More Vulnerable To The Next Economic Shock

Sydney Morning Herald

Saturday March 4, 2006

Matt Wade Economics Writer

THE worst monthly trade result in history has soured John Howard's anniversary week.

Despite the once-in-a-century minerals boom, Australia has chalked up 46 consecutive trade deficits, the latest a record $2.7 billion blow-out.

Trade has been one of the rare weaknesses in Australia's recent economic performance but it is an important one.

Export volumes have risen by just 5 per cent in the past five years despite the most favourable global economic conditions for decades. Economists rate this the worst trade performance since World War II.

Politicians - and most market economists - have been tipping a sustained improvement in the trade position for years, but we are still waiting.

The resources boom, fuelled by energy-hungry China and India, has pushed up earnings from mining exports but other export sectors, important for Australian jobs, have been flat.

Manufactured exports are struggling to remain competitive and growth has been flat since 2000. Services exports, such as tourism and education, have grown modestly and rural export values are still recovering from the drought.

The relatively high level of the dollar, which has been buoyed by commodity prices, has taken a toll on many exporters. The high exchange rate has also made imports more attractive, adding to the gaping trade deficit.

Yesterday's trade deficit comes just days after the announcement of a $14.5 billion blow-out in the December quarter current account deficit - which measures the trade deficit plus interest and dividend payments to foreigners.

We also learnt this week that Australia's net foreign debt had reached a record $473 billion, more than half the annual value of the economy.

The combination of a gaping trade gap, ballooning current account deficit and rising foreign debt means Australia is exposed if global economic conditions turn sour.

Financial markets have so far been relaxed about Australia's trade and debt position but sentiment can swing quickly.

An unexpected development overseas - such as a sharper than expected rise in global interest rates or a commodity price slump - could hit investor confidence.

The dollar is the conventional victim when investors are spooked.

An extreme currency fall may force the Reserve Bank to set interest rates at a higher level than desirable to check the inflationary effects of a plunging exchange rate, which would push up the price of imported goods. A currency crash would also make Australia's foreign debt even bigger.

Trends in the global economy have been kind to Australia recently but that doesn't mean they always will be.

As each monthly trade deficit is added to the last, Australia becomes more vulnerable to the next global economic shock.

© 2006 Sydney Morning Herald

Back to News Index | Back to Home