Data Diary

Australia’s current account – recycling the trade surplus

Posted on 03 September 2010

The release of the latest current account data by the ABS (here) was met within universal approval.  It’s not hard to see why – a bumper trade surplus has Australia within sight of the other side of the ledger:

Here we have the current account deficit pulling back under $5bn for the first time in the better part of a decade – driven by exports of coal, iron ore and all sorts of resource rich items. Of course, that worrisome red worm (generically ‘capital flows’) is the one that is denying Australia the current account surplus we so richly deserve. This is the fat finger of our foreign debt burden coming back at us.

It’s an issue of ‘banana republic’ proportions that is likely to resurface if our trading partners decide to throttle back on the imports.

As we discussed back in June (here), our net foreign debt to GDP puts us amongst some awkward company. While that is not the same as saying we have reached our credit limit, it does suggest that our sensitivity to global risk premiums is high. It also hints at how the market might come to view our lucky country economy if things go pear-shaped in China.

Looking at the growth in debt to GDP slightly differently consider the following chart:

Now remembering that GDP is the sum of consumption, investment, government spending, and the trade balance (C+I+G+X-M) then this chart raises the obvious question as to where did all that debt go?  There seems to have been a leak somewhere as GDP growth trailed behind that of debt.

The answer lies in the definition of ‘investment’.  It doesn’t include the acquisition of pre-existing or ‘secondary’ assets.  If we borrow $100,000 to buy an established house, this investment in isolation does not make it into the GDP figures.  Mind you, it’s likely that some of the new debt will flow through to GDP – the person who sells the property spends some of their winnings on consumption, those good souls who earn a clip off the ticket can afford to pay themselves, and the banks can take their interest margin etc.  The point is the increase in debt will be greater than the GDP effect.

Given our housing habit has been the key driver of our demand for foreign debt, we can surmise that the ‘leak’ has been house prices. Access to debt has enabled our market to bid up established house prices ahead of the growth in our income.  GDP lags growth in debt – and in house prices.

Here we get to the sting in the tail.

Our debt may be swapped back into Aussie dollars (a very good thing – it’s analogous to borrowing in your own currency), but it is still a fixed term liability. Repay, rollover or default – those are our options.

If we choose to repay – that is, join the global trend to deleveraging – then, there this will drag on GDP.  If consumers increase their savings rate, either the government steps into the breach, or GDP must retrench. This is the problem currently facing the US economy. At least we have the luxury of a trade surplus.

Rolling over the debt until wage inflation catches up looks mighty appealing in this context.  Still there is that refinancing hump that is facing our banks in 2011/12.  Let’s hope that China is still the bull at the mine-gate come maturity.