Australia Is About to Run a Surplus at Precisely the Wrong Time
Australia is on track to close twin deficits that were once seen as the Achilles heel of its small and open economy. Yet the dramatic turnaround is probably not what the Reserve Bank is after.
Economists surveyed by Bloomberg expect a current-account balance of A$1.5 billion ($1 billion) in data out Tuesday, the first surplus since 1975, while the government’s budget is also close to -- if not already being -- back in the black for the first time since before the global financial crisis.
Both surpluses -- should they come to pass -- are solidly underpinned by the extraordinary and unexpected spike in iron-ore prices fueled by huge supply disruptions and record Chinese steel production. Though both factors have since unwound and iron ore is set for a record monthly fall, suggesting that any current-account surplus may not last too long.
Reserve Bank Deputy Governor Guy Debelle this week noted the “significant transformation” from 33 years ago when then Treasurer Paul Keating warned that Australia’s record current account deficit -- at almost 6% of GDP -- risked seeing the nation becoming a “banana republic.”
Yet for the RBA, with a cash rate at a record-low 1% and forecast to drop to 0.5% next year, a current-account surplus suggests the currency might be a bit stronger than it otherwise would be and investment somewhat softer -- the opposite of what’s needed in 2019. A budget surplus, meanwhile, means the government isn’t providing much stimulus to an economy that’s slowed sharply and where rate ammunition is running low.
The central bank has been urging the government to step up activity: infrastructure spending, productivity-enhancing reforms and other measures to stoke economic growth. But the fiscal authorities have proved reluctant, highlighting instead its tax cuts -- though the bulk of these only kick in strongly midway through next decade.
The notion that twin surpluses could prove detrimental to the economy would’ve been outlandish to Keating, who in 1986 confronted a balance of payments crisis that sent the currency tumbling. In response, he galvanized the electorate behind a wide-ranging reform program to help the country trade its way out of trouble, and introduced a period of fiscal rectitude designed to balance the budget to offset the current-account’s vulnerability.
Keating’s reforms would help underpin the economy’s 28 years without a recession -- defined locally as two consecutive quarters of contraction -- but also turn budget surpluses into an obsession with law makers. That’s led to the current situation where Treasurer Josh Frydenberg is prioritizing a return to the black over aiding a weakening economy.
Current-account surpluses are “rare beasts” in Australia, with deficits recorded in 133 of the past 159 years, says Michael Blythe, chief economist at Commonwealth Bank of Australia.
A surplus “is typically associated with extreme economic events,” he said. “Wars and recessions seem quite effective in producing surpluses. Some examples include the 1930s depression, the early 1960s credit squeeze that cut imports and the Korean war wool boom that boosted export prices.”
Blythe notes that in addition to the boon of high iron ore exports, Australia’s swelling trade surpluses have been aided by “unusually weak” import growth due to weak domestic spending. So in a sense, like the budget, the result is a mixture of good luck and not particularly positive omens.
©2019 Bloomberg L.P.