The trade deficit is here to stay

Market pundits were again surprised by yesterday’s trade deficit. Notes from a number of banks expressed surprise and Peter Martin captures the mood this morning:

Unexpectedly bad trade figures for February show income from resource exports down for the second consecutive month.

Over the quarter, income from coal exports fell 19 per cent, and income from metal ores and minerals exports fell 10 per cent.

”The commodity price cycle peaked in the third quarter of last year,” said the chief economist at HSBC, Paul Bloxham.

”Indeed, with global growth expected to be below trend and more commodity supply likely to come on stream over the next year or two, it appears likely Australia’s terms of trade peaked in the third quarter as well.”

…”It’s just as well that we don’t worry about current account deficits these days,” quipped the chief economist at BT Financial Group, Chris Caton.

…”There is no need to hit the panic buttons just yet. Having said all that, the second consecutive trade deficit is is unlikely to ease investor concerns about the extent of the slowdown in China,” said an economist at Commonwealth Securities, Savanth Sebastian.

There is no mystery here. As I’ve been writing for months, the deficit is driven largely by the bulks. The following chart from the RBA says it all:

For the past six months, coal shipments have been weakening and although iron ore volume shave held up its price has fallen on greater supply.  Thus the quarterly contract prices (the blue line) have corrected significantly from their post-GFC highs starting in January. It looks like these basic dynamics continued into March with poor outgoing coal volumes from Gladstone Port (below 2009 levels) but strong ore demand showing up in some price pressure. April will see quarterly ore contracts flat (or rising slightly) and coal contracts will fall further. The weakening dollar may help a bit but without a significant correction I expect the deficit to remain for the foreseeable future.

If rate cuts get a response, the current account deficit is going to blow out. Another reason to sell the dollar.

David Llewellyn-Smith
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  1. “There is no mystery here. As I’ve been writing for months, the deficit is driven largely by the bulks.”

    The deficit is driven by over-consumption, insufficient production, which is driven by a distorted economic system which is driven by negative RAT interest rates.

    As per DE’s post yesterday I don’t understand why such a song and dance is made every month over the trade figures while the CAD and its implications are virtually ignored.
    It looks to me like a long term effort by MSM, bureaucrats and politicians to disguise the real truth from people while trying not to tell out and out bare faced lies.
    Pull the wool over your own eyes.

    The CAD is chronic (50 years)not some short term (five years) phenomenon. So we need to look much more closely for its causes than simply to say it’s ‘driven largely by the bulks’

  2. Diogenes the CynicMEMBER

    Yes Flawse negative RAT interest rates are a problem here and elsewhere. No one wants to have a proper functioning interest rate system that rewards savers and allocates capital properly.

    Our CAD will continue unless we erect tariff walls and increase labour flexibility.

    • No, our CAD will continue while we persist with commodities – coal, iron ore, wool, and the list goes on – which will forever subject this country to both short and long-term shocks. As for the pundits above, there’s no skill involved in stating the bleeding obvious day after day; the real challenge, however, is to provide an alternative economic model.

      It’s simply mind boggling how none of these pundits – nobody at all – can even envisage a future beyond resources and commodities. If that’s true of the “experts”, then imagine our leaders. Seriously, the best thing Australia can do for itself is to stop pretending it even gives a damn about being a first rate economy…

  3. Thanks Diogenes

    I was a farmer back in the days of high tariffs. We were left to the open market while manufacturing was protected.
    Wages in protected industries went nuts. Powerful unions had a field day at the expense of everyone else (still do of course)(Note I include in the powerful union category the Law Society!) The execs of the protected companies all drove Benz’s and Jags.
    Farmers, in general, were broke.
    So I’m seriously opposed to tariffs.

    So the first thing that has to happen is to get the A$ to a value we are paying our way. Then industries can probably sort themselves out. We could approach the subject of industry protection of some kind after we got the major step done. I do think direct subsidies are better. They have to be considered every year according to whether they are justifiedand whether the society can afford them.

    So the current mantra for free and floating exchange rate has to go.
    Being boring and stating the obvious again we know the exchange rate is rigged by Hedge Funds and foreign CB’s so why don’t we just rig it ourselves!

    All sorts of problems along the way of course…inflation etc.
    The (easy) answer lies back in time.

    • “..we know the exchange rate is rigged.. so why don’t we just rig it ourselves”

      A loud and piercing “Hear Hear!” to that, flawse.

      Especially given that everyone else is doing it, in one form or another. It angers me that (eg) Switzerland and Norway have intervened in currency markets to try and minimise impacts of “hot money” on their economies, but our politicians, Treasury, RBA, and “expert” commentariat insist that we must stay ‘pure’ to “free market” doctrine. Our biggest trade partner has a currency peg, but to even speak such evil regarding ourselves is verboten.

      The US, UK, and EU manipulating their currencies via QE, LTRO etc is all fine and dandy for our ideologues. Infuriating.

    • How about the government uses fiat money to buy overseas assets. The issuing of more money in this manner should reduce the exchange rate but would not add to the domestic money supply, therefore not inflationary. The assets purchased could form our SWF.

      • Alex…that’s a kind of MMT activity. Then the fiat is overseas and they want somewhere to spend it. So they bring it back here and buy our assets! Then it also adds to the domestic money supply. There are no easy ways out of this.

        When you think about this stuff everything goes in a circle…round and round!

        • Alex Heyworth

          ” So they bring it back here and buy our assets!”

          Hmm …. maybe we can sell them some overpriced houses!

          • Nice one Alex! Unfortunately what they buy is our mines, rural resources and industries!

            My conclusion of the night it’s best not to think about it…it’s a bit depressing.

            Mt wife always asked me ‘why do you think about these things?’
            ‘No one else does and they are all happy and making money living in luxury houses!’

            I really have no answer for her.

        • Institute reserve requirements for the banks like the chinese have. The growth in the money supply caused by the printing of chinese yuan to maintain the usd peg is mopped up by rising reserve requirements (hence why the chinese have dropped reserve requirements when foreign reserves fell due to the exit of hot money recently).

    • SweeperMEMBER

      Agree about the exchange rate. The floating currency has not worked. Its a taboo subject though – anyone who even raises the issue is considered a fool.

    • I listened to Philip Coggan podcast a while ago (think I probably saw it mentioned here on MB) – ‘Paper Promises: Money, Debt and the new World Order’.
      He said:
      Historically it has been the creditor who gets to set the rules (after upheaval) – e.g. USA > WWII, Germany in EZ at present. Coggan suggests on a world-wide scale it’s China’s turn to set the rules. China doesn’t like floating exchange rates.

  4. Thanks forty-niner! It didn’t improve my mood but does reinforce what I’ve been trying to impart around here for a while.

    I hope those who opined that I had damaged my credibility by predicting a disastrous outcome if we keep doing what we do will actually listen and absorb some of this!!!

    Somehow around here everyone seems to go MIA!

  5. I just listened to the last few mins of questions.
    I have to say I think (and I’m open to other suggestion) the attempt to ‘inflate away’ this amount of debt would result in hyperinflation.
    Inflation basically is a redistribution of money from those who have saved to those who have borrowed. I don’t think there is enough saved money to go close!

    Lastly inflating away debt hasn’t worked in the last 50 years. Inflation has brought on an explosion of debt. It would again.
    Why would anyone save or not borrow in an environment of RAT rates of minus 20%? minus 40%? or minus 80%? etc etc