Trade surplus hits seven month high

International trade; Performance of Services

• Australia’s trade surplus widened by $716 million to $2,333 million in May – a seven month high. Exports rose 3.2 per cent with imports up 0.4 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year. The increased surplus is the equivalent of $650 for every man, woman and child in Australia.
• The Performance of Services index fell by 1.4 points to 48.5 in June. The sector has been contracting for 12 out of the last 14 months. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What does it all mean?

• The economy may be going through a soft patch but the dollars keep rolling in. The impact of the natural disasters on the trade balance is all but finished and Australia is again paying its way in the world. Australia has now notched up a total trade surplus in excess of $26 billion over the past 14 months. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However, as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• Higher commodity prices and increased demand for coal and iron ore has helped insulate the Australian economy in the near term and will be the catalyst for the robust 4½ per cent growth that the Reserve Bank is anticipating over the current financial year.
• Interestingly Australia is now as reliant on China as it was on Japan in the late 1980s. The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in a space of a year- and it is still rising. The increase in the surplus is the equivalent of $650 for every man, woman and child in Australia. If the money was handed out to households chances are that it would be spent, but at present the dollars are heading back to mining companies and being paid out in wages, bonuses, tax, and dividends. For most Australians the effect will be felt in superannuation returns over the years to come.
• Australia is now as reliant on China as it was on Japan in the late 1980s. And it is still early days. While we will ride China’s successes in coming years we are also vulnerable to its stumbles.
• The data last Friday highlighted a surprising improvement in the manufacturing sector (from a level of substantial weakness) however there is no such turnaround taking place in the service sector. The services sector has contracted for 10 months out of the past year and there is no real catalyst to suggest a turnaround.
• There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Business margins are constrained, thus depressing profitability. On an encouraging note the forward looking index of new orders recorded is back in expansionary mode and holding at 8-month highs. However it is still early days and a period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

• Australia’s trade surplus widened by $716 million to $2,333 million in May.
• Exports of goods and services rose by 3.2 per cent while imports of goods and services rose by 0.4 per cent. Exports are up 5.7 per cent on a year ago while imports are up 8.1 per cent.
• Rural exports rose by 6.4 per cent in May while non-rural exports rose by 0.6 per cent.
• Within imports, consumer imports rose by 4.0 per cent in May. Capital goods imports fell by 7.7 per cent while intermediate goods imports rose by 1.8 per cent.
• Consumer goods imports are down 5.1 per cent on a year ago but capital goods are down 3.6 per cent and intermediate goods are up by 18.6 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year – a lift in the surplus that is the equivalent of $650 for every man women and child in Australia.

Performance of Services

• The Performance of Services index fell by 1.4 points in June to 48.5. The sector has been contracting for 12 out of the last 14 months. The key 50.0 level separates expansion from contraction.
• Four of the nine sub sectors expanded in the month – unchanged from the previous month. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• Not surprisingly the strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s notched up a record $973 million services deficit in May. It was the 16^th consecutive services deficit and clearly highlights why the services sector has been contracting in recent times.

• No doubt the strength of the currency is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.