In the year to July, Australia’s trade surplus with China hit a record $33.66 billion. But over the same period Australia recorded a record trade deficit with the US of $18.15 billion.
What does it all mean?
- With Australia’s trade surplus with China hitting fresh record highs, you would expect that our overall trade position was in good shape. Not so. Australia’s trade accounts have been in deficit for the past seven months. So what is going on? Well just as the surplus with China is hitting new highs, the deficit with the US is also hitting new highs. And at the same time the trade accounts with India, Indonesia and Korea aren’t as healthy as they were late last year.
- In part, Australia’s firm currency is to blame, as well as the more competitive position of the US. Over the past year Australia’s trade deficit with Indonesia has widened markedly while the surplus with South Korea has narrowed markedly. In addition, Australia is more reliant on iron ore exports, representing nearly a quarter of total receipts. It is important that we don’t get myopic and neglect trends in trade competitiveness with other countries and with our key exports.
- China’s dominance of two-way trade with Australia is now just short of the highs maintained by Japan in the late 1980s. While there are plenty of positives for Australia if Chinese economic growth remains strong, there are clear risks if China falters or authorities there make policy mistakes – such as keeping monetary policy too tight for too long.
What do the figures show?
- Australia’s trade position weakened in July. Overall a deficit of $556 million was recorded, an increase in the deficit of $329 million from the $227 million shortfall in June.
- Exports of goods and services fell by 2.7 per cent (goods down 3.3 per cent) while imports of goods and services fell by 1.5 per cent (goods down 1.7 per cent).
- Rural exports fell by 2.6 per cent. Non-rural exports (excluding gold) fell by 1.4 per cent while gold exports slumped by 24.7 per cent.
- Of note:
-Iron ore lump rose $47m (4 per cent) with quantities up 6 per cent and unit values down 2 per cent.
– Iron ore fines fell $42m (1 per cent) with quantities up 4 per cent and unit values down 5 per cent.
– Hard coking coal fell $383m (24 per cent) with quantities down 22 per cent and unit values down 2 per cent.
– Semi–soft coal rose $19m (3 per cent) with quantities up 7 per cent and unit values down 3 per cent.
– Thermal coal rose $122m (9 per cent) with quantities up 13 per cent and unit values down 4 per cent.
- Within the total of imports, consumption goods rose by 0.2 per cent (clothing, toys, books and leisure goods up), pital goods slumped by 7.6 per cent (large falls in aircraft, computers and industrial equipment), intermediate goods fell by 1.1 per cent (fuels up 8 per cent) and gold imports rose by 0.4 per cent.
- In the year to July, Australia’s trade surplus with China hit a record $33.658 billion, up 37.6 per cent on a year ago. But over the same period Australia’s trade deficit with the US hit a record $18.15 billion, up 26.5 per cent. And in the year to July, the trade surplus with India stood at $10.73 billion, down from the record $14.86 billion surplus in the year to August 2010.
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.
What are the implications for interest rates and investors?
- The trade data is useful in highlighting strengths, weaknesses and vulnerabilities. While China must buy our iron ore and coal to sustain economic growth, Australia’s high currency is weighing on the competitiveness of our domestic manufactures, resulting in more goods being sucked in from the US. No doubt, the widening trade deficit with the US reflects in part online spending by consumers – responding to both cheaper US prices and a firm Aussie dollar.
- If the Australian trade accounts remain in the red over coming months, there will be downward pressure on the exchange rate – hardly a negative development, and offering support for Australian businesses.