5 Feb 2014
Australia's transition towards current account surplus positive for AUD
FXStreet (Bali) - There has been an article from Commonwealth Bank of Australia chief economist Michael Blythe, published by the AFR, doing the rounds since Tuesday. In the publication, Blythe suggests that the Australian Dollar may benefit mid long term from a change of trend in its current account balance, with the Economist speculating that Australia may be generating small current account surpluses within five years.
Article published by Michael Blythe (key quotes)
"Current account deficits are the norm in Australia. Deficits have been recorded in 128 of the past 150 or so years."
"From this financing perspective, the current account deficit reflects a shortfall of domestic savings relative to domestic investment. Despite perceptions to the contrary, the gap reflects high investment rather than low savings. By running current account deficits, we have been able to sustain a higher investment rate than otherwise. Economic growth rates and living standards are higher than otherwise as a result. Looking ahead, the flow of funds will evolve in a way that would produce a current account surplus (or net lending to the rest of the world)."
"Households will continue to save and remain significant net lenders. The change in household behaviour promoting savings was under way before the financial crisis hit. The pick-up in household savings and reduction in borrowing appetite look 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 also decline. The recent mid-year review shows the Commonwealth budget deficit slowly declining over the next 10 years. However, the chances are that the government proceeds 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. From there, it is only a small step to lending to the rest of the world. We may be generating small current account surpluses within five years."
"From a real world perspective, the move to current account surplus requires a shift to trade surpluses and a narrowing in the net income deficit. A sharp rise in resource export volumes and a marked reduction in resource-related capital goods imports as the mining construction boom winds down will drive the move to trade surplus."
"The expanding middle-income population in Asia should lift demand for Australian services exports such as tourism and education as well. On the income side, the broad macro backdrop suggests payments on our foreign liabilities should grow reasonably slowly. Global interest rates are set to remain low for an extended period. But the expansion of Australian superannuation funds will boost earnings on our foreign assets by more. The net income deficit (Australia’s interest and dividend payments to the rest of the world, less our offshore investment earnings) should narrow as a result. Trade surpluses and smaller income deficits equal current account surplus. Countries that run current account surpluses typically have strong currencies. Examples include Switzerland, Japan and Singapore. The argument is reinforced from the deficit perspective."
"The fears about global capital flows generated by the Fed tapering debate in 2013 had a bigger negative impact on those emerging economy currencies with large current account deficits. As a result, it is reasonable to expect the Australian dollar to strengthen should a persistent current account surplus emerge. Abstracting from US dollar-specific influences, the combination of a AAA rating and a current account surplus would likely see the Australian dollar again trade well above parity to the US dollar."
"Another feature of current account surplus countries is that average interest rates are lower. There are two reasons. By definition, surplus economies have national savings running ahead of national investment. They don’t need higher interest rates to attract capital: the lack of reliance on global funding sources means surplus economies are often seen as safe havens and have lower risk premiums."
Article published by Michael Blythe (key quotes)
"Current account deficits are the norm in Australia. Deficits have been recorded in 128 of the past 150 or so years."
"From this financing perspective, the current account deficit reflects a shortfall of domestic savings relative to domestic investment. Despite perceptions to the contrary, the gap reflects high investment rather than low savings. By running current account deficits, we have been able to sustain a higher investment rate than otherwise. Economic growth rates and living standards are higher than otherwise as a result. Looking ahead, the flow of funds will evolve in a way that would produce a current account surplus (or net lending to the rest of the world)."
"Households will continue to save and remain significant net lenders. The change in household behaviour promoting savings was under way before the financial crisis hit. The pick-up in household savings and reduction in borrowing appetite look 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 also decline. The recent mid-year review shows the Commonwealth budget deficit slowly declining over the next 10 years. However, the chances are that the government proceeds 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. From there, it is only a small step to lending to the rest of the world. We may be generating small current account surpluses within five years."
"From a real world perspective, the move to current account surplus requires a shift to trade surpluses and a narrowing in the net income deficit. A sharp rise in resource export volumes and a marked reduction in resource-related capital goods imports as the mining construction boom winds down will drive the move to trade surplus."
"The expanding middle-income population in Asia should lift demand for Australian services exports such as tourism and education as well. On the income side, the broad macro backdrop suggests payments on our foreign liabilities should grow reasonably slowly. Global interest rates are set to remain low for an extended period. But the expansion of Australian superannuation funds will boost earnings on our foreign assets by more. The net income deficit (Australia’s interest and dividend payments to the rest of the world, less our offshore investment earnings) should narrow as a result. Trade surpluses and smaller income deficits equal current account surplus. Countries that run current account surpluses typically have strong currencies. Examples include Switzerland, Japan and Singapore. The argument is reinforced from the deficit perspective."
"The fears about global capital flows generated by the Fed tapering debate in 2013 had a bigger negative impact on those emerging economy currencies with large current account deficits. As a result, it is reasonable to expect the Australian dollar to strengthen should a persistent current account surplus emerge. Abstracting from US dollar-specific influences, the combination of a AAA rating and a current account surplus would likely see the Australian dollar again trade well above parity to the US dollar."
"Another feature of current account surplus countries is that average interest rates are lower. There are two reasons. By definition, surplus economies have national savings running ahead of national investment. They don’t need higher interest rates to attract capital: the lack of reliance on global funding sources means surplus economies are often seen as safe havens and have lower risk premiums."