Record trade surplus; Record exports to China & US

Record plunge in services sector activity
International trade; Services gauge; Chinese data

Foreign trade: The trade surplus rose to a record high of $10.602 billion in March (consensus: $6.0 billion surplus) up from a surplus of $3.865 billion in February (previously: $4.631 billion). The rolling annual surplus was at a record high $71.69 billion in the year to March, up from $66.53 billion in February.

Record trade: Australia’s annual exports to China were at new record highs of $149.86 billion in March with annual exports to the US at a record $15.371 billion. Net exports are estimated by Commonwealth Bank Group economists to add 0.3 percentage points to economic growth in the March quarter.

Services gauge: The AiGroup Performance of Services index fell by 11.6 points in April –the largest monthly decline on record – to a record low of 27.1 points (lowest since 2003). A reading below 50 signifies contraction in activity.

China data: The Caixin China services purchasing managers’ index rose by 1.4 points to 44.4 points in April (consensus: 50.1 points). A reading below 50 signifies a contraction in activity. Chinese exports rose by 3.5 per cent over the year to April (consensus: -11 per cent), but imports fell by 14.2 per cent (consensus: -10 per cent).

The trade data is instructive on income flows in the economy and consumer and business activity. The services purchasing managers index provides guidance on conditions in retailing, financial services and the services sector more broadly.

What does it all mean?

• At last, some good news on the economic data front. Australia posted its 27th successive trade surplus in March – and a record one at that. Australia’s annual exports to both China and the US hit record highs. The weaker Aussie dollar against the greenback was one contributing factor, supporting Aussie exporters as commodity shipments continued during the virus outbreak.

• Increased exports of iron ore, coal and natural gas would provide some comfort to policymakers that China may be through the worst of its coronavirus economic downturn. In fact, shipments of iron ore – Australia’s largest export – totalled 17.6 million tonnes in the week to April 24, up from 16.2 million tonnes earlier in the month, according to Global Ports’ data. And iron ore shipments from Port Hedland jumped 20.5 per cent in March with Chinese-bound exports up 21.6 per cent, according to the Port Hedland Port Authority.

• Fortescue Metals have recently reported that their order books for iron ore from China “are very strong” with Chinese steel inventories declining for seven straight weeks and rebar demand recovering after the economic shutdown. In fact, steel rebar inventories have declined from peaks of 13.65 million tonnes in mid-March to 9.548 million tonnes last week, according to the Beijing Custeel E-Commerce company.

• Where the virus shutdown did show up (as expected) was in the services sector with large declines in income earned from international tourists and students as Australia’s international borders were shut. Travel exports – including tourism, education and passenger transport – fell by 15.4 per cent to $4.029 billion in March. And car imports also fell, reflecting the weak consumer backdrop.

What do the figures show?

International trade – March

• The trade surplus rose to a record high $10.602 billion in March (consensus: $6.0 billion surplus) from a surplus of $3.865 billion in February (previously: $4.631 billion). The rolling annual surplus was a record high $71.69 billion in the year to March, up from $66.53 billion in February.

• Exports of goods and services rose by 15.1 per cent (exports of goods rose by 21.6 per cent).

• Imports of goods and services fell by 3.6 per cent (goods imports rose by 1.3 per cent).

• Rural exports rose by 7.0 per cent. Exports of non-rural goods lifted 14.7 per cent. Gold exports surged 224.9 per cent.

• Major moves: Metal ores and minerals, up $2,809 million (or 32 per cent); wool and sheepskins, up $59 million (up 28 per cent); other mineral fuels, up $485 million (up 10 per cent); and cereals, up $44 million (up 9 per cent).

• Within imports, consumer imports rose by 0.1 per cent, capital goods imports dropped 3.3 per cent and intermediate goods imports rose by 0.3 per cent.

• Services exports fell by 9.4 per cent and services imports plunged 18.6 per cent in March.

• A net services surplus of $463 million was posted in March following a deficit of $302 million in February.

• Australia’s annual exports to China rose from $148.55 billion to a record high $149.86 billion in March. Exports to China are up 20.9 per cent on a year ago. Exports to China account for 38.22 per cent of Australia’s total exports.

• Australia’s annual imports from China eased from $77.38 billion in February to $76.90 billion in March. Annual imports were down by 0.2 per cent on a year ago. Imports from China still accounted for 25.24 per cent of Australia’s total imports.

• Australia’s rolling annual trade surplus with China rose from $71.17 billion to a record $72.96 billion in March.

• Australia exported a record $15.371 billion to the US in the year to March and imported a record $37.354 billion.

Performance of Services – April

• The AiGroup Performance of Services index fell by 11.6 points – the largest monthly decline on record – to a record low of 27.1 points (since 2003) in April. A reading below 50 signifies contraction in activity.

• By sub-index, sales (-6.6 points to 24.6 points), new orders (-12.2 points to 23.1 points), employment (-16.6 points to 28.7 points), finished stocks/inventories (-14.6 points to 31.5 points) all declined. Capacity utilisation fell by 1.7ppts to 68.5 per cent and average wages fell by 15.3 points to 35.4 points.

• According to the AiGroup, “A small number of services businesses continue to report strong demand for personal protective equipment (PPE), IT services and some types of personal services. Some businesses who provide repair and maintenance services noted an increase in demand from businesses in maintaining machinery and equipment (in order to delay new investment and/or due to delayed replacements), while others reported customers didn’t want them to attend on site.”

• And, “Restrictions associated with the COVID-19 pandemic suppressed business activity across all sectors in in the Australian PSI® in April. As restrictions were maintained across the month, businesses reported lower new orders and sales and escalating disruptions to imported and local supplies. Discretionary spending remains lower for nonessential household goods, but some food suppliers reported strong ongoing demand. The COVID-19 crisis comes on top of the fallout from summer’s bushfires, widespread drought conditions and longer-term structural changes.”

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 Australian Industry Group compile the Performance of Manufacturing Index, the Performance of Services index and the Performance of Construction index each month (the latter with the Housing Industry of Australia). The Commonwealth Bank and Markit also compile purchasing manager surveys for manufacturing and services sectors. The surveys are amongst the timeliest economic indicators released in Australia. The surveys are useful not just in showing how key sectors are performing but also in providing some sense about where they are headed. The key ‘forward looking’ components are orders and employment.

What are the implications for investors?

• The Federal Government and private sector are keen to reopen Australia’s economy as quickly as possible. All will be revealed tomorrow, but as it stands restrictive measures and business shutdowns are costing jobs and incomes – as evidenced by the record plunge in April services sector activity and employment. Of course, the economic reboot is fraught with danger. The virus continues to form clusters and the colder weather will help it thrive, endangering lives.

• Australia’s “old” sources of growth benefited from China’s reopening after the pandemic hit its economy hard in January and February. The weaker Aussie dollar and a return to work by China’s factories, steel mills and construction workers boosted demand for our bulk commodities – iron ore, coal and natural gas. Australia earned over $100 billion in iron ore export income over the year to March. But we can’t rest on our laurels. China’s April imports data was weak – down 14.2 per cent on a year ago – reflecting supply chain constraints and weak demand from western countries hit by the virus pandemic.

• And perhaps policymakers, concerned about our trade “dependence” on China, and ability to deal with medical emergencies, should take a glance at the chart below. Australia is currently exporting around $6.5 billion worth of medicinal and pharmaceutical supplies to the rest of the world on an annual basis.

• Commonwealth Bank Group economists estimate that net exports will add 0.3 percentage points to March quarter economic (GDP) growth. But will it be enough to stave off a “technical recession”?

Published by  Ryan Felsman, Senior Economist, CommSec