a bit since the start of this year, but there is little sign to date of a sustained improvement in construction activity. weakness in construction has been accompanied by declines in output of a range of manufactured products over the past year. 1 steel is one obvious example. mining activity in china has also been affected. indeed, a further decline in the output of unprofitable chinese mines would provide some support to commodity prices, and would benefit other producers, including in australia. the substantial appreciation of the renminbi over the past year ( 12 per cent in trade weighted terms ) may also have contributed somewhat to the weakness in the industrial sector bis central bankers ’ speeches although the weakness in china ’ s property and manufacturing sectors is clearly of concern to commodity exporters like australia, there are a number of countervailing forces supporting broader activity in china. • first, growth in the services sector has been resilient, and should continue to be assisted by a shift in demand toward services as incomes rise. • second, growth in household consumption has also been stable in recent quarters aided by the growth of new jobs. 2 of course, such outcomes cannot be taken for granted ; if the industrial weakness is sustained, it might eventually affect household incomes and spending. • third, chinese policymakers have responded to lower growth by easing monetary policy and approving additional infrastructure investment projects. they have scope to provide further support if needed, although they may be reticent to do too much if that compromises longer - term goals, such as placing the financial system on a more sustainable footing. there are two key implications of the slowing in china ’ s growth for australia. first, the substantial slowing in industrial production has contributed to a further decline in commodity prices over the course of this year. ( this is in addition to the contribution from the substantial increase in the supply of commodities, including from australia. ) we ’ ve detailed the effect of the decline in commodity prices on australia ’ s economy elsewhere. 3 i would just add that commodity prices remain relatively high. the bank ’ s index of commodity prices has fallen by about 50 per cent from its peak, but is still almost 80 per cent above early 2000 levels. clearly, conditions in the industrial sector in china, and asia more broadly, will have an important influence on the path of commodity prices over the near term. beyond that, the changing nature of china ’ s development implies that the potential for commodity prices to rise from here is somewhat limited. second, the

is another illustration of the importance of the terms of trade for economies focused on commodities. after experiencing exceptional growth over the last three years, partly driven by the good performance of cocoa prices, contrary to that of other commodities, activity appears to have slowed down, in the wake of the downturn in prices. the subject is also of major importance for central banks because the challenge here is to find how to implement appropriate counter - cyclical policies in the face of large - scale shocks that monetary policy cannot deal with either on its own or in the long run. in this spirit, i would like to share with you this morning some thoughts on two issues : how important are the terms of trade cycles for the economic and financial situation of the exporting poor countries and their neighbours? and how to mitigate shocks? 1 / 3 bis central bankers'speeches 1. how important are terms of trade shocks for poor and vulnerable countries? to illustrate my point, i will take the example of sub - saharan africa. the super cycle of commodity price growth has coincided with over a decade of strong economic growth in subsaharan africa. the degree of causality between these two developments is the subject of debate. before the cyclical downturn, a large majority of observers emphasised the endogenous nature of african growth and minimised, or even denied, the role of the terms of trade appreciation. however, the current terms of trade shock has led to a reversal of the perception of the african outlook. for oil - exporting countries, the twofold decline in prices between mid - 2014 and early 2016 resulted in large budget and external deficits, calling for a rapid adjustment, due to the weakness or lack of countercyclical leeway. the savings accumulated during the upswing in oil prices proved largely insufficient and the borrowing capacity of the countries concerned remains very limited, although some benefited from debt cancellations under the heavily indebted poor countries initiative. in poor and vulnerable countries where financial development is weak and sovereign indebtedness with the banking sector is predominant, the feedback effects between the deterioration in public accounts and rising debt, on the one hand, and liquidity, or even solvency of the banking system on the other, also foster the propagation and amplification of shocks. the current terms of trade shock thus highlights the excessive dependence of vulnerable and poor countries on commodities. 2. how to mitigate terms of trade shocks? on this subject, it seems essential to distinguish two types