Last week’s national accounts for the September Quarter suggested that Australia had lifted its growth rate. The growth reading was in part due to a bounce in the volume of exports and a decline in the deficit of the balance of trade. The accounts showed that exports added 1.5% to growth in the quarter, but its impact was actually overstated because of weak growth across the domestic economy. Noteworthy is that domestic business investment is tracking lower.
In our view, a closer inspection of the accounts is warranted and it should be conducted over a longer period than 3 months. By doing so we can observe the longer term trends. These trends are clearly shown if six month numbers rather than quarterly accounts are analysed and compared over the last three years.
To begin with, let’s review the six months to September trade account figures for Australia and do so over the last 3 years.
6 months to September 2013 …… $7.0 billion deficit
6 months to September 2014 …… $8.8 billion deficit
6 months to September 2015 …… $18.3 billion deficit
The deterioration in the trade account is clear to see and contests the conclusion that the Australian export sector is contributing significantly to growth. In passing, we note that in the year to September 2015, the annual growth in value of our exports was just 1.3% and this was swamped by the 5% annual growth in imports.
Consequently the Current Account (which includes net income) has also sharply deteriorated. Similar to the above, the 3 year comparison to September is as follows:
6 months to September 2013 …… $27.7 billion deficit
6 months to September 2014 …… $27.3 billion deficit
6 months to September 2015 …… $38.6 billion deficit
It is clear that Australia’s economic performance is deteriorating. The recent decline in trade export performance is because export prices have fallen faster than production has increased. The Current Account is deteriorating despite massive offshore equity investment by Australian superannuation funds.
Today, the income yields earned on foreign investment is low due to the monetary settings of International Central Banks. Australia will require a further massive increase in foreign investment to make a meaningful impact on the Current account deficit. In the 6 months to September 2015, the net income deficit was $20.2 billion and this was actually $1.6 billion worse than the previous corresponding period despite the fact that offshore investing has ballooned.
But have a look at the $1 trillion of net foreign debt
The big issue for Australia, and the one that no politician wants to discuss, is the burgeoning level of net foreign debt. As at the end of September it reached $994 billion, and it will certainly be above $1 trillion as of today.
The net debt is offset somewhat by the ownership of equities. As at September, Australians owned $71 billion more offshore equities than foreigners owned of ours. Thus net foreign liabilities (including equity) was $922 billion.
Net foreign debt now exceeds 60% of GDP – a level that economists regard as “becoming concerning” and a point beyond which demands an economic/policy response. In the 1990s, it was a level that forced New Zealand to restructure its economy (although it is noteworthy that NZ today still has net foreign debt of over 60% of GDP).
The following table gives readers the trends for the last 3 years. The table shows that net foreign debt has increased by $230 billion. The growth of foreign debt has been 33%, far exceeding economic growth over the same period of about 10%.
Figure 1. Balance of Payments Details ($million)