The sheer volume of resources exports is driving the nation towards a trade surplus, and a higher exchange rate.
The sheer volume of resources exports is driving the nation towards a trade surplus, and a higher exchange rate.
In April 2014 the Australian dollar bought you US92 cents; and while this might seem irrelevant to many people, it was also the last time Australia posted a trade surplus (an event that could re-occur soon, potentially bringing a sharply higher exchange rate).
For anyone planning an overseas holiday and for buyers of imported goods, the prospect of a stronger Aussie dollar might sound enticing.
For exporters who have been enjoying the competitive boost that comes with an exchange rate in the US70-cents range, the prospect of a return to a rate around US90 cents might not be so welcome. It could be the difference between posting a profit and being able to stay in business.
What’s happening with the dollar is both predictable and inevitable, with the recent surge in the price of coking (steel-making) coal possibly delivering a quick move up in the exchange rate from its current US75 cents into the US80-cents range.
The key to forecasting a stronger dollar lies in the strength of the Australian economy and the fact the country is a trading nation that relies on exports dominated by basic raw materials (coal, iron ore and gas), with strong contributions from farm products and services (education and tourism).
While financial market observers have detected the first signs of a sea change in Australia’s trading position (and its near-certain impact on the dollar), it is not yet a factor in many business plans.
That will change as the monthly trend evolves, and can already be measured in the shift from monthly deficits as high as $4 billion last December to the latest monthly deficit of $2 billion.
The dramatic improvement in Australia’s trade position in less than 12 months is evident in the value of dollar, which late last year was hovering around US70 cents, moving up to its current level despite strengthening in the US dollar against most other currencies.
But the more important test is to look back to the last time Australia enjoyed a consistent run of monthly trade surpluses. That was in 2010 and 2011, the height of the commodity-price boom and a time when the dollar bought $US1.07, and more on a good day.
No-one is talking about a return of the commodity-price boom, though the trend is pleasingly upward.
However, economists are starting to talk about the ‘volume boom’, as projects developed during the past five years ratchet up to their maximum output levels. And it’s the tonnages going out from Australian ports that are driving down the trade deficit and moving the country closer to a surplus – and a higher exchange rate.
Westpac commented on the improving trade position in one of its latest research reports, which began by noting that the August deficit of $2 billion was an improvement on July’s deficit of $2.1 billion, comfortably exceeded consensus forecasts for August of a deficit of $2.3 billion, and was significantly ahead of Westpac’s own forecast of $2.5 billion.
HSBC was on to the trade improvement earlier, advising clients last month that the malaise of low commodity prices that had affected Australia’s resources sector was almost over.
“Mining’s big drag is almost done,” is how HSBC described the negative effect on the country’s economy from the collapse in capital investment in new projects (of the sort that delivered spectacular growth for WA).
The collapse in new project development is fast becoming a statistical blip as the new, positive factor develops – sharply increased tonnes and the first signs of rising commodity prices.
A second HSBC report published two weeks ago continued the theme, this time calling it ‘an unusual case of export-led growth’; unusual because while other countries are trying to achieve export-led growth, Australia is actually doing it.
“Export volumes rose almost 10 per cent year on year in the second quarter of 2016 … and have averaged around 6 per cent growth each year for the past three years,” HSBC said.
The reason volume growth has been ignored so far is that it has been swamped by lower prices, which depressed the financial impact.
There’s more to come as projects started at the tail end of the capital investment boom join the export boom. HSBC reckons volumes will grow by 8.2 per cent in 2017 and 9.1 per cent in 2018.
If the volumes keep rising and commodity prices continue to trend up, it becomes interesting to think about trade surpluses from 2018 and a much higher dollar from around that time.