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
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
Related Articles:
- None Found
About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia and pens the small cap newsletter, The Australian Small Cap Investigator. He is also a contributing editor to the Australian resource investing publication Diggers & Drillers.
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.