Stronger Aussie dollar curbs trade surplus

International trade; New car sales

• Trade surplus: The trade narrowed from $2,024 million to $856 million in June. The rolling 12-month surplus rose from $8.9 billion to $12.7 billion (biggest surplus in 5 years).
• Record Chinese exports: Australia exported a record $95.4 billion of goods to China in the year to June. Australia’s rolling annual trade surplus with China hit a 32-month high of $34.3 billion in June.
• Australia’s exports to India hit fresh 5-year high, totalling $14.9 billion in the year to June, up 55 per cent on the year.
• According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totalled 92,754 in July, up 1.6 per cent on a year ago and a record for the July month.
• In the year to June, SUVs represented a record 49.4 per cent of combined passenger car and SUV sales. SUVs accounted for a record 38.6 per cent of all vehicle sales.
• CBA expects net exports to detract 0.4 percentage points from economic growth in the June quarter.

What does it all mean?

• Healthy car sales and a solid trade surplus (albeit smaller than forecasts) adds to the positive economic data this week. The one concern would be that the stronger Australian dollar was starting to have an impact on the growth of exports – an issue that the Reserve Bank policymakers highlighted at the Board meeting early this week. In fact the smaller trade surplus was driven by a decline in the prices received for coal and iron ore exports, despite volumes being more mixed. And importantly the Aussie dollar strengthened even more substantially in July and will likely have a have further impact on the trade account. No doubt policymakers will keep a close eye on the currency in coming months.
• Capital goods imports are effectively a proxy for business investment. The good news is that imports rose by over 13 per cent in June and are now 21 per cent higher than a year ago, the fastest growth in almost five years. And this lift was despite the stronger Australian dollar. The Reserve Bank notes that business investment is lifting and this is evidenced by the latest data.
• Looking forward it is likely that the trade surpluses should continue thus provide a lift in national income over the coming year. In fact Australia’s rolling annual trade surplus was the biggest in five years in June. However the higher Australian dollar may limit the size of the boost in national income.
• Interestingly the big picture story is about exports to China – hitting fresh record highs in the year to June. The Chinese economy is turning over nicely, with Chinese domestic consumption lifting. China buys a third of Australian exports and around a quarter of our imports come from China, so a healthy Chinese economy is very much in our interests. In addition exports to India are up almost 55 per cent over the past year and holding at a 5-year high.
• Overall car sales remain healthy. Car affordability is at the best levels recorded, employment is rising, interest rates are at record lows and wealth levels are at record highs.
• Looking forward, vehicle sales should remain strong over the rest of 2017. Interest rates are unlikely to rise any time soon and car manufacturers are competing hard for business, restraining prices. In addition, all indications point to firm conditions in the job market. The area to watch is the housing market as softer home prices and rising household debt could restrain car buying enthusiasm – although even that seems to be an unlikely outcome.

What do the figures show?

International trade:

• The trade surplus narrowed from $2,024 million to $856 million in June. The rolling 12-month surplus rose from $8.9 billion to $12.7 billion (biggest surplus in 5 years).
• The net services deficit rose to from $153 million to just $252 million in June.
• Exports of goods and services fell by 1.4 per cent in June (goods down 1.2 per cent). Imports of goods and services rose by 2.4 per cent per cent (goods up 3.2 per cent) after rising 0.2 per cent in May. Exports are up 22.6 per cent on a year ago, while imports are up 7.2 per cent.
• Rural exports rose by 0.6 per cent in the month while non-rural goods fell by 3.6 per cent and gold exports rose by 26.8 per cent.
• The main components contributing to the fall in seasonally adjusted exports estimates were:
  • metal ores and minerals, down $470m (7 per cent)
  • coal, coke and briquettes, down $340m (6 per cent).
• Volumes of iron ore fines were lower by 8 per cent in June with prices lower by 10 per cent. Volumes of lump iron ore fell 2 per cent with prices down 3 per cent. Volumes of coal exports rose: Semi-soft +5 per cent; hard coking +1 per cent; thermal +1 per cent.
• Within imports, consumer imports rose by 2.3 per cent in May with capital goods imports up by 13.2 per cent while intermediate goods imports down by 4.3 per cent.
• Consumption goods imports were up 2.6 per cent on a year ago while capital goods imports were up 21.3 per cent and intermediate goods imports were up by 8.4 per cent.
• Australia’s annual exports to China lifted from $94.5 billion to US$95.4 billion in the year to June – a record high and up 27.4 per cent on a year ago. Exports to China accounted for 32.8 per cent of Australia’s total exports.
• Australia’s annual imports from China rose from $60.7 billion to a 12-month high of $61.0 billion in the year to June and were down 0.5 per cent on a year ago. Imports from China accounted for 23.1 per cent of Australia’s total imports.
• Australia’s rolling annual trade surplus with China hit a 32-month high of $34.3 billion in June although this is still well down from the record high of $42.8 billion set in April 2014.
• Australia’s exports to India held at fresh 5-year highs, totalling $14.9 billion in the year to June, up 55 per cent on the year.

New vehicle sales

• According to the Federal Chamber of Automotive Industries (FCAI), new motor vehicle sales totalled units 92,754 in July, up 1.6 per cent on a year ago.
• Passenger vehicles in July were down 5.9 per cent on a year earlier while sales of sports utility vehicles (SUVs) were up by 9.4 per cent and other vehicles were up by 2.1 per cent.
• In the year to July, SUVs represented a record 49.4 per cent of combined passenger car and SUV sales. SUVs accounted for a record 38.6 per cent of all vehicle sales.
• FCAI notes “The Northern Territory produced the strongest sales growth across the states and territories, posting a 10 per cent gain on its result for July 2016. South Australia had the second-largest growth rate at 8.7 per cent, followed by Victoria (+4.2 per cent), New South Wales (+1.3 per cent) and Queensland (+0.5 per cent).”
• “Japan remained our strongest source of vehicle imports for July with 27,524 vehicles, followed by Thailand (21,915), South Korea (13,656), Germany (6,542), USA (4,026), and England (3,163).”
• “The Toyota Hilux was the nation’s top-selling vehicle in July with 3,742 sales (up 19.3 per cent on its July 2016 outcome), followed by the Toyota Corolla with 3,208 sales, the Ford Ranger (3,076 sales), Mazda3 (2,466) and the Toyota Camry (2,385).”

• 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 Federal Chamber of Automotive Industries releases estimates of car sales on the third business day of the month. The figures highlight the strength of consumer spending as well as conditions facing auto & components companies.

What are the implications for interest rates and investors?

• The trade data has no influence on monetary policy. But the solid underlying demand for our exports and solid growth of Chinese imports are both serving to support the Aussie dollar.
• Encouragingly capital goods imports – a proxy for business investment – are up over 21 per cent on the year. The Reserve Bank would be comforted about the perceived lift in business spending.
• Australian exports are rising solidly and will be instrumental in driving economic growth over the coming year.