Record current account surplus

Longest stretch of consumer confidence gains
Current Account; Government Spending; Consumer Sentiment; CBA Credit Card

Current Account: The broadest measure of international trade – the current account – was in surplus by a record $8.395 billion in the March quarter in seasonally adjusted terms. It was the fourth successive surplus. Over the year, the surplus was a record $22.246 billion. Net exports (exports less imports) will add around 0.5 percentage points to economic growth in the March quarter.

Government sector: Government consumption and investment spending will add around 0.3 percentage points to economic growth in the March quarter.

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating rose by 6 per cent to 98.3 points (long-run average since 1990 is 112.9). Sentiment has lifted for nine successive weeks – the longest stretch on record – since hitting record lows of 65.3 points on March 29 (lowest since 1973).

Commonwealth Bank (CBA) card spending: According to the CBA, spending in the week to May 29 was up 3.3 per cent on a year ago (week prior: +3.9 per cent) with online spending up 10.1 per cent and in-store spending up 1.2 per cent. But “an easing of restrictions in the past week or so has not yet driven further momentum in spending activity”, according to the CBA.

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. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses.

What does it all mean?

• Australia’s external accounts are in reasonable shape. In the March quarter – ahead of the full impact of the coronavirus pandemic – a fourth successive and record current account surplus was posted. The terms of trade (ratio of export to import prices) remained elevated, lifting by 2.9 per cent during the quarter, boosting national income.

• Net exports are expected to add around 0.5 percentage points to tomorrow’s much-anticipated economic (GDP) growth figures for the March quarter. That said, in a sign of some weakness in Australia’s trade position, export volumes fell by 3.5 per cent and import volumes were down 6.2 per cent – owing to weak domestic demand. Australia is arguably the most exposed major economy to China, so Chinese efforts to lift economic activity following the virus crisis are very much in our interests.

• And government spending on infrastructure and health care prior to the COVID-19 crisis remains a supportive pillar for the struggling Aussie economy. Public demand increased by 1.4 per cent and public consumption lifted by 1.8 per cent during the March quarter. That said, investment was flat. Combined, the government sector is expected to add 0.3 percentage points to GDP growth in the March quarter.

• Aussie consumers are more upbeat about the future. In fact, sentiment has lifted for nine successive weeks – the longest stretch of gains on record (dating back to 1973).The ANZ-Roy Morgan index is up by 50.5 per cent since hitting record lows on March 29. Consumer views on ‘current economic conditions’ lifted by 15.7 per cent. And household views on whether it’s a good ‘time to buy a major household item’ rose by 10.9 per cent – its fourth straight gain.

• So why the optimism? Aussie consumers clearly think that they’ve seen the worst of the pandemic with a low number of new virus cases enabling restrictions to be eased. In fact, Reserve Bank Governor Philip Lowe said last week in his testimony to the Senate said, “With the national health outcomes better than earlier feared, it’s entirely possible that the economic downturn will not be as severe as earlier thought.” And recent weekly data from the Bureau of Statistics, SEEK and Indeed all point to a tentative bottoming in the labour market with job hiring intentions and wages lifting off low levels in May.

What do the figures show?

Balance of Payments – March quarter

• Current Account: “The current account surplus, seasonally adjusted, rose $6,673m to $8,395m in the March quarter 2020, as COVID-19 effects impacted international trade. The balance on goods and services surplus rose $5,628m to $19,188m. The primary income deficit fell $822m to $10,612m.”

• Goods & Services: “In seasonally adjusted chain volume terms, the surplus on goods and services rose $2,292m from $8,628m in the December quarter 2019 to $10,920m in the March quarter 2020. This is expected to contribute 0.5 percentage points to growth in the March quarter 2020 volume measure of GDP.”

• In real terms exports of goods fell by 0.7 per cent with services exports down by 12.8 per cent. Imports of goods fell by 3.9 per cent with services imports down 13.6 per cent.

• Exports of rural goods, in seasonally adjusted terms at current prices, rose $134m or by 1 per cent to $12,254m, with volumes down 1 per cent and prices up 3 per cent. Exports of wool and sheepskins were up $56m or by 8 per cent, with volumes up 6 per cent and prices up 2 per cent.

• Exports of non-rural goods, in seasonally adjusted terms at current prices, rose $1,660m or by 2 per cent to $77,762m, with prices up by 2 per cent. Metals (excluding non-monetary gold), were up $208m or by 7 per cent, with volumes up 10 per cent and prices down 3 per cent.

• Exports of non-monetary gold, in original and seasonally adjusted terms at current prices, rose $12m to $6,106m, with volumes down by 10 per cent and prices up by 11 per cent.

• Imports: In real terms consumption goods fell 2.1 per cent; capital goods declined 10.3 per cent; intermediate goods declined 3.2 per cent and imports of gold rose by 47.1 per cent.

• Terms of trade (ratio of export to import prices) rose by 2.9 per cent in the March quarter, up from 103.5 to 106.5. Export prices rose 2.4 per cent with imports down 0.5 per cent.

• Net foreign debt rose $3.8 billion to $1,146.3 billion at the end of March.

• The debt servicing ratio (net income on foreign debt, ratio to exports of goods and services) was steady at -4.2 per cent in the March quarter.

Government Finances – March quarter

• “General government final consumption expenditure increased by $1,929m or 2 per cent, and is expected to contribute 0.3 percentage points to growth in the March quarter 2020 volume measure of GDP.” (ABS)

• “Public gross fixed capital formation decreased by $208m or -0.8 per cent, which will not detract significantly from growth in the March quarter 2020 volume measure of GDP.” (ABS)

• Overall, spending by the government sector rose by around 1.2 per cent in the March quarter.

Consumer sentiment – Week ended May 31

• The weekly ANZ-Roy Morgan consumer confidence rating rose by 6 per cent to 98.3 points. Sentiment has lifted for nine successive weeks – the longest stretch on record – since hitting record lows of 65.3 points on March 29 (lowest since 1973). But confidence still remains below the long-run average of 112.9 points since 1990.

• All five major components of the index rose last week:

The estimate of family finances compared with a year ago was up from -13 points to -12.5 points;

The estimate of family finances over the next year was up from +20.7 points to +20.9 points;

Economic conditions over the next 12 months was up from -41.3 points to -32.1 points;

Economic conditions over the next 5 years was up from -0.1 points to +7.4 points;

The measure of whether it was a good time to buy a major household item was up from -2.7 points to +7.9 points.

• The measure of inflation expectations fell from 3.2 per cent to 3.1 per cent.

The Commonwealth Bank (CBA) credit card data – Week ended May 29

• CBA card spending in the week to May 29 was up 3.3 per cent on a year ago, compared to a 3.9 per cent lift for the week ended May 22. Online spending rose 10.1 per cent and in-store spending was up 1.2 per cent over the period. CBA Group economists cautioned, “An easing of restrictions in the past week or so has not yet driven further momentum in spending activity. Restrictions were eased again as of 1 June, so the data over the next two weeks will need to be closely watched to see if households have the confidence to move about more in society by eating out, going to the beauty salon and spending more on recreation items. Significantly, spending growth is still running below where it was in early January before the coronavirus hit.”

• In terms of the categories, CBA economists added, “Momentum on goods spending slipped slightly, while services spend improved a little with the easing of restrictions helping the services economy a little more. Household furnishings and equipment spend has started to ease from its elevated levels.”

• By regions, “we saw a pause in spending momentum in all states for the week ending 29 May, apart from Queensland, Tasmania and the ACT”, said the CBA.

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.

• The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

• The weekly Commonwealth Bank (CBA) household credit & debit card spend data is derived from transaction authorisations to give a near real-time view. This means that cancelled authorisations, refunds, reversals, etc. will not be included. Data has not been adjusted for effects of consumers substituting between cash and card payments. CBA merchant facility spend data is derived from the Merchant Acquiring System which includes net sales from both CBA and Other Financial Institution (OFI) domestic and international cards.

What are the implications for interest rates and investors?

• CBA group economists (CBA, CommSec, BankWest) expect a 0.3 per cent fall in March quarter economic activity when data is released tomorrow. Public investment and net exports are both expected to make positive contributions to growth. But household consumption, dwelling investment, business investment and inventories could all detract from output. Annual GDP growth of around 1.4 per cent is expected in the March quarter – the slowest growth rate since 2009.

Published by Ryan Felsman, Senior Economist, CommSec