Terms of trade will lift income but challenge Australian households

The Russia-Ukraine conflict has generated another spike in Australia’s terms of trade. As energy importers look to substitute away from Russian exports, prices for several of Australia’s key export commodities have risen sharply. The surge in export prices is expected to be short-lived, although we do see gas prices settling at a higher level in the long-run due to the dislocation caused by the conflict.

Nevertheless, we do not expect firms will undertake new mining projects in Australia due to the current spike. Accordingly, this terms of trade episode will have limited impacts on the real economy, although government and corporate revenues will be boosted substantially by higher export prices. 

What you will learn:

• 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.
  
  
• The reduction in supply has seen large spikes in energy and food prices – both of which make up a large share of Australia’s exports. Simultaneously, expectations for steel production in China have increased, boosting demand for iron ore and coking coal and driving up prices.
  
  
• We expect the peak in these price cycles will be short lived, although the dislocation in energy markets is expected to keep oil prices well above previous expectations for some years ahead.