Much is made of the Commonwealth budget deficit which is expected to reach about $35 billion in fiscal 2015/16. This represents about 2.25% of GDP. Whether this deficit is caused by taxation or expenditure issues or indeed both is a moot point – but there is another more significant deficit that commentators and investors are simply ignoring. We suggest that they continue do so at their peril.
Last week on the same day as the RBA decided to leave cash rates steady the ABS released Australia’s latest trade data. The August numbers confirmed that the slide in Australia’s trade performance continues unabated and the devaluation of the $A has at this point not offset the dramatic fall in our commodity export prices.
The table below shows that over the last 6 months Australia has racked up a trade deficit over $16.5 billion. The prior 6 months had recorded a deficit of about $8 billion. The deterioration by of over 100% or $8 billion in just 6 months is alarming given the 15% depreciation of the $A against the $US over the same period.
Australian Balance of Trade
Figure 1. Australian Balance of Trade
Source. Trading Economics; Data: ABS
Simply stated the $A has not devalued enough to make Australia competitive in international trade. The current annual trade deficit run rate of over $30 billion will ensure that Australia’s current account (which includes net interest paid on foreign debt) will stay firmly in the red and that our GDP will stay at sub optimal levels.
The next chart shows a longer term trade perspective and illustrates that the recent April deficit of just below $4 billion was Australia’s worst ever monthly trade deficit.
Australian Trade Balance
Figure 2. Australian Trade Balance (sa)
Source. Business Insider; Data. ABS
The following table outlines the trade problem that confronts Australia and it is unlikely that the recently signed Trans Pacific Trade Agreement can or will do enough to change the outlook.
Australia is highly dependent upon China (32% of our exports) and the price of iron ore and coal (34% of our exports). Further, the recent collapse in the oil price makes the progress of gas exports problematical.
Trade Composition
Figure 3. Trade Composition
Source: ABS, IMF, Goldman Sachs Global Investment Research
A close analysis of the above table does indicate some hope for a partial balancing of trade. The deficit of personal travel services of $11.6 billion in 2014 will grind lower as the $A falls. This will result from a slowing in the numbers of Australians travelling abroad and an influx of Asian inbound tourists. However, the travel deficit requires more than a lower dollar – it requires a concerted infrastructure plan to double our capacity for inbound tourists. Today no such plan exists.
The above leads to the inevitable conclusion that the Australian dollar, which has bounced off a recent low of about US 69.5 cents will continue its depreciation cycle. The best long term guide for the value of the $A remains the terms of trade and the trade account. Neither of these is showing any significant improvement and indeed the trade account is getting worse.