Australia’s international trade position is continuing its steady march to a position where monthly surpluses are increasingly common.
The balance on international trade in goods and services is being driven to surplus by a surge in export receipts, which in turn is a key factor supporting bottom line GDP growth. This in itself is welcome news at a time when the mining investment outlook is gloomy and as policy makers strive to maintain a 3 per cent GDP growth pulse.
While export growth is strong, softer demand for capital equipment is dampening import growth which is further helping the move to a trade surplus.
In the last three years or so, Australia has recorded a monthly surplus for international trade on 25 occasions, including in each of the last four months. The ongoing lift in export volumes from the mining sector, in particular, and as the recent fall in the Australian dollar steadily boosts export competitiveness, more monthly surpluses will be assured.
There’s nothing automatically wrong with international trade deficits. When the import side of the ledger is concentrated on capital equipment, and used to boost the productive capacity of the economy, running surpluses based on stronger exports (as opposed to a recessionary inspired import fall) is desirable. This is effectively where Australia’s external accounts are heading.
Australia’s export links with Asia in general and especially China, remain on a massive growth trajectory.
In 2000, China took less than 5 per cent of Australia’s exports of goods and services. Now China takes over 25 per cent of all exports. This is why trends in China’s economy and its policy settings matter so much for investors, financial markets, corporations, the government and the Reserve Bank alike.
Amid of all this, Japan remains Australia’s second largest export market accounting for around 18 per cent of all exports, a level that has held more or less for over a decade. Currently, South Korea and India together account for a further 12 per cent of Australia’s exports and are obviously important markets. In total, Asia takes around 75 per cent of Australia’s exports which is why our engagement in the region is so important.
It is no real surprise to see that the European Union accounts for just 8 per cent of Australia’s exports, about half the level of a decade earlier. The US has never been a major export market for Australia and it is now less relevant than ever taking just 5 per cent of all exports, to be the same order of importance as India.
In other words, Japan is now a larger export market for Australia than the EU and the US combined.
The move to an international trade surplus has helped diffuse the residual concerns, if there were any, about the current account deficit.
With surpluses on the trade balance, the current account deficit is now accounted for by the net income balance (deficit usually). Net income, in this instance, is effectively made up of the outflow of dividends and interest to foreign holders of Australian stocks and bonds less the inflow to Australia from our holdings of foreign stocks and bonds.
With massive capital inflow into Australia over the past couple of centuries, there are now always more outflows than inflows, hence the deficit on the net income balance.
As the chart below shows, the net income balance has narrowed in the last few years, no doubt a function of the very low interest rate climate prevailing around the world. This narrowing in the net income deficit, together with the move to trade surplus, has seen the current account deficit fall to below 3 per cent of GDP. This is near historical lows and is well down on the average of around 6 per cent of GDP in the period between 2001 to 2008 and it is getting close to it lowest level since the 1970s.
Australia’s economic transition from a mining investment boom to a more balanced growth mix has exports rising as a critical aspect of that trend. While the Reserve Bank and Treasury forecasts are both reliant on household consumption and dwelling construction to contribute to GDP growth over the next two years, stronger exports will no doubt figure in the plan to lift GDP growth above 3 per cent.
On present indications, the move to an international trade surplus and rising export volumes, especially from the mining sector, suggests GDP growth is on track to hit 3 per cent by year end and should hit 3.75 per cent in 2014. It is not all that common for Australia to have an export led growth phase but it looks like one is forming about now.