JP Morgan Australia Report

JP Morgan Australia Report

Australia’s current account deficit narrowed much more than expected in 4Q, owing mainly to an improvement in the trade balance. The current account deficit fell to -A$6.5 billion (J.P.Morgan -A$7.8 billion, consensus -A$7.4 billion) from -A$9.5 billion in 3Q, marking the smallest deficit in seven years.

The goods and services balance remained in surplus for the second straight quarter, rising to A$4.1 billion, from A$1.4 billion in 3Q. The third quarter result had marked the first surplus in the goods and surpluses balance since 2001. The improvement in the trade balance in 4Q, though, was owing to a 10%q/q rise in exports due to still-elevated prices for commodities, while imports were up a milder 5%. The services balance fell to –A$400 million, the first deficit since late-2000.

Importantly, for our 4Q GDP forecast, in volume terms, the deficit on goods and services closed to A$7.1 billion. The decrease of A$4.2 billion from 3Q means that net exports will add a huge 1.5%-points to GDP growth in 4Q; this will be the first time net exports have added to GDP growth since 3Q06. This contribution from net exports more than offsets the 1.2%-points that inventories will subtract from fourth quarter growth. As a result, we now expect a mildly positive 4Q GDP result tomorrow. Our forecast calls for GDP growth to print at 0.4%q/q in the fourth quarter, compared to our previous forecast of a decline.

The public sector measures released by the ABS this morning also contributed to our final 4Q GDP forecast. In the December quarter, final government consumption expenditure increased A$11 million (a negligible rise in percentage terms over the quarter), bucking expectations for a rise. General government gross fixed capital formation fell 3.6%q/q – we had expected a small rise.

Other details on the 4Q current account balance:

·        The income deficit fell 4%q/q to A$10.4 billion, and accounted for around 3.4% of GDP.

·        Income debits decreased 5%q/q, owing mainly to a fall in incoming direct investment.

·        Income credits were down 6%q/q, thanks mainly to a 24% drop in portfolio investment assets.

·        The net international investment position was a net foreign liability of A$714 billion (+1%q/q). Net foreign debt increased A$20.1 billion and net foreign equity fell A$16 billion.  

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