September quarter 2019 flowing through to LNG contract prices;

Export contract prices for LNG are driven by the international crude oil price with a 4 to 6 months lag.

Source: Australian Bureau of Statistics

The Australian export price index rose by 4.1%. through the year with the main contributors being:

• Metalliferous ores and metal scrap (+27.5%);
• Gold, non-monetary (excluding ores and concentrates) (+26.3%);

Moreover, the price movements for major export products of Australia during the December quarter was driven by the following:

• Metalliferous ores and metal scrap (–9.1%);
• Coal, coke and briquettes (–14.7%);
• Gas, natural and manufactured (–2.3%);
• Gold, non-monetary (excluding gold ores and concentrates) (+0.5%);
• Meat and meat preparations (+6.9%);

NSW T-Corp's stance on Fiscal Stimulus

The Australian Government had introduced lower income tax rates with an intent to boost the household income in 2019 and for backing small and medium?sized business while ensuring all taxpayers, including big business and multinationals, pay their fair share.

NSW Treasury Corp is of the view that this move led to the boost in savings rather than consumer spending, from which its perceived that spending is not likely to be revived easily even if the federal government increases the expenditures.

However, this does not necessarily indicate the ineffectiveness of the fiscal stimulus. Rather this opens the opportunity to rethink and better and largely design the fiscal stimulus as compared to the 2019 tax rebate.

Citing the current scenario; it is expected that the Government shall offer additional backing to the economy in the 2020 budget; however, it is less likely that there will be any alteration in the momentum of consumer spending.

Bottomline

With so many uncontrollable factors in the international business environment already triggering the slowdown, the experts and investors worldwide predict for a not so strong 2020 for the global economy as well as domestic economies. There is an increased burden over the governments across the globe to at least maintain the financial and economic performance of their respective economies. However, in such an interconnected and interdependent trade environment, it is a herculean task for the governments to meet all the objectives of financial stability.