Australia's export boom

Sun, 20 Apr 2014  |  

This article first appeared in the April edition of the Melbourne Review. See

Australia is in the midst of a quite startling export boom. What is exciting and positive for Australia's longer run growth prospects is that the transition of the economy towards exports has much further to run.

The surge in exports and the prospects for yet further growth is largely the result of the once in 100 years mining investment frenzy over the past decade. Capacity in the mining sector has risen massively as the mining companies built the infrastructure needed to extract and transport the raw materials to the export markets, mainly in China and elsewhere in Asia.

Much has been written and discussed the fall away in mining investment. That is perhaps one of the most obvious aspects of the change in the structure of the economy over the next few years and nothing can or should be done to arrest that inevitable fall.

What has received much less attention, but should be taking over the discussion of where the growth is coming from, is the export sector.

The most recent data shows that the value of exports growing at an annual pace of a very robust 18 per cent. This has seen the balance on international trade move to a sizable surplus of a little over $1 billion for the last few months. The volume of exports has increased at an impressive 6.5 per cent in the past year and has registered seven straight quarterly increases.

What is even more impressive about the export efficiency of the Australian economy and the resources sector in particular, is that the export transition has occurred despite some signs of less robust economic growth in China.

Encouragingly, China is easing its domestic policy settings at the moment as it works to support its economy from the second half of 2014. When China succeeds in locking in GDP growth around 7 to 7.5 per cent, Australian exporters will continue to be major beneficiaries and Australia's trade performance will continue to improve.

In addition to the massive boost to output from mining, the lower Australian dollar has also aided the export sector. For the last six months or so, the dollar has hovered around 90 US cents, well down from the level around 105 US cents a year ago. This depreciation has helped to give Australian mining companies a competitive boost and has helped support other exporters and those firms competing with imported goods and services.

The fact that exports are registering such stellar growth and the trade balance is comfortably in surplus suggests that the Australian dollar, around current levels of 90 US cents, is not over-valued.

Indeed, one very important benchmark in judging whether a currency is over or under valued is to look at the trade and export performance. If a currency was over valued, for example, as the Reserve Bank of Australia and others have suggested in recent times was the case for the Australian dollar, it would manifest itself in a poor trade performance. In simple terms, exports would be faltering under the pressure of a market misalignment.

The fact that Australia's export and trade performance has been improving at a rapid pace when the dollar was around 90 cent suggests the RBA and others need not worry about an over valued currency. Indeed, so strong is the trade turnaround that some may suggest the Australian dollar is undervalued at recent levels particularly what is happening to commodity prices and domestic growth.

It is not just mining that is registering an improved export position. Inbound tourism is growing rapidly and after a particularly troubling few years, education exports are also lifting. There are also some encouraging signs that agricultural exports are also expanding to round out a more favourable picture. 

In all, it appears that one of the critical elements needed for the economy to transition from the mining investment boom to other sources for growth is occurring. The surge in exports over the past year or two is set to continue and this will see the export sector being a significant contributor to bottom line GDP growth. With any further momentum in dwelling construction and household consumption expenditure, as has been the case since the middle of 2013, the overall rate of economic growth is on track to reach and even exceed its long run trend for the next couple of years.

Australia does not have a reputation as a particularly efficient export economy. Years of wide trade deficits and quite alarming current account deficits have at times created a perception of risk and instability. This is changing and indeed it is quite possible that over the next few years will record surpluses on its current account and Australia will be seen as an export powerhouse.

comments powered by Disqus


Change of view on interest rates

Fri, 24 May 2019

Having been the only economist to correctly anticipate an interest rate cut from the RBA when close to 50bps of interest rate hikes were priced in to the market last year (See Bloomberg 17 August 2018), I have agonised over the exact months the cuts would be delivered and then how many rate cuts would be needed to reflate the economy.

Recently, I was of the view that the RBA would need to cut 100bps from now, to a level of 0.5%, but I did so with relatively low confidence. This is why I recommended all clients to close their long interest rate positions on 17 April 2019 (when the implied yields were 1.10% for the mid 2020 OIS; 1.35% on 3 year yields and the Aussie dollar was just over 0.7000 at the time).

Like in most good trades that were massively in the money, I left a little money on the table while I reassessed the outlook.

Since calling for interest rate cuts from the RBA, a lot of water has passed under the bridge, especially in the last few weeks.

Events mean I am changing my view on interest rates and have been placing / will be looking to implement new trades.

Watch out Australia: There's a flood of dismal economic news on the horizon

Wed, 01 May 2019

This article first appeared on the Yahoo Finance website at this link:


Watch out Australia: There's a flood of dismal economic news on the horizon

The Australian economy is in trouble and Scott Morrison and the Liberal Party government need to come clean and acknowledge this and outline a framework how this period of economic funk is to be addressed if they win the 18 May election.

The Liberal Party is campaigning in the election on a “strong economy” and being “good economic managers”, bold claims that fly in the face of the latest score card for the economy.

That scorecard shows a flood of what is, frankly, disappointing or even dismal economic news. Australia is going through a very rare recession in per capita GDP terms and last week saw data showing zero inflation in the March quarter. Contribution to these indictors of economic funk is the fact that well over half a trillion dollars of householder wealth has been destroyed as house prices have tumbled.

Add to that the fact reported by the Australian Office of Financial management last week that gross government debt is $543 billion, almost double the level that the Coalition government inherited in September 2013, and the scorecard is looking very ratty indeed.

As the ad man used to say, “but wait, there’s more”.