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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Friday, 4 December 2015

Deficit blows out

Deficit blowout

The Aussie economy racked up an 18th consecutive seasonally adjusted trade deficit in blowing out to $3.3 billion in October, with September’s deficit revised out to $2.4 billion and faltering commodity prices weighing heavier by the month.

Merchandise exports

Iron ore with an estimated FOB value of $4.2 billion was exported in October, a veritable world away from the $7.2 billion (!) monthly peak in December 2013, with the commodity price continuing to nosedive over the weeks that have followed.

Coal and LNG recorded moderate increases in the month, with the LNG now being shipped from Gladstone expected to be a significant contributor to economic growth over the next couple of years.

As a point of comparison I have plotted a dotted line in the chart above which denotes the value of monthly services exports, which have trended up to a new high of $5.4 billion having increased by a heartening 4.4 per cent over the year.

Granted the monthly value of services exports are well and truly dwarfed by the total monthly value of commodity and merchandise exports at more than $21 billion, but, hey, every little helps at the moment!

Year-on-year merchandise export values have at least stopped declining over the past couple of months, following 17 dismal releases reporting year-on-year declines.

Plotting merchandise export values below in rolling annual terms, we can see that while coal export values have been flat, iron ore export values have been dumped by $19 billion or 27 per cent, with petroleum & oils, copper, and LNG also clobbered by falling prices. 

On the positive side of the ledger, the lower dollar should help the value of some other export items, with gold, aluminium, cereals, nuts, fruits & vegetables, grog, and a wide range of other line items recording growth in export values.

Although not a trend that a vegan typically yearns to highlight, perhaps the most impressive performance has been the explosion in exports of meat, live exports and other animal produce - particularly to cater for the Chinese middle class - the annual value of exports having almost doubled since the beginning of 2013.

The meat and livestock industry now accounts for more than $15 billion per annum in export values.

Destination China

The iron ore price collapse has hobbled the rolling annual value of exports to China, with FOB values down by 13 per cent over the past year.

With the Chinese economy moving away from construction towards a more consumption based economy there may be no way back for the iron ore price with waning demand facing a wall of supply.

State versus state

At the state level, Western Australia ($8.4 billion) and Queensland ($4.4 billion) continue to account for 39 per cent and 21 per cent of merchandise exports respectively, although naturally WA has had to bear the brunt of the iron ore price crash.

At the monthly peak WA exported more than $12 billion of merchandise exports in December 2013.

While Queensland has switched nicely back into surplus, Western Australia has seen the level of its previously enormous trade surplus weighed down.

Finally the monthly trade services balance remains in deficit to the tune of $0.7 billion, though the lower dollar has at least aided the tourism sector to become one of the shining lights of the economy in recording another monthly surplus of $0.5 billion.

The wrap

Overall, a result which disappointed expectations and suggests that some of the repair work done in the third quarter of the year could be unwound again in the fourth.

Given that iron ore prices will be lower again in the final quarter of 2015, there isn’t likely to be much in the way of positive news before next year, although the impacts of the lower dollar on other sectors of the economy have yet to fully work their way through.