In a post on my personal blog, Confusions over current economic forecasts, I explained why I found some of the current economic discussion so personally confusing. A key reason was the growing divergence between my own judgements and various forecasts and rhetoric.
In this post I want to look at just one variable, Australia's trade performance. Concerns here were a feature of both the recent Access Economics report and the Australian Government's own forecasts.
But is the position as bad as everybody says? Let's test this with some rough back-of-envelope calculations. I am doing these as I write, so that I am not sure just what my end point will be.
The latest Government projections forecasts a current account deficit for 08-09 of 41/2% of GDP. Exports are projected to go down sharply, imports to decline at a slower rate.
Australia's GDP is a bit over a trillion dollars, so this equates to a current account deficit of around $47 billion. All figures are in Australian dollars.
In the six months to end December, Australia had a trade surplus of $4.8 billion dollars. So to get to a 08-09 $47 billion trade deficit, we "need" a deficit in the second half of the year around $52 billion. This equates to a monthly deficit of $8.7 billion.
In the six months to end December, Australia's exports totaled $111.5 billion. To "achieve" the 08-09 projections, and assuming that imports remain constant, exports need to fall by $52 billion or by 47%.
I just don't believe this.
Look, I may be wrong. If so, please show me where my error is. I may just have committed a maths stupidity. I have done so before.
Until I am shown to be wrong, I just don't believe the forecasts.
The thing that I had forgotten in writing this post was, of course, financial payments. I will deal with that in a moment. First to answer a question from SA.
SA, both the Access Economics forecast and some Government commentary has placed great weight upon our deteriorating trade position. To quote one example:
This is not just a recession. It will be the sharpest deceleration Australia's economy has ever seen," said a director at Access Economics, Chris Richardson....
The current account deficit is predicted to rise, from $65 billion this financial year to $100 billion next year, as exports fall faster than imports. With the international spotlight back on debt, Mr Richardson said a large current account deficit could leave Australia exposed, should other countries prove unwilling to continue lending us the money needed to finance the deficit.
Our trade stats improved at just the right time, so I found the gloom about the current account odd. This post was a very rough back-of-envelope calculation to test this:
- The latest Government forecast suggested a deficit on the current account for 08-09 of 41/2% of GDP. This roughly equated to a deficit of over $47 billion.
- To the end of December our balance of trade in goods and services was credit $4.8 billion. Given this, a deficit on the current account of over $47 billion seemed to imply a deficit on the balance of trade for the December half year of around $52 billion. Projected deficit (47 billion) = December half surplus (4.8 billion) -June half deficit (52 billion).
- In turn, this seemed to imply a fall in exports of around 47%.
In running this calculation, I was ignoring net current financial flows - interest paid and received, dividends paid and received, royalties paid and received - that are added to the balance of trade to get the balance on current account. These are affected as well by current events.
Australia has borrowed quite heavily to fund past trade gaps. These borrowings have been largely private sector through the banking system and are generally denominated in overseas currencies, and especially the US dollar.
Two issues arise.
The first is one of risk. What happens if, as Chris Richardson suggests, other countries stop lending to us? This was the reason why the initial sub-prime crisis affected Australia - domestic liquidity was affected because bank overseas borrowings were affected.
Barring catastrophe, I think that we can already put this one aside because of the impact of the bank guarantee. Our banks are borrowing internationally.
The second issue is the impact of the depreciation of the Australian currency. This increases the Australian dollar value of interest payments, thus adversely affecting the balance on current account. The final effect here depends upon the combination of future movements in the value of the currency with movements in interest rates.
Again, all this shows the importance of shifts in our trading position and the importance of our move into surplus at just the right time.
According to the latest RBA statement, a far better document than the official Government forecasts, the improved trade position moved the current account deficit from over 6% of GDP to 3.2% in the September quarter to around 2.5% in the December quarter. So the Government forecast of a deficit of 41/2% still implies a substantial shift. The Bank figure is 31/2%; this seems more reasonable.