Australia's trade surplus doubled expectations in February


Australia’s trade surplus jumped to the second-highest level on record in February.

According to the ABS, the trade surplus ballooned to $3.574 billion in seasonally adjusted terms, more than double the $1.7 billion level expected by economists.

It was also well above the upwardly-revised $1.503 billion surplus of January, and came close to toppling the record-high surplus of $3.7 billion set two months earlier. Had it not been for an upward revision to December’s figure, it would have been a record.

Distortions created by the timing of the Lunar New Year holiday in China may go someway to explaining recent movements in the size of Australia’s trade surplus, soaring in December, narrowing sharply in January and then booming again in February.

However, maybe it wasn’t.

One of the main factors underpinning the size of the February surplus was not that exports boomed, but rather that imports slumped, casting some doubt as to the strength of domestic demand right now.

On the export side of the ledger, the ABS said that values rose by 1%, or $469 million, to $32.405 billion, helped in part by a surge in volatile non-monetary gold exports.

They increased by 33%, or $352 million, making the largest contribution to the lift in exports values recorded.

Elsewhere, the value of non-rural goods rose by $236 million, helping to offset a decline in the value of rural goods which fell by $195 million (5%). Services credits, often overlooked given the sheer value of Australia’s commodity exports, rose by an impressive $76 million.

The increase in non-rural goods was driven by a rebound in the value of coal and iron ore exports.

Coal exports jumped by $238 million while those for metal ores and minerals — predominantly iron ore — rose by a smaller $110 million.

In volume terms, iron ore lump exports jumped by 14% while those for fines slid 8%. For coal, volumes for hard coking coal and thermal coal fell by 8% and 10% while those for semi-soft jumped by 20%.

Helping to explain the size of the trade surplus, as export values rose, those for imports fell, and sharply.

According to the ABS, they fell by 5%, or $1.601 billion, to $28.832 billion.

Imports of consumption and other merchandise goods fell by $859 million and $792 million respectively, overriding a smaller gain in capital goods imports which increased by $77 million. The value of services imports also softened, falling by $28 million.

The ABS said that the weakness in consumption goods was driven by lower imports of consumer goods, electrical items, food and beverages, along with textiles, clothing and footwear.

The value of consumption goods imports have now fallen 6.4% over the past year, an outcome that fits with recent lacklustre retail sales and car sales figures.

It also hints that consumer demand is also softening after a purple patch at the end of 2016, something that was driven by a decline in the level of the household savings rate.

For intermediate and other merchandise goods, imports of fuel and lubricants, transportation parts, and processed industrial supplies all fell by more than $160 million apiece.

The rebound in capital imports was driven by higher values for civil aircraft and industrial transportation equipment.

This table from the ABS shows the full breakdown of exports and imports by component in seasonally adjusted terms.

Source: ABS

While the trade surplus, on the surface, was impressive, economists at UBS point out that commodity export volumes have been weak, potentially creating downside risks to Australia’s Q1 GDP, especially given the supply disruptions created across Queensland’s coal sector as a result of Cyclone Debbie.

“The trade data to date — especially the net fall of commodity exports values across January and February — and looming hit to coal exports in late-March, still implies a large net export drag on Q1 real GDP, and hence downside risk to our growth forecast of 0.8%,” they said.

Tom Kennedy, an economist at JP Morgan, shares a similar view, saying that Debbie will have implications for both the terms of trade and real GDP growth, particularly in the June quarter.

“Weak export shipments are a clear negative for real GDP growth however, and it seems likely net exports will be a drag in 2Q17,” he says. “We are not yet able to quantify the impact on GDP with the true extent of the damage not yet known.”

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