09/01/2017 - 14:18

Trade game is changing

09/01/2017 - 14:18

Bookmark

Save articles for future reference.

OPINION: One month of data and a forecast for strong annual growth in exports is not a trend, but a careful analysis of Australia’s latest trade figures appears to confirm that an economic recovery is under way – and that could mean that the currency might be next to move up.

Trade game is changing
A stronger Australian dollar will have implications for imports and export prices.

OPINION: One month of data and a forecast for strong annual growth in exports is not a trend, but a careful analysis of Australia’s latest trade figures appears to confirm that an economic recovery is under way – and that could mean that the currency might be next to move up.

The dollar, so far, has moved modestly since the release late last week of international trade numbers for November, and the publication on today (January 9) of a prediction that mining and energy exports would top $200 billion in the current financial year.

From US72.5 cents before the good news on trade reached financial markets, the Australian currency has risen slightly to around US73 cents.

But if the forecast of a trade boom from the federal government’s chief economist, Mark Cully, is correct, then it is possible see a pathway for the dollar to reclaim parity with the $US, and perhaps return to a level as high as $US1.10.

A lot changes if that happens – and it’s not all good news. Foreign imports will be cheaper, but exporters will struggle to maintain the momentum that started building early last year.

Mr Cully’s forecast for mining and energy exports reaching $203.9 billion this year is based on the recent surge in commodity prices, especially for iron ore and coal, which has occurred just as extra tonnes from projects launched during the boom reach are reaching overseas markets.

The combination of higher volumes and higher prices could make financial 2017 the best year ever for Australian exports – with the local effect magnified when the US dollars earned are converted to Australian dollars.

The first hint that the Australian trade game is changing came with the release of the startling November export and import figures by the Australian Bureau of Statistics, with the improvement on the October numbers delivering a shock that few economists had seen coming.

One man who has been telling anyone who would listen that Australia’s trade position was on the verge of a dramatic change is Paul Bloxham, chief economist of HSBC Bank Australia, the local arm of London-based Hong Kong Shanghai Bank.

Mr Bloxham has made regular comments to the effect that it was only as matter of time before increased tonnes were matched by higher prices to deliver a trade shock.

“The stars are finally starting to align for Australia’s trade numbers,” he said in his latest comments in an HSBC report headed ‘Australian exports are booming’.

“Up to this point, much of the positive impact on the economy from the boost to export volumes, from newly built capacity, has been offset by declining commodity prices.

“But commodity prices now appear to have past the trough and Australia has more capacity coming on line.”

Mr Bloxham and other bank economists are starting to see widespread implications for the change in conditions, which include an 8.4 per cent increase in the value of exports in November compared with October, when imports fell by 0.1 per cent.

Over the full 12 months to the end of November, the value of exports rose by an eye-catching 15.7 per cent, while the value of imports fell by 2.4 per cent.

What happens next is extremely interesting, because if the November export boost is repeated then a number of significant changes occur, including a reversal of forecasts about Australia slipping into a recession with company profits and job creation accelerating.

“Strong trade numbers in November help to dispel any fears that we could see a repeat of the very weak third quarter gross domestic product number (minus 0.5 per cent),” Mr Bloxham said.

“Secondly, nominal GDP should get a significant boost from the trade numbers. This should lift local incomes, corporate profits, tax revenue and flow through to wages changes.”

Interest rate setting will also be debated more intensely over the next few months, with HSBC forecasting no more rate cuts but rather that the next move is likely to be a rate rise in 2018.

However, the issue that appears to have eluded most economists is that of the exchange rate, despite the November trade surplus being the first since March, 2014 and the second biggest since the trade boom of 2011.

Two tests of those dates, mid-2011 and March-2014, produce interesting numbers because six years ago the exchange rate rose as high as $US1.10, and three years ago it was at US90 cents.

A return to $US1.10 is unlikely, at least in the short term, but a continuation of strong trade data makes US90 cents, and even parity, look quite achievable.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

Subscription Options