The Australian economy just had a red-letter day.
It has experienced its first current account surplus since the June quarter of 1975. That’s 44 years ago. Gough Whitlam was the prime minister, Ian Chappell was captain of the Australian cricket team and petrol was 14 cents a litre.
Not only that, it was also Australia’s largest quarterly current account surplus on record – $5.9 billion – achieved by a goods and services surplus of $19.9 billion less a net income deficit of $13.9 billion, according to data from the Australian Bureau of Statistics (ABS).
The surplus was $7 billion improvement on the previous quarter and about $18.5 billion better than a year ago.
ABS chief economist Bruce Hockman said the surplus was down to both the high prices and volumes of Australian commodities exported during the quarter.
“Continued global supply interruptions have maintained high iron ore prices into the June quarter, boosting our export receipts to record levels.
“Export volumes for the key bulk commodities of liquid natural gas, coal and iron ore were up, while volumes fell across several import categories resulting in an increased June quarter trade surplus.”
Iron ore hit a peak of $US120 a tonne in the quarter and has since slipped back to about $US85 a tonne. But a healthy foreign education sector and a rebound in tourism also helped boost the surplus.
The current account records a nation’s transactions with the rest of the world – namely, its net trade in goods and services, net earnings on foreign investments and transfer payments. When credits exceed debits, the country has a current account surplus, meaning that the rest of the world is essentially borrowing from it.
While Trade Minister Simon Birmingham was quick to talk up the result as reflection of the strength of the economy – particularly the resources sector – and of free trade agreements, the figures were also a reflection of a much less encouraging story.
A story of weak consumer spending and lower investment levels.
That weakness in consumer spending resulted in imports falling 0.6 per cent, the majority of which was made up of consumer goods.
Chief economist with BIS Oxford Economics, Dr Sarah Hunter, said the figures showed imports fell 1.5 per cent, with a 2.9 per cent fall in consumption goods.
“This confirms that conditions were challenging for households in the first half of 2019,” Dr Hunter said. “But the cuts in the [official] cash rate and income tax cuts for low- and middle-income households should begin to provide some relief as we move towards 2020.
“But a broad-based pick-up won’t materialise until growth in household income accelerates,” she said.
So a surplus must be a good thing, right?
Dr Hunter said a surplus is neither a good nor a bad thing. Australia has enjoyed 28 years without a recession and posted current account deficits for that entire time.
“We [Australia] generally run a trade deficit with the rest of the world, that is, we import more goods and services than we export,” Dr Hunter said.
“It doesn’t necessarily matter if a country runs a deficit, as long as they have a credit rating that can still attract money from foreign lenders. So, is running deficits a problem for a country like Australia? No, it isn’t. It only becomes a problem when the rest of the world won’t lend to you.”
The problems arise when a country runs a deficit and has a poor credit rating or is considered a risky proposition, such as emerging markets, like Argentina or Turkey, she said.
Australia certainly isn’t in that boat, and nor is the United States which has run years of current account deficits. Its current account deficit in 2018 was $US488.5 billion ($726.5 billon). The European Union, on the other hand, ran a surplus of $US404.9 billion ($602 billion).
And is this the first surplus of many? Probably not, according to AMP Capital’s chief economist Dr Shane Oliver.