Weekly Economic Briefing: Australia is running trade surpluses … for now

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

Australia is running trade surpluses… for now

The latest data released by the Australian Bureau of Statistics indicates Australia’s seasonally adjusted trade balance was in surplus by just over $800 million in May, the fifth consecutive month of trade surpluses. In fact, Australia, which typically runs trade deficits, has recorded surpluses in 10 out of the last 12 months.

For now, export values remain elevated. But the potential for global trade tensions to escalate is a growing risk to Australia’s export, and broader economic performance.

Chart 1: Australia’s trade balance

Source: ABS

Export values remain sharply higher than a few years ago, primarily reflecting strength in iron ore, coal and mineral fuel exports. Indeed, mineral fuel exports (especially LNG) have surged in recent years to become the third largest export, displacing higher education. Growth in LNG exports is expected to continue as new capacity comes online. Additionally, while iron ore and coal volumes have been weaker in recent months, prices received are still favourable, especially for coal. How much longer Australia will be able to retain a trade surplus will largely depend on how commodity prices fare.

Over the last five years, the country’s fastest growing exports were LNG and international education, which increased at an average rate of 13% to 14% per annum. Iron ore volumes have continued to rise, but at a much slower rate recently, as the mining investment boom is now behind us and little new supply is coming online. China buys nearly one-third of Australia’s exports, and Chinese demand for industrial inputs such as iron ore and coal remains strong, despite a slowdown in local GDP growth.

Australia’s education exports remain highly dependent on Asia as the source of over three quarters of overseas students (and a large 32% share originating from China). Overall, education exports now represent 37% of service exports and 8% of total exports, and bring in over $8.5 billion for the Australian economy.

Imports, on the other hand, have grown at a more moderate rate over the last few years. This mainly reflects slow growth in consumption imports – a direct result of slow wages growth, which has weighed on overall household spending growth. Our fastest growing imports over the last five years have been capital goods, such as transport and industrial equipment. This is consistent with the ongoing investment in the LNG sector and the recovery taking place in non-mining business investment.

Personal travel (i.e. outbound tourism) is our largest import, at nearly 10% of total imports. While growth in personal travel is not quite as strong as capital goods imports, it has been picking up over the past year, reversing previous declines. This pickup comes after the $A stabilised following earlier falls, and may also partly reflect strong growth in household wealth, which has helped offset the weak wage growth environment.

As well as being Australia’s largest export market, China is also our largest source of imports – nearly 20% of our imports originate from China, including capital and consumer goods.

Table 1: Australia’s top exports and imports

Source: ABS

While Australia’s trade performance has been strong lately, global trade tensions could put Australia’s trade and broader economic performance at risk. The tariffs implemented by the US to date – and retaliatory tariffs from some of its major trading partners – have had a fairly muted impact on the prices of key Australian exports. The latest round of US tariffs on US$34 billion of Chinese imports kicked in last week, with China responding in kind. This follows the earlier US tariffs applied to steel and aluminium, and retaliatory tariffs by China, Europe and Canada.

But we don’t know where all this ends. The US has threatened much bigger tariffs on China than those already imposed. If trade tensions escalate into a much bigger trade war, there would inevitably be a meaningful hit to global economic growth.

China would be particularly affected. A slowdown in its economic growth would likely mean significant falls in iron ore and coal prices, which would hurt Australia’s incomes. And should Chinese households feel some of the economic pain, Australia’s education and tourism exports could also be affected. In such a scenario, the Australian dollar would likely fall and cushion the blow, but it wouldn’t completely offset the pain.

For now, it’s a case of wait and watch how the US–China trade relationship evolves from here.

For more information on the Australian brief, please contact co-authors David Rumbens and Monique Champion.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

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OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 0.2% at 7,618.

International economic briefing by Ian Stewart

Economics and business

  • The US began to impose new tariffs on $34bn of imports from China and threatened to extend tariffs to all Chinese imports, worth $500bn
  • Growth in Chinese exports to the US slowed sharply in 2018H1 ahead of the imposition of US tariffs in July
  • The EU warned of retaliatory tariffs on $300bn of US imports in response to President Trump’s threats to impose tariffs on car imports
  • The US Fed says that US businesses are scaling back or postponing investment plans due to “uncertainty over trade policy”
  • Bank of England research shows that if the tariffs that have already been announced by the US, China, EU, Mexico, Canada and Mexico are implemented they would raise average US tariffs to their highest level in more than 50 years
  • In a sign of the strength of the US economy, and of rising wage pressures, US workforce participation surged in June, with 601,000 new workers joining the labour force
  • Bank of England Governor Mark Carney said he is increasingly confident that the UK economy will bounce back after a weak 2018Q1
  • The UK services sector PMI rebounded in June, posting its strongest reading since October 2017
  • With the UK likely to be excluded from the next generation European fighter project, the UK has entered talks with Sweden on building a new fighter jet
  • UK Prime Minister Theresa May is planning to lift the eight-year freeze on fuel duty, the Guardian reports
  • Euro area PMIs showed service sector input costs rising at their fastest pace in seven years in June, with staff costs rising sharply
  • Tesco and Carrefour, Europe’s two largest supermarkets agreed to jointly purchase own-brand products, leveraging their size to lower costs
  • An anti-establishment populist candidate with left wing views, Andrés Manuel López Obrador, won Mexico’s presidential election
  • Turkish inflation rose to 15.4%, a 14-year high, in June

Brexit and European politics

  • UK Prime Minister Theresa May won approval from her cabinet on the basis of the UK’s future relationship with the EU after Brexit
  • The proposal includes the creation of a free trade area for industrial and agricultural goods while retaining the freedom to diverge on services
  • The cabinet also backed a facilitated customs agreement which the government say would remove the need for customs checks between the UK and the EU
  • The plan will be fleshed out in more detail in a White Paper due to be published on Thursday
  • Jaguar Land Rover warned that a no-deal Brexit scenario would cost them £1.2bn a year in tariffs, making it unsustainable to keep its production in the UK
  • A no-deal Brexit would be most harmful to UK regions outside of London, according to the Institute for Public Policy Research
  • The Guardian reports that the EU will offer a year’s extension to the transition period alongside their likely rejection of the UK’s proposals

And finally…

  • America’s cheese stockpile hit an all-time high of 1.69bn pounds due to a fall in demand and a surplus of milk which has a longer shelf life when made into cheese – quantitative cheesing

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