OK, last report I read had Australian trade deficits at 7.5 of GDP but everyone is freaking out that USA is at 6% meanwhile australian currency has had a huge rally in the last few years on the back of this massive trade deficit.... supposedly currencies are supposed to have a crisis when deficits get over 6%? can anyone explain why Australia is different? and why people are still piling into australian dollars? do interest rate yields just trump almost all economic problems?
It's only a matter of time. I'd be looking for opertunities to short the Australian dollar. The current Australian government has done nothing to help the economy over the last eight years, all they have done is ride on the coat tails of the Hawke/Keating reforms and no adjustments have been made along the way, now, as you have pointed out, the problems are starting to compound. Here is a post on another group by a wise economist. Today, the Current Account Deficit (CAD) figures for the December Quarter were published by the ABS. Officially, the figures demonstrated that our external imbalance has now hit 7.1% of GDP. The likely March Quarter figure could top out at 7.5% (for the reasons explained, below). This is significant as it comes on top of yesterday's 2nd worst trade deficit result (ie: the $2.7B January trade deficit). Chiefly, our CAD is made up of 2 primary components: 1. the trade balance (or deficit); and 2. the net income balance. Traditionally, the net income balance has been a negative figure whereas our trade balance has, at times, traded in surplus (as well as deficit). The trend revealed by the December Quarter CAD was, however, somewhat worse than expected. In the main, this was due to the rapid and accelerating deterioration in our net income balance. 12 months ago (ie: 4q03), this stood at 3% of GDP, whilst our trade deficit stood at 2.8%. At the time, our CAD was 5.9% of GDP. Today, our income balance (deficit) stands at 3.8% of GDP, whilst our trade deficit is 3.2% of GDP. Our CAD is 7.1% of GDP. Throughout 2004, our income balance averaged 3.3% of GDP, vs our trade deficit average of 3.0%. During the same period, our CAD averaged 6.4% of GDP. What, however, is quite disconcerting is the rapid deterioration in the net income balance, measured as a proportion of GDP, as the following demonstrates: PERIOD INCOME BALANCE TREND % OF GDP 2Q03 2.8% Stable 3Q03 2.7% Stable 4Q03 3.0% Deteriorating 1Q04 2.7% (3.3%) Improving (one-off) 2Q04 3.0% (2.9%) Deteriorating 3Q04 3.5% (3.1%) Deteriorating 4Q04 3.8% (3.3%) Deteriorating In the same time period, our trade deficit has been relatively stable, as the following demonstrates: PERIOD TRADE BALANCE TREND % OF GDP 2Q03 3.4% High 3Q03 3.3% Improving (gradual) 4Q03 2.8% Improving (strong) 1Q04 3.2% (3.2%) Deteriorating (one-off) 2Q04 2.5% (3.0%) Improving (one-off) 3Q04 3.2% (2.9%) Deteriorating 4Q04 3.2% (3.0%) Stable Given yesterday's January trade deficit, it now seems quite likely that the March Quarter trade deficit will grow to ~$7.5B. It is likely that the net income balance will further deteriorate to ~$8.6B. Overall, the March Quarter CAD will likely deteriorate to $16.3B (including miscellaneous adjustments). As a proportion of GDP, this suggests that the March Quarter CAD could well top 7.5%, of which: 1. net income balance = 4% of GDP; and 2. the trade deficit = 3.5%. The future direction of our CAD, therefore, seems to be reflected in a net income balance (or deficit) of >4% of GDP, and an oscillating trade deficit averaging well above 3% of GDP. Once all this becomes apparent to the markets, it is quite likely that a sharp and sustained $ adjustment will be required and that the RBA and the Federal Government together will need to carefully address the situation. So-called higher export prices for our extracted commodities from April onwards, however, is simply not going to do the trick. Australia's external imbalance is much worse than that of the USA, and our capacity to redress it is that much more constrained. Our imbalance is now heavily structural (ie: income balanced) in nature and nothing short of running sizeable trade surpluses in the future will re-dress that problem. Canberra indeed has a problem brewing up. All the best, Grant62 Grant also points out, and has done for about 18 months, that it's Europe that will be the undoing of world growth as France and Italy are spiraling into severe recessions. Hope this helps. regards.