Australian trade deficit falls further than expected

by Mark Benson on June 8, 2012

in Money, Business and Finance

Is it safe to look yet?

The Australian trade deficit fell more than many people expected during the month of April with analysts having forecast a AU$900 million deficit. The actual deficit came in at just AU$203 million which is a far cry from the AU$1.28 billion in the previous month. As a consequence there are signs that the Australian economy is consolidating and is actually starting to strengthen again.

While there is no doubt that the figures were unexpected to say the least it appears that a strong rebound in the shipment of iron ore is behind much of the improvement. However, there is growing confidence that the Australian economy itself is coping better than many had expected and indeed the Reserve Bank of Australia has been commenting upon the potential reduction in base rates in the short to medium term.

Why is Australia so strong?

Just a few weeks ago it seemed as though the Australian economy was heading for a period of very slow and sluggish growth but this has changed dramatically over the last week or so. We saw better-than-expected employment figures, we saw better-than-expected economic performance in the first quarter of 2012 and now we have a significant narrowing of the trade gap. This performance is all the more impressive when considered against the ongoing difficulties within Europe and in other areas of the world.

One of the main reasons why the Australian economy is so strong is because the natural resources sector continues to expand and demand from China and India is holding up better than many had expected. Indeed a reduction in base rates by the Chinese authorities should boost short-term demand for natural resources which will be fulfilled by Australian mining companies.

Can this continue?

Better-than-expected economic growth, better-than-expected employment figures and a better-than-expected trade deficit, has the Australian government died and gone to heaven? This is the perfect scenario for the up-and-coming general election in 2013 and more and more analysts are predicting less severe base rate reductions in the immediate future after markets began to take it for granted we would see a reduction at the next meeting.

While there is no doubt that the Australian economy is stronger than many of its overseas counterparts there is also no doubt that a European collapse would have a significant impact. Indeed it is forecast that a collapse of the euro and a collapse of Europe would reduce UK GDP by around 2% even though the country is not part of the euro itself. We are not suggesting that a collapse of Europe would have such an impact upon Australia but it does show that we are in treacherous waters and uncharted territory.

Australian base rates

Earlier this week we saw the Reserve Bank of Australia cut base rates by 0.25% to 3.5 percent which is a reduction of 1.25% since November 2011. While this would seem severe on the surface, it is nowhere as severe as that seen in Europe and America and indeed despite the fact that the market had already factored in a reduction in July the chances have reduced dramatically. It is estimated that there is an 80% chance of a 0.25% reduction after the Reserve Bank of Australia meeting in July set against an assumption of a 0.5% reduction prior to the announcement of these trade figures.

This perfectly illustrates the very difficult nature of economic forecasting and the fact that the Australian economy is proving to be a very elusive prey. We have seen analysts become too pessimistic about the economy and we have seen analysts become too optimistic with very few able to find that middle ground which relates to actual performance. The truth is that after yesterday’s trade figures analysts are no nearer forecasting the immediate direction of the Australian economy with any confidence. However, one thing is for sure, overseas investors still see Australia as a potential safe haven for their funds and who can blame them after this exceptional run of data?

Immigration

As the Australian economy continues to grow it is almost inevitable that we will see yet more pressure on the domestic workforce. We have mentioned on numerous occasions the appearance of a number of skills shortages which are likely to become more acute in the short to medium term with particular emphasis upon the natural resources industry and the mining sector. The government will need to play a very clever hand with regards to immigration because many unemployed Australians believe that overseas workers are “stealing their jobs” when in reality there is a need for specific skill sets which are not available.

It will be interesting to see how the authorities tackle the problem of immigration, in relation to employment, because with next year’s general election on the horizon they can ill afford any more public relations disasters. Looking back over the last couple of years there have been a number of major issues with regards to public relations which have seen the Labor Party fall 20% behind in the polls. In many ways this is a Catch-22 situation because if the government does not wave through further overseas workers then the mining industry will struggle and this will place more pressure upon the domestic workforce.

Investment, investment, investment

If there is one thing which has been a constant over the last few years it is the ever increasing amount of money which is being invested in Australia by overseas backers. We have seen billions upon billions of dollars flowing into the country creating not only a feelgood factor but also expanding the economy itself. So far there appears to be little let up in the pace of investment with employment in the mining sector not expected to peak until around 2015.

Against this backdrop it is difficult to see any immediate issues with regards to the domestic situation in Australia although as we have suggested above, there are concerns about the European economy. If the Labor Party was to step back from the brink and become a major player in next year’s general election it would be one of the best comebacks of all time. Whether the momentum of late will continue until election day remains to be seen.

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