KEY POINTS:
The price of Australia's exports sank 3 per cent last quarter, the steepest drop since 2003, as the country's currency surged, easing a little of the huge trade stimulus enjoyed in recent years.
Yesterday's Government data also showed import prices easing 0.8 per cent as falls in cars, computers and phones outweighed the increasing cost of food, petrol and steel.
Since the value of exports fell a lot more than the cost of imports, it implied Australia's terms of trade are likely to have suffered the first decline since 2001.
The terms of trade, what Australia pays for imports compared with what it gets for exports, have surged by over a third in the past four years. That gave a huge boost to company profits and personal incomes and is a major reason the economy is running so hot.
"It looks like the terms of trade was actually a drag last quarter, largely due to the rising dollar," said Stephen Roberts, research director at Grange Securities.
Australia is one of the world's major exporters of iron ore and coal, but both are priced in US dollars and many bulk contracts are set only once a year. Since the Australian dollar strengthened markedly over the third quarter, the value of exports in local currency terms fell.
"But what's important is that nobody expects that to last," Roberts said. "All the signs are that contract prices of iron ore and coal will rise sharply next year and override any currency effect."
Analysts, for instance, think contract prices for iron ore could rise 30 per cent or more next year.
"The key is that this fall [in export prices] is not the start of a trend," said Brian Redican, a senior economist at Macquarie Bank. "From that perspective, it's not an impediment to another rise in interest rates."
The Reserve Bank of Australia lifted its cash rate to a 10-year high of 6.50 per cent in August, aiming to head off an unexpectedly rapid revival in inflation.
Yet the economy has shown no sign of slowing in the face of higher borrowing costs with employment strong, the jobless rate at 33-year lows, credit growth high and a widespread lack of spare capacity after 16 years of ceaseless expansion.
Much now rests on the Government's inflation report for the third quarter due out next Wednesday. Should that show another sharp rise in underlying inflation, the central bank could hike interest rates again as early as its November policy meeting.
The import cost of food and live animals rose 3.3 per cent in the third quarter, while beverages and tobacco increased 1.5 per cent.
- Reuters