It is not hard to appreciate that this provides a significant boost to incomes and spending. With exports representing about a fifth of GDP, each 10 percent increase in the terms of trade adds about 2 percent to the value of national income.
The increase in business investment now underway will in due course add to the economy's productive capacity. It also offers the prospect of a pick-up in export volumes, particularly in the resources sector.
Having said that, however, I should note that the current downturn in this sector is an unusually mild one compared with previous cycles.
A pattern of growth that was heavily skewed towards household spending was not going to be able to continue indefinitely, and the balance-sheet adjustment now occurring in the household sector should reduce the risk of a sharper adjustment later.
What we have been seeing is a change in the composition of growth, with businesses rather than households now the main drivers of growth in domestic spending.
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