Balance of Trade

Australian balance of trade worsens in the December 15 quarter

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.

Source: ABS

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.

Source: RBA

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.

Source: ABS

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.

Source: Westpac

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.


Source: ABS

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:-

Source: ABS

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:-

Source: ABS

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:-

Source: ABS

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.

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GDP top-line looks better than it really is – Sept 2015

The GDP result for the September quarter came in ‘better than expected’. In real terms, the economy grew by 0.9% in the Sept qtr and +2.5% for the year. This is historically low growth, but given the scope of the adjustment currently underway in the Australian economy, it’s not a bad result.

This is a case though where the ‘better than expected’ top-line result isn’t representative of the underlying performance. Our latest growth figures were mostly the result of an unusually high contribution from net exports in the quarter. Investment spending continues to fall and household consumption spending was at best, on par with previous results and not really trending either way. The less-worse National income figures were due to Terms of Trade that didn’t decline as much in the Sept quarter.

Indicators of domestic activity show that the economy is continuing to languish. One measure of domestic activity known as Gross National Expenditure or GNE (which is just adding up the contribution of all consumption spending, investment spending and inventories), shows that growth was negative in the latest quarter:-

Source: ABS

There are several important points about the September quarter results.

Net exports made an unusually high quarterly contribution to GDP growth

…and the question is whether this latest quarter of net export contribution can be sustained. The analysis below is based on chain volume measures ie removing price effects. The situation would look different if you looked at nominal results.

The size of net exports in the Sept quarter was unusually large and was the combination of two factors 1) larger-than-normal growth in exports and 2) a corresponding contraction in imports.

To provide some historical context – the contribution of net exports to real GDP growth in the Sept 2015 qtr (last orange bar) was the fourth largest quarterly contribution since the start of this data series:-

Source: ABS

The chart above suggests that these ‘blowout’ quarters are infrequent, but not impossible, events. Net exports have been making a larger contribution to GDP growth since 2010.

Exports – Of the $4b growth in exports for the quarter, $3.9b of that was due to growth in goods exports. The biggest contributors to growth in goods exports for the quarter were non-monetary gold ($2.36b), metal ores ($1.24b) and then coal ($0.9b), in real terms. So actually, the largest contributor to our export growth for the quarter had nothing to do with mining. The size of the Sept quarter export growth for non-monetary gold was unusually large. But all it represented was a return to a fairly normal level of exports – it was actually the previous quarter fall that looks like the anomaly.

While there has been a slow-down in growth of our largest export, metal ores & minerals, volumes are still at all-time highs. The current level of contribution to growth is actually above just above average. At the time of writing, iron ore spot prices have now fallen below US$40/mt. The ongoing fall in prices is likely to result in a shake-out among higher cost producers, but the impact on our export volumes will be dependent on how low prices fall and how much Chinese economic growth slows (our largest export market). By all accounts, growth in China is expected to slow in 2016 and this will likely have adverse effects on our exports.

Despite the higher growth in the latest quarter, annual growth in coal exports have been negative over the last two quarters.

A significantly smaller amount of our export growth, $140m, was attributed to growth in services exports in real terms (source: ABS 5302.06). Growth in service exports have slowed in the last two quarters. There is no doubt that the growth in services exports has benefitted from the falling AUD, but the size of the sector for the moment is still small – approx. 20% of overall exports (in real terms). There is still much work required to further develop our service export industries and the Productivity Commission released a draft paper in August 2015 “Barriers to Growth in Services Exports” outlining the barriers and potential remedies.

It’s likely that we will continue to see higher than average contribution from exports (in real terms) to GDP growth in the near term, maybe just not to the same degree as this quarter.

Imports – Imports contracted by over $2b in real terms for the quarter. This is now not an unusual event, but the recent trend is somewhat unprecedented in the history of the data.

Goods imports peaked in June 2012 and are now 2% below that peak. Service imports peaked later in June 2013 – and are now 16% below that peak.

Source: ABS

Most of the decline in services imports can likely be attributed to the falling AUD. Since Sept 2013, price deflators (price index) for service imports increased by over 24% versus the Sept qtr 2015. The average quarterly change in the import price index during this time was +8%.

Not all of the decline in the import of goods can be attributed to the effect of the fall in currency. The import price deflator for goods also increased, but to a lesser degree averaging 2.3% since June 2012 (which is roughly around CPI levels). The areas that have contributed to the slowing in the import of goods is the area of capital goods. Since mid-2012, the import of capital goods has contracted by over 26%. This is mostly the result of the decline in mining investment spending, but is not limited to mining.

In the latest quarter, the largest part of this contraction was lower imports of Intermediate and Other Merchandise Goods for groups such as processed industrial supplies, iron & steel, lubricants and other parts for capital goods. While this could be just a quarterly aberration, there is an important point to this. What sits in these groups are inputs for industries such as car manufacturing. As this industry in particular starts to wind down in Australia, lower imports here could start to become the norm (but will be replaced by imports of finished product).

Demand for imported consumption goods continues to grow – food & beverage, household electrical, non-industrial transport (cars), textiles, clothing, footwear, and toys, books and leisure goods all grew in the latest quarter. Annual growth of imports of consumption goods is over 10%.

It may not be so unusual now to see further declines in imports and this will add to net exports.

Taking a step back though, the theory is that net exports are supposed to take over from where the mining investment boom left off. But it’s not likely that the spoils of an export boom are shared throughout the economy in the same way as an investment boom. Think wages, prices, employment, investment – all of these have been falling as we’ve moved into the more volume, cost and efficiency focused phase of the mining boom. The export boom still supports some level of local employment, government revenue and mostly corporate profits. But this is highly dependent on commodity prices. The Sept quarter was essentially a breather from the more aggressive falls in our major commodity prices – iron ore, coal (bulk commodity prices) and oil. The falls have now continued on in earnest – this will be reflected in the Dec data.

The decline in mining capex spending isn’t being offset by other investment spending

There has been a narrative that the housing construction boom can and will fill the gap left by mining investment.

As of the latest quarter, private dwelling investment spending contributed +0.5% pts to annual real GDP growth, whereas total private business investment detracted -1.5%pts from annual real GDP growth.

Source: ABS

Housing construction has at least taken up some of the slack left by lower mining investment, especially for employment.

According to GDP figures, we are well and truly into the housing construction ‘boom’. Currently, dwelling investment spending, including alterations and additions, is growing at over 10%:-

Source: ABS

In historical terms, this level of growth is just above average, but it has been accelerating since 2012.

There are many factors that weigh against the ongoing growth in the housing construction boom. Household debt (mortgages) is already at all-time highs, banks are tightening lending standards, negative wage growth, likely lower demand from foreign investors, slowing population growth and interest rates that have little room to power further growth. On the plus side, with prices starting to cool in some parts of the country, it could start to encourage those who have been priced out of the market (FHB’s).

There is no evidence to suggest that the growth generated by dwelling investment spending is or will be remotely close enough to filling the gap left by lower mining investment. It’s likely that we will continue to see further declines in overall investment spending. The latest capex survey highlighted that these declines were not limited to mining either. Manufacturing and services were also expected to see lower capex in the coming year. In fact the survey highlighted that some of the bigger falls in spending were to be expected from 2016, although the capex survey does tend to overstate the extent of capex changes.

Public sector activity lags

The falls in investment spending are not limited to the private sector, with public investment spending also detracting from GDP growth. The worrying element is the rhetoric of the new Treasurer who believes that we have a spending problem, not a revenue problem. It’s fully expected that the December MYEFO will highlight a further deterioration in the budget deficit and this will only add further pressure to the level of public spending.

Household consumption spending growth is trending along, but not accelerating

Household consumption spending is still the largest part of our GDP. Growth in household consumption spending has been fairly stable over the last year, but still well below the growth levels pre-GFC:-

Source: ABS

For the moment, household expenditure is neither accelerating nor decelerating. On an annual basis, the falls in investment spending (public & private gross fixed capital formation) were only just offset by growth in consumption spending – with GNE growing by 0.24%. But in the latest quarter, the growth in consumption spending, both public and private, is more than offset by the declines in investment spending resulting in GNE declining by 0.6% on a quarterly basis.

At least the slight improvement in Compensation of Employees in the last few quarters, and mortgage/house price growth, will continue to help underpin spending.

National income improved in the latest quarter

The analysis so far has focused on the economy in ‘real terms’ – removing the effect of price changes to understand the actual level of activity. But an important consideration is how much income we as a country generate from our productive activity. One of the more important determinants of our National income at the moment is movement in our terms of trade (ToT). As mentioned, the Sept quarter was a breather from the accelerating falls:-

Source: ABS

This is a slightly different view of movement in the ToT because I wanted to highlight that while the ToT still declined in the latest quarter, the level of that decline was smaller than in the June quarter. This was the result of more stable commodity prices during the September quarter.

Growth in the individual components of National income improved in the latest quarter, ‘saved’ partly by less-worse Terms of Trade falls and better labour market data. We still seem a long way from the income levels pre the ToT peak (2011):-

Source: ABS

Part of this recent improvement is not going to last, especially the improvement (or the less negative contribution) in the gross operating surplus of private non-financial corporations, given the ToT declines have continued to accelerate in the December quarter.

An interesting point is that Gross Mixed Income (GMI) is making a larger contribution to overall to income/nominal GDP growth and has been trending this way all year. “GMI” represents unincorporated enterprises. Could this be the result of a growing group of self-employed people?

What isn’t adding up is the labour market. The relationship between Gross National Expenditure and hours worked has a reasonable level of correlation over its history (r=0.65). In the last few quarters, growth of the two measures have diverged – hours worked continues to grow and GNE is slowing (in the quarterly data GNE is actually declining):-

Source: ABS

For the moment, labour market indicators show that the labour market is actually quite stable. Hopefully this means that GNE will follow hours worked.

As always, GDP is backward looking. As of early December, we are looking at renewed falls across commodity prices, continuing poor data out of China, a worsening budget situation and a housing market (Mel & Syd) that looks like it is starting to cool.

More woe to come for our Terms of Trade

There have been two recent indications that we could see some weakness in our external sector when September 2014 GDP is released in a few weeks. Firstly, a continued unfavourable mix of import and export price changes in the Sept quarter point to further declines in our Terms of Trade (ToT). This provides an important indication of continued slower National income growth in the Sept quarter. Secondly, net exports look like it will only make a small positive contribution to overall GDP growth in the Sept quarter according to the latest monthly trade data. Growth in Australian National income and output during the 2000’s has been due, in no small part, to the ToT and the resources investment boom. But as the commodity cycle transitions from the investment to the production and export phase, National income growth has slowed and the degree to which export growth will outweigh the decline in project investment is now unclear. The transition is so far looking bumpy due to falls in commodity prices and what appears to be slower growth in China right at the time that production and export supply from these major resource projects starts to come online.

Import and Export Price Indexes

The release of import and export price data for Sept indicates further declines in the ToT when the National Accounts data for the September quarter is released in early December. The Import and Export Price Index (IPI and EPI) does not use the same methodology to measure import and export prices as the ToT index, but the EPI and IPI provides a fairly good indicator of what the National Accounts will show for the ToT in December. Directionally, the two have moved in sync.

The main highlight is that Export Price Index (EPI) for the Sept quarter continued to fall faster than the Import Price Index (IPI), albeit at a slower rate than the quarter prior:

  • Export prices declined by -3.5% for the Sept qtr, but were down -7.9% in the previous June qtr – therefore Sept was not quite as severe

From an annual perspective, export prices have now declined in three out of the last four quarters, hence the large increase in the annual rate of change:-

  • Export prices have declined by -9.5% for the year to the end of the Sept qtr. The annual change was -1.9% at the previous June qtr 2014

     

The EPI peaked back in Dec 2008 and the index is now 24% below that peak. In the last 3 years, the EPI is down -18.3%.

Source: ABS

Export price indexes by major export have declined in most cases, with the exception of Gas.

New index weights were applied in Sept 2014 based on export size. Our top five exports represent 64% of total goods exports as at Sept 2014 – Metalliferous Ores 33.24%, Coal, Coke & briquettes 14.38%, Gas, Natural & Manufactured 7.05%, Gold non-monetary (ex gold ores & concentrates) 5.37% and Petroleum, petroleum products and related materials 4.5%.

Export prices in four out of the top five exports declined in the quarter, adding further to annual (and longer term) price declines.

Source: ABS

The exception for the moment is Gas. Export prices for LNG continue to rise, likely still a function of a reasonably tight global market. The development of LNG projects are at a slightly different stage than Iron Ore.

Source: ABS

Investment in new LNG capacity has been part of the growth in resources investment and there are at least six (6) major Australian projects (as well as US, Indonesian and Malaysian projects) due to come online from 2015, adding further volume to total Australian exports and likely adding downward pressure to prices at the same time. It’s unclear the degree to which growth in LNG exports will off-set the decline in project investment spending – an important consideration when thinking about the impact on local aggregate demand.

Some relevant points from the BREE Sept 2014 update:-

“Over the medium term, Australian gas production will more than double. This growth will be underpinned by Australian LNG production which, in concert with rising Chinese gas consumption, will result in a much larger global LNG market by 2019. Supply growth and lower oil prices will also place downward pressure on LNG prices.”

“The growth in Australia’s exports over the period to 2019, underpinned by 61.8 million tonnes a year of new capacity, greatly alters the Asia-Pacific LNG market and is expected to make Australia the world’s largest LNG exporter by 2019.”

“A growing US LNG export sector would increase liquidity in what is currently a very tight global market. This would in turn depress spot prices and place longer term pressure on contract pricing and the mechanisms under which contracts are negotiated.”

Monthly Balance of Trade – September (seasonally adjusted)

Trade data released for September points to only a small positive contribution to nominal GDP growth from net exports in the September quarter.

Source: ABS

Net exports in the June quarter GDP (current prices) was -$4,691m, a large negative turnaround from the +$2,566 net exports figure of the March 2014 qtr. Based on the monthly trade data (which is revised each month as more data becomes available), the current estimate for the Sept quarter is approx. +0.04% pt contribution to GDP growth for the quarter (using the net exports data at current prices from the National Accounts 5206.03 until June 2014). The annual contribution will not be favourable at this current rate either. As mentioned, the trade data is provided monthly and tends to be revised the following month, so should be considered as an estimate until GDP is released.

What made the current quarterly change slightly positive was the fact that, despite lower exports of goods & services of -$621m, imports also slowed in the quarter and are so far estimated to be $984m lower than in the previous quarter. Had imports increased/grown versus the June qtr, then the trade balance would have been worse (and likely detracted from GDP growth) given the quarter on quarter decline in nominal exports.

The contributor to the decline in exports was within the ‘Goods/Merchandise’ category. But in order to drill down into the detail, you need to look at data that is not directly comparable – Merchandise Exports by SITC classification using original data, not seasonally adjusted data. The ‘original’ data paints a much more positive view of the status of our goods exports. Using the original data, goods exports grew by 1.68%, rather than the decline of -1.1% that the seasonally adjusted data indicates.

Using the more positive data still highlights that our single biggest export group, Metalliferous ores (28), likely only made a small contribution to overall nominal export growth for the quarter. This is somewhat concerning given that projects are starting to come online and haven’t cycled a full year yet.

Source: ABS 5368.12a

From BREE:

“Iron ore volumes are forecast to increase by 13 per cent in 2014-15, underpinned by a full year of production by recently started mines. However, earnings from iron ore are forecast to decline by 4 per cent because of forecast lower prices.” Source: BREE Sept 2014 Update

On a more positive note, the month on month trend may be highlighting a turnaround in iron ore exports, with the last three months showing improvement in the trend at least.

Source: ABS

With further falls in the ToT likely, National income growth will remain low. The monthly trade data suggests that net exports, despite major mining export projects coming online, may not provide the impetus for higher nominal GDP growth in the quarter. We’ll now have to wait and see what the National Accounts look like in early December.