Data released this morning by the Australian Bureau of Statistics show that Australia’s current account deficit (CAD) for the March quarter 2005 rose to $15.6 billion. This reflects an increase in the net income deficit, which was partly offset by a narrowing in the trade deficit.
The March quarter balance of payments does not incorporate the impact of the significant increases in iron ore and coal contract prices that took effect in April 2005. These new contract prices will flow through to export receipts from the June quarter. As a consequence the CAD is expected to decline in the June quarter. The mining sector has also made a significant investment in new capacity, spending more than $25 billion over the past three years. These increases in production capacity, combined with measures to alleviate transport bottlenecks at key ports, will see mineral export volumes grow strongly over 2005 06.
In the March quarter, the net income deficit rose to $8.4 billion, driven by high profits earned by foreign-owned Australian based companies, particularly in the mining sector. The trade deficit fell by $22 million to $7.1 billion, with solid export growth partly offset by growth in imports.
Export volumes grew by 1 per cent in the March quarter. Exports of metal ores and minerals grew strongly, while rural exports fell 4.6 per cent in the March quarter, reflecting the smaller 2004 grain harvest and continuing dry conditions in many parts of rural Australia. Import volumes grew by 2 per cent in the March quarter, with imports of motor vehicles making a significant contribution following the tariff reduction on 1 January 2005. The terms of trade grew by 1.1 per cent in the March quarter to be 7.6 per cent higher through the year. The increase in the terms of trade over the past year mainly reflects strong increases in coal, iron ore and base metal prices. Coal and iron ore price increases will flow through in the June quarter.
Australia’s net foreign debt rose from $421.3 to $424.7 billion in the March quarter. The general government share of Australia’s net foreign debt has fallen sharply since the Coalition Government came to office in 1996 from 17.2 per cent to 4.5 per cent. With the debt servicing ratio currently at 9.7 per cent of export income, Australia’s ability to service its net foreign debt is very strong, and certainly much stronger than in the early 1990s when the debt servicing ratio hit a peak of 20 per cent of export income.
Macroeconomic conditions are more stable now than during previous episodes of large CADs. The budget is in surplus, government debt is close to zero, the unemployment rate is at a 30 year low, and inflation and interest rates are at low levels by historical standards.