Last week, the ABS released the latest Balance of Trade figures for the month of December 2015. It is the first view of what the nominal trade balance for the December quarter is likely to show. This early view shows that December quarter net exports is likely to detract from nominal GDP growth in the fourth quarter. The main driver of this result was the continued fall in the total value of exports of -3.2% for the quarter. Further falls in commodity prices and a slightly stronger $A during the quarter seem to be the main drivers. The 4th quarter GDP/Balance of Payments figures in real terms (adjusted for price movements) will be the test to see if export volumes have continued to hold up, given concerns over slowing Chinese growth.
The size of the trade deficit was partially ‘saved’ by a -0.7% decline in the value of imports versus the previous quarter. If imports had continued to grow, then the nominal trade deficit would have been higher. But in the detail of this decline in imports, there appears to be a rapid slowdown in the import of consumption goods over the December quarter. This is only one quarter where the trend has changed, but is something to watch, especially as an indicator of a change in household spending patterns.
The value of the trade deficit widened again in the December quarter.
This first view of the Dec quarter trade deficit shows a large increase versus the Sept quarter. At this rate, the nominal value of net exports is likely to detract approx. -0.51% points of growth from nominal GDP in the Dec quarter GDP.
For the year, this has been the largest trade deficit recorded in Australia (in the available data from the ABS). The main reason behind the deterioration in our trade balance has been the lower value of our exports.
The total value of exports fell by 3.2% in the Dec quarter
The December quarter results show a weaker performance across many of the export categories, but not all.
Source: ABS, The Macroeconomic Project
The export of rural goods was the only area where contribution to growth improved in the December v. September quarter. Given that in USD terms, rural commodity prices were fairly stable over the quarter, but fell in $AUD terms (due to a slightly stronger AUD over the quarter), it’s likely that volumes were stronger in the quarter. While export of services also made a positive contribution to growth, the contribution slowed to half in the December quarter.
Of all the export categories, the main contributor to the fall in export value was non-rural goods (commodities, metals, machinery, other manufactures etc.) contributing -3.5%pts to the overall decline. Non-rural goods represented 58% of the total value of exports in the December quarter, so has a fairly large impact on the overall result.
The big part of the fall in value was related to the continued falls in commodity prices throughout the last quarter of 2015. Priced in USD, commodity prices fell by 9% over the quarter.
Priced in $A terms, commodity prices fell by more than 11% and this was the result of a strengthening in the AUD over the quarter (on avg +4.2% versus Sept quarter – Source: RBA). At the very least, we know that export volumes didn’t grow enough to offset the negative impacts of both price falls and a stronger currency on the total value of non-rural exports.
This result is likely to be income-negative in the December quarter. Falling revenue for commodity producers/exporters will continue to place pressure on their operating environment (lower income, profit and more pressure on cost reduction) and will also see continued falls in tax receipts for the government.
The 4th quarter data will be important to see how volumes have held up – as one indicator of underlying demand. The question of the Chinese slow down and its potential impact on Australian exports remains unclear. As of the Sept quarter, export volumes of our largest export (metal ore & minerals) continued to grow – albeit at a slower pace.
The latest China Resources Quarterly for Summer 2015/6, shows that Australian volumes of iron ore exports to China were slightly lower in the Dec quarter versus the Sept quarter.
But for profit, income and tax receipts, its nominal terms (volume*price) that still matters the most. The chart above clearly shows the value of iron ore exports falling.
What ‘saved’ a worse trade deficit was a fall in the nominal value of imports
The value of imports fell by -0.7% in the December quarter and growth reversed across most import categories.
The best performing categories were the import of intermediate goods (which didn’t decline further in the latest quarter) and the import of services (very little change from last quarter).
Whilst the declines across the bigger import categories aren’t large, they still represent relatively large reversals from the previous quarter.
As I highlighted in a previous post, there have been some unprecedented trends with regard to imports recently. The following chart from Sept 15 Balance of Payments takes a historical view of chain volumes (import values in real terms) for goods & services imports:-
What is unprecedented is the change in the trend of imports of goods and services over the last several years.
Services imports clearly peaked back in the June 2013 quarter and quarterly volumes have been declining ever since. The Sept 2015 quarter volume (real $’s) measure of services imports is now 16% below the 2013 peak. The implicit price deflator for services (services imports price index) over the same period of time has increased by over 24%.
Goods imports peaked in June 2012 – since then, the quarterly volumes have fallen by only -2.4%. In other words, remained fairly flat – but this is still a big shift in the historical trend. The implicit price deflator for all goods imports has increased by only 8%. This low increase is being influenced by a 40% fall in Fuels & Lubricants import prices during that time (source: ABS 6457.03).
Part of what has driven this decline in goods imports since June 2012 has been the decline in the import of capital goods as the investment stage of the mining boom started to unwind. This has subtracted -7.53% points from the growth of goods imports in real terms over that time. But on the other side of the ledger, the import of consumption goods has continued to grow, contributing +4.12% points to the growth of goods imports (also since June 2012). In nominal terms over that same time, the contribution from growth in consumption goods imports far outstripped the decline in capital goods imports and contributed +9% pts to import growth versus capital goods which detracted -3.2% pts from import growth.
The nominal value of consumption goods imports has declined in the December quarter
So the import of consumption goods (such as food, household electrical, textiles, clothing, footwear etc.) has been one of the stronger performers in terms of import growth – in both real and nominal terms. Its also the second biggest import category in nominal terms. Given the categories it covers, it could be used as another barometer of household spending and demand in the economy – spending which has remained fairly stable. It’s important to note that the import of consumption goods hasn’t ‘peaked’ and reversed in the same way that services or capital goods imports have peaked. The red flag in this latest release of the balance of trade figures is that the value of consumption goods imports appears to have declined in the December quarter:-
This isn’t unusual in the data – clearly there have been periods when the value of consumption goods imports has declined quarter on quarter. But the November & December rolling quarters are reversing at least 12 months where the import of consumption goods has consistently grown at +4%.
It’s possible that the fall could be price-related (as the currency has continued to fall since 2011). But the data also shows that since the AUD currency depreciation commenced, consumption goods import prices and consumption goods import volumes have been growing in tandem. In fact, during 2015, growth in both price and volume of imported consumption goods (at least up to Sept 2015) has been accelerating:-
What we know so far about December is that import prices for consumption goods still grew by +1.4% (quarter on quarter), yet the nominal value of consumption goods imports declined by -1.1% which detracted -0.3%pts from the growth in imports. We’ll have to wait until the Q4 data to see the impact on volume. It’s too early to say what this means, but it’s certainly something to watch.