Record trade surplus papers over Australia’s worrying domestic economic trends

Australia has posted its biggest trade surplus on record and is on track to post its first current account surplus since Gough Whitlam was prime minister.

Key points:

  • Australia posted its biggest ever monthly trade surplus in June, at $8.04b, up from the previous record of $6.17b in May
  • The nation is now poised to record a current account surplus for the first time since June 1975
  • A 3.6pc slump in imports boosted the trade surplus — cars and planes accounted for much of the fall in imports

In June, Australia sold $8 billion more goods and services to the rest of the world than it imported. That is a whopping $1.8 billion higher than the previous month, which was itself a record trade surplus.

Over the quarter, the trade surplus widened to just under $20 billion, more than $5 billion above the March quarter, and over the year Australia accumulated surpluses totalling almost $50 billion.

As Westpac economist Andrew Hanlan pointed out, the March quarter current account deficit was only $2.9 billion — the lowest in many years — meaning there is a very good chance Australia will post its first current account surplus since the June quarter of 1975, when the June quarter figures come out in a few weeks.

A current account surplus basically means the nation is earning more from overseas than it is paying out.

But, even if it eventuates, Australia’s stay in the black as against the rest of the world looks set to be fleeting.

“Given the terms of trade has only limited upside from here and the income account remains in structural deficit, our expectation is for the current account to return to deficit in the medium term,” JP Morgan’s Tom Kennedy warned.

Although, in the short term, the record trade surplus is likely to stave off any risk that Australia’s economy shrank in the June quarter, with analysts agreeing it will contribute more to GDP than they had previously expected.

Iron and coal boost exports

There are no prizes for guessing how Australia is posting record trade surpluses, with surging iron ore prices and shipments of LNG contributing much of the improvement so far this year.

Brazil’s tragedy boosts Australia’s fortunes

Machine loads iron ore

Machine loads iron ore

The collapse of another tailings dam in Brazil, which has killed hundreds, has also driven iron ore prices to multi-year highs and will boost the profits of Australian miners and taxes to the Federal Government.

Read more

Again in June, iron ore and other mineral exports rose 5 per cent, adding a further $554 million to the positive trade balance.

While iron ore prices have slumped more than 20 per cent in recent weeks, they were higher than June levels for most of July, meaning there is a chance of an even bigger contribution to the next set of trade figures before this effect eases off.

The other big export contributors to the improvement that month were coal (up by 4 per cent, or $232 million) and metals (excluding gold, up 21 per cent, adding $230 million).

The biggest fall in exports was in rural goods, which dropped 4 per cent, led by a 36 per cent ($207 million) slump in grains, due to the drought conditions persisting across much of the country.

As Citi’s economists noted, this export growth has come despite a trade war raging between China and the US.

What next in the US-China trade fight?

Custom image showing Chinese 100 Yuan notes.

Custom image showing Chinese 100 Yuan notes.

The US has now declared China is a “currency manipulator” — but what does that mean and what effect will it have on the trade war?

Read more

“The record run of Australian trade surpluses has occurred despite Australia’s largest export partner and most important strategic partner engaging in a trade war,” Citi’s Josh Williamson said.

“Australia is also exporting more to both nations. In original terms, exports to China increased by 5.9 per cent month-on-month and 35 per cent year-on-year, while exports to the US increased by 9.9 per cent and 15 per cent, respectively.”

JP Morgan believes the trade war has actually boosted Australia’s export performance, with this the 18th consecutive monthly trade surplus.

“Since the first round of tariffs was implemented in March 2018 Australia’s external sector has strengthened,” Mr Kennedy said.

“With local government infrastructure likely to be an important part of any further stimulus offset, we retain the view that the US-China trade conflict will have only a limited impact on the external sector.”

Concerning import fall

However, while a 1.4 per cent rise in exports overall boosted the surplus, a 3.6 per cent slump in imports contributed more than twice as much to the improvement in the trade balance.

On the one hand, the decline in imports may be a sign that the lower dollar is causing people to buy Australian.

The other more concerning, and more likely, explanation is that the import slump simply reflects the fact that Australians are cutting back on spending in general.

That is reflected in a 5 per cent drop in consumption good imports, which boosted the trade surplus by $450 million.

According to the Bureau of Statistics, more than half of this decline in imports was due to “non-industrial transport equipment” — cars and bikes — which fell 13 per cent, or $260 million.

This is further confirmation of a very weak trend in new car sales that has persisted for many months.

It is terrible news for car dealers, but not necessarily so bad for the economy now that all the nation’s cars are imported.

Camry in a coal mine?

Are plunging car sales a harbinger of economic doom or a shock-absorber for more labour-intensive parts of the economy?

Read more

Much more concerning was a 9 per cent ($600 million) slump in capital goods imports.

This is the machinery and equipment that firms import to assist in their businesses and a fall in this category can signal weakness in investment and expansion, ultimately meaning lower economic and employment growth.

The good news in the June figures was that the very volatile (because each one is so expensive) civil aircraft sector fell 46 per cent, accounting for $307 million of the drop, with industrial transport equipment accounting for most of the rest ($213 million).

The volatile nature of some of these factors also means it is possible that June 2019 was as good as Australia’s trade surplus gets for quite a while, but while it lasts it is a welcome fillip for an economy that is generally otherwise spluttering.