Actually, Australia's huge trade surplus might not be great for GDP

John Patrick Fletcher/Action Plus via Getty ImagesSorry. What?
  • Australia recorded another huge trade surplus in January, the second-largest on record.
  • Exports jumped by 5%, largely thanks to gold.
  • J.P. Morgan says the details suggest it won’t do much to help real GDP.

There hasn’t been a lot of good news around about the Australian economy of late.

Unsurprisingly, news that Australia’s trade surplus surged to the second-highest level on record in January was seen as something to celebrate.

However, beyond the headline $4.5 billion surplus, J.P. Morgan’s Australian economics team isn’t convinced the result was all that great, including for Q1 GDP.

Here’s a snippet from a research note from Economist Tom Kennedy explaining why:

Headline export and import growth were both strong, but in a similar fashion to December’s release, the underlying details were less favourable. This is particularly so for real GDP given our estimate of the value/volumes split suggests real export volumes growth was negative at the start of 2019.

This dynamic was most pronounced across the dominant non-rural goods component — iron ore, coal and LNG — which, once deflated by the commodity price indices, suggests volumes fell close to 3% in January.

While the shifting timing of Lunar New Year means we shouldn’t place too much emphasis on individual monthly trade prints at this time of year, this is a soft outcome in the context of more fundamental headwinds influencing Australia’s trade outlook such as US-China relations, Australia’s maturing mining production cycle and lengthy delays/restrictions for coal exports [to China].

So the strength in commodity exports was likely due to higher prices, rather than stronger volumes, and will unlikely be all that supportive for Q1 GDP growth, at least from a volumes perspective.

However, it will help to boost nominal GDP, corporate earnings and taxation revenues, so that’s something of an offset.

However, longer-term, Kennedy says the tailwinds provided to the economy from stronger export volumes will likely diminish in the year ahead, helping to explain why J.P. Morgan sees the RBA rate cuts in the months ahead.

We expect net exports to be less supportive of real GDP in 2019, meaning the growth burden will fall increasingly on domestic drivers such as consumption and capex. We still look for quarterly real GDP growth to pick up a bit from the unimpressive pace of the second half of 2018 although, with a lower jumping off point, it is clear the RBA will need to reassess their current forecast set and we expect another round of downgrades in May’s Statement of Monetary Policy.

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