For decades Australia has been running current account deficits.
It means we, as a nation, need to borrow money from the rest of the world to fund our lifestyles, investment and growth.
Current account deficits are usually seen as bad things as the debt piles up in what seems a never-ending cycle of borrowing and spending.
Current account deficits often make currencies vulnerable to speculative selling and devaluation, as happened in the Asian crisis in the late 1990’s and then again over the past year for nations such as India and Indonesia and, to a lesser extent, the Australian dollar.
Famously in the 1980’s, then Treasurer Paul Keating caused a currency crisis by comparing Australia’s current account position with that of a Banana Republic.
But no more, according to Michael Blythe the CBA’s chief economist.
In a note to clients overnight, Blythe explores the structural changes that are occurring in the Australian economy and believes that, “Australia may be at the start of an era of current account surpluses. Funding flows, trade flows and income flows are evolving in a way favouring a shift to surplus.”
That’s a big shift for Australia, but a shift that Blythe says was under way before the financial crisis hit.
Households will remain significant net lenders. The change in household behaviour was underway before the financial crisis hit. The pickup in household savings and reduction in borrowing appetite looks permanent.Business net borrowing is set to decline. The mining construction boom that drove business funding requirements to exceptionally high levels is ending. Government net borrowing should decline. The recent mid-year review shows the Commonwealth budget deficit slowly declining. We suspect, however, that the government will proceed further and faster than the baseline projections suggest.
These shifts will narrow the gap between domestic savings and investment and reduce net borrowing from the rest of the world. We may be generating small current account surpluses within five years.
This is really good news if Blythe is right because it means households are cutting their cloth to fit and crucially that all the investment in mining will pay off in the long run with increased exports and income – that’s how investment is supposed to work.
The good news, according to Blythe, is that this shift to current account surplus implies lower interest rates in the economy.
However, more problematic for the RBA and Australian business is Blythe’s assertion that “Abstracting from USD‑specific influences, the combination of a AAA rating and a current account surplus would likely see the AUD again trade well above parity to the USD.”
So like many things in economics, on the one hand a current account surplus is good for the economy, while on the other, it might not be.