Trade deficit stuns everybody but MB

By Leith van Onselen

The Australian Bureau of Statistics (ABS) has just released trade data for the month of January, and it’s a shocker, with the trade balance moving to a deficit of $673m in January 2012, a turnaround of $1,998m on the surplus in December 2011.

The worsening trade balance has been driven solely by a reduction in goods and services exports, which slumped $2,279m (8%) to $25,372m. The trade balance would have been even worse had goods and services imports not also fallen by $281m (1%) to $26,045m.

The result has shocked markets, with the Australian Financial Review (AFR) publishing the following in relation to the result:

There has been a massive slump in the nation’s trade performance, with the trade balance plunging almost $2 billion from a strong surplus to a large deficit in the space of a month.

In a result that is likely to stun markets, the trade balance fell to a deficit of $673 million in January, driven by a big 8 per cent fall in exports which overwhelmed a modest 1 per cent decline in imports.

Similar headlines are apparent across the business media. The equity market and dollar fell on the result too.

Yet it will be of no surprise to MacroBusiness readers. Houses and Holes predicted last October that the falls in the iron ore and coal prices would produce this outcome (herehere and here).

Turning to the key charts, you can see that a significant portion of the fall in the value of total exports was accounted for by a reduction in iron ore exports (-$1,227m), with the reduction in coal exports (-$268m) also contributing to the fall:

The value of iron ore exports in January were down $2,154m from their peak levels reached in October 2011 ($6,275m). The fall in iron ore exports now sees coal as Australia’s largest single export commodity by value, accounting for 23.7% of total merchandise exports in January versus iron ore’s 21.4% share:

The fall in the value of iron ore exports has been driven primarily by falling demand from China. January’s exports to China ($5,163m) were $2,135m below the peak level reached in October 2011 of $7,298m:

Similarly, the share of total merchandise exports going to China is also falling, down from a peak of 31.0% in October 2011 to 26.9% in January 2012:

Given its status as the nation’s iron ore capital, Western Australia appears to have borne the brunt of the export slowdown, although it remains way out in front of the other states. Western Australian merchandise exports in January ($8,406m) were $2,838m below the peak level reached in December 2011 ($11,244m) Queensland, too, experienced a smaller reduction in exports of -$657m:

Reflecting the decline in the value of exports, Western Australia’s and Queensland’s merchandise trade surplus declined by -$3,001m and -$847m respectively:

Finally, you can also see the deterioration in Australia’s services export, which have been trending down since late 2008 on account of the high Australian dollar:

Reflecting the increased purchasing power, Australia’s services imports (mostly overseas travel and tourism) has surged, which has thrown Australia’s services trade balance into deficit:

If there is one thing that this trade result illustrates it’s that the Australian economy is highly non-diversified, with 45% of our merchandise exports concentrated in just two commodities – iron ore and coal –  and 25% to 30% of our merchandise exports going to a single destination – China. While this industry structure has served Australia well over the past decade as the Chinese economy boomed, it places us in a precarious position should China’s economy ever hit a speed bump.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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  1. Sebastionbear

    Ahhhhhhhhh, that’s why I just love my daily fix of MB. HnH and UE, you guys rock – as do all the bloggers in the den of the Reynard Fox!

    My friends think I have some inside knowledge that ‘I predict’ what is going to happen in the economic mayhem that is Australian and Global economics.

    I did smile when I read all the ‘shock’ and ‘Surprise’ headlines in the MSM regarding the deficit.

    Keep up the good work, you’re making me look good.

    Cheers, Craig

  2. Well done.

    Have to say though, all these ‘expert’ economists are failing consistently with their forecasts – do they toss a coin or throw a dart?

      • The headline figures quoted at the beginning of the post are seasonally adjusted. Unfortunately the country and commodity level data used in the merchandise trade charts above are raw, since the ABS doesn’t provide seasonally adjusted figures.

    • Sorry 3d1k, aren’t MB bloggers all economists? Or you mean only those who are in the government?

  3. So it does look as though Ore’s on the nose whilst coal is still cooking, so to speak. It backs the GSP insights from the other day, albeit subject to large volatility.

  4. Wow, this and Swan’s ‘Dutch disease’ policies in the space of a day!

    The powers that be will finally be ready to have the right discussions, just as it’s too late…

      • What do you mean 3d?

        At least they might actually start having the debate about our concentrated dependence on what are fundamentally volatile, and cyclical, commodities.

        The only complication I see is how they respond to the question “so why have you only decided to start talking about it now?”…

        (Particularly when it has been well flagged in certain non-mainstream arenas – ditto for the state of the housing market).

  5. So the ‘Holes’ going according to prediction; now we only have to wait for the ‘Houses’ to do their bit. My suggestion is that one will follow the other; and with Holes having started….well….

    • Houses have started. Ireland’s first 12 months losses were less than 1.5% with a tiny rise in unemployment. Ours were 5%?

      Wait until household dicretionary spending really falls on reducing home equity or zero rises in expected equity.

      Then the fun starts.

      • That’s well and good if Australia follows Ireland. But what if Ireland follows Australia? Ireland could see an enormous house price boom that lasts 40 years.
        Why should the market of country A follow that of B? Is Ireland a follower or a leader?

        • thomickersMEMBER

          Usually when Ireland has an “economic problem” it is usually followed by a long term mass exodus.

          • Phil the engineer,
            That is very funny, but does that mean that in order for Sydney property to crash, I will be forced to work in an Irish pub? If so it doesn’t help me get a cheap house.
            Perhaps the shortage of housing could be resolved in a better fashion.

        • Its already kicked in – %5 reduction already, looking like trend continuing and accelerating in 2012.

  6. Let’s see where that unemployment goes now. There was too much early gloating by some last month.

    When will government get it’s act together and see that Australian families are struggling and that more of it is on the horizon!? So frustrating.

  7. knock knock, hello, RBA, is there anyone in there? the lights are on at martin place but nobodys home.

    • Sebastionbear

      Just on that comment GB – or if anyone else can answer……………

      Does the RBA get a ‘heads up ‘from the ABS as to what the figures are looking like prior to the scheduled release as in the case of ToT? Or do they have to wait just as us data hungry plebians do?

      It certainly doesn’t look as though the RBA has prior knowledge based on their (perhaps flawed) decisions.

      Then I suppose they might have to act on the information…………….

      • no heads up Sbear as far as im aware. for the life of me i cant comprehend how they cant see this coming. or maybe they do and are just in denial hoping it will go away?

        but thats GDP, Unemployment and now trade deficit. 3 strikes for stevens and the RBA this week. keeping their perfect track record in place of missing every single major turning point in the economy.

        • IMO: The RBA does not look at the economy in 12 or 18 months into the future and set rates for that point. (In front of the curve, I can’t understand why the media keep telling us this BS) . They set rates on the previous data and are always behind the curve, riding the current wave either up or down. We see it EVERY time the world melts and the RBA sits or like in 2008 is still increasing rates. (Based on previous data). The RBA don’t crystal ball anything and I’m starting to wonder if they need a risk management department to hypothesize different scenarios and the course of action they should take, if those events happen. Instead of saying “OMG how did that happen, Lets Cut or Increase rates”

          To all of us, the drop in GDP, increasing unemployment hidden by falling participation rates, ToT dropping off a cliff, deflating of the housing bubble, etc, etc, etc are all things well spoken about here and other non MSM places. But hey, there old cut and paste department seem to be working overtime tacking on the end of each statement
          “With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy remained appropriate for the moment. ….. The Board will continue to monitor information on economic and financial conditions and adjust the cash rate as necessary to foster sustainable growth and low inflation.”

  8. Great work (as usual) – and nice headline. There is certainly more consistent noise about declining steel production in China.

    Also it is hilarious just how much coal we will sell to anyone to do anything with, but mum and dad wont let us use it at home. Hard to see this slowing that much.

  9. UE I think MB needs to go mainstream to wake these muppets up. You and your fellow bloggers use the data and IMO point out the risks, give good guidance. What I think is about to unfold will show how right you are. None of these guys saw the GFC so why would they see this …

    We have the government and MSM in general spinning a story which is not connected to reality IMO.

    So many issue coming into play, and no policy in sight. The recent OECD shows us having a deteriorating education system, and the list goes on. On top of that spend and tax and the more uncompetitive we become. Pump up housing at the expense of everything else … tell me I’m wrong.

    Rock on dude..

  10. Wow… well if that doesn’t make people start worrying about our reliance on mining I don’t know what will.

    Then again, the series are volatile, so see if it repeats in a months time. What are the quarterly numbers like, that is, could this just be noise in the data?

    • The fall will be driven by the correction in quarterly iron ore and coal contracts. Therefore we will not pick up until the April contracts come through, which we won’t see until June, at which it will no doubt be a shock all over again!

      • “Yet it will be of no surprise to MacroBusiness readers. Houses and Holes predicted last October that the falls in the iron ore and coal prices would produce this outcome ”

        Nice call HnH…..

          • 3d1k your a china bull why are you praising this data… I thought you said China would boom forever and Australia would prosper…….

          • LBS, I give credit where credit is due. FWIW I have not said China will boom forever. I have said that I hope the China story continues, for both the Chinese and for us. For this I have been tagged China Fanboy!

            It should by now be apparent to all the magnitude of the importance of China to our domestic economy, our resources base has been about the only factor that has prevented us from the slide into euro-like conditions and even then it may not be enough to stave off the impact of the end of the credit boom. So far, so good. Yes, softness appearing in a range of stats – what else to be expected – has occurred in almost every other developed economy. Keep your fingers crossed for a China soft landing.

          • I thought 3d1k is more of a China hopeful than a blinded bull. Some of you fail to notice that 3d1k reads enormous amounts and posted one of the best China links ever provided by readers of this blog last year. It was a podcast which explained why China’s remodelling will be troublesome and why even a modest fall in their GDP growth has profound effects on the Australian economy. ToT topic has been extensively covered here by MB bloggers. Great stuff all around, in terms of objective data.
            The economic experts IMO may be very good professionals, but who they work for may influence the interpretation and forecasts to some degree. Also, as discussed before, humans prefer being optimistic. I know many people who would opt not to read any of the stuff we absorb daily here at MB.

          • No worries. Name calling and hostility in general ruins good discussions whereas civilised disagreements and debates are insightful.

          • If I can join the love fest for a moment, I must say that I agree with Goldilocks. It’s a bit rich to label 3d1k a “China fanboy” just because he hopes that China has a soft landing. We should all be hoping for the same as the alternative sucks for Australia.

            It’s not 3d1k’s fault that the Government has squandered the proceeds of the mining boom, nor is it his fault that we are over-exposed to housing. He’s just trying to make the best out of the cards that we have been dealt.

          • I hate to break up this love fest. But I distinctly remember about 3-4 months ago, 3d1k lecturing everyone here on their pessimism and the “glass half-empty” attitude.

            Now that the data clearly shows the chickens are coming home to roost, some of the water in his half-full glass has evaporated.

    • Sebastionbear

      “could this just be noise in the data?”

      2 Billion is a lot of noise for 1 month!

      • It is, but at the same time, look at the spike in services in mid 2000. It went up by about 2 billion off a baseline of 2.5 billion. That may have been something real, I can’t remember what would have caused that. Still, large spikes can and do reverse, even at the scale of billions of dollars. Personally, I tend to think it won’t be noise, or at least most of the 2 billion will fit the eventual trend. But without solid information as to why it is not noise, I wouldn’t claim as such. So if we can see that the drop is related to a quarterly contract locking in a drop in price, with maybe some yearly contracts also heading down, then we have a trend.

        • ‘look at the spike in services in mid 2000. It went up by about 2 billion off a baseline of 2.5 billion. That may have been something real, I can’t remember what would have caused that.’

          Could the olympics have something to do with that? I can’t thing of anything else..

          • Yeah actually all the hospitality, bed and breakfast places, and all the restaurants probably had it good around then… if it was the Olympics the spike should be mostly localised to the NSW data. I’d agree with that interpretation, so it isn’t noise then. So less arguement that the current change could be noise. Also guess that means that the Olympics was good for the economy here, unlike in Greece.

    • Well MB are big on ‘trend’ and there isn’t one yet, whether this is an anomaly impacted by extended Chinese New Year we will have to wait a month or two to see. Port Hedland still busy.

      This emphasises the reliance on mining when there is little else looking rosy. But never fear, the RBA released a paper late 2011 focusing on TOT shock…

    • sorry to but in but yes. you thought Q4 GDP was a shocker at just 0.4%. wait till you see Q1.

      • I can hear it now GB. Q1 zip or -ve and the May budget handed down with various new taxes.
        We’re all doomed you know, sky’s gunna fall in etc etc.
        Heheheh. Quite funny really.

        • On the contrary, Government spending will tighten even more to supposedly reduce the ‘crowding’ effect. The Libs will say they haven’t done enough. You can see where this is going…..but it’s never been a better time to buy a house!

      • the flooding will have an impact too, if only minor.
        I wonder do forecasters factor in the natural disasters that seem to inevitably occur every year now?

  11. Okay, general question for the experts. Say the high currency is in part based on the fact Australia is coupled to China, and so AUD is China play. Does this downturn, if sustained, mean that the currency will immediately begin to drop?

    Then priced in AUD the exports will be worth more, and the TOT will jump up again. So does that make the TOT self correcting in the case of a drop?

    Additionally, why are the miners not vocally supporting a currency peg? If you halved the currency, you would double the sale value in AUD of the exports, making a huge increase in profits.

    Here’s a crazy idea, can anyone tell me if it would actually work?

    The government undertakes for a currency peg to lower the currency to 0.80 USD or so. In return, the miners have to pay 30% or so of the EXTRA profit they make because of the devaluation. This helps tourism, manufacturing etc, the miners make even more, and the government easily makes a surplus, with it going into a SWF denominated in other currencies to maintain the peg.

    The only problem I can see is that it makes the housing issues worth with regard to off shore borrowings. But the government would be in a better position to help with that.

    • Rumplestatskin

      In theory this seems logical (I have had many arguments about this. After all, they are our major exporters, and if the high AUD is bad for other exporters…), but there are practical factors that mean that miners are not so fussed on the high AUD –

      1. A lot of the machinery etc being used in the current capital investment boom is imported, and
      2. The major players are foreign owned, and need to pay their profits to foreign shareholders in their own local currency.

      If the major miners were fully owned domestically, and all the capital inputs were manufactured domestically, I believe they would be pushing for a lower AUD.

      • So if in a few years, when the machinery has all been built they start pushing for a currency peg then we have that they are more local owned. Of course if they don’t they are either being silly, or dominated by foreign interests. Either way, I suspect the mining industry can handle a lower dollar better than the tourism etc industries can handle the high dollar.

      • 😀

        $300B in AUD FX traded nightly.

        Low $200B in exports ANNUALLY.

        This is why we should just try an implement a Tobin Tax. There are a whole bunch of people either making monmey for nothing, or diverting risk here for no long term pay off.

        We should be taking a clip from it.

          • Raptor, thanks for posting this info again – elsewhere I mentioned recently hearing a London based forex expert talking on a range of currencies – AUD purely a CT play now.

          • Peg the dollar!

            Seriously, how is it helping that our currency has become a plaything of the forex markets.

            If the AUD is truly a pure carry trade “play” now, then the floating dollar is benefiting no-one except traders.

          • Okay probably showing my naivety again, but if it is OUR currency, even if traded overseas, surely there is some way that the government could write rules surrounding the currency. It could decide to unfloat the dollar if it wanted to, though that would be silly and probably really stuff up bank funding.

            But if it could do that, why is the government unable to legislate that all AUD currency trades have to be registered with the RBA or some new thing, and that each trade has a 0.001c stamp duty? Any trades external to the RBA (or whatever) are deemed to be void, and no longer valid currency in Australia. It is only government writ that makes the notes legal tender, I would have thought they could take it away as well.

  12. If demand, and therefore price for iron ore continues to decline we might see a very large expansion project in WA put on hold for a while.

    • thats right R. the lofty and wrong forcats are based on all capex plans coming to fruition but can tell you that if miners get the heeby jeebys they will shelve projects, cancel contracts and lay off staff quicker than you can say “at trend”

  13. Sorry guys, I don’t buy it. I think the RBA needs to redo their seasonal adjustments.

    This dip looks like a seasonal dip due to Chinese New Year. I’m pretty sure that the ABS don’t adjust for CNY. It doesn’t look like it’s listed under their seasonal adjustments for this data, and it’s not part of SEASABS. To confirm that, look for a big bounce back next month.

    Seasonal adjustment isn’t automagic – it uses historical fluctuations to make a guess about how the current figure is due to seasonality. The adjustment is never 100% correct. With the massive growth in China’s influence on these figures, the impact of CNY over time would be growing, which means that the historical adjustments that would occur in Jan/Feb are now understated, significantly understated.

  14. I think most economist know what’s going on and about to happen.

    I think it’s a sign of our times, ‘keep on dancing until the music stops’. If not you could be ostricised like Barnaby Joyce.

  15. Now that you’re gloating is over, it is clear you missed the news item explaining that ome iron ore shipments were delayed by cyclone heidi in mid Jan. This will go a long way to explain the large fall in iron ore volumes during the month. For such a large fall in volumes in one month (permanent change in volumes that is), you’d also expect BHP and RIO to be updating the ASX which I am yet to see.

    Imagine if it all reverses next month…I’ll be watching it very closely.

    The iron ore price is pretty steady lately at around $140/ton and AUD sitting around the same level before the announcement.

    The evidence suggests waiting for the Feb numbers before declaring victory with your bearish agenda.

    • dumb_non_economist

      Wouldn’t a rough estimate of that be known,its impact as well and commented on?

    • daroo,

      Stats at this site might interest you:

      Port Hedland Port Authority – everything from volumes shipped, type of cargo, destination, ships in Port and at anchorage, quite interesting (especially if you are not WA based) to get a handle on level of activity (massive).


      • Mining BoganMEMBER

        26 waiting outside. The fewest I have ever counted was five in 2009.

        When or if they drop to that then I’ll start to worry.

          • Have you seen how many coal ships there are parked outside Newcastle? It’s horrifying.

            I despair of this country (and humanity) every time I go to a Newcastle beach.

    • The trend began turning downward around August last year and has pointed consistently down ever since. In the context of the past 10 years, it looks to be heading back toward historically normal.

  16. Can someone please explain the spike in coal exports to Japan in 2008?

    The more recent spike is probably explained by Fukushima going offline, and the Japanese needing replace nukes with coal, but what’s that huge spike in 2008?

    FWIW, I reckon ore prices will decline from here (due to pressures on both the demand and supply side) but the world can’t get enough black death. We truly are a suicidal species.

      • Its likely that installed capacity of gas and coal power stations are similar, giving them the flexibility to change fuel sources.

        For example based on nominal rating I’m pretty sure US installed capacity is just one third of total electricity generation, but still accounts for half of all electricity produced.

        So perhaps when gas prices were going gangbusters in 2008 they reverted back to using cheaper coal

    • JacksonMEMBER

      On your second point Lorax, suggests that peak cheap oil is just going to result in more coal as fuel.

      The data seems to confirm your hypothesis.

      • They have a large reliance on oil for energy production, looks like they replaced it for a while with coal.

  17. Sorry guys, I’m in the wait till we see Feb numbers and maybe March as well given rain in NSW and Newcastle being biggest coal export port in world (is that still correct?)

    Surely someone is paying someone at the 10 biggest Iron ore and Coal export ports to report ship departures and estimated tonnage. Customs must have these numbers, surely, and feed them to Treasury, RBA, Trade and Intelligence.

    The 10 biggest ports would capture 90% of the volumes of what is now 45% of our exports according to the chart above.

    Bet your life some big commodity traders have the info on a daily basis.

    Time to make it public under continuous disclosure through ASX or by ABS early alerts in the interest of an informed market fro AUD, mining shares and interest rates.

  18. Robert Sherlock

    Australia’s number one exporter own’s a part of many of the main 3’s (Vale, BHP, Rio) iron ore projects. Historically it has been a middle man to export to Japan, but now acts as a middle man between iron ore exporters, steel mills and China. Its power is great, how else does the iron ore price nearly double in a day!

    Check out its website and just see how much of Australia does it own, trees, cows, uranium, coal, iron ore, oil, gas, everything!

    Now just how much of Australia’s biggest exporter trading hits AUD, close to nothing. A little is converted to pay a few Australian staff, Australia’s biggest exporter employs hardly any Australians, the USD received for selling the Australian assets are either sent to shipping/equipment companies in USD and the rest sent to Japan in Yen. The biggest exporter doesn’t really use the AUD, a dropping of the AUD just makes the Australia workers cheaper.

    No support for the AUD at all from anyone big enough to support it. It is just traders not understanding currency basics. Does anyone remember the AUD dropping from 90c to 60c in a month for no reason, wait until there is a reason, then watch the panic.

    If you really want to know what a currency is worth buy $1000 your own “basket of goods” in Australia and the buy it in USA you will find that a 30-50cent value is closer to real. I am paying half for Fuel, cars, food and clothing and around a fifth for housing (in Texas).

    • Okay, just for completeness, what was the name of that export company? Surely it has a website or something we could look at.