This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2272401-034728405.html
Australia has a trade problem
Australia’s international trade position is getting markedly worse.
The bad news is that exports are falling, despite a strong global economy and some strength in commodity prices. At the same time, imports have picked up partly because of the overvalued level of the Australian dollar and partly because of an increase in capital goods imports which are picking up in line with the improvement in business investment.
In November, Australia registered a monthly deficit of $628 million on trade in goods and services which was the second deficit in a row and it sits in stark contrast to the monthly trade surpluses around $3 billion in late 2016 and early 2017. The weakness in exports is surprising. The world economy is strong with growth getting close to the best in a decade. Commodity prices are rising in line with the global strength which should be adding significantly to our export receipts. The fact that exports have been falling for nine straight months in trend terms is probably best explained by the strength of the Australian dollar which is more than offsetting the positive influences. The strong Aussie dollar, it should be noted, is being held up by Australia’s relatively high interest rates.
In the 34 years since the Australian dollar was floated, there have been numerous examples of how a high (overvalued) Australian dollar has eroded the international competitiveness of the export sector.
This appears to be the case now and is made more problematic in the current environment of intense globalisation with the expansion of low cost producers. With the dollar edging higher in recent months, export weakness is likely to remain a factor in the trade accounts.
Unlike exports, imports are on the rise.
There are several factors at play when it comes to the surge in imports which are up around 8 per cent in the past year. The high Aussie dollar is one of those. Imports are cheaper as the dollar rises. Just think of the appeal of an overseas holiday if the dollar is say, parity to the US dollar versus a time when it is languishing around 60 US cents. The same incentives apply to importers. There is some good news in the high import levels, with a strong rise in capital equipment imports over the past year. Indeed, in the 12 months to November, capital goods imports (machinery, equipment, cars, trucks and the like), rose to a record $72 billion. This is up a strong 14 per cent from a year earlier.
This positive trend on capital goods import reflects other news on the economy that is showing the start of a recovery in business investment which rose by around 2 per cent in each of the June and September quarters of 2017. With the NAB and illion surveys of business confirming a more upbeat view on capital expenditure into 2018, the rise in capital goods imports is not surprising and it should be reflected in stronger business investment right through 2018.
The international trade position is set for further deterioration into 2018, even if exports can reverse the recent weakness if commodity prices remain firm. The deterioration will be centred on further growth in imports.
With the Australian car industry closed, 100 per cent of new motor vehicles sales will be imported. And as business sector capital investment continues to recover, the high import component of such investment will feed through to further increases in the import bill.
Get set for on-going large trade deficits which should cap gains in the AUD and if interest rates keep rising in the US relative to Australia, might even lead to a weaker Aussie dollar by year end.