Australia’s Current Account Deficit is a Disgrace
What about the stock market? Well, what about it? The stock market powers along, day after day, as if everything in the economy were just fine. But what about the economy? Is it nearly as rosy as the stock prices are telling us?
The Australian Bureau of Statistics (ABS) today said the current account deficit was a seasonally adjusted AU$15.381 billion in the first quarter of the year. This is disgraceful Australia, we say with all due respect, as an American whose country routinely spends more on imports than it banks from exports. But really, America became a nation of consumers long-ago. Australia is a nation of resource producers. How can this country possibly be spending more on imports than it takes in through exports?
The answer, although a little technical, is probably what worries the Reserve Bank at night. Despite growing the money supply by 12.2% in the last twelve months, the Reserve Bank is not worried about inflation. But perhaps it should be.
The answer to the current account deficit lies in Australia's favourable terms of trade. Rising prices for the things Australia exports have increased the purchasing power of the local currency. Or as the Reserve Bank itself put the case a few years ago, "An increase in export prices relative to import prices means that a larger volume of imports can be purchased with a given volume of exports, thus increasing the real purchasing power of domestic production."
If we read that correctly, it means the same amount of iron ore is buying you a greater amount of flat screen TVs from Sony (although we don't recommend trying to pay for your TV with iron ore. If you do however, be sure to write us and tell us how it goes.)
Booming exports mean higher profits, taxes, and royalties. All these things should translate in to greater spending...investment spending by businesses, consumer spending by consumers (if only their wages were rising), and government spending by governments who do what governments always do - spend.
If this doesn't sound like inflation in the pipeline, we are deaf here at the Old Hat Factory. What's kept things in check so far is relatively low import prices. Hmm. We'll keep watching.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). Dan draws on his network of global contacts from his base in Melbourne. He’s the managing editor of resource newsletter Diggers and Drillers and the editor of The Daily Reckoning Australia.
Comment by kage on 6 June 2007:
Yes, it's terrible, and it will continue to get worse until we stop (or are prevented from) borrowing. If you think the cad is terrible, check out foreign debt (but visit the toilet first).
Comment by G Riddy on 18 July 2007:
It's so true, is the Australian Government taking external stability in the foreign market into account at all?
Comment by Andy on 10 October 2007:
I have a quick question then, which I don't quite understand. Its quite obvious that such a current account deficit is bad, but why in light of this in our Dollar appreciating. It seems to go against normal economic laws? And Im not talking about increasing in relation to US dollar either - I mean our Trade Weighted Index is trending up..
Any ideas why?
Comment by Scotty on 14 February 2008:
What about the fact that Australia's net national income deficit has remained around 4% of GDP, almost two-thirds of the CAD it is not just the Balance of Goods and Services (imports vs. exports). However indeed the 'Wealth Effect' has kicked in with Australians rewarding themselves with excessive purchase of imports, but i don't think this is yet a 'disgrace'. Yes ultimately inflation will be exerienced. But i believe the Reserve bank will be able to curb spending and this spending will most likely drop off in the imported sector thus narrowing the BOGS deficit. In comparison to America, whether or not they became a consuming economy years ago, they still run a bigger deficit than Australia (in terms of % GDP) and with a positive net national income this is made up entirely of a massive trade deficit funded by foreign liability. Great article though - good to see a change from economists saying that the increasing CAD is nothing to worry about.
Comment by Tasmanian on 24 April 2008:
This is a bit of topic but i must complain about the logo at the top of the page.
Where is Tasmania????!
This always happens!! Why does everyone leave it out?
We are part of this country as well - prejudice.
Comment by A.J on 16 May 2008:
What about Australia's Financial & Capital balance? That is well into the deficit. People should not look only at the CAD on goods and services because the Australian dollar is appreciating.
Comment by Australian on 20 May 2008:
Dear Tasmanian
In response to your question, although it may be difficult for you to understand, the nation of Tasmania is located off south coast of Australia.
Sorry for the confusion there.
Comment by smart on 24 July 2008:
everyone seems to be forgetting that the CAD really isnt that bad. In the 1980's the CAD was bad and the debt servicing ratio was 20%. Today the debt servicng ratio is 11% and australia is more competitive. you might also want to read about the "Pitchford Thesis" it has some interesting stuff on CAD
Comment by John James on 5 June 2009:
Ur an idiot! we rely on foreign savings to fill the gap between domestic savings and investment. (AD>AS)!
That is the CAD promotes economic growth. and isnt it a coincidence that as economic growth increases the CAD increases???
nevertheless 99% of debt this is from the private sector so as long as the investment that is being funeded by overseas capital inflow generates sufficients returns to pay for the sercivngs costs in the future; the increase in foreign liabilites can be viewed as sustainable in the future
Comment by Ross on 5 June 2009:
Sorry smart. I will say it nicely but must agree entirely with John James. The CAD combined with services economy expqansion and asset price infaltion only possible by crony ticket clipper credit wrapping foreign issued bonds and misdirecting them into the residential and commercial real estate bubbles produces the mother of all multipliers which whoops up GDP for mugs like McKibbin and all the Keating era travellers to promote as a responsible debt service ratio.
Well mate when the bubble pops the great muliplier becomes equally the equally great contractor and we still owe the money. Foreign capital wasted on unproductive urban assets and the tcket clipping rent takers like we have and as John James implies we have not only just put our Grandkids inheritance up against wall but we have eaten their daily bread for the next twenty years.
Comment by Lilly on 23 August 2009:
"Its quite obvious that such a current account deficit is bad, but why in light of this in our Dollar appreciating."
Increased borrowing from overseas, means more capital inflow, meaning a greater exchange of $OS to $Aus - increased demand for $Aus -> appreciation.
Right? (year 12 economics)
And CADs not so bad exactly as smart said.
Comment by Queenslander on 29 August 2009:
One of the many things that worry me about the economy is who is paying back the debt? As I understand it, if a person works one hour per week it is deemed that that person has worked for the week and therefore is not counted as unemployed. If this is so, the 7 pct unemployed is probably far, far greater. The so called 'Temporary Defecit' much talked about a few months ago, has slipped from the Labour Govt agenda and the only thing that is/was 'Temporary' was the Surplus paid for by Australian taxpayers. A 'Temporary Defecit' is like a temporary mortgage, and that normally lasts for about 25-30 years!
Comment by Comment by Josh on 1 September 2009:
This hype about how bad the CAD is ridiculous, there is nothing that says specifically that having a CAD is a bad thing as long we have sustainable economic growth allowing us to finance it. Furthermore one reason we have a CAD is because we have such low levels of national savings and high amounts of consumption. This in comparison to Japan, who has a high levels of net savings and lower levels of consumption, but whats happening to them now? When their export earnings drop off significantly like what is happening now because of the Global financial crisis, they are unable to stimulate their economy effectively because of the nations tendency to save which limits the effectiveness of fiscal stimulus. Where as our economy is doing relatively well some might say because of our tendency to spend, allowing us to cope much better then other countries with global down turns.