Australia’s trade deficit continues to grow

By Leith van Onselen

The Australian Bureau of Statistics (ABS) has just released trade data for the month of October, with Australia’s trade deficit increasing to a seasonally-adjusted -$2,088 million, from -$1,420 million in September.

It was the tenth consecutive month that Australia has recorded a monthly trade deficit (see below chart).

In seasonally adjusted terms, exports rose $99m to $24,405m. However, the increase in exports was more than offset by a $768m (3%) increase in imports to $26,493m, mostly on the back of capital goods (+$674m).

Australia’s major export – iron ore (22% share) – and third biggest export – gold (7% share) – rose by $882 million and $158 million respectively,  whereas Australia’s second and fourth biggest exports – coal (15% share) and gas (5% share) – fell by -$300 million and -$29 million respectively over the month (see below chart).

Exports to China rose by $1,031 million (+20%) over the month, taking its share of total exports to 30% from 26% in September. By contrast, exports to Japan fell by -$53 million (-1%), taking its share of total exports to 18% from 20% in September (see below chart).

Given their status as Australia’s major producers of iron ore (Western Australia) and coal (Queensland), Western Australia and Queensland continued to dominate the nation’s exports. Western Australia alone accounted for 48% of Australia’s merchandise exports in September, much of which was iron ore (see below chart).

Western Australia also continues to hold-up Australia’s trade balance, recording a whopping surplus of $7,047 million (+22%) in October, again mostly on the back of iron ore exports (see below chart).

Finally, Australia’s services trade balance improved slightly over the month (+$8 million), but has essentially stabilised after a horror run since late-2008 on account of the high Australian dollar (see below charts).

Twitter: Leith van Onselen. Leith is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.

 

 

Comments

  1. The trade balance continues to worsen because of RBA rate cuts. More cuts result in more imports since the exchange rate hasn’t moved and interest payments on debt is lower.

    Good to see an increase in capital goods imported but the party will end when the RBA is forced to raise rates in 2013.

    • Diogenes the CynicMEMBER

      Whilst I would like the RBA to raise rates I cannot see that happening in the next 2-3 years if at all. We are headed for ZIRP.

      • Why would we have ZIRP if unemployment is below 6%? I agree that will probably be where we end up in the long-term (5-10years) but in the medium term it is difficult to see interest rates going below 2% without major inflationary pressure.

    • Logically you would think our dollar should be dropping and inflation ratching up and interest rates then rising, but I cant predict when its going to happen.

  2. So according to Graph 1, Australia ,with a couple of Chinese induced hiccups, has run a trade deficit of probably an average $1 billion per moth for a decade (and probably longer if that Graph was displayed, back); a country rich in export resources – is a net borrower – to balance it’s Current Account. And it’s borrowed to fund, what? Export capacity? Technological innovation? Social transformation? Nope. We know what it’s borrowed for, and having not saved a bean over many decades of profligate spending, the time is upon you , us, to reap the rewards.Interest rate falls? I don’t think so…..

    • Yep Janet and somewhat top the point the Trade Balance is really the smaller part of the problem of the Current Account Deficit. In the face of the massive sell-off of assets that has accelerated markedly over the last decade or so we face an accelerating repatriation of dividend problem. Then we have the interest of the debt we have accumulated as well.

      Would those who advocate even more negative RAT rates and higher government deficits, all of which lead to higher Trade and CAD deficits and thus more foreign debt and asset sales, like to explain how this can possibly end well?
      Treasury? RBA? MB? Labor pollies? Liberal Pollies? Greens? Bob’s Party? Somebloodybody?????

      There must be somebody around somewhere with all the answers otherwise they wouldn’t follow the inane path we have gone down…

      Waits……

      • The flipside of the trade deficit though is that foreign countries have wanted to give us billions of dollars worth of petrol, cars and trucks, TVs, clothes, computers etc in return for Australian dollars.

        How much of that decision has been in the hands of the RBA and Australian politicians? Other than import restrictions (to stop foreigners selling us more stuff than they buy from us), could we actually have done anything about it?

      • Pete…any screw up of a policy would be better than the stupidity we are involved in.
        It requires better brains than mine but relying solely on interst rates as a determinant of the dollar is nuts!

        We could have restricted foreign purchases of Aus assets. That would have undercut the one-way bet the speculators have been able to make on the currency with interest rates.

        We have CHOSEN to sell assets to fund consumption. It’s been our choice for 50 years straight.
        There’s a lot of claptrap going on about wanting a lower dollar but few actually do. With a lower dollar is going to come a lot of higher prices. It’s now a death-trap! The RBA knows it! Treasury must know it. Contributors here just pretend it isn’t going to happen.

      • Flawse
        Compared to a period like 1997-2001 where our dollar come off from 0.8 to around 0.46 – yet inflation stayed relatively well behaved (GST impacts aside) – where do you see inflationary pressures coming from at this point in time ? Imports are still running at a similar level to around 2000, I believe. What is substantively different to that period ? Is it mostly the difference in oil prices in your view that will have the biggest impact ? Apologies if you’ve already gone over this in another post.

      • @Pithoneme

        The period of the late 1990’s was a unique period in global trade development because China’s emergence created a prolonged period of exported deflation to Western countries. This coupled with enormous “apparent” productivity gains from the development of the internet.

        If you need any proof of this look no further then the income disparity that developed in this period between wages in the local economy and wages in global exposed industries.

      • Hi pith
        At the risk of being boring…..I have gone over this a bit but it is surely worth repeating because I can’t see another commenter in the whole damned world looking at this except a bloke named Shaun Rein who has written a book entitled ‘The End of Cheap Chna’
        So, as I said, at the risk of being boring I’m going to set this out.
        Note i am talking about the ‘risk of inflation’ As Yogi Bera said ‘It is difficult to make predictions especially about the future!’
        Note also I don’t want to teach my grandmother to suck eggs and insult your intelligence. Some will be obvious stuff to you but I include it for completeness

        Inflation

        If we look at the ABS figures for inflation they are divided into tradable and non-tradables. Non-tradable inflation is, more or less domestic inflation for services that are not traded internationally and are not influenced by the exchange rate. So your non-tradables are Heath and education costs, Govt charges etc etc.
        Tradable inflation in Aus runs at 4 to 5% yet the published CPI number tends to increase at about 2%…how so? Tradable inflation tends to run at zero to slightly negative offsetting the non-tradable inflation and bringing us a total for both sectors as about 2.5% or thereabouts.
        In the past few years we have had a run up in exchange rate from 0.85 to around 1.05. The last 12 months have brought a bit of stability around the 1.03 to 1.05. In the period of the run from 0.85 to 1.05 we should have had a high negative tradable goods inflation of minus 8% or so. Overall inflation should have been negative. It wasn’t because prices out of China were rising quickly to match the appreciation in our exchange rate. In my own business our USD FOB prices were rising at about 10% per year. Wages in our factories (that we deal with) were rising at 23 to 27% every year for three years. That pace has slowed in the past 12 months down to about 14%.

        The effects of Chinese demographics are irreversible. The Chinese work force is already in decline. Factories in most of the big exporting provinces have been experiencing difficulty in attracting and maintaining workers for at least four years. The Chinese stimulus programne post GFC exacerbated the problem however there is an underlying major trend towards labour shortages that cannot be ignored. Associated with this is the growing prosperity of workers and their families. It is much more difficult to get workers to do shift work or overtime even at penalty rates. As a Taiwanese friend of mine who has a very large factory in China said to me over dinner one night ‘The Chinese people want the good life too. Just like you!’ This is an accelerating trend. Young Chinese people want office jobs with computers rather than working at factory type jobs. The trend there is no different to anywhere else except that it is stronger. Remember those entering the workforce now are ‘The Little Emperors’ They are the single (spoiled) children of relatively prosperous couples!

        Despite criticism from the ‘experts’ in the West who are simply the only ones who ‘know’ how to run an economy the Chinese Government has, for many years, been attempting to re-orient their economy. In recent years much of the wage rises have gone into such things as health insurance and superannuation. This de-risks a Chinese person’s life and makes them more likely to consume.
        The point is the tendency for Chinese wages to rise at a much faster pace than ours in the West is not likely to end any time soon. Our problems in this regard will become more and more emphasised with time.

        The End of Cheap China (Shaun Rein) also signals and end to a 50 year cycle for weestern economies such as Australia. In the 60’s we benefited from cheap goods from Japan. By the 1980’s this has moved to Taiwan then Korea and finally China with other SE Asian nations kicking in their own smaller contributions. Pith, without checking dates, I’m sure you’ll find the last decline in the A$ was at a time of the great emergence of China as a cheap supplier of reasonable quality goods. At one time I remember I couldn’t afford to miss going to a single Canton Fair because prices were declining so rapidly. If you missed one your pricing could be out by as much as 10% for the next 6 to 12 months. So I think, at that time, although the dollar was falling FOB prices out of China were falling rapidly at the same time.

        The deflationary effect from China is finished! No one should make any mistake about that. Yet we blunder forth into the future making inflationary predictions and ‘rewarding’ ourselves for our low inflation with low interest rates to expand our debt and consume even more. This is like a 50 year build-up in future bad news that we have ignored. It is bad news that will last decades into the future and threatens our civilisation.

        In these pages I’m ridiculed by HnH et al for suggesting that the long term demographics and prosperity trends in China will be a huge factor in China. The role China played in keeping inflation under control is pretty largely ignored by all and sundry. So also the role China will play in feeding future inflation is TOTALLY ignored. One is portrayed as a FOOL for even mentioning it.

        Now I don’t know the future and EXACTLY how it will play out but to ignore the dynamic of China is total ignorance in the first degree. There ARE offsetting factors to Chinese inflation. Those proffered by MB ‘experts’ include

        1. As the economy tightens there is a greater squeeze on margins. This has been going on for a decade or more. Quite probably this effect is nearing its end as it is now proving difficult for retailers to stay in business. As a result we have had some major consolidations. These consolidations mean future rising, not lower, margins.
        2. Internet sales are increasing at lower prices. Yes sure. How far can this go? I don’t know. However the end result of this trend is that we will be captive to a few known popular brands. Again this will tend, in the long run, to lead to higher prices.
        3. Robotics and productivity in China will tend to slow the pace at which costs rise. How big this effect will be but you can probably write your own number and make up a story around it. I just don’t know. However certainly I do not thing these factors are going to result in a further major decline in prices ex China.

        There are probably others I haven’t thought of. However these should be considered in terms of rising prices in raw materials generally. I simply cannot see a low inflationary outcome in the medium and long term.

        Time and space limits my prognostications but I’m happy to discuss this. At least we might get this possibility on the agenda!

      • Chinabob Not sure if you saw this but one contributor on interest.nz.nz reckoned interest rates should be set ont eh basis of the non-tradable inflation. To me it damned good sense!

      • Thanks flawse – that is quite a comprehensive response !

        Would you have expected Europe to be exhibiting the same kind of phenomena in their inflation data at the moment given the fall in the EUR ?

      • Pith I’ll consult with my European expert on that one and get back top you.

        Logically yes. However I suspect (and I don’t have the numbers) that Imports constitute less of European GDP than Aus. I believe our figure on that is 32%.
        Similarly for the US I’d guess imports are a lower % of GDP. In addition the US has, in my view, a more flexible economy than we have. Again I’m open to persuasion on that!

        Note that in our case with imports about 32& of the economy, if inflation in imports is say 12%, we would get a lift in inflation to about 7%.
        If Europe and the US have lesser % of imports to GDP then the rise in inflation is commensurately lower.

        My contention is that this also answers the conundrum of low inflation in the face of wildly accelerating money supplies in the West. The increased money/credit supply has resulted in high CAD’s from sucking in cheap goods. In this way increased money supply may even have resulted in lower inflation than would otherwise have been the case. Just my thinking!

        There is however a massive problem for the whole western world. We do have inflation in our future. If we don’t deal with it it will run out of control and destroy our societies. If we do deal with it we will end up with a depression that will destroy our societies. Great choices we have left ourselves through our self-indulgence.

        The real problems aren’t about debt although these debates now dominate the economic world. We have allowed a toxic economic and social structure to develop that would, even if attacked in a serious matter immediately, take at least decades to resolve and fix. By decades I mean two generations like thirty to fifty years. In all honesty I believe we have a problem that cannot now be solved.

        Please note on this I am really interested in opinions and theories! My thinking doesn’t lead me down a good road!!!

      • “the long term demographics and prosperity trends in China will be a huge factor in China.”

        Should have read
        “the long term demographics and prosperity trends in China will be a huge factor in Australia.”

      • Thanks flawse – your thinking on this is interesting. I see from tradingeconomics.com that imports as a % of GDP in the Euro area is around 40% vs 20% in Australia. The Euro hasn’t been subject to the same increase in money supply as in the US, and yet they still haven’t seen much sign of inflationary pressures in the past few years despite their currency falling away. I notice that personal travel has grown to be our biggest import. To the extent that a lower AUD dampens demand for such services, I am just trying to work through the possibility that Australia will perhaps not get the spike in inflation feared if our dollar sinks back towards the .80 level.

      • Pith

        I ‘think’ your numbers are wrong on European imports but I’ll consult with a young friend of mine who is the European strategist for a major investment bank.
        Look forward to further discussion

        P.S. Europe is kind of interesting. It has that great internal rift but its external account overall is pretty good.
        Again my young friend reckons Europe might be further into facing its problems than say the US. On the other hand the new energy play in the US might yet rescue it.
        I’ll get back top you.

      • PPS Again re my young friend he reckons the best thing you could do re Europe would be to go somewhere and hide out for 7 or 8 years and then poke your head up to see if anything is happening! He’s not optimistic however is backing high inflationary outcome. His predictions not related to my theories.

      • Pith

        One more thing re Europe. The dynamic of the past few decades there has been fairly heavily influenced by the rise of Eastern Europe, cheaper wages there etc Do it’s inflationary characteristics might be somewhat different….Just thinking!

  3. Ajaydee73MEMBER

    “with Australia’s trade deficit increasing to a seasonally-adjusted -$2,088 million, from -$1,420 million in September.”

    Sorry for being anal, but when you say the deficit _increased_ by _negative_ $2,088 million, that actually means the deficit decreased!

    I’m a fan of this website, but the misuse of negatives irks me every time.

    • Lest I be accused of pedantry:

      It is correct to say that the deficit increased _to_ (not _by) -$2,088 million, from -$1,420 million.