• Revised ABS jobs data up to September (designed to correct for recent seasonal adjustment problems) now shows a slightly weaker jobs market over the last two months than previously reported with unemployment now drifting up to 6.2% (revised from 6.1%). This shouldn’t really be a major shock and is unlikely to have any implications for interest rates. Forward looking labour market indicators such as ANZ job ads point to some improvement ahead.
• The trade deficit for September came in worse than expected at $2.26bn with falling commodity prices clearly weighing on export values. However, the good news is that stronger export volumes are pointing to roughly a 0.7 percentage point positive contribution to September quarter GDP growth.
• Retail sales rose a stronger than expected 1.2% in September and by 1% in real terms in the September quarter.  Annual growth in retail sales growth at 5.7% (see chart below) indicates that the improvement in retail sales growth seen since late last year is being sustained with the help of low interest rates and rising wealth levels offsetting poor jobs growth and consumer sentiment.

The likely strong contribution to GDP growth from trade and retail sales points to solid September quarter GDP growth. That said the mixed nature of recent readings on the Australian economy generally points to the RBA leaving interest rates on hold at record lows well into next year.

Shane Oliver, AMP Capital

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  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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• The October trade balance was a deficit of $529m – an increase of $258m on the deficit in September.
• Exports declined by a very small 0.1% over the month and imports lifted by 0.8% to near record highs.
• Australia ran a goods surplus of $427m over the month and a services deficit of $957m.  The services deficit is being driven by freight charges and related insurance charges.

Exports to China hit a record high: CBA

Exports to China hit a record high, both as an absolute amount and also as a share of total exports.The October trade deficit of $529m came in worse than market expectations which centred on a $350m deficit {CBA(f) ‑$600m).  Australia has been running a trade deficit since December 2011.  Deficits have primarily been a result of a falling terms of trade.  The decline in commodity prices over the past two years has seen the value of our exports relative to imports fall.   Trade deficits therefore become more likely until volumes are sufficient to offset the price effect.  A softer AUD bodes well for export receipts, but pushes up the price of imports.

The 1% rise in imports over October was due to a lift in consumption goods (+1%), services (+1%) and other merchandise goods (+1%).  Imports of capital goods were largely flat.  Machinery and equipment imports fell by 5% over the month reflecting the slowdown in mining‑related capital expenditure.

Exports were largely flat over October despite a small decline of 2.4% in commodity prices (AUD terms).  This suggests that export volumes lifted.  Over the past year, export volumes have been rising while commodity prices have softened a little.  That is why net exports have being making a positive contribution to real GDP growth.  The QIII GDP figure showed that net exports contributed a sizeable 0.7ppts to real growth over the quarter.  This is a measurement of volumes.  But the trade balance is a nominal measure so changes in the prices of goods, as well as the volumes, matter.  In terms of the breakdown over the month, there were falls in rural exports (‑3%), other mineral fuels (‑11%), and metal ores and minerals (‑1%).  These were partially offset by a solid rise in coal, coke and briquettes (+7%) on the back of a solid lift in volumes.

On a geographic basis, exports to China hit a record high during over the month, surpassing $9bn for the first time.  Exports to China are up a whopping 58% on year ago levels.  Its share of exports from Australia also hit a record high, surpassing 40% for the first time.  These numbers highlight just how important the Chinese economy is to Australia’s growth at present.  And why economic data out of China is having an increasingly bigger impact on the AUD and the Australian equity and interest rate markets.

From an RBA perspective, today’s figures are neutral for policy setting.  Resource export volumes are solid, reflecting a continuing increase in capacity as the mining boom transitions from the investment phase to the extraction phase.  The AUD has pulled back to be trading near USD0.90 this week and the central bank will be comforted that the local currency looks to once again be playing its traditional role of buffering incomes and local activity.

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• The trade surplus widened in August. The trade surplus rose by $603 million to $2,346 million. Exports fell by 2.4 per cent while imports fell by 5.1 per cent.
• Petrol prices are set to rise – but modestly. Terminal gate or wholesale petrol prices hit fresh 11-month lows last Friday. But prices have since edged up by just under a cent a litre and regional gasoline prices are also rising. According to the Australian Institute of Petroleum the national average retail pump price fell just 0.2 cents a litre last week to $1.23 a litre.
• The job market is strengthening. The Advantage internet job index rose by 3.3 per cent in September, led by gains in heath care, accounting and IT. But the ANZ index of job ads rose by 0.7 per cent – the weakest increase in five months.

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