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Policy Hub: Macroblog provides concise commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues for a broad audience.

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June 1, 2005

Another Record Current Account Deficit -- No, Not The U.S.

From the Wall Street Journal (page A18 in the print version):

Australia's current-account deficit widened to a record A$15.65 billion (US$11.82 billion) in the first quarter, sending an already shaky Australian dollar even lower...

Australia's current-account deficit reached more than 7.2% of gross domestic product. The current account is one gauge of a country's balance of payments of all its international transactions, public and private, and provides the broadest measure of trade in goods and services and investment earnings.

While Australia's trade deficit narrowed slightly during the quarter, the improvement wasn't enough to offset a widening of the net-income deficit that measures capital flows.

Meanwhile, the Financial Times reports on a disappointing GDP report:

The Australian economy rebounded to expand by an annualised 1.9 per cent in the first quarter but the improvement was weaker than expected and may be short-lived because it was fuelled by a build up in inventories.

Data released Wednesday showed gross domestic product rose 0.7 per cent in the first three months of the year, up from 0.3 per cent in the fourth quarter, a revision from the 0.1 per cent initially announced.

First quarter growth was ahead of the annualised rate of the 1.5 per cent recorded in the previous quarter but below the 2.2 per cent expected by economists who had targeted an upturn of 0.9 per cent for the quarter...

The data confirms that Australia whose economy is in its 14th consecutive year of expansion has entered a period of economic underperformance.

The slowdown in growth, which has averaged more than 3 per cent a year over the past decade, contrasts with the 3.7 per cent and 2.7 per cent recorded in the US and UK respectively in the first quarter.

Naturally, the commentary turns to the dilemma this poses for the central bank:

... the weakening data means the Reserve Bank is unlikely to raise rates in the near term, with economists almost unanimous that it will not act after its upcoming monetary policy meeting.

The bank raised rates for the first time in over a year in March, to 5.5 per cent, and, with inflation creeping towards the top of its 2 to 3 per cent target range, has suggested it may need to act again.

May 5, 2005

The Global Gloom Spreads To Australia

Yesterday the Bank of Australia declined to adjust its key monetary policy rate -- duly reported, among other things at The Skeptical Spectator -- and the Financial Times marked the occasion with a look at the economic situation Down Under.

After the longest expansion in its history, is the Australian economic miracle over? The country breezed through the Asian financial crisis, the collapse of the global technology bubble and even weathered a drought that has cut farm output by a third. But, after a charmed 14-year run, output growth abruptly slowed to 1.5 per cent last year and neared zero in the fourth quarter.

The current account deficit meanwhile has reached a 40-year high of 6.4 per cent of gross domestic product. House price growth, after more than doubling in the six years to 2004, tumbled through last year and in some areas, actually fell. Bothered by the prospect of rising inflation, the Reserve Bank of Australia increased the cash rate in March and may raise it again.

Well, not yesterday, but we get the point.  The article seems to provide some support for those awaiting a housing-price collapse -- and the collateral damage -- elsewhere:

As one of the most successful economies in the Organisation for Economic Co-operation and Development, Australia's troubles also have implications for other economies. The current experience, for example, appears to vindicate those who warned that the combination of rapidly rising house prices and household borrowing might prolong an illusory expansion, but only at the price of a deeper downturn when the bubble burst.


Beneath the surface, the GDP numbers are not quite as they seem. Business investment remains strong in Australia. Home building is certainly declining, but that was not only expected but also welcomed. Household consumption is quite firm. Employment has picked up solidly. The unemployment rate is now lower than it has been for more than a quarter-century.

The unexpected weakness has been in exports. After increasing briskly over the year to June 2004, export growth stopped. The problem is not lack of demand but shortage of product. This is most apparent in metals exports, which fell in volume over 2004 despite rising prices. The house price boom has been deflated by interest rate increases, but without deflating the economy. Yet the impact on consumption has been zero. Household consumption growth last year rose to about the average of the past decade.

The prognosis?

By the end of the year growth will be faster and the current account deficit narrower...

UPDATE: On the other hand, here is this morning's news from the FT:

Australia has posted its second largest monthly trade deficit on record, reflecting the higher cost of oil imports and the impact of a potentially serious drought on its important rural sector.

According to data released on Thursday, the trade deficit in March jumped to A$2.67bn, well ahead of market expectations of a shortfall of A$2.1bn and up from a revised A$2.24bn in February.

Imports rose by 2 per cent while exports, dragged down by an 8 per cent drop in farm goods, fell 1 per cent. There were declines in shipments of beef, sugar, wheat and wool, all segments in which Australia is among the top five global exporters.

While Australia’s economy is predominantly service-based, commodity and farm goods still figure heavily in its external trade, accounting for more than half of merchandise exports.