Monday, June 11, 2012

Commodity Prices and Commodity Exporters

Catching up on some reading on the weekend I came across these fabulous graphics that put recent commodity price increases into context.  They come from chapter four of the latest World Economic Outlook from the IMF.

Source: IMF staff calculations.
Note: The real price index for a commodity group is the trade-weighted average of the
global U.S. dollar prices of the commodities in the group deflated by the U.S. consumer
price index and normalized to be 100 in 2005. 
The blue vertical lines indicate long cycle
peaks, and the red vertical lines indicate long cycle troughs. 
The exact dates of these turning points are as follows (where M = month). 
Energy: 1981:M1, 1998:M12, 2008:M7.
Metals: 1974:M4, 2001:M12, 2008:M6. 
Food: 1977:M4, 2001:M11, 2011:M2. 
Raw materials: 1973:M9, 2002:M1, 2011:M2. 

While energy prices peaked at a level higher than the peak of 1981, the recent peaks for metals, food and raw materials have gotten nowhere near the peaks of the 1970s. The note above shows the month and year of the various peaks.

The second graphic to come from the report shows the percentage that commodity exports account for in total exports and in GDP. 

What the graphics show is that Australia has an export structure that is closer to developing countries than other developed economies, which was seen as a bad thing in the1980s and 1990s, but is now seen as a good thing. Australia must be very close to becoming a red country rather than a pink country in the top graphic. 

BUT it also shows that we are NOT as dependent on commodity exports as many of these developed countries primarily because exports are less important for the Australian economy than for most countries in the world apart from Japan and the United States (and Europe if considered as one country!). 

Our economy is overwhelmingly made up of services. In fact according to the ABS services account for 80 per cent of the economy (remember construction is a service!)  (Services were once defined by The Economist as things that you can buy or sell, but can't drop on your foot - I'm sure that doesn't apply to construction). See here for a breakdown of the Australian economy.

Still we have become increasingly dependent on resource exports and that may be a problem as the IMF makes clear in a world where demand and prices for commodities could be on the wane.

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