Debt servicing ratio at 41-year low
Current Account; Government spending

International trade: The broadest measure of international trade – the current account – was in surplus by $14.5 billion in the December quarter. The rolling annual surplus rose to a record $49.36 billion. Net exports (exports less imports) will detract 0.1 percentage points from economic growth in the quarter.

Government sector: Government consumption and investment spending will contribute around 0.3 percentage points to economic (GDP) growth in the December quarter.

Notes on issue: The value of $50 notes in circulation has risen 22.2 per cent over the past year. The value of $100 notes has risen 14.4 per cent over the past year. The value of $50 notes and $100 notes combined are up 18.4 per cent over the year – just off the fastest pace in 18 years.

The balance of payments data has implications for trade-exposed businesses and companies vulnerable to changes in the Aussie dollar. The government spending data is an input to the calculation of economic growth.


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What does it all mean?

• Based on today’s data, the economy may have grown 2.6 per cent in the December quarter after lifting 3.3 per cent in the September quarter (biggest gain since 1976). The economy is roaring back.

• The ride could still be bumpy over the next year, but Australia’s success at suppressing the virus gives us more options and more upside potential than many other advanced economies. And the vaccine roll-out has begun.

What do the figures show?

Balance of Payments – December quarter

• The current account surplus rose by $3.8 billion to $14.5 billion (3.0 per cent of GDP) in the December quarter 2020. The rolling annual surplus hit a record high of $49.36 billion in 2020.

• The ABS noted: “Australia’s seventh consecutive quarterly current account surplus, in the December quarter 2020, was driven by strong exports of Australia’s metal ores (up $3.7 billion) and cereal grains (up $1.3 billion) on the back of favourable growing conditions in late 2020. Imports grew in December quarter 2020 driven by increased demand for consumption goods, while the Australian Government’s instant asset write-off appears to have increased demand for capital goods such as industrial transport equipment, capital goods (not elsewhere specified) and machinery equipment”.

• The balance on goods and services surplus rose by $4.4 billion to $18.1 billion in the December quarter.

• Exports of goods rose 4.3 per cent in real terms in the quarter with imports up 5.2 per cent. Rural export volumes soared 23.5 per cent. Exports of services rose 1.2 per cent with imports up 2.7 per cent.

• In seasonally adjusted chain volume terms, the surplus on goods and services fell from $12.3 billion to $11.8 billion. And net exports are expected to detract 0.1 percentage points from GDP in the December quarter.

• The terms of trade on goods and services for the December quarter rose 4.7 per cent to 106.7, with an increase of 3.9 per cent in export prices and a decrease of 0.8 per cent in import prices.

• Australia’s net foreign debt rose by $2.7 billion to $1,165.3 billion.

• Australia’s net foreign equity asset position increased from $213 billion to $218.1 billion at 31 December 2020.

• The debt servicing ratio (net income on foreign debt, ratio to goods and services) fell from 3.6 per cent to 3.1 per cent in the December quarter – a 41-year low.

Government Finances – December quarter

• General government final consumption expenditure increased by 0.8 per cent and is expected to contribute 0.2 percentage points to the change in GDP in December quarter 2020.

• Public gross fixed capital formation increased by 2.5 per cent and is expected to contribute 0.1 percentage points to the change in GDP in December quarter 2020.

What is the importance of the economic data?

• The quarterly Balance of Payments figures have few short-term effects on financial markets. The importance of the data is merely to highlight Australia’s trading position with the rest of the world as well as the contribution of foreign trade (exports less imports) to the latest estimates of economic growth.

• The Australian Bureau of Statistics releases the quarterly Government Finance Statistics near the start of March, June, September and December. The data details public sector consumption and investment spending and indicates the sector’s contribution to economic growth.

What are the implications for investors?

• Australia continues to pay its way in the world with another healthy current account surplus posted in the December quarter, although down from record highs. The soft greenback and economic recoveries at home and abroad should keep the Aussie dollar elevated near US77-78 cents. While not a level favoured by Reserve Bank policymakers, the Aussie is supported by a strong lift in commodity prices. The CommSec daily commodity index has risen 52 per cent over the past year.

• The value of super-low interest rates and a strong trade surplus is highlighted by the fact that the debt servicing ratio is the lowest in 40 years.

Important Information

The information presented in this email is an extract of a CommSec Economic Insights report. The full report is published on the CommSec website (under Market News > The Markets). The extract and report are approved for distribution in Australia only and must not be directed or distributed to any person or entity outside Australia, except with the prior approval of your Business Unit Compliance team.

The extract has been prepared without taking into account your objectives, financial situation or needs. It is not to be construed as a solicitation or an offer to buy or sell any securities or financial instruments, or as a recommendation and/or investment advice. Before acting on the information in this report, you should read the full report and corresponding disclaimers, and consider the appropriateness and suitability of the information, having regard to your own objectives, financial situation and needs and, if necessary, seek appropriate professional of financial advice.

Published by Craig James, Chief Economist, CommSec