4 Things Everyone Gets Wrong About The Australian Commodity Bust

Business Insider

Much has been written about the commodity bust in Australia. But that debate has reiterated "important misconceptions" according to Morgan Stanley analysts Gerard Minack and Katie Hill.

Minack and Hill write that most focus  on Australian GDP growth, commodity prices, and the Chinese economy, and miss the real issues at hand.

They identify four things about the Australian commodity boom-bust debate that really annoy them:

Watching levels instead of growth rate

Minack and Hill believe commenters shouldn't watch levels i.e. commodity prices or terms of trade (the value of exports relative to imports). They should instead focus on changes in real national income growth. For instance, the drop in costs of Chinese iron ore imports commodity prices will impact real national income, but terms of trade will still be high.

Watching real GDP instead of real income

Real GDP growth wasn't crucial to Australia's commodity boom because the GDP growth was driven by higher commodity prices, rather than an increase in production.

Moreover, real GDP isn't a good measure of real income when the terms of trade (the ratio of export to import prices) change, because mere price changes don't impact real GDP (what a country produces). 

A rise in terms of trade does however increase real income. Currently, Minack tells Business Insider, the commodity boom has caused a gap between real income and GDP, by adding 17 percent to real income. Focusing on GDP alone ignores the fact that in the event of commodity bust this real income will decline.

"This boom is different"

Talk that this boom is different is nonsense. This is because commodity busts aren't caused by a decline in demand, rather, they're caused by expanding supply. Australia according to Minack and Hill is in a supply-expanding boom.

"There is no bubble"

Mining is a bubble that could pose a threat to the Australian economy in the next two - three years. "The increase in commodity prices has far outstripped house price increases over a similar period. The income effect of the commodity boom has been more direct and powerful than the wealth effects of rising house prices"

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