When a Surplus Doesn’t Mean Good News

When a Surplus Doesn’t Mean Good News

It’s possibly the most exciting week of the year for me.

There’s a massive data dump rolling through my inbox this week.

So far, the Australian Bureau of Statistics has released mineral exploration data and June business indicators.

Then yesterday, my inbox scored government finance statistics, balance of payments and retail trade data.

Today, gross domestic product data is coming out in just a few hours.

And later in the week, we’ll get the numbers on building approvals for July.

I suspect the economic data we’ll get this week confirms my thesis.

That is, Aussies are doing it tough…

And believe it or not, it all starts with a surplus.

Mine collapse good for business

We’ve been conditioned to think a surplus is good.

So anything with the word ‘debt’ or ‘deficit’ attached to it is automatically read as bad news by Aussies.

And a lot of the mainstream analysis I’ve read recently backs up that view.

At the very least, there have been limited attempts to convey the true meaning of ‘twin surpluses’.

Yesterday, we found out that Australia has both a current account surplus and a trade balance surplus.

The current account surplus dominated the headlines, because it’s the first time this has happened since 1975. I’ll explain what that surplus means later in the week.

Today, I want to talk about the other surplus — our trade surplus.

It sounds good on paper, but it isn’t so rosy once you understand what’s driving it.

Tuesday’s data dump showed us that the trade balance surplus increased for the 18th month in a row.

Actually, it’s higher than ever.

The trade surplus — where the value of our exports is higher than the cost of imports — grew to $8 billion in June.

So how’s that a bad thing?

The problem with the trade surplus is that it highlights just how much Australia relies on selling its minerals to international trading partners.

More to the point, this year’s trade surplus has been largely driven by iron ore prices.

It’s estimated that higher iron ore volumes and prices contributed as much as $5 billion towards the June trade surplus.

And, while it’s a little macabre to think about it like this, our iron ore good fortune comes on the back of the Brazilian Brucutu mine collapse at the start of the year.

That one mine contributes 10% of the world’s iron ore supply.[1]

Spending is down

More than once this year, I’ve explained the importance of Australia’s trade balance, and what it actually means.

And once again — for the 18th month in a row — Australia finds itself with a trade surplus.

But that’s not the good news it appears to be.

In spite of the positive-sounding headline, a trade surplus isn’t always positive.

More so when you’re not a country that manufactures things for export.

Let me put it this way.

People and businesses aren’t buying as much. That means there’s less demand for things we normally would bring into the country.

Exporting more than we import tells us that domestic demand is weak.

Local demand for stuff — whether it be for business, to fill our homes, or to spend at cafés and restaurants — is dropping.

This includes retail goods like apparel, electronics, coffee and furniture.

And this decline isn’t confined to households, either.

A higher trade surplus also reflects the lack of business demand for goods used in construction and engineering.

Trade surplus data paints a big picture of the economy.

We are bringing less and less into the country.

Our consumption-driven society is spending less money.

Sexy headlines don’t reveal the truth

The consumption side of the Aussie economy has been in a steady decline for a couple of years now.

However, it’s largely been missed in the mainstream media, as some analysts can’t see the forest for the trees.

Here’s why.

Commodity headlines are sexy.

Giant Caterpillar trucks make for good highlight reels on TV. And a relatively high Aussie dollar makes Australians feel wealthy, as it makes imported goods cheaper.

Hearing these things repeatedly adds to overall market sentiment. It looks like the economy is on a roll.

Not only that, but the mining sector makes some Australians an awful lot of money.

The problem is that mining exports only account for 10% of total gross domestic product (GDP).

Whereas consumption — the buying and selling of goods and services inside Australia — makes up 55% of GDP.

So what we buy and sell is far more important for Australia’s overall economic health than what’s happening with a bunch of rocks we dig out of the ground.

The thing is, far too much attention is paid to the mining sector. As a result, too many analysts have overlooked the steady decline of the consumer.

One sector gets all the profits

Perhaps the most frustrating part of this is that too many commentators are getting caught up in the ‘good news’ of the surplus.

However, by focusing only on the exports, they are missing the real threat to Australians.

That’s the unevenness of the Aussie economy.

Our multibillion-dollar mining companies are making money, but we aren’t making money on an individual level.

More to the point, the higher trade surplus will distort our GDP figures.

Later today, we’ll get to see how Australia fared during the second quarter of this year.

No doubt the iron ore prices and volume will ‘support’ the final quarterly GDP figure.

Meaning that it’s highly likely our GDP will be positive rather than negative…but not by much.

The trade surplus data trumps the reality for everyday Australians.

Our stark truth is that ordinary Australians are facing their own recession, yet it isn’t coming up in official data.

Official government data is skewed towards a buoyant mining sector — no matter how small its economic contribution really is.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia