If you know your economic onions, you know that our economy has long run a deficit in trade with the rest of the world which, when you add our net payments of interest and dividends to foreigners, means we’ve long run a deficit on the current account of our balance of payments and, as a consequence, have a huge and growing foreign debt.
Except that this familiar story has been falling apart for the past five years, and is no longer true. In that time, our economic dealings with the rest of the world have been turned on their head.
Last week the Australian Bureau of Statistics announced that we’d actually run a surplus on the current account of $8.4 billion in March quarter. Does that surprise you? It shouldn’t because it was the fourth quarterly surplus in a row.
But that should surprise you because the first of those surpluses, for the June quarter last year, was the first surplus in 44 years. And now we’ve clocked up four in a row, that’s the first 12-month surplus we’ve run since 1973.
Of course, when the balance on a country’s current account turns from deficit to surplus, its net foreign liabilities to the rest of the world stop going up and start going down.
What’s brought about this remarkable transformation? Various factors, the greatest of which is our decade-long resources boom, which occurred because the rapid development of China’s economy led to hugely increased demand for our coal, natural gas and iron ore.
A massive rise in the world prices of those commodities, which began in 2004 and continued until 2011, prompted a boom in the construction of new mines and gas facilities which peaked in 2013. From then on, the volume of our exports of minerals and energy grew strongly as new mines came online.
But while our mining exports expanded greatly, the completion of the new mines and gas facilities meant a fall in our extensive imports of expensive mining equipment. As a consequence, our balance of trade in goods and services – which between 1980 and 2015 averaged a deficit equivalent to 1.25 per cent of gross domestic product – has been in surplus ever since.
The rise of China’s middle class gets much of the credit for another development that’s helped our trade balance: strong growth in our exports of services, particularly inbound tourism and the sale of education to overseas students.
When our country has gone since white settlement as a net importer of foreign financial capital – which has been necessary because our own savings haven’t been sufficient to fund all the physical investment needed to take full advantage of our country’s huge potential for economy development – it’s not surprising we have a lot of foreign investment in Australian businesses and have borrowed a lot of money from foreigners.
In which case, it’s not surprising that every quarter we have to pay foreigners a lot more in interest and dividends on their investments in our economy than they have to pay us on our investments in their economies.
This “net income deficit” – which is the other main component of the current account - has grown enormously since the breakdown of the post-World War II “Bretton Woods” system of fixed exchange rates prompted us to float our dollar in 1983 and started a revolution in banks and businesses in one country lending and investing in other countries, including the rise of multinational corporations.
That was when Australia’s net foreign debt started rising rapidly and the net income deficit began to dominate our current account. The net income deficit has averaged a massive 3.4 per cent of GDP since the late 1980s.
It hasn’t changed much since the tables started turning five years ago. Except for one thing. The rapid growth in our superannuation funds since the introduction of compulsory employee super in the early 1990s has seen so much Australian investment in the shares of foreign companies that, since 2013, the value of our “equity” investment in other countries’ companies has exceeded the value of more than two centuries of other countries’ investment in our companies.
At March 31, Australia had net foreign equity assets worth $338 billion. You’d expect this to have significantly reduced our quarterly net income deficit, but it hasn’t. Why not? Because the dividends we earn on our investments in foreign companies aren’t as great as the dividends foreigners earn on their ownership of our companies. Why not? Because our hugely profitable mining industry is three-quarters foreign-owned.
If you add our net foreign equity assets and our net foreign debt to get our net foreign liabilities, they’ve been falling as a percentage of GDP for the past decade. If you look at the absolute dollar amount, just since December 2018 it’s fallen by more than 20 per cent.
If all this sounds too good to be true, it’s certainly not as good as it looks. The final major factor helping to explain the improvement in our external position is the weakness in the economy over the 18 months before the arrival of the virus shock.
The alternative way to see what’s happening in our dealings with the rest of the world is to focus on what’s happening to national saving relative to national (physical) investment. That’s because the difference between how much the nation saves and how much it invests equals the balance on the current account.
Turns out that national investment has fallen in recent times (business investment is weak, home building has collapsed and government investment in infrastructure is falling back) while national saving has increased (households have been saving more, mining companies have been retaining much of their high profits, and governments have been increasing their operating surpluses).
So much so that the nation is now saving more than it’s investing, giving us a current account surplus. But this is a recipe for weaker not faster “jobs and growth”.
