After yesterday’s ‘better than expected’ 0.9% GDP figures, we didn’t have to wait long for some bad news. It took only 24 hours before reality set back in.
Australia’s balance of trade had a forgettable October, according to new figures. The trade deficit blew out by a dismal 38%, to $3.3 billion. That’s worse than most economists expected. And way above forecasts for a $2.4 billion deficit.
It’s the single worst monthly performance since April. In fact, you’d have to go back a long way before that to find a similar collapse. April aside, the deficit hasn’t plunged this low since 2008.
Why is it important? The beauty of the trade deficit is its simplicity. It measures the difference between import and export revenues. The more we import, and the less we export, the higher the deficit — or vice versa.
The last time Australia had a positive balance of trade was in 2014. But that proved a short lived affair, taking place just prior to the commodity price crash. Before that, you’d have to go back to late 2011 to find the last trade surplus.
Of course, there’s nothing stopping an economy from running a trade deficit. But a deficit implies debt. Which means countries must find ways of repaying that debt in the long run. They either do it by boosting their trade surplus, or by taking on more debt.
But Australia is a long way from that. Without a rebound in mining exports, we can’t expect trade surpluses. Instead, Australia becomes a perennial net importer. Just like it was prior to the mining boom.
It was mining once again that dragged on weaker export revenues during October. While imports remained flat, exports were down $829 million for the month. Commodity shipments saw the biggest falls. Ultimately, the rise in export volumes failed to offset falls in commodity prices. Iron ore alone was down 6% for the month, with revenues declining $366 million.
So, a bad month at the office for Australia’s export sector. What conclusions can we make from it? Well, if nothing else, it paints the ‘positive’ GDP figures in a new light. The Daily Reckoning’s Greg Canavan explains:
‘The headline [GDP] number came in at 0.9% for the three months to 30 September. This was better than expected and, annualised at least, represents a 3.6% growth rate.
‘But it wasn’t as good as it appeared. The healthy result came from an unusually strong contribution from ‘net exports’. This refers to the volume growth of exports versus the volume growth of imports.
‘During the September quarter, export volumes increased while import volumes decreased. This combined to see ‘net exports’ produce an exceptional contribution to economic growth.
‘There is one thing about the headline growth number that you need to know though. It measures increases in production volumes. It doesn’t care whether the increase in volumes is profitable or not.
‘This is why the headline economic growth number is not a very good measure of the country’s economic wellbeing. It doesn’t reflect economic reality.
‘The strong growth in ‘net exports’ came largely from a hefty 4.6% growth in export volumes. My guess is that much of that came from iron ore volume growth, as well as the start of LNG exports. The problem though, is that the growth in export volumes was more than offset by a decline in the price received for said exports.
‘We know this because the trade deficit for the September quarter came in at over $7 billion. So while additional export volumes contributed to headline economic growth, in reality, we sold these additional volumes for less. This resulted in Australia generating a big trade deficit for the quarter, meaning more money flowed out of the country, despite the so called export boom.
‘But plenty flowed back in too, in the form of foreign creditors satisfying our demand for more debt. I’ll get to that in a moment.
‘But first, let’s look at the growth numbers when they actually take onto account the prices we receive for exports and the prices we pay for imports.
‘The bottom line is that we remain on a trend to lower growth. Increased production volumes are all well and good but if they don’t provide you with a decent return on investment, they are useless.
‘It’s like a Chinese steel mill making more and more of the stuff while losing more and more money. Eventually it will go bust.
‘My gripe is that the headline figure doesn’t convey the quality of that growth. It suggests the Aussie economy remains strong. But selling more for less, and generating lower returns on investment, isn’t creating wealth.’
Really, that’s what it boils down to. We’re selling more for less, which is no recipe for productive growth. The GDP figures won’t tell you that the so called export rebound is a sham. But the $3.3 billion trade deficit in October will. As does the $7 billion trade deficit recording during the third quarter.
Beneath the surface of ‘strong’ GDP growth, the economy is in much worse shape than mainstream headlines would have you believe.
Junior Analyst, The Daily Reckoning
PS: Sooner or later, the reality of Australia’s worsening trade balance will hit home. And when it does, the RBA will have no choice but to lower rates again.
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