Australia’s Current Account Deficit is a Disgrace

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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

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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19 Comments on "Australia’s Current Account Deficit is a Disgrace"

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kage
Guest

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).

G Riddy
Guest

It’s so true, is the Australian Government taking external stability in the foreign market into account at all?

Andy
Guest

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?

Scotty
Guest
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… Read more »
Tasmanian
Guest

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.

A.J
Guest

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.

Australian
Guest

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.

smart
Guest

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

John James
Guest

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

Ross
Guest
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… Read more »
Lilly
Guest

“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.

Queenslander
Guest
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… Read more »
Comment by Josh
Guest
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… Read more »
Danni
Guest

I think that anyone who says the CAD is a bad thing is an idiot. I am only 16 and even I know the above article is a whole lot of absolute rubbish. What is wrong with a large amount of foreign debt? It is only bad if we’re consistently borrowing to stimulate consumption and spending. Australia’s large amount of foreign debt is helping to improve our standards of living. I see nothing wrong with that.

Chris
Guest
To start, Australia has been running a current account deficit for some time. The only real reason for the deficit is the Austrian’s high marginal propensity to consume. Is this a problem? Well not exactly. All it means is Austrian’s would like to enjoy the life they have and therefore spend a high proportion of their incomes, not bad at all. The only problem about this is when they come to borrow from a bank. The low savings means banks cannot lend from consumers savings but instead they have to borrow from overseas(along with other domestic resources). Of course the… Read more »
Daniel Strauss
Guest

You are all idiots, we are doing fine, if our nations still alive, it means we are at least satisfactory. GO STRAYA

Jack
Guest
Yes, Australia does have a large CAD, but this is due to the fact that Net incomes in the Current account is a huge negative(makes up approx 75% of the deficit) This is due to the large amount of foriegn investment in this country in the past, where now companies must send profits and dividends overseas. And the fact that we import more than we export is not a bad thing. It shows that confidence is high, and that the Australian consumer is willing to spend their money. The only way to permanantly reduce the CAD, and then bring it… Read more »
rick e
Guest

Good to see new blood join in and put it where they stand at this stage of life. We all see life differently threw different agers. Round and round it goes….. Spandau Ballet

Arthur Phillip
Guest
The current account deficit was the reason the Liberal party drove around Sydney with a Debt Truck in 1998. It was used to highlight how high it was, and how incompetent the Keating government were in handling it.The truck actually broke down on one occasion and the Liberal people said it was because the debt was so large. Very funny guys those Liberals. By 2005 with John Howard entrenched as Prime Minister, and Peter Costello as Treasurer, the current account deficit had doubled. In his biography, Peter Costello recalls all the achievements of his days in office, but nowhere in… Read more »
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