When a Surplus is Bad News

When a Surplus is Bad News

Day after day, I watch another economist, analyst or market expert flip their view.

Suddenly, experts that were sure the Reserve Bank of Australia would raise rates last year are now making a case for further rate cuts.

A whole bunch of mainstream commentators said the RBA would never take rates below 1.5%. Well, our central bank did just that.

Not only that, but there was another cohort saying that consumer spending would bounce back when wages increased or job vacancies fell…or when house prices began to rise again.

Of course, humble old me has known for years that none of these things were going to happen.

Can’t see the forest for the trees

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.

And that’s why so many of them are doing a 180 on their original analysis today.

Just how much trouble are we in?

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.

After all, we have been conditioned to think that a ‘surplus’ means we’ve spent less than we earned. It’s a favourite trick of the pollies each election year…reminding us they’ll bring Australia back into a ‘surplus’.

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.

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

Let me put that another way.

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

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 a lack of business demand for goods used in construction and engineering.

Trade surplus data paints a big picture of the economy.

And the most recent data shows Australia recorded its biggest trade surplus ever.

In June, Australia sold more than $8 billion worth of goods to the rest of the world. That’s $1.8 billion more than in May. It also beat economists’ forecasts.

This increase largely came from higher metal and mineral prices. Those two sectors added 4.9% to the tally.[1]

However, imports — the stuff we as consumers bring into the economy — fell 3.6% for the month.

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

We are bringing less and less into the country.

Our consumption-driven society is spending less money.

In fact, the gap between Australian imports and exports has been increasing every month since 2018.

More to the point, the gap between the two widened even more in June…

Australian trade surplus – June 2019
(Exports – orange line, imports – blue line)

Source: ABC News[2]

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

One side is getting wealthier — and it’s not you

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.

We have a lob-sided 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 too.

Australia’s June GDP data (which will contain these trade balance figures) won’t be released until September.

And the higher commodity prices will ‘support’ our GDP. Meaning that it’s unlikely our national income will fall for this quarter.

So once again, the trade surplus data will trump 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.

Once more, the data won’t reflect the reality of a recession in Australian consumption.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia