[CommSec Research]Trade boom; Dollar drives tourism slump

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Trade boom; Dollar drives tourism slump

International trade; Migration & Tourism

• Australia’s trade balance improved from a revised deficit of $87 million in February to a surplus of $1,704 million in March.
• Exports rose by 9.2 per cent in March while imports rose by 1.2 per cent. The surge in exports was largely driven by the non-rural component - metal ores and minerals which rose by $891 million or 15 per cent, while coal, coke and briquettes rose by $387 million or 14 per cent.
• Net migation (permanent and long-term arrivals less departures) fell by 33 per cent to 202,080 people in the year to March. Tourist arrivals fell by 2.1 per cent in seasonally adjusted terms in March to 579,500 – marking the weakest reading in 11 months.

What does it all mean?

• The impact from the natural disasters on the trade balance is all but done. Trade surpluses are once again back on the agenda. Australia has now notched up a total trade surplus in excess of $23 billion over the past year. In addition the trade deficit in February was revised down from $200 million to just $87 million. The economy may be going through a soft patch but the dollars keep rolling in.
• It is important to highlight that despite the boost to Australian coffers, the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However as the Reserve Bank points out the increase in savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• Higher commodity prices and increased demand for coal and iron ore has helped insulate the Australian economy in the near term and will be the catalyst for the robust 4½ per cent growth that the Reserve Bank is anticipating over FY2011/12.
• Interestingly the strength of the dollar is likely to play a key role in determining how well exports outside the resource space perform. In fact the strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s service sector has notched up its 18th consecutive deficit and although the shortfall has eased from the record high $700 million reached in January it is still holding at $563 million in March.
• The Aussie dollar strength is making Australia a less attractive destination for overseas tourists and potential international students. The latest tourism data has confirmed the weakness in overseas tourist arrivals which is holding at the weakest levels in 11 months. In addition migration levels have come of the boil over the past year having fallen by over 30 per cent. However there were some encouraging signs in the monthly data that suggested migration levels maybe turning around with over 70,000 new migrants entering the country in the past two months. Clearly it is still early days and a sustained improvement in skilled migration will be needed to combat a super tight labour market.

What do the figures show?

International trade

• Australia trade balance shifted back to a surplus in March. The trade balance improved from a revised deficit of $87 million in February to a surplus of $1,704 million in March.
• Exports of goods and services rose by 9.2 per cent in March. Imports of goods and services rose by 1.2 per cent. Exports are up 20.6 per cent on a year ago while imports are up 26.3 per cent on a year earlier.
• Rural exports fell by 2.3 per cent in March while non-rural exports rose by 10.8 per cent.
• Within non-rural exports, metal ores and minerals was the major driver of the strength, rising by $891 million or 15 per cent. Non-monetary gold exports rose by $503 million or 59 per cent to $1,352 million in March.
• Within imports, consumer imports fell by 1.3 per cent in March, capital goods imports fell by 8.3 per cent while intermediate goods imports rose by 7.5 per cent (fuels and lubricants up by $222 million).
• While the physical trade of goods is in surplus, the services account remains mired in deficit. However the deficit did narrow further from the record deficit of $737 million posted in January to a $563 million shortfall in March. The high Australian dollar is a key culprit, depressing tourism receipts.

Overseas arrivals/departures

• Net permanent and long-term arrivals to Australia fell to 202,080 people in the year to March 2011, down 33.3 per cent or 101,550 people on a year ago. Departures from Australia rose by a modest 740, while arrivals plunged by 29,940 in March.
• The net number of permanent settlers entering Australia (arrivals less departures) stood at 20,160 in March.
• Tourist departures fell by 0.5 per cent in seasonally adjusted terms in March to 575,600 after sliding by 1.4 per cent in February. Departures are down 3 per cent on a year ago.
• Tourist arrivals fell by 2.1 per cent in seasonally adjusted terms in March to 579,500 – marking the weakest reading in 11 months. Arrivals are down 2.2 per cent on a year ago.
• In seasonally adjusted the tourism deficit – the gap between departures and arrivals – stood at 96,100 in March, down 20,800 on February and below the record (34-year history) deficit of 126,600 in June 2010.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector.

What are the implications for interest rates and investors?

• Clearly migration intake targets will needed to be lifted markedly over 2011/12 if we want to complete all necessary projects – both the rebuilding and repair work in Queensland and Victoria as well as the raft of mining and energy projects. To meet the demand for workers, the government will clearly need to look overseas or risk forcing wages and prices up. The labour market will be closely watched by the Reserve Bank in determining if inflationary pressures are building.