Balance of Payments
Recent Trends in the Balance of Payments
Balance in Merchandise Trade (Net Goods)
The balance of 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 in Net Services
The balance in 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
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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
The current account balance is cyclical in nature
Global Financial Crisis
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.
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.
Strengthening world economy and improvements in domestic economic growth have seen the current account deficit increase in contemporary years. This results in increases in imports as well as increases in outflow of income.