Given the declines in Chinese steel prices and spot iron ore price, Deutsche Bank economist Adam Boyton forecast that Australia’s terms of trade (the price of exportable goods divided by price of importable goods) could be 15 per cent lower year-on-year by the fourth quarter.
During the past 50 years such declines have only been seen five times and in three of those five instances the economy has entered recession, says Boyton.
"If we look back over the past 50 years we find only five instances of a 12% or larger year over year decline in the terms of trade: 1961, 1971, 1975, 1985 and 2009. In 1961, 1971 and 1975 the economy entered recession. The originally published GDP releases for 1986 almost show a technical recession (i.e. two consecutive quarters of negative growth) with a contraction of 0.4% in Q4 1985, zero growth in Q1 1986 and a further 0.4% contraction in Q2 1986; although these have over the years been revised to 0.1% qoq, 0.6% qoq and – 0.1% qoq, respectively. The real exception was 2009, with a large fiscal stimulus offsetting the impact on the real economy of the sharp turn lower in the terms of trade.
Boyton doesn't want to overemphasize the possibility of a recession.
With official rates at 3.5% the RBA has room to cut rates, Glenn would move to cushion the economy in transition.
