Last year Australia announced the breaking of an existing 44-year record of current account deficits, registering a $5.9B current account surplus.
Deputy Governor of the RBA Guy Debelle has addressed these outcomes stating that “the trade surplus and the current account deficit reach multi-decade milestones”.
What has caused this historic change? A single commodity has been the catalyst, iron-ore!
As indicated above, iron ore prices surged during early 2019 on the back of a sudden shortage of global supply after the Brumadinho mine disaster in Brazil.The disaster involved the collapsing of a dam which tragically buried people and mines in the iron ore export hub of Brazil. This particular mine supplied 40million tonnes of iron ore per year into the global marketplace. As supply of iron ore decreased, scarcity lead to upward pressure of the prices as indicated above. Iron ore is a raw material utilised in the production process and tends to have a stable level of demand over time despite fluctuations in prices(inelastic good), particularly from high growth emerging economies such asChina, as it is a key manufacturing input of production.
Now, how did this impact Australia?
Iron Ore in recent years has been Australia’s highest source of export revenue reaching a high of approximately $80B in 2019. These inflows were recorded as credits in Australia’s balance of goods and services, increasing the trade balance and in turn having a positive effect on the current account. The extent to which the trade balanced provided stimulus into the Australian economy is indicated below where it outsized net primary income outflows in absolute terms, resulting in a current account surplus.
To demonstrate the extent that export revenue has propelled these changes note the following monthly trade balances:
However, amidst the COVID downfall, the economic growth forecasts of “high growth” emerging markets such as China are morbid with output levels falling below 0. Economists have argued that this will induce significantly reduced demand for iron ore and effectively“ cut off” a profitable revenue source of the Australian economy.
As a counterargument, Commonwealth Bank economist Joseph Capurso argues that China’s “infrastructure led economic stimulus package will be reliant on iron-ore” in the post COVID-19 recovery.
Chinese demand for iron ore propagated the tailwinds of our current trade boom, and better yet, their infrastructure led response will only amplify the rewards the Australian economy will receive.
Trade surpluses represent an excess of credits in the form of export revenue relative to debits in the form of import expenditure in the balance of goods and services component of the current account. Through an increase in export demand, the current account outcome moves towards a smaller deficit or larger surplus.
However, another constituent of the Current Account is the Net PrimaryIncome component which has generally sustained large deficits in light ofAustralia’s savings and investment gap. Due to this structural feature of theAustralian economic landscape, large debt borrowings from overseas have occurred overtime with servicing costs creating large outflows out ofAustralia’s Current Account. In 2019, the trade boom held the magnitude to the extent that the positive trade surplus exceeded the net primary income account deficit, creating a holistic surplus in the current account, the first in 44 years.
As export sale increase, not only are these injections credited inAustralia’s current account, they also constitute injections into Aggregate demand. In the current global economic climate where subdued growth levels have deteriorated Australia’s GDP levels, the external sector has provided injection in Australia’s circular flow of income and increase the external component of Aggregate demand. External sector has often acted as an antibiotic for Australia’s economy, providing stimulus during murky domestic conditions. This effect is illustrated on the graph below.
As export revenue acts as an injection intoAustralia’s economy via particular exporting industries, this has flow on effects on increases in wage rates. This notion is prominent when comparing the mining and manufacturing sectors. Wage growth tends to be indexed in line with company and industry performance, hence in internationally competitive industries like mining, wage growth is high, whereas in non-competitive industries like manufacturing, wage growth is stagnant. Coupled with these flows, there is a disproportionate relationship between heightened investment flow into the mining sector, despite only employing a small proportion of the population. This disproportionate increase, using economic theory and holding ceteris paribus, will lead to an outward movement in the LORENZ curve and increase in the Gini Coefficient.
Indeed, it can be argued that "winners", those that reap rewards of outcomes, tend to be concentrated and minimal! However, keep in mind, indirect affects of our trade boom will ripple through all demographics of society via