WEEKEND ECONOMIST: The lucky country
The surge in exports in the last nine months and the prospects for strong demand from China in the coming 12 months highlight why the Australian economy has truly been blessed with good luck.
These readings have improved sharply over the last two months (consumer sentiment is up by a record 23.2 per cent) and the sheer pace of increase must signal that these levels remain fragile. One factor that in our opinion has been critical for restoring decent levels of consumer sentiment has been the signal to consumers that Australia may avoid a recession. Of course, a recession is defined for purposes of the media as two consecutive negative quarters of GDP growth (although we favour a "negative growth over the year" definition).
Growth in the December quarter printed -0.6 per cent and most economists were expecting a negative print for the March quarter heralding the official announcement of recession. The result was a 0.4 per cent positive print which was hailed in the media as Australia avoiding recession. In response, the Westpac-MI Consumer Sentiment Index surged by 12.7 per cent – the second largest increase since 1974.
The major source of this unexpected positive growth in the first quarter was the 2.2 percentage point contributed to GDP (estimate) from net exports. That followed a 1.7 percentage point contribution in the December quarter. Over the two quarters combined, imports contracted by 14 per cent while global trade was down by around 20 per cent. The collapse in Australia's imports at a much faster pace than would normally have been expected given the 1 per cent reduction in domestic demand must have been partly related to the collapse in global trade overall. As with other countries, financing difficulties and inventory rundown would have been key reasons. Nevertheless the credit constraint effect on trade would have been much less severe in Australia than offshore given the robust state of Australia's banks.
Over that same period, Australia's exports actually increased, by around 2 per cent. The source of this extraordinary export performance was a sharp turnaround in rural exports. Nearly 2 percentage point of the 2.7 per cent growth in exports in the March quarter came from rural exports. Non-rural commodities were flat while manufactures were a significant drag on export growth.
While we would like to dig deeper into the net export story using data for export volumes by country we are unaware of such a data source. Consequently we have to talk in values which can obscure volumes when prices and exchange rates fluctuate as wildly as they have over the last year. However we expect that the fundamental messages set out below are probably still reliable even though the analysis focuses on values rather than volumes.
Japan was Australia's 'saviour' in the December quarter taking more than twice the level of exports taken by China (by value). Japan's imports from Australia were up 37 per cent on the previous quarter whereas China's were down by 10 per cent. A sharp reduction in resource exports to China was evidently offset by stronger exports to Japan (in value terms at least).
However there has since been a sharp turnaround. In the three months to May 2009, the value of exports to China is 30 per cent higher than the value of exports to Japan. The value of exports to China has increased by 44 per cent in the 3 months to May relative to the December quarter. This has coincided with a sharp swing in Chinese growth. On a quarterly annualised basis, GDP growth in China surged from 2 per cent (December quarter); to 6 per cent (March quarter) and 18 per cent (June quarter).
Over a period when global trade collapsed by 20 per cent Australia's export growth of 2 per cent was truly extraordinary. With imports falling 14 per cent and more closely reflecting global conditions, net exports contributed nearly 4 percentage point to GDP (estimate) growth allowing Australia to, for now, avoid a technical recession.
While there are many factors which can explain this, the main reasons seem to be: a surge in rural exports associated with the easing of the drought; the surprising strength of exports to Japan in the fourth quarter; and, since then, the more explicable surge in exports to China that have picked up the slack from weaker Japanese demand. Exports to China are now booming, directly reflecting the surge in domestic growth since the bulk of Australia's exports to China are not recycled back into exports to other countries but are instead absorbed by infrastructure investment which has been the dominant source of China's booming growth.
The recent resurgence in exports to China supports our current forecast of a further positive contribution to GDP growth from net exports in the June quarter. At this stage we estimate that net exports will add a further 0.3 percentage point to GDP growth in the June quarter – enough to keep growth positive despite sharp falls in business and housing investment. The June quarter national accounts are set to be announced on September 2 and another positive quarter of growth will, by silencing recession talk for another three months, help nurture the current fragile but vitally important rally in consumer and business confidence.
The timing of our various trade flows over the last nine months and prospects for China's demand going forward are true testament for why we can still call ourselves 'the Lucky Country'.
Bill Evans is chief economist at Westpac.