By Jessica Irvine
COMMODITY prices have emerged as perhaps the single most important factor determining Australia's economic fate.Unfortunately, they're also the economic variable over which domestic policy makers have least control.
Global supply and demand will continue to dictate the prices we earn for our exports, with ripple effects across the entire economy, including interest rates.
So is it good or bad news that on the latest estimates by the Australian Bureau of Agricultural and Resource Economics, the value of commodity exports is set to soar by more than 20 per cent in the coming financial year? That all depends on where you happen to be sitting.
If it's the leather-clad chair of a mining company CEO, you'll be smiling, no matter how much money you are spending to derail the tax proposals of a democratically elected government.
If you happen to own shares directly in those mining companies, or indirectly through your superannuation as most Australians do, you may also cheer as the value of your stock climbs to reflect higher anticipated profits. Employees in the mining industry may also look forward to a fatter pay cheque. If they spend the money on new shoes, haircuts and gadgets, retailers and service providers in turn will also get a boost.
Certainly, a federal government pinning its re-election hopes on a strong economy pulling its budget back into surplus ahead of schedule would have cause for celebration.
While there is considerable upside to the commodities boom, the downsides are becoming increasingly familiar.
Higher commodity prices mean global currency investors will buy up Australian dollars in their search for higher returns. The value of the dollar rises.
This makes life particularly hard for exporters of manufactured goods or tourism providers, whose products and services become relatively more expensive for foreigners to buy. Australian firms competing against cheaper imports also suffer.
In such a commodity-driven economy, resources - including labour - flow to the minerals sector and out of other industries, forcing employers to compete for workers by offering higher wages, even as their profitability is being squeezed.
While cheaper imports help somewhat to cool inflation, the prices of domestically produced goods rises along with wages.
In the end, the Reserve Bank will be forced to set interest rates higher than would otherwise be the case to cool inflationary pressures in the economy.
It's up to you if you want to cheer that or not.