Balance of Payments – December Quarter 2004

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Balance of Payments – December Quarter 2004



Data released this morning by the Australian Bureau of Statistics show that

Australia’s current account deficit (CAD) for the December quarter 2004

was $15.2 billion reflecting a widening of both the net income deficit and the

trade balance.

The net income deficit increased by $758 million to $8.2 billion, driven by

higher profits earned by foreign-owned Australian based companies, consistent

with strong growth in profits across the economy. The trade deficit rose by

$180 million to $7.0 billion, with solid export growth offset by continued strong

growth in import volumes.

Export volumes grew by 1.3 per cent in the December quarter, mainly reflecting

growth in Australia’s exports of resources and manufactured goods. Exports

of other mineral fuels (mainly oil and LNG) grew by 11.7 per cent in the quarter,

while exports of metal ores and coal grew by 6.1 and 4.8 per cent. Exports of

rural commodities fell in the December quarter as late rains adversely affected

the size of the 2004 grain harvest. Many rural areas are also still experiencing

low sub-soil moisture levels after the drought, again keeping rural output down.

Service exports fell by 1.2 per cent in the December quarter.

Import volumes grew by 3.2 per cent in the December quarter, to be 13.1 per

cent higher through the year, consistent with the current strength of national

income growth. Imports of capital goods are 19.4 per cent higher through the

year, consistent with very strong growth in business investment. Consumption

and service imports have also been growing solidly, supported in part by strong

growth in household incomes in line with a falling unemployment rate and solid

wages growth.

The terms of trade grew by 1.6 per cent in the December quarter to be 9.9

per cent higher through the year, and are now at their highest level since the

September quarter 1974. The increase in the terms of trade over the past year

mainly reflects strong increases in coal, iron ore and base metal prices.

Australia’s net foreign debt was $422 billion (current prices) in the

December quarter, an estimated 51 per cent of GDP. The general government share

of Australia’s net foreign debt has fallen sharply in recent years, accounting

for only 5.0 per cent of total net foreign debt in the December quarter –

well below the 17.2 per cent share in 1996. With the debt servicing ratio currently

at 9.3 per cent of export income, Australia’s ability to service its net

foreign debt is very strong, and certainly much stronger than in the early 1990s

when the debt servicing ratio hit a peak of 20 per cent of export income.

While Australia’s export volumes rose in the December quarter, export

growth over the past year has been flat and lower than is typical for this stage

of the world economic cycle. In part, this is due to the high level of the exchange

rate, which in trade weighted terms was more than 8 per cent higher than the

post-float average over the December quarter. Furthermore, while strong growth

in the world economy, particularly in the United States and China, has created

a surge in demand for mineral and energy commodities, long lead times in the

planning and construction of new mining projects have meant that supply increases

have been slow. Combined with rail and port bottlenecks, which may reflect inadequate

investment by state governments, this has resulted in only moderate growth in

the volumes of our commodity exports over recent quarters. In value terms, however,

Australia has benefited from a sharp increase in mineral prices on world markets.

Over the past three years, Australia’s mining industry has invested

around $26.5 billion in the expansion of productive capacity. As this new capacity

comes on line, including over 2005 06, it is likely that Australia’s exports

of mineral commodities will increase significantly. Combined with easing import

growth, this should see a narrowing of Australia’s current account deficit

over the period ahead. Moreover, increases in export prices coming into effect

in April 2005 should see the CAD narrow further, consistent with forecasts released

today by ABARE for 16 per cent growth in commodity export earnings in 2005-06.

In marked contrast to previous increases in the CAD, the current increase

has occurred at a time of stability in Australia’s macroeconomic aggregates.

The Government’s budget is in surplus, more than $70 billion of government

debt has been repaid since March 1996, inflation and interest rates are exceptionally

low by historical standards and the unemployment rate is at 30 year lows. It

is nonetheless important to maintain a strong programme of economic reforms

that will further strengthen the Australian economy and enhance the sustainability

of economic growth.

1 March 2005



David Alexander

(02) 6277 7340