Commodity Prices in Australia

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However, there are economic benefits due to increasing commodity prices since a rise in the prices of exports compared to imports leads to an increase in international purchasing power. This contributes to economic welfare. Australia can benefit from an increase in prices of commodity exports as well as a decrease in import prices. We need to analyse the impact of a decrease in commodity prices on the Australian economy. If we go back to the cyclical downturn in the prices of commodities in the period 1998-1999 we find that Australia was able to maintain above trend growth rates. This indicated that the production of commodities and export volumes made a small contribution to economic growth. Commodity price shocks have a major impact on the mining, manufacturing and construction industry. The insurance and financial sector is not affected a lot. Manufacturing sub industries such as clothing and textiles are quite unresponsive to changes in commodity prices. In the case of a bulk commodities shock, construction output increases significantly (Knop & Vespignani 2014).

All sectors of the economy have not equally borne the benefits of the rise in the prices of commodities. The strong Australian dollar has negatively impacted the portion of the export sector which has not benefited due to the resources boom. This phenomenon is known as the Dutch Disease. After the mining boom, the output of resources related to construction has greatly increased. On the other hand, the output of some manufacturing sub sectors which do not provide inputs for the resources sector have decreased (Kirchner 2009)

- Effect on the GDP:

The slide in prices of commodities leads economists to cut their growth forecasts. Lower prices of commodities weigh on wages and profits. Business investment and consumer spending are constrained, and there weaker growth in public demand. ANZ economists have predicted softer growth of 2.9 percent and 3.2 percent in 2015 and 2016 respectively. In the graph below we find the percentage change in the GDP year by year and quarter by quarter. The GDP understates welfare gains due to an increase in the prices of commodities. Yet, it is widely used for the measurement of economic growth. As per this measure, the economy in Australia has l outperformed several developed countries, however this owes little to the increase in the prices of commodities (Sydney Morning Herald 2015).

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Percentage Change in GDP

Source: Sydney Morning Herald, 2015

The following industries have been analysed:

- Import-Export Industry

- Airline Industry with regards to fluctuations in Oil Prices

- Australian Tourism Industry in relation to the mining boom

- a. Effect on the Import Export Industry:

The recent fall in commodity prices such as coal and iron ore may have consequences like ending Australia’s period of economic growth. There are concerns whether the commodities and resources sectors are highly reliant on Chinese exports. As China is facing an economic crisis the demand for iron ore and coal are decreasing. This is happening when there is additional supply in the market due to recent investments that led to an expansion in production. The terms of trade measure export prices against those of imports. The terms of trade have decreased by 25 percent from the high of 2011. Other than iron ore and coal, the prices of sugar, wheat and gold are also decreasing. There is pessimism about the economic outlook in China and this could decrease household spending and consumer sentiment. The decrease in the national disposable income over a two year period has happened for the first time since the recession in the 1990s. This does not mean there is a recession coming but does tell us that there are difficult times ahead. This is the hold that the prices of exports have over the economy (Fidelity 2015).

b. Airline Industry and Oil:

Oil prices have a significant impact on the airline industry and lead to adaptations by airlines. The volatility of oil prices make it difficult to make profits. Fare prices increase and passengers look for affordable methods of transportation. Oil is the aviation sector’s major energy source. The operational cost of airlines increase due to higher oil prices. As we can find in the figure below oil prices were more than $100 per barrel and have recently decreased to about $50 per barrel. Lower cost carriers have greater exposure to fuel prices compared to their higher-cost competitors. From the perspective of the airline longer flights present a critical challenge to making profits since they use a large amount of fuel. If the cost burden of fuel expenditure cannot be passed to customers then airlines may have to stop certain flights which are not profitable. Airlines have started measures such as check-in baggage fees in order to stay afloat. Travelers might cut back on long haul international travel due to higher fares being charged by airlines. Thus volatility in oil prices has an impact on operations in the airline industry (Capling 2000). Large firms in the industry have the advantage of economies of scale. On the opposite end of the spectrum, the decline in the price of oil can have a positive result on the Australian Economy on the whole considering the fact that Australia is a large importer of oil. This falling prices is speculated to increase in Australia’s terms of trade and in the purchasing power of national income.

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c. Impact of the mining boom on the Australian tourism industry:

The mining boom started in the mid-2000s and resulted in a rapid increase in the prices of mining related commodities. Due to higher profits, the mining sector has had a higher capacity to pay greater wages. As can be seen from the figure below, Australian investment in mining has increased. The growth in work opportunities in the tourism industry has been moderate in the same time period. It has links regional areas in Australia and has been affected more than other sectors due labor constraints which are associated with the mining boom. The mining industry has a large number of workers who have to fly in and fly out, which leads to the requirement of air services. Large carriers are benefitting from the booming mining industry. This has been