The full report is available below (PDF format) as well as a quote from the authoring economist. The media may reproduce our charts with attribution to BIS Oxford Economics.
Australia’s terms of trade (the ratio of export prices to import prices) increased sharply through the pandemic due to a combination of strong demand and disrupted supply in markets for Australia’s major commodity exports. We had anticipated a correction in the terms of trade over 2022, but the Russian invasion of Ukraine and associated volatility in commodities markets has seen the terms of trade spike again.
Unlike the run-up in the terms of trade during the early stages of the pandemic, import prices have also increased of late (albeit by less than export prices). Fuel prices have been the largest contributor to date, while renewed supply chain disruption has increased our outlook for import prices over the rest of 2022. Households have much greater exposure to import prices than export prices; the inflationary impulse from higher import prices poses a headwind to household consumption and has contributed to a downgrade in our outlook for 2023.
The Federal Government will benefit from higher commodity prices through higher taxation revenues on mining profits. The upgraded the terms of trade outlook in the FY23 Federal budget already allowed for an improvement to the budget position despite an increase in expenditure, and the latest spike in prices provides further upside.
“The Russia-Ukraine conflict has generated another upswing in Australia’s terms of trade. While government and corporate revenues will be boosted substantially by higher export prices, households have much greater exposure to import prices; the inflationary impulse from higher import prices poses a headwind to household consumption and has contributed to a downgrade in our outlook.” – Thomas Rudgley, Economist, BIS Oxford Economics
About BIS Oxford Economics:
BIS Oxford Economics is one of the world’s foremost independent global advisory firms, providing reports, forecasts and analytical tools on 200 countries, 150 industrial sectors and 7,000 cities and regions. Its best-in-class global economic and industry models and analytical tools provide an unparalleled ability to forecast external market trends and assess their economic, social, and business impact.