11/09/2019 - 10:37

Accounting for the surplus

11/09/2019 - 10:37

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There’s an economic significance to Australia delivering a current account surplus in the June quarter that reflects a wider trend than just strong exports.

Accounting for the surplus
A current account surplus also says something about financial flows. Photo: Philip Gostelow

There’s an economic significance to Australia delivering a current account surplus in the June quarter that reflects a wider trend than just strong exports.

Much was made in the press because it was the first such surplus since 1975, a time when the exchange rate was fixed and the economy much more heavily regulated.

The $5.8 billion surplus included a strong trade position, with exports around $124.8 billion and imports of $104.8 billion, according to the Australian Bureau of Statistics.

Primary income is also part of the current account, and includes wage and investment income.

That was in a deficit of $13.9 billion, largely driven by dividends and interest on foreign capital invested in Australia.

But perhaps the more interesting news was unnoticed.

The current account is only one part of the balance of payments.

The other half is the capital and financial account, and both sides should theoretically always be opposite if the exchange rate is floating.

The capital and financial account came in at a deficit of $4.2 billion in the June quarter, meaning Australian investment overseas exceeded inbound investment for the first time in a generation.

That was driven by a net outflow of debt of $10.6 billion and a net inflow of equity of $6.7 billion, the ABS said.

The upshot is that savings across households, business and government exceeded the level of investment in the local economy for the first time in many years.

There is debate between economists whether the current account drives the capital account or if the causal link is in reverse.

Former US Federal Reserve chairman Ben Bernanke wrote on this topic in 2015.

“A country’s current account surplus is roughly the net amount of financial capital it is sending abroad; it’s also equal to the country’s national saving less its investment at home,” Mr Bernanke said.

“A country with a current account surplus is saving more than it is investing domestically and using the excess savings to acquire foreign assets.

“A country with a current account deficit is a net borrower on global capital markets.”

Reserve Bank of Australia deputy governor Guy Debelle said in a 2017 speech that Australia had a high level of investment relative to saving, which had been supported by foreign capital.

“Foreign investment has been instrumental in expanding our domestic productive capacity and has been attracted by the favourable risk-adjusted returns on offer here,” he said.

Assuming investment flows do drive the balance, there are three major recent causes that created prolonged Australian deficits.

Persistent budget deficits since the GFC have meant increased demand for foreign capital, with the federal government’s net debt position moving from -3.8 per cent of GDP to around 19 per cent.

There was also an inflow during the resources boom, with the mining industry’s capital stock rising nearly $600 billion in the 10 years to June 2018, a good portion of which came through foreign investment.

Finally, the amount of income put aside by households as savings has dropped in Australia and many other advanced countries in recent decades, reaching 2.3 per cent in June, according to Trading Economics.

That is down from nearly 20 per cent in the 1970s.

Households have instead been willing to borrow, with debt rising to be about 1.8 times disposable income, according to the RBA

Perhaps then the budget returning to surplus, households becoming more cautious about borrowing, and the resources boom abating could be the key factors in June’s result.

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