Balance of Payments
Recent Trends in the Balance of Payments
Balance on Merchandise Trade (Net Goods)
The balance on merchandise trade tends to fluctuate according to changes in the world and domestic growth. Australia exports mainly primary products which are very price inelastic and are subject to large price fluctuations.
An increase in world economic growth will increase demand for Australian commodities, raising prices and hence, increasing the value of net goods towards a lower deficit or higher surplus. High levels of domestic economic growth tend to increase imports, as Australian businesses increase imports of capital goods and households increase the level of imported consumer goods, such as electronics, from higher incomes and confidence within the economy.
Balance on Net Services
The balance on net services is generally in a deficit, due to the fact that Australia is an isolated country requiring imports of services such as freight. In addition, our high incomes generally result in a high expenditure on overseas travel, although this fluctuates according to domestic economic growth.
Balance on Income
This is always in a deficit due to Australia's high level of foreign liabilities. High levels of foreign investment results in a high outflow of income to overseas residents. Periods of high levels of domestic economic growth will increase the income deficit as the repayments profits and dividends will be higher.
Balance on Foreign Investment
The balance of foreign investment is always a surplus to supplement Australia's current account deficit. The balance of foreign investment will tend to increase during periods of high economic growth, as investment becomes less risky.
Recent Trends in the Current Account
From the above graph, we can note the following:
The current account deficit reached its peak during 2007 at -7.5% of GDP.
The current account deficit decreased as a result of the GFC, decreasing from -7.5% in 2007 to -5% in GDP.
The current account deficit increased during the mining investment boom to -4.3% of GDP.
Prior to the COVID-19 pandemic the current account was in surplus 2.5% of GDP.
The current account balance is cyclical in nature.
Below looks at analysis of the key events during this time and its impact on the current account deficit.
Key Events in the Balance of Payments
Global Financial Crisis (GFC)
The GFC saw the current account deficit sharply decrease from -7.5% of GDP to -5% of GDP. This was due to a decrease in export values as demand for Australian exports decreased from a slowing world economy and lower income debits as profits and dividends paid to overseas residents also decreased.
2011 to 2012 saw an eventual reversal of current account balance movements. The current account deficit increased most likely from increases in foreign investment financing business investment to increase commodity output to capitalise on high commodity prices. In addition, the deficit would have grown from increasing outflows of profits and dividends as mining revenues increased.
Post Mining Investment Boom
The mining boom saw huge investment in infrastructure to increase the output of commodities. After the mining boom, those outputs were realised, increasing exports and lowering the current account deficit. In addition, lower foreign investment means that Australia's servicing costs on foreign investment are also lower, resulting in a lower income deficit.
During 2015 - 2020, the current account deficit decreased and eventually turned into a current account surplus. This is largely due to superannuation funds selling off foreign equity holdings to provide liquidity for the COVID-19 Early release of superannuation program, increasing the deficit on the capital and financial account, hence, increasing the surplus on the current account.