Trading Room home page

Terms of trade to trend lower: Treasury

Market watch top headlines

Australian reports

World reports

Stocks to watch

ALZ, API, BHP, BRL, BSL, FMG, ILU, TPM, YAL,

AAP

February 14 2013, 12:52AM

Dr Gruen said he did not expect devastating floods and fires this summer would have the same material impact on the economy as they did two years ago.

There was also reason to be cautiously optimistic about the global outlook, with moderate growth expected to pick up over the course of this year.

However, this was dependent on a series of global downside risks being avoided, Dr Gruen warned.

While the US Congress agreement on the fiscal cliff avoided the the worst-case scenario, uncertainty remained about the resolution of scheduled expenditure cuts in March and the threat of protracted negotiations from the US debt ceiling in May.

The crisis in the euro area was still far from resolved and downside risks continued to dominate, while geopolitical tensions in the Middle East remain unresolved.

"Accordingly, the risk lingers that these tensions could escalate, generating a surge in global oil prices," Dr Gruen said.

Treasury Secretary Martin Parkinson told the hearing there had been a squeeze on mining company profits, which in turn impacted government revenues.

He said when the terms of trade eases off as commodity prices fall, that would usually be accompanied by a significant fall in the exchange rate.

"The fact is, the exchange rate stayed up," Dr Parkinson said.

"What that's meant is that firms - such as in the mining sector where there revenues are in US dollars and their costs are in Australian dollars - they are getting their margins squeezed."

Dr Gruen said mining investment's share of the economy will peak over the next year.

But there was a question mark over whether there would be a smooth transition to other contributors to economic growth.

"Part of what's been holding back non-mining investment is the high level of the exchange rate," he said.

He said the December quarter capital expenditure data due on February 28 would be studied to see what firms are doing in regard to non-mining investment.