• Volatility ahead of key events: Currency and share markets have exhibited volatility in recent days ahead the Scottish referendum and the US Federal Reserve meeting to decide interest rate settings.
• Less volatile Aussie shares over time: While the sharemarket has proved weaker and a little more volatile in recent days, volatility is still historically low. Over the past year the ASX 200 has only traded up or down by more than 1 per cent on only 30 days, the lowest result since January 2006 – almost 9 years.
• Chinese stimulus: There are reports that China’s central bank has boosted liquidity at the biggest five banks.
• Imports down: Imports of goods fell by 3 per cent in seasonally adjusted terms in August.

The US central bank decision and Scottish referendum have implications for currency-sensitive businesses. The Chinese stimulus is important for resource companies. The imports data provide insights on retailers. The Chinese coal decision has implications for Australian coal producers.

The US, Scotland & China

• Up until recent days, there had been growing speculation that the US central bank could signal an earlier start to the rate hiking cycle. But that perception appears to have been turned on its head in the last 24 hours, in part due to the views of a prominent Fed watcher, Jon Hilsenrath of the Wall Street Journal. Hilsenrath believes that the Federal Reserve won’t dramatically change the language in the statement that outlines the interest rate decision. In particular, Hilsenrath believes there will be no change in a key paragraph:
• “The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.”
• Central banks have in the past have used certain “mouth-pieces” in the media to signal future intentions in order to reduce uncertainty and volatility. But the views of the Wall Street Journal Fed watcher are in line with a number of other key analysts. CBA strategists are in accord with these views, believing the Federal Reserve is unlikely to start lifting interest rates until around mid-2015.
• The Fed decision will be crucial for the short-term outlook of share and currency markets. Overnight, the US Dow Jones went within seven points of closing at record highs, lifting almost 101 points over the session.
• The other news overnight were reports that China’s central bank, the People’s Bank of China, was set to add 500 billion yuan in liquidity for the top five banks through standing lending facilities. The Aussie dollar rose from lows near US90 cents to highs around US91.10 cents.
• Uncertainty about the Scottish referendum result also remains a key factor influencing financial markets at present. But given the result is on knife’s edge, the referendum is more a background issue, making investors less keen to take on fresh positions until the final outcome is known, potentially on Friday.
• The Aussie dollar hit the lowest levels in around six months on Monday, below US 90 cents. But the foray below the psychologically-important level has proved brief for now. While the Aussie dollar has come under pressure from a stronger greenback (on rate hike fears) and softer Chinese economic data, the longer-run pressure has come from lower commodity prices. The key CRB futures commodity index hit a 9-month low on September 15, before recovering modestly overnight, up by 0.9 per cent.
• Many analysts would argue that the Aussie dollar is now at a more appropriate level given recent trends of commodity prices. But the Aussie is by no means the weakest global currency in 2014. The Aussie is actually up 1.6 per cent from the start of the year, making it the seventh best performing currency against the greenback.

Aussie dollar: Big picture

• The Aussie dollar hit the lowest levels in around six months on Monday, below US 90 cents. But the foray below the psychologically-important level has proved brief for now. While the Aussie dollar has come under pressure from a stronger greenback (on rate hike fears) and softer Chinese economic data, the longer-run pressure has come from lower commodity prices. The key CRB futures commodity index hit a 9-month low on September 15, before recovering modestly overnight, up by 0.9 per cent.
• Many analysts would argue that the Aussie dollar is now at a more appropriate level given recent trends of commodity prices. But the Aussie is by no means the weakest global currency in 2014. The Aussie is actually up 1.6 per cent from the start of the year, making it the seventh best performing currency against the greenback.

More bad news for coal

• China’s National Development and Reform Commission said that the country will ban the import and local sale of coal with high ash and sulphur content starting from 2015 in a bid to tackle air pollution. While Australia’s Mineral Council believes that mines can adapt to meet the restrictions, there are significant exports and regional economies affected. According to consultants Wood Mackenzie, China imported 54 million tonnes of thermal coal and 30 million tonnes of metallurgical coal from Australia in 2013. Wood Mackenzie says all the thermal coal exceeded the new ash limit, while the metallurgical coal was below the limit.
• Given that a high proportion of economy-wide spending is on imported goods, the latest data is worth noting. The Australian Bureau of Statistics report that “In seasonally adjusted terms, goods debits fell $677 million (3 per cent) between July and August 2014 to $21,423m. Intermediate and other merchandise goods fell $878m (9 per cent), consumption goods fell $65m (1 per cent) and non-monetary gold fell $25m (10 per cent). Capital goods rose $292m (6 per cent).”
• Annualised imports from Japan are currently at 3-year lows, down 5.4 per cent on a year ago, while imports from China are growing at the slowest annual pace for five months.
• There are a few balls in the air at present for investors. Still, for traders of shares or the Aussie dollar, the volatility is probably welcome – certainly sharemarket volatility is near 9-year lows. For longer-term investors, the good news is that once we move into a new week, a lot of uncertainty will be resolved. The Scottish issue will hopefully be settled, the next US interest rate decision won’t occur until October 28/29 and the next batch of Chinese economic data won’t occur until early-mid October. And in Australia, the profit-reporting season is out of the way while the Reserve Bank won’t be moving interest rates any time soon.
• In the coming week the major domestic focus is the Financial Stability Review on Wednesday while the key international events are “flash” manufacturing readings for the US, Europe and China on Tuesday.

Australian economic data: Imports

• Given that a high proportion of economy-wide spending is on imported goods, the latest data is worth noting. The Australian Bureau of Statistics report that “In seasonally adjusted terms, goods debits fell $677 million (3 per cent) between July and August 2014 to $21,423m. Intermediate and other merchandise goods fell $878m (9 per cent), consumption goods fell $65m (1 per cent) and non-monetary gold fell $25m (10 per cent). Capital goods rose $292m (6 per cent).”
• Annualised imports from Japan are currently at 3-year lows, down 5.4 per cent on a year ago, while imports from China are growing at the slowest annual pace for five months.

What are the implications for interest rates and investors?

• There are a few balls in the air at present for investors. Still, for traders of shares or the Aussie dollar, the volatility is probably welcome – certainly sharemarket volatility is near 9-year lows. For longer-term investors, the good news is that once we move into a new week, a lot of uncertainty will be resolved. The Scottish issue will hopefully be settled, the next US interest rate decision won’t occur until October 28/29 and the next batch of Chinese economic data won’t occur until early-mid October. And in Australia, the profit-reporting season is out of the way while the Reserve Bank won’t be moving interest rates any time soon.
• In the coming week the major domestic focus is the Financial Stability Review on Wednesday while the key international events are “flash” manufacturing readings for the US, Europe and China on Tuesday.

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• The GDP (economic growth) figures were released last week. And the question we are getting asked most is what is the story with inventories – that is, unsold goods. Inventories provided the biggest contribution to economic growth in the December quarter. But strangely the inventories to sales ratio fell.
• Inventories are goods sitting on shelves, work in progress or stockpiles of raw materials like coal and wheat. If they are rising, it may point to softer production or imports ahead. In this note we provide a view on the apparent inventories puzzle. And it all appears due to prices – especially lower import prices.

Inventories – the true story

• Most people probably wonder what all the fuss is about – inventories (stocks) hardly seem a big story. But if we import or produce goods and they don’t get sold, then some adjustment may need to occur. If we import too much, it may actually be positive – we can cut future imports. However if we produce too much, that is a different story. That may lead our businesses to trim production because we have enough goods sitting on shelves.
• In the December quarter, inventories seemingly accounted for all economic growth – inventories contributed 0.8 percentage points to growth and overall economic growth was 0.7 per cent. But, strangely, when you compare the level of inventories to overall sales, the ratio actually fell to a record low. That is, it doesn’t seem as though we have too many inventories after all.
• Well it seems that part of the answer is contained in prices. It seems that we brought in more of cheaper imported goods. But if those goods haven’t been sold as yet, that can produce some inconsistencies or quirks in the data. (The Bureau of Statistics notes that “For national accounting purposes, the physical change in inventories during a period should be valued at the prices prevailing at the time that inventory changes actually occur.” The problem is that many businesses use historical cost accounting methods so the ABS has to calculate an Inventory Valuation Adjustment (IVA) to calculate true changes in volumes and values.)
• We use the word ‘seems’ because no one can ever know the full story with inventories. Did companies import a lot more goods and then didn’t sell them as hoped? Or did they import the goods because the deals were good and they wanted to stock up on the expectation of stronger sales ahead. Still, whatever the case, companies need to sell the goods in question eventually.

So what do the figures show?

• The accompanying tables give a detailed picture of what really happened to inventories in the December quarter.

• The sector that provided the biggest contribution to GDP in terms of the change in inventories was wholesale trade (adding 0.36 percentage points). Retail trade and “other non-farm” (mainly mining) provided 0.13pp, with manufacturing, farm and public authorities all adding 0.06pp.
• So the greatest change came from wholesale trade. These are firms that  purchase goods (generally in bulk) for the purpose of on-selling (and generally to retailers). Now wholesalers may import the goods or buy in bulk from domestic manufacturers for on-selling.
• The next interesting point is to compare the real (inflation-adjusted) change in inventories to that in current prices. The biggest difference is wholesale trade. In real terms inventories rose by $797 million; in current price terms, inventories rose by only $381 million. Farm inventories also rose by $807 million in real terms and by $1297 million in current prices.
• Clearly farm prices are rising sharply – accounting for the higher figure in current prices. But the wholesale trade sector appears to have stocked up with cheaper goods, thus the lower build-up of stocks in current price terms compared to real terms.

• In real terms, non-farm inventories rose by $935 million; in current price terms the book value of stocks actually fell by $640 million. Now sales in current prices rose by $505 million – all of which was domestic sales. So the overall inventories to sales ratio (comparing goods in current price terms) actually eased from 0.673 to 0.668.
• If prices of imported goods are falling and cheaper imported goods are flooding in to the country, the lower prices are reflected in the book-value value of inventories. Domestic sales will end up reflecting the cheaper goods in future months.
• A reasonable conclusion is that wholesale trade sector stocked up with cheaper goods that haven’t been sold as yet. Businesses and consumers will hope they will be able to buy these cheaper goods in coming months.

Implications for investors

• The puzzle seems to have been solved – wholesalers bought cheaper imports and these haven’t been sold as yet. As we stress, no one knows the full story, but across all sectors stocks (inventories) provided a boost to economic growth.
• Inventories don’t appear excessive in relation to sales and it doesn’t appear that production needs to be wound back – but perhaps import growth will soften. Still, it’s hard to see inventories boosting GDP in the March quarter.
• Will wholesalers pass on the savings of a stronger dollar and lower technology prices to retailers? And then will retailers pass these savings on to consumers? Certainly businesses and consumers are price conscious and are driving hard for bargains.
• The bottom line is that deflation is still a key issue for the business community, especially retailers. Pressure on margins and profitability will continue. But lower retail prices are positive for consumers and inflation, potentially keeping interest rates lower for longer.

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The big picture

• The role of a business economist is to educate, inform and occasionally entertain. But most people merely want business economists to explain what key issues mean in practical terms.
• And the one concept that most people want to understand is the terms of trade. Simply, the terms of trade relates the prices that we receive for our exports to the prices we pay for imports. If we get paid more for our exports and we pay less for our imports, it means that we are – collectively – better off. It means more income for Australians.
• The Reserve Bank constantly notes that the extra income being received because of the high terms of trade is a key source of concern, but most don’t know what that has got to do with them. And rightly so because the gains aren’t easy to see and aren’t distributed evenly.
• But since 2004 when the terms of trade started to lift in a meaningful way, our exports have increased by $34 billion, with the extra income from higher prices totalling $23 billion and volumes up $11 billion. Over the same time imports rose by almost $22 billion with almost all the increase in extra volumes – we effectively paid no more but also paid no less in net terms over the period in response to price changes.
• Most of the income gains have gone to businesses – in the form of increased revenue, higher profits, cheaper inputs and savings on new equipment. But consumers have also done well with the higher Australian dollar making imported goods more attractive.
• If businesses and consumers use the increased revenue and cheaper prices to boost spending on a raft of domestic and foreign goods and services then the Reserve Bank would be worried. In other words there would be more money chasing the goods and services on offer, potentially driving up prices and economy-wide inflation.
• But if businesses and consumers instead use the terms of trade gains to cut debt levels and boost savings then the Reserve Bank has less to worry about. And that is precisely what has been happening.
• So don’t let anyone tell you that interest rates will need to go up because the terms of trade is rising. It depends whether the extra income is spent or saved, and the latter continues to dominate, serving to minimise the inflation risk. The Reserve Bank has been at pains to point this out, but it has had mixed success in getting the message through – even to the business and media economists that should know better.

The week ahead

• It comes around every three months – the time when the stars appear to align and we are bombarded by what appears to be every imaginable economic statistic.
• The ‘autumn avalanche’ kicks off on Monday with data on private sector credit (lending), home prices and the Bureau of Statistics (ABS) business indicator series. The latter includes figures on inventories, profits and sales.
• On Tuesday the Reserve Bank Board meets to decide interest rate settings – but no change is required or expected. Also the quarterly balance of payments data is released the same day together with government finance, retail trade and the performance of manufacturing survey. Retail trade is expected to grown by 0.3 per cent in January but the floods may have distorted the results.
• On Wednesday, GDP or economic growth estimates for the December quarter are released. At this early stage (key components will be released over the next few days) we estimate that the economy grew by 0.7 per cent in the quarter after an anaemic 0.2 per cent increase in the September quarter. There is the risk that a ‘technical recession’ may be revealed in the GDP numbers over the next year – two consecutive quarters of economic contraction. As noted, this would be more of a ‘technical’ event – influenced by floods and cyclones – but it will serve to keep the Reserve Bank on the interest rate sidelines for longer.
• On Thursday data on building approvals and international trade are released. Again the figures will be affected by the floods. Building approvals probably rose 3 per cent while a trade surplus of $1.5 billion is expected.
• In the US, the first Friday of the month is notable because it is when monthly employment data is released. And after disappointing figures in the last couple of months, there is a lot riding on the upcoming February data. The good news is that economists tip an improvement with non-farm payrolls expected to lift by 160,000, although the unemployment rate may edge up from 9.0 per cent to 9.1 per cent. Nevertheless the results should encourage investors and thus keep the bull market alive.
• Turning to the other data, personal income and spending figures are released on Monday together with pending home sales and regional manufacturing gauges for New York and Chicago. On Tuesday the ISM manufacturing survey is released together with construction spending and car sales. The Federal Reserve Beige Book is released on Wednesday with the ADP employment index and Challenger job layoff series.
• On Thursday the ISM services index is issued while factory orders data is released on Friday alongside the nonfarm payrolls data.
• Also of note, the Chinese purchasing managers for February will be released on Monday. Investors hope for solid, but not sensational growth.

Sharemarket

• No doubt the post-mortems are about to start – with analysts and investors alike dissecting the results from the profit-reporting season. But overall the simple conclusion is that the earnings results have been very mixed. And understandably so. Consumers haven’t been spending, forcing businesses to slash prices and margins, and ultimately depressing earnings. There have also been headwinds provided by the lofty Australian dollar – not just for those with significant overseas operations – but also for retailers, contributing to price deflation at home. The ongoing strength of the Chinese economy has lifted mining revenues but it has also caused headaches for companies – what to do with all the cash? In aggregate, though, profits by ASX 200 companies rose by around 40 per cent over the past year, so it is clear that Corporate Australia is in fundamentally strong shape.

Interest rates, currencies & commodities

• The tensions in the Middle East and Africa have caused oil and gold prices to gyrate and injected more life into equities markets, but currency markets have been relative immune from the volatility. The Aussie dollar continues to hover near parity against the greenback although it has lost some ground against the Euro. The inflation hawks at the European Central Bank have been rattling sabres, threatening to push up interest rates, despite many countries in the process of implementing austerity measures to get debt and budget deficits under control.
• Financial markets are preparing for a long period of inaction by the Reserve Bank on interest rates. The Reserve Bank Governor has noted the “reasonably lengthy” periods in the past of “sitting, waiting and watching.” Shortterm interest rates have barely budged over 2011 with physical 90-day bill yields holding close to 4.90 per cent, modestly above the 4.75 per cent cash rate.
• It’s important to highlight the conflicting forces acting on world oil markets. On the one hand there are the tensions in the Middle East and Africa, raising concerns about potential disruptions of crude oil supplies – especially into Europe. Speculative forces have also been active in pushing up Brent prices. But on the other hand, China is attempting to slow its economy, US gasoline inventories are near 21-year highs and OPEC is intimating that some members may be allowed to lift production if there are disruptions to global supply. The Australian petrol price may be near 28-month highs, but interestingly the $1.35 per litre average price is not far above the 5-year average of $1.28 a litre.

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• Petrol sales in the September quarter were the lowest for any September quarter in five years, as consumers and businesses focussed on cutting costs. Unleaded petrol sales totalled 2,873 mega litres in
  the September quarter – marking the weakest quarterly reading in 13 years.
• The Reserve Bank Assistant Governor Philip Lowe has highlighted the concerns about the limited amount of spare capacity in the economy, higher commodity prices and the resulting threat of inflation.
• In seasonally adjusted terms imports fell by 5 per cent in January. The slide in imports suggests that the recent spell of trade surpluses should continue, albeit at a more sedate level given the impact of the
  recent floods.

What does it all mean?

• The weakness in petrol sales in the September quarter of 2010 shows that consumers and businesses remain focussed on keeping costs down. Overall petrol sales recorded the weakest reading for a September quarter in five years. And more importantly unleaded fuels sales were at the weakest levels in 13 years. Added to which the purchase of E10 has risen exponentially.
• Despite more cars being on the road, fuel sales remain sluggish with sales down 1.3 per cent on a year ago – no doubt a further sign of the conservatism that is currently part of the economic landscape. While people are generally confident, they are also keen about saving a buck wherever they can, trimming car usage, and using cheaper variants of fuel such as E10.
• Interestingly premium unleaded petrol sales recorded a modest rise, which may be due to newer vehicles potentially requiring a higher octane fuel.
• In the past the Reserve Bank has highlighted concerns about tight labour capacity, and once again the Assistant Governor Philip Lowe has used the opportunity of a speech in Sydney to highlight the inflationary pressures developing from higher commodity prices and the limited spare capacity in the domestic economy
• As the global economic recovery gains traction it is likely that inflationary pressures will gain traction – particularly in the Asian region. The Assistant Governor noted that if the recent run in higher commodity prices gained traction it is likely that a swifter policy response maybe required.
• The labour market will continue to be a hot button issue for the Reserve Bank. In recent times Reserve Bank liaisons with businesses have suggested that access to labour is at comfortable levels. However as activity and investment ramps up in the second half of the year it is likely that labour shortages – particularly in mining and construction – will become more prominent.
• The Assistant Governor did highlight that the domestic economy is close to full employment. Importantly the anticipated surge in growth over the second half of the year is likely to result in further interest rate hikes as the central banks attempts to ensure inflationary pressures – particularly wage inflation – remains muted. Importantly if the jobs can’t be filled here skilled migration visa’s needs to be increased to allow Australia business the option of tapping foreign workers as needed. And while wage inflation has not been an issue in recent times, CommSec expects wages growth to be an indicator closely watched by the Reserve Bank over the coming year.
• Interestingly the Assistant Governor also warned that despite the current commodity boom it was important to factor in periods of volatility – with particular focus on China, where bouts of weakness was a possibility.

What do the figures show?

• Sales of automotive gasoline (unleaded, proprietary brand, lead replacement and E10) totalled 4654.6 megalitres in the September quarter, down 1.3 per cent on a year ago and the lowest September quarter result in five years.
• Unleaded petrol sales totalled 2873.7 megalitres in the September quarter, marking the weakest quarterly reading in 13 year (March 1997). Alternatively sales of E10 fuel jumped 51.4 per cent over the year to 772.9 megalitres.
• Other data out today shows that imports fell by 5 per cent in January, in seasonally adjusted terms Assistant Governor’s Speech
• “If these inflationary pressures were to intensify, a stronger policy response than seen to date would be likely, increasing the risk of a subsequent sharp slowdown in the region.”
• “This more cautious approach to spending could be quite long lasting, with households using the strong income growth to further improve their balance sheets.”
• “In putting together our forecasts, we have assumed a middle path, with the saving rate staying high, but consumption growth broadly matching income growth over the next couple of years. We will, of course, be looking very closely to see if this is how things evolve.”

What are the implications for interest rates and investors?

• The weakness in petrol sales is a further indicator of the inherent level of conservatism by households and the resulting cautiousness being shown by businesses. A period of interest rate stability is required to ensure that activity levels pick up in the second half of the year.
• The strength of the job market has potential to boost wage growth and therefore inflation. Fortunately at present, wage pressures are restrained, allowing the Reserve Bank to remain on the interest rate sidelines. Given the weakness in consumer spending and lack of activity in the near term CommSec expects the Reserve Bank to remain on the interest rate sidelines until May.

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• The broad measure of business inflation – the producer price index (PPI) – rose by just 0.1 per cent in the December quarter, well below expectations for an increase of 0.5 per cent. Compared with a year ago, producer prices were up by 2.7 per cent.
• Inflation was narrowly based, and largely driven by price increases for building materials and agricultural products like flowers and poultry. The rising Australian dollar resulted in prices of imported goods falling by 4.4 per cent in the December quarter to be 2.4 per cent lower over the year.
• Motorists need to prepare for higher petrol prices. The terminal gate or wholesale price of petrol leapt by almost 2 cents a litre last week to 26-month highs. CommSec expects petrol prices to rise 3 cents a litre over the coming fortnight.

Click here to download this document (pdf)

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• Prices of imported goods slumped by 3.8 per cent in the December quarter, driven largely by the appreciation of the Australian dollar. Import prices are 1.0 per cent lower than a year ago.
• Import prices were at record lows across a whole host of products including computers, mobile phones, leather & travel goods, and paper products and electrical equipment.
• The index of imported electrical appliances fell by 7.9 per cent in the quarter – marking the biggest quarterly fall in records going back 23 years. Similarly imported food prices have fallen by almost 20 per
  cent in the past two years.
• Prices of export goods fell by 8.1 per cent in the December quarter. However export prices are still 19.0 per cent higher than a year ago.
• The data on import and export prices suggest that the broader terms of trade may have fallen by around 2 per cent in the December quarter.

Click here to download this document (pdf)

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• Chinese economic activity picked up pace in the last three months of the year. The Chinese economy grew at a 9.8 per cent annual rate in the December quarter (consensus 9.2 per cent) up from 9.6 per cent in the previous quarter. China’s industrial production also strengthened in December while the pace of retail sales activity rose to 25-month highs.
• The annual rate of consumer price inflation eased from the 28-month high of 5.1 per cent in November to 4.6 per cent in December. Food prices rose by 9.6 per cent over the year while non-food prices rose by just 2.1 per cent.
• Chinese authorities are continuing to achieve a degree of success in controlling property prices.

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• The east coast floods were caused by the La Niña weather event. La Niña will continue until at least March. El Niño and La Niña are regular climactic events and there has been no discernible change in their severity or regularity in recent years.
• The forerunner of today’s Bureau of Infrastructure, Transport and Resource Economics (BITRE) undertook the seminal study on the costs of natural disasters in Australia in 2001.
• Based on the analysis from the BITRE of all 77 flood events (cost greater than $10 million) from 1967 to 1999, CommSec estimates that the cost in current dollars would be almost $52 billion. The entire 1974
  floods across the nation are estimated to cost just over $4 billion in today’s dollars.
• Economists are tending to over-estimate the economic and financial impact of the Queensland floods. While activity is lost in the short-term, it is boosted in the longer-term through rebuilding, repair and
  refurbishment work. This restoration work has already begun.

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• How are Australia’s states and territories performing? CommSec has attempted to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.
• Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, indicators were compared with decade averages – that is, against the “normal”.
• It is clear that the ACT has the stand-out economy at present. In the ACT, unemployment is low, with housing activity, construction, population growth and economic growth all above average. The only blots on the copybook are retail spending and business investment.
• The Western Australian economy had also been an out-performer but it has slipped back to the pack. While construction work is the clear driver, population growth has slowed, dragging on the housing sector. Unemployment is low compared with other states but it has been drifting higher.
• There is little to separate Victoria, South Australia, Northern Territory, Tasmania and NSW. Certainly NSW has been a major improver over the last quarter led by above-average population growth and firmer business investment. But both the Queensland and NSW suffer from weak housing markets – the only two economies where dwelling starts are below decade averages.

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• Australia’s trade surplus narrowed by $636 million to $1,925 million in November. Economists had tipped a surplus near $2 billion. Exports were flat over the month while imports rose by 2.9 per cent.  Australia has chalked up trade surpluses of $17.1 billion over just the past eight months.
• Australia’s trade surpluses with both China and India soared to record highs over the past year. In the year to November, Australia sent $17.7 billion more in exports to China than it received in imports. Just under two years ago the trade surplus was close to zero.
• While the physical trade of goods is in surplus, the services account remains mired in deficit – the deficit widening from $372 million to $454 million in November. The high Australian dollar is a key culprit, depressing tourism receipts.
• Total exports from Queensland were $4,199 million in November – 21 per cent of total Australian exports. The floods in Queensland is likely to see more sedate trade surpluses take place in coming months.

What does it all mean?

• The economy may be going through a soft patch but the dollars keep rolling in. Australia has now notched up its eighth consecutive trade surplus, totalling in excess of $17 billion. 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.
• Interestingly Australia is making strong inroads amongst its Asian counterparts. The trade surplus with China has now risen to a record high of just over $17 billion on a yearly basis. Clearly this is a phenomenal result given that just under two years ago that trade surplus was close to zero.
• Similarly the trade balance with India has also expanded. In the year to November the trade surplus with India ballooned to $14.4 billion. Australia’s trade surplus with India has been gradually building over time but it has doubled since the start of 2008.
• Higher commodity prices and increased demand for coal and iron ore has helped insulate the Australian economy. However given the floods in Queensland it is likely that trade surpluses are likely to be more moderate in coming months.
• Not surprisingly the strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s services deficit has widened by over $450 million in just the past month. No doubt the strength of the Australian dollar 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.

What do the figures show?

International trade

• Australia’s trade surplus narrowed by $636 million in November to $1,925 million. Economists had tipped a $2 billion trade surplus. Exports were flat in the month while imports rose by 2.9 per cent. It was the eighth consecutive trade surplus.
• Rural exports rose by 1 per cent in November while non-rural exports rose by 2.2 per cent and non-monetary gold fell by $325million or 21 per cent.
• Within non-rural exports, coal, coke and briquettes fell by 5 per cent. “On a recorded trade basis, between October and November 2010 exports of bituminous (thermal) coal fell $240m (19 per cent), driven by volumes. Exports of semi-soft coal fell $78m (10 per cent), with decreases in both volumes and prices. These falls were partly offset by hard coking coal which rose $16m (1 per cent), with an increase in volumes and a decrease in prices”.
• Within rural exports meat and meat preparations rose by $35 million or 6 per cent.
• Within imports, consumer imports rose 1.0 per cent in November, capital goods imports rose by 8.3 per cent while intermediate goods imports rose 3.5 per cent.
• While the physical trade of goods is in surplus, the services account remains mired in deficit – the deficit widening from $372 million to $454 million in November. The high Australian dollar is a key culprit, depressing tourism receipts.
• Australia’s trade surplus with China hit a record high of $17.1 billion in the year to November.

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 Reserve Bank will point to our trade surpluses as evidence of the mining boom’s impact on the economy. As more dollars flow into the country, policy has to tighten to soak up the extra money and thus prevent inflationary pressures from building. However the sluggish level of activity at present suggests that the Reserve Bank can hold off on any near term rate hikes.

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