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Run of trade surpluses continuesInternational trade; Performance of Construction
Trade surplus: The trade surplus fell by $754 million to $977 million in April. Still, it was the 11th surplus in 12 months.
Construction gauge: The Performance of Construction index eased from 55.4 points in April to 54.0 in May. Readings over 50 signify services sector expansion. 
What does it all mean?
It wasn’t that long ago when there were a litany of woes confronting the Australian economy. Inflation and unemployment were high together with interest rates; there was significant red ink for both the federal budget and foreign trade; foreign investors fretted about Australia’s high debt levels; and the Aussie dollar was plunging.
Today Australia’s economy is in far better shape. Certainly Australia is now paying its way in the world with surpluses now considered ‘normal’. Both prices and demand for our key exports remain favourable. High oil prices are boosting imports and preventing Australia from recording bigger trade surpluses.
With infrastructure spending and home building soaring, construction companies are finding it hard to attract and retain staff. There is upward pressure on input costs and selling prices. The question is how much of the wage and cost pressures will spill over to other industries.
What do the figures show? International trade – April:
A trade surplus of $977 million was posted in April, down from a revised $1,731 million surplus (previously reported as a surplus of $1,527 million) in March. The rolling annual surplus rose from $7.438 billion to $7.985 billion.
The net services deficit narrowed from $183 million to $176 million – smallest deficit in 10 months.
Exports of goods and services fell by 2.2 per cent (goods fell by 3.0 per cent).
Imports of goods and services fell by less than 0.1 per cent (goods down by 0.3 per cent).
Exports were up by 11.3 per cent on a year ago, while imports are up 6.9 per cent.
Rural exports fell by 0.2 per cent – the first fall in three months. Non-rural goods fell by 2.5 per cent – the first fall in five months. Gold exports fell by 16.1 per cent after rising 7.7 per cent in March.
Iron ore lump and fine exports both fell 1 per cent. Thermal coal rose 2 per cent; semi-soft coal fell 14 per cent; and hard coking coal fell 4 per cent. LNG exports rose 2 per cent.
Within imports, consumer imports fell by 2.3 per cent with capital goods imports up by 1.9 per cent, and intermediate goods imports up by 14.7 per cent.
Consumption goods imports were up by 1.9 per cent on a year ago while capital goods imports were up by 6.4 per cent and intermediate goods imports were up by 11.5 per cent.
Australia’s annual exports to China rose from US$99.5 billion in March to US$100.85 billion in April – just short of the record high of $101.7 billion in the year to October 2017. Exports to China are up 8.8 per cent on a year ago – the slowest annual growth rate in 16 months. Exports to China account for 32.8 per cent of Australia’s total exports.
Australia’s annual imports from China rose from US$64.97 billion to US$65.52 billion. Annual imports were up by 8.7 per cent on a year ago. Imports from China accounted for 21.9 per cent of Australia’s total imports.
Australia’s rolling annual trade surplus with China rose from $34.53 billion to $35.33 billion.
Australia’s rolling annual trade deficit with the US eased from $18.24 billion to $18.07 billion. Performance of Construction index (PCI):
The PCI fell by 1.4 points to 54.0 in May. Readings above 50 indicate expansion. The index for commercial construction fell 11.4 points to 52.6. But houses rose 8.3 points to 58.6; apartments rose 3.5 points to 46.8; and engineering rose 2.6 points to 55.8.
AiGroup wrote: “The input prices sub-index registered 82.6 points in May. This was an increase of 8.1 points from April, indicating that cost pressures in the construction of building projects lifted sharply during the month. This increase in costs was driven by robust demand for construction materials, escalating energy input costs and supplier price hikes related to strength in commodity prices.”
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 monthly Performance of Construction index is released by AiGroup and the Housing Industry Association. The PCI provides guidance on construction activity and is important for construction and construction-related businesses.
What are the implications for interest rates and investors?
The construction sector will be a key driver of the economy in 2018/19 together with exports. The Reserve Bank is hoping for economic growth near 3 per cent in both 2018 and 2019 and latest data supports this view.
The on-going trade surpluses provide a solid plank of support for the Australian dollar. The Reserve Bank is reasonably quiet on the currency, suggesting that the level is appropriate for current circumstances. The Commonwealth Bank Group expects the Aussie to lift to US78 cents by end 2018.
While the US may be railing against a raft of countries on trade, there wouldn’t be concern about the relationship with Australia. Our trade deficit with the US is not far away from record highs.
CommSec expects no change to official interest rates until at least 2019.
Published by Craig James, Chief Economist, CommSec