Thursday, October 08, 2009

Interest rate rises, the balance of payments and the Australian economy - August 09 trade figures

I watched the global reaction to the Reserve Bank's decision to raise interest rates with a degree of bemusement. To paraphrase one overseas story, it was a case of a one trillion dollar economic tail wagging the global market dog. I guess it shows how much concern is still around.

A key reason why I waAugust 09 goods and servicess more optimistic about the Australian economic position last year than most was the sudden strengthening in Australia's trade position. To my mind, this gave Australia an added economic buffer. The trade position has now gone into reverse.

   The August trade figures were released by the Australian Bureau of Statistics on 6 October. They confirmed a continued deterioration in Australia's trade position.

The attached graph from ABS shows the balance of trade on goods and services. You can see clearly how the trade position improved over 2008, then went into reverse in the early part of 2009.

The next graph shows Australia's imports of goods and is quite instructive. You can see how Australia's economic expansion led to the country sucking in increasing overseas goods. This went into reverse at the end of 2008.

Imports of services displayed a somewhat similar trend, although service imports are now displaying a stronger upward trend.     August 09 goods debits

Now the point here is that our balance on goods and services has deteriorated in spite of a decline in imports of goods.

The reason for this lies in a decline in the value of our exports of goods; service credits are essentially flat lining.

The next graph shows our exports of goods. You can see just how steep the decline in the value of our exports has been since the peak at the end of last year.

I haven't attempted to disentangle the price and volume effects in the figures, nor have I looked at compositional issues. I think that the raw numbers are sufficient for present purposes.

Just as the improvement in Australia's trade position provided a buffer leading into the global turn down, the deterioration now proviAugust o9 goodsdes a constraint on economic growth.

As the Australian economy expands, additional imports will be sucked in. Without additional exports, the consequent deterioration in the balance on goods and services must constrain growth.

In theory in a world of floating exchange rates, the Australian dollar should depreciate to balance any deterioration. In practice, in at least the short term, the Australian dollar moves at variance to the economic fundamentals. Just as the fall in the value of the ozzie last year was not supported by the fundamentals, I would now question the size of the rise.

During the week I heard one commentator suggest that Australia was now, in economic terms, in a group of its own. Others suggested that demand for commodities especially from China was the proximate cause of Australia's better performance.

If you look at the numbers, it seems to me that Australia is in fact in the same position as most countries, if a little more fortunate. We are just as dependant as other countries on improved economic conditions if the current recovery is to be sustained.