![Australian trade does face headwinds: they include the inevitable end to China's stimulus measures and a general lull in ...](/content/dam/images/g/u/s/p/1/v/image.related.afrArticleLead.620x350.gv1cia.png/1490065395378.jpg)
Changes in the Chinese economy have again hit Australia, with ripples in China creating significant waves in our trade performance.
In November 2016 a 31-month deficit on the balance of trade was reversed as Australia went into trade surplus, a surplus that has continued to January this year, albeit smaller than in December.
Australian Bureau of Statistics trade data shows the seasonally adjusted trade surplus at $3.3 billion in December 2016 and $1.3 billion in January, compared to June 2016 when Australia's imports outweighed exports by $3 billion.
The January 2017 trade figures softened on the December quarter, as imports rose 3.7 per cent while exports fell 2.9 per cent. Non-monetary gold exports dropped 39 per cent in January while our imports of consumption goods rose 7 per cent.
![Senior economist at ANZ Research, Felicity Emmett, says the current trade story is mainly being driven by global ...](/content/dam/images/g/v/1/q/o/4/image.imgtype.afrArticleInline.620x0.png/1489967168479.jpg)
Senior economist at Austrade, Mark Thirlwell, says the 31-month trade deficit leading to November was built on the back of a drop in commodity prices and a still-relatively high Australian dollar.
"Our total export values were down in 2015-16, which was down on 2014-15. It was largely due to low commodity prices in iron ore, coal and LNG."
Thirlwell says the conundrum for the economy was that the resources commodity exporters were delivering high volumes but with low prices. And the low revenues from those exports were not offset by the rising fortunes of our services exports, tourism and education in particular.
Change of fortunes
That all changed in the final quarter of the 2016 calendar year, says Thirlwell, when Chinese government stimulus measures kicked in and the demand and prices for coal and iron ore increased suddenly.
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"At the same time that the Chinese domestic economy is enjoying a renewed stimulus, they are also closing coal mines. So our exporters are already at high volumes and the prices are rising."
At the end of June 2016 the spot price for iron ore was $US52 per tonne and by the end of February of this year it was at $US89. In the same period the Australia coal price has risen from $US53 per tonne to $US80.
Thirlwell warned the Chinese stimulus measures – including infrastructure construction, business tax cuts, increased government spending, lowering interest rates and relaxed capital reserve ratios for banks – are temporary and will last only another year, at most. However, the size of the measures has been sufficient to give a jolt to Australia's major exports.
For instance, in the final quarter of 2016, the value of Australian exports of minerals lifted by almost 30 per cent and fuel exports by 15 per cent.
Thirlwell says the ease with which the Chinese economy throws its weight around in the Asia-Pacific region is "economic reality" rather than something to be lamented.
"The important thing is that Australian resources producers have been exporting at high volumes, regardless of China's domestic settings. When the prices rise, they take the higher revenues."
Solid demand
While the Chinese central bank and government juggle the domestic economy to encourage construction spending, Thirlwell says another force is providing solid demand for Australian services exports such as education and tourism.
"Chinese household incomes are steadily rising, and the Australian dollar devalued."
Thirlwell calls our tourism and education exports the ''Visitor Economy" and it is driven by two factors.
"The Visitor Economy is driven by price and demand. So as the Australian dollar has lost ground to the US dollar in the past four years, the price of these services becomes more attractive to Chinese consumers, while the demand is growing because of the growth in their middle class."
McKinsey Consulting has predicted that in purchasing parity terms, 75 per cent of Chinese households will be in an income band occupied by Brazil and Italy ($US9000-34,000 pa.) by 2022. Only 4 per cent of urban Chinese households were in this band in 2000.
"This is happening in India and Indonesia, as well as China," says Thirlwell. "You have more households moving into the income bracket where they can take a holiday overseas and they can choose where their children are educated, which includes overseas. Australia benefits from this trend because our tourism offering is of great interest in the Asian market and our education institutions have a reputation for quality."
Thirlwell says Australia's trade coming out of a long period of deficit is the headline news but agriculture continues to perform strongly. He says manufacturing exports increased 2.6 per cent in the year to June 30, 2016, and then increased in the December quarter by 6.6 per cent.
He says Australian companies contributing to global supply chains with companies such as Boeing and Lockheed Martin, is bolstering the manufacturing exports.
He says Australian trade does face headwinds: they include the inevitable end to China's stimulus measures and a general lull in world trade.
"We're seeing some encouraging signs that world trade might be picking up again," says Thirlwell, in relation to the soft global trade figures since 2014.
He says broader headwinds are also lurking, such as renewed talk of protectionism and roll-back on initiatives such as the Trans-Pacific Partnership.
However, Thirlwell says the main drivers of Australia's immediate trade future – China growth and the Australian dollar – are in a sustainable zone. China is still in growth mode and while the AUD's current levels are not ideal for exporters, they are short of the over -.80¢ level at which exports see an impact.
Strong commodity prices
Senior economist at ANZ Research, Felicity Emmett, says the current trade story is driven by global commodity prices, rising household income in China and Asia, and the strength of the Australian dollar.
"Agricultural exports have been strong following a good season, and with the depreciation of the Australian dollar, manufacturing exports – and manufacturing jobs – are doing well," says Emmett. "But the main story is strong commodity prices for coal and iron ore, and the rising household incomes in China, and Asia more broadly."
She says the steep uplift in iron ore and coal prices in the second half of 2016 created "a big impact on the current account deficit in the December quarter", and drove the current surplus. The reduced trade surplus in January was also due to resources prices easing slightly.
"Those two factors – Chinese incomes and the Australian dollar – are pushing our services exports, especially in tourism and education. The Aussie dollar is very important to our services exports and the depreciation of the dollar has seen services exports rise."
She says there has been an increase in business arrivals, also, but it is the calculation of income versus affordability that drives tourism and education.
She says manufacturing and agriculture are also performing solidly at the moment but they were not having the impact on the trade figures that services and resources exports were having.