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For 44 years, Australia has paid more out to the rest of the world in the form of imports, dividends and interest payments than it has received back. It was back in June 1975 when Australia last had a current account surplus – albeit a fleeting one, lasting only a quarter. At that time, Gough Whitlam was still Prime Minister, God Save the Queen was our national anthem and the Australian dollar was pegged to the US dollar. But that changed last week, when Australia recorded a current account surplus of $5.9 billion in the three months to June.
A lot has changed in the Australian economy over this near half-century. In the mid-1980s, after the current account deficit ballooned out to 6% of nominal GDP (see chart), then-Treasurer Paul Keating warned Australia was at risk of becoming a banana republic; an economy dependent on the exports of a limited-resource good. Back then, he was referring to our reliance on agriculture and resource exports. It was meant as a warning to the risks we faced if the demand for these exports dried up.
In truth, last week’s surplus reflects some of this risk, albeit to the upside. Struggling on the back of the trade tensions with the US, China is ramping up construction to stimulate its economy. That means they’re buying more of our iron ore, and paying extra for it as well. With tensions lingering – driving falls in exports from China – that stimulus may continue in the short-run.
There is another (less flattering) interpretation of Australia’s move to a current account surplus and that is, for the first time in 44 years, Australians are saving more than they are investing. We typically borrow from the rest of the world to fund our investment, but in the June quarter Australia was a net funder of investment elsewhere. Unfortunately, this is more a reflection of a lack of investment opportunities in Australia than a move to a more prudent savings culture.
Last quarter’s current account surplus helped maintain modest growth in the broader economy. In the June quarter, the Australian economy expanded 0.5% from the previous three months and 1.4% compared to the same period last year. But in per capita terms, the economy is smaller now than in June last year, and we’ve now had four consecutive quarters of trend growth below 0.5%. That’s the first time that’s happened since Australia’s last recession in the 1990s.
These figures characterise the cyclical and structural headwinds facing the economy: weak wage growth is making Australians more reluctant to part with their money, the global economy is slowing and the trade war is driving uncertainty and stifling confidence. Looking forward, the benefits of the recent personal income tax cuts should start to flow through the economy this quarter. The recent interest rate cuts look to have again been effective in supporting asset prices, but there is little sign yet of lifting business investment. And with a cash rate of only 1% to play with, the Reserve Bank is looking for additional support from the Federal government in the form of fiscal stimulus to help navigate this period.
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.