Saturday, December 3, 2011

Inside Australia's trade performance - Part 2

Part 1   Part 3

In continuing Part 2 of the analysis of Australia's trade performance, I have updated Part 1 (charts & text) to clarify the Merchandise Categories of that initial analysis. The whole of the Balance of Trade (BOT) is presented in this Part 2 which is Total Goods and Services as per the ABS data series. In doing it this way, you will see that Total Balance of Trade trend is comprised of 60% Merchandise Trade anyhow, and the two trends are not discernible at a casual glance. Even under scrutiny, the trend analysis from Part 1 shows to be more than valid for forecasting possible future trade balances.

Also I show where this trade is coming and going from by Country, as well as the contribution of the trade by Australian State (that is sure to excite some justifiable interstate arguments). Finally some facts and figures on GDP are presented in Part 3. What is of increasing concern is the amount of volatility that can be seen in the late stages (since 2008) of the mature growth curves. Volatility is not stability, and history dictates that in mature curves (>30 years), above average rates of increase are not sustained, with pullbacks (corrections) typical of what was seen in 2008. The frequency to which they occur is dependent in part on what can be done (if anything) to stabilise the underlying growth (regression) back to sustainable values over the longer term. The Australian GDP charts indicate this very effectively in Part 3. Presently, our GDP growth has returned to 8.2% growth YoY as measured at last quarter Jun2011 - this was down from 8.5% YoY as measured in Mar2011. Modern GDP growth (post 1990) peaked at 9.1% during 2008. Point being, what underlying natural rate of growth is sustainable that smooths out the recent volatilility? or is volatility here to stay?

(nominal balance, AUD $Millions, monthly except where indicated)
AUSTRALIA - TOTAL GOODS and SERVICES BALANCE OF TRADE (1971, monthly)


AUSTRALIA - GOODS and SERVICES versus Merchandise (1988, monthly)


Hence it's obvious the trends of the BOT and Merchandise are virtually one and the same at cursory glance. Merchandise represents 60% of all of Australia's trade, of which we already know is better than 80% resources. When you remove the merchandise balance from the total balance, the remaining trade is remarkably closely net neutral (balanced), as per below, {edited} showing recent sustained deficit since 2010 - offset by recent boosted growth in resources export revenue.

AUSTRALIA - GOODS and SERVICES LESS Merchandise (1988, monthly)


Merchandise surplus is 60% of trade account credits, while deficits are 55% of trade account debits. This adds further credibility to the argument that the ongoing resources boom is the only thing keeping Australia's trade balance in the black. Any marked change to global conditions will catch Australian politicians with their pants further down than they already are.

AUSTRALIA - Top 7 surplus trade partners

*worth noting that up until 2008, China was our second worst trading deficit partner, behind USA. Now it is our second highest surplus partner due only to an insatiable (so far) demand for resources, mainly iron ore and coal.

Further to the concern that China is only recently our new best friend (since 2008), is that the 7 countries above represent a staggering 90% (!!!) of our total surplus merchandise trade. This introduces a more worrying national security issue brought about by our inherent dependency not only the large volumes of few resources, but the tightly located (and colocated) market region to which they are served. Any instability in the East Asia/APAC region that disrupts any of these major surplus export partners can alter the flow of trade, placing these resources (or any of the major surplus trade categories) with increased strategic importance from a foreign policy point of view.



Equally importantly, Australia must not only encourage alternative export markets, but also be proactive in assisting in the resolution of trade barriers that might disrupt existing or future volumes. This is not excluding assisting in the development and/or application of new and better efficiencies/processes/technologies in adapting to changes in environmental requirements of heavy industry and energy resources.

AUSTRALIA - Bottom 7 deficit trade partners

* USA and Germany have been consistently worse deficit trader (predominantly defense, vehicles, and technology). Note the large volatility now seen in UK trade. This is masking a deterioration in the UK trend (into deficit).

By contrast with the Top 7 contributions to the surplus, the above 7 deficit trading partners contribute 57.5% of the total deficit trading. This difference in concentration (of influence, or spread of contribution) introduces much greater difficulty in forcing any rebalance back into any future imbalance. Since exports are explicitly dependent on global demand and pricing factors, whereas imports are increasingly driven by a growing lack of local production/G&S imbalance and (often poor) consumer discipline. The latter being where the US now finds itself with overwhelming challenges.



Current policies will provide very little defense to arrest the outflow of capital due to the nature of our increased dependency on imported produced goods. Further work is needed by this author to identify the largest rates of change of deteriorating surpluses, and increasing deficits.

AUSTRALIA BALANCE OF TRADE - by State
As is obvious from the charts below (and to those with an ear within 1 foot of the ground), Western Australia is well within it's rights to dominate any discussion on policies concerning resources, followed by Queensland as a distant second.These 2 states dominate the export of natural resources coal, iron ore, aluminum, copper and natural gas as well as livestock and other large primary industry contributions. It is surprising given the large surplus trade for Queensland, that the balance shows periods of substantial cyclic offsets with the underlying balance well short of Western Australia. Hopefully this is indicative of broader development and needed improvements (yes, I'm a Qlder).


WA is tracking the ongoing growth in iron ore exports, having surpassed coal in 2010. Qld has not followed the sustained coal export trend as it must be offsetting against rising import consumption so far for 2011.

It is obvious the 2 southern states of NSW and Victoria are large net consumers and outstrip the combined balance of the remainder of Australia excluding Western Australia, making even more obvious our growing dependency on resources. It sounds like a broken record doesn't it? Likewise, there would be no policies in place to address this imbalance of capital flows, with the recent grab for capital by this Federal Government coming from WA, and to a lessor extent Qld and SA. This author has his own personal opinions on the likely success (or otherwise) of the MRRT tax restructure, that is now largely intrinsically dependent on the extent and nature of FDI and the foreign controlling interests in our natural resources (privately held or public listed).

In short summary - the above combined analysis shows that Australia's surpluses are tightly concentrated, while it's deficits are widely scattered. Addressing any imbalance arising from conditions beyond our control (and pretty much anything will be beyond our control) is going to be a long distance outside current considerations of this present (or even previous) Governments. In terms of investment positions and future risk, Australia has it's bare arse facing the wind - this is presently an undesirable all or nothing unhedged position with respect to resources. Good while the going is good, with plenty of downside when things go pearshaped.

Being in this position would make any sensible person more protective of the goose laying the golden eggs. But those people do not find themselves in politics. Does this Government have any contingency plan in place for considering future trade impairments? Judging by the recent knee jerk hysterics that resulted in the disruption of the live export market, the answer is obvious to this author. But it's important for people to understand why large industry lends a heavy hand from time to time.

We used to have more local industries than we presently do, and the numbers are getting tighter for many more of them.

Part 1   Part 3
Regards,

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