Declining commodity prices and an elevated AUD weigh on exports

From

Trade Balance – May 2014

  • Commodity prices on the decline

    Commodity prices on the decline

    The May trade figures showed a large deficit of $1.9bn

  • Declining commodity prices and an elevated AUD over the month weighed on export receipts.
  • Exports of goods and services were down by 4.6% over the month, driven by falls in iron ore and coal.
  • Imports fell by 0.6% due to a big fall in capital goods, primarily as a result of the pullback in mining related capital expenditure.
  • A stabilisation in export prices and below‑trend domestic demand growth should see the trade balance return to surplus over coming months.

The May trade deficit came in a lot larger than the market had been expecting.   The market consensus was looking for a small deficit of $200m {CBA (f) ‑$500m}.  The May result was the second consecutive deficit following three big monthly trade surpluses over QI.  The widening in the trade deficit from an upwardly revised $780m shortfall in April reflects a sizeable fall in goods exports and a small decline in imports.

The fall in exports over May was driven by a big decline in metal ores and minerals (‑$760m or 9%).  The plunge in the spot price of iron ore over May was not coupled with a fall in the AUD over the month.  As bulk commodity exports are priced in US dollars, the net result of a decline in prices and a flat AUD weighs on export receipts.  Other mineral fuels fell by a sizeable $352m over the month (‑13%).  Rural exports declined by a more modest 2%.  Services exports bucked the trend and were virtually unchanged over the month.  On a positive note, tourism exports are up around 8½% on year ago levels.  It looks to us like a slightly softer AUD and a pickup in the advanced economies is supporting the domestic tourism sector.  We expect this to continue over the period ahead as global growth lifts.

Imports recorded a small 0.6% decline over May.  The fall was driven by a 4% fall in capital goods imports, which continue to trend lower as the construction‑intensive part of the mining booms unwinds.  This will be a familiar theme over the year ahead.  Consumption goods imports were largely unchanged over the month.   An elevated AUD helps to contain growth in import costs and therefore receipts.  It also helps to keep a lid on tradables inflation which has lifted over the past year.    

Goods exports to China accounted for almost 38% of total goods exports over the past year and highlight both the importance of and dependence on the Chinese economy to Australia.  Resource exports to China will continue to dominate the trade story ahead.  But service exports will also be important.  Tourism is the 3rd biggest export earner at present and education is the 5th largest. The emergence of the Asian middle income consumer brings the huge potential for an acceleration in both goods and services exports.

Looking ahead, we expect to see the monthly trade balance return to surplus.  In our view, export receipts will lift due to higher volumes and a stabilisation in commodity prices.  And import growth is expected to remain soft as the decline in mining capital expenditure weighs on capital goods imports.  Consumption goods imports, on the other hand, are expected to trend higher in line with a lift in household expenditure.

From a GDP perspective, net exports made a massive contribution to QI quarterly growth of 1.4ppts.  A combination of a surge in export volumes, buoyed by some good weather, and a fall in imports underpinned the result.  The story looks like it will be a little different over QII.  We expect to see a bit of statistical payback in export volumes while import volumes are being supported by an elevated AUD.  The net effect means that net exports are unlikely to drive growth over QII.  But we do expect them to be a significant contributor to growth over H2 2014.

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