One problem with service sector exports is that they appear to be highly correlated with the Australian dollar.
But the good news is services have been one of the primary beneficiaries of the end to the mining boom and associated fall in the value of the Australian dollar the RBA said in its latest Statement on Monetary Policy.
In a special section, Box A, dedicated to services trade, the RBA said “net service exports have contributed around 0.5 percentage point to annual GDP growth in Australia over the past couple of years, reflecting a pick-up in service export volumes and a decline in service imports. This follows a period of about four years during which net service exports subtracted from GDP growth”.
The RBA says one reason service exports fell the exchange rate and the fact that the “resources boom in Australia was associated with a large appreciation of the Australian dollar”, putting a handbrake on service exports.
The RBA said:
Over the decade to 2013, this (the rise in the exchange rate) contributed to subdued growth in Australia’s service exports, which became relatively more expensive in foreign currency terms.
Slow demand post-GFC also hurt Australian exports while the high Aussie dollar “supported strong growth in service imports to Australia, as they became relatively less expensive compared with domestically produced services”.
That’s where the good news from the end of the mining boom comes in.
“Since 2013, with the decline in commodity prices and mining investment, and the depreciation of the Australian dollar, these trends in services trade have reversed. Australia’s exports of services, including education, tourism and business services, have increased over the past few years, while service imports to Australia have declined noticeably”, the RBA said.
The RBA says that travel services, which includes tourism and education, have been “particularly responsive to movements in the exchange rate” with these exports having “increased significantly in recent years in line with the substantial increase in visitor arrivals, particularly from China and east Asia”.
We’ve seen that trend manifest in news from the ABS that during March, for the first time ever, more Chinese than New Zealanders visited Australia last year.
At the same time tourism exports fell, along with the Aussie dollar, as Australians have switched from international to local holidays
Meanwhile, as tourism exports are surging, educational exports, which account for around half of all travel exports, have also been rising strongly. But the RBA says this sector also depends “on other factors, such as the perceived quality of educational institutions and changes in migration policies, including requirements for student visas and the ability to use study in Australia as a pathway to permanent migration”.
Business services is also an important and growing area of exports with the falling Aussie dollar improved the “international competitiveness of Australian business service firms”.
That trend, the central bank says, could be further accelerated if the Aussie dollar stays low as local firms “choose e to bring production of services back to Australia that had previously moved offshore to benefit from lower costs”.
The RBA says Australian service exports will continue to benefit from growth in Asia.
There is considerable scope for Australian service exports to the Asian region to continue to increase over time. The prospects for further increases in per capita incomes in Asia imply that the demand for Australia’s service exports is likely to continue to rise. As households’ disposable incomes increase, they tend to consume more services such as education and travel, some of which they will pursue offshore. Similarly, as the region continues to grow, firms in east Asia are likely to demand more business services.
In the end though the RBA says it’s mostly about the Australian dollar.
Australia is well positioned to capitalise on this demand, although the future growth in Australia’s services trade will also depend on the extent of competition, which is likely to be intense, and exchange rate movements, which will affect Australia’s price competitiveness.
Australia is an economy in transition. The upside of the downside in the mining boom is a lower Australian dollar and increased services exports.