There is not a large correlation between trade surplus and broad investment market performance, but trade surplus is a resultant of local and global conditions, and is paramount for small economies like ours in funding the social policies of Government. That includes its own growing cost burden of operation. Trade deficits result in the risk of foreign ownership of growing Government debt, which is never a good thing for small economies.
Our performance of external trade identifies the obvious and critical nature of the current global commodities demand in providing much needed funding for all current policies (whether they are good or bad). The best and worst performance of our trade balance is provided below. There should be few surprises, except where cumulative policy decision of the past have incurred a detrimental response to certain subsectors.
As can be seen, the extreme recent volatility in merchandise trade balance is foreboding in providing a wide projection range of future balances in the near term. -$3Bn Nov2009 to +$4Bn in Jun 2010 is a swing of $7Bn in less than 12 months, which immediately followed a less volatile dip of -$5.5Bn resulting from the GFC. Despite 6 prior years of increasing commodity export, it took until the GFC May2008 to generate trade surpluses sufficient to overcome growing trade deficits.
(edit) During the worst of GFC 1.0 in 2008, monthly export surplus dropped $7.5Bn (or a massive 43% decline!). Corresponding deficits dropped only $5.0Bn (only 33%) resulting in a return to deficit within a 12month period. What's worse is deficits recovered before surplus indicating we are more sensitive to external conditions for our continued prosperity, and more dependent on externally produced goods.
Merchandise Trade Balance closely follows the trend for total Goods and Services Balances (see Part 2, our Balance of Trade)
Optimists will say this is simply recovering to a pre-GFC upwards trend, however these people will be ignorant to the highly cyclic nature inherent to Australia's trade balance. The cyclic volatility provides no assurances in this current climate of global uncertainty, and China has only very recently (since 2007) become a major trade surplus provider for our Balance of Trade (BOT).
(nominal balance, AUD$Million, FOB values)
MERCHANDISE TRADE BALANCE - 1998 to 2011, monthly
ZOOMED UPTREND, TRADE BALANCE - 2006 to 2011, monthly
Breaking this total balance down into composite trade items, reveals the best and worst performing categories. Not surprisingly, our commodities and primary industry provides the lions share (well over 80%) of monthly surplus trade resulting in $17.2.0Bn surplus (monthly, Sep2011); against which $13.5Bn (monthly) is offset in deficit trade categories that are more numerous and less concentrated.
Best 7 Merchandise surplus groups (including combined aluminium, combined copper)
(Top 7 surplus shown accounts for 79.7% of total +$17.2Bn trade surplus Sep2011)
* Gold excludes gold coins, +$171M in Sept 2011
Worst 7 Merchandise deficit groups (including combined motor vehicles, combined petroleum)
(Bottom 7 deficits shown accounts for 36.3% of -$13.6Bn total trade deficit Sep2011)
What is not clear from the charts above, is an answer to the question: Has the results from surplus categories created the corresponding deficit? It is abundantly clear from the above, that without the offsetting surplus due to external demand for our commodities, there would be a severe deficit in response to continued demand for imported goods. This is where Government policy more often ignores the differences in internal and external lead/lag responses to import export data against the background of local demand.
It is clear that our surplus trade is tightly concentrated, while our deficits are much broader being spread over a wider range of merchandise groups. This is not an ideal investment position with enduring market volatility under prevailing economic uncertainty and murmurings of national security tensions. In the absence of alternative sources of surplus, it makes targeting reductions in import costs more difficult to address.
AUSTRALIA MERCHANDISE SUBTOTALS - Surplus versus Deficit against Trade Balance
You can see during the Tech Crash period of 2000 to 2004 that we had record deficits (up to that time) given exports were not suffering at all (by comparison, remained elevated) - yet our lack of discipline combined with prevailing policies of the time resulted in record deficits in 2004. It has taken the resources boom to recover our trade surplus and reduce the accumulated trade deficit to less than -$100Bn (in the red).
Therefore, expect a likewise return to deficit in any continued global weakness that impacts the export of our commodities and primary industries.It stands to reason then that this Government makes hay while the sun shines. I doubt any present (or past) Government has the wherewithall to address the trade imbalance when it next arises, let alone have a plan for it in preparation.
TO BE CONTINUED- PART 2 by Country, by State and Total Trade Balance Trend
Regards,
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