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Economy in Brief

Australian Economy Remains Strong, But Strong A$ May Already Be Generating Some Restraint
by Carol Stone November 1, 2007

The deficit in Australia's trade in goods and services increased further in September as exports declined and an accompanying decline in imports was smaller. The overall deficit was A$1,862 million, up from A$1,665 million in August (seasonally adjusted). The year-ago figure was A$761 million.

We have highlighted here before (See May 4, 2007 commentary) the role of raw materials, particularly mineral resources, in Australia's international trade. The SITC 3 categories, "crude materials, inedible, ex fuels" and "mineral fuels, etc" together constitute about half of the nation's total goods exports. These exports have brought considerable revenue into the Australian economy. Australia's economy has been strong recently. Indeed, today, a report of September retail trade shows a gain of 0.9% in that month, extending a trend of notable growth in consumer spending.

However, the commodities markets are priced in US dollars. The Australian dollar, perhaps bolstered by the vigorous economy, has risen markedly. Yesterday, according to the New York Federal Reserve Bank, it was priced at US$0.9271, the highest month-end value since March 1984. [In fact, a retail purchase in New York City yesterday came right at par.] This rapid increase in the exchange rate means that world commodities, with US dollar prices, bring relatively fewer Australian dollars than before. Thus, it is not surprising to see a moderation in the value of these key Australian exports, which have averaged over the last six months only 0.5% above a year ago.

This point is more clearly made in the commodity price index compiled by the Reserve Bank of Australia; the RBA publishes this in both US$ and A$. See the difference in the third graph. Flexible currency values are, of course, one of the important transmission mechanisms for global trade adjustment and for monetary policy. The strong Australian dollar can help restrain inflation in Australia and by slowing the Australian-dollar value of tradable goods, it can also modulate economic activity, an "automatic stabilizer". Still, today's strong retail trade report brought further talk the the RBA might raise interest rates at its next policy meeting. This talk too can bring more strength to the currency -- at least until it is evident that that very strength is restraining the economy.

AUSTRALIA (Mil.A$) Sept 2007 Aug 2007 Jul 2007 Sept 2006 Monthly Averages
2006 2005 2004
Balance on Goods & Services -1,862 -1,665 -1,011 -761 -969 -1,399 -1,985
Goods Credits (Exports) 13,764 14,558 14,200 14,009 13,809 11,690 9,881
Goods Debits (Imports) 15,848 16,408 15,408 14,908 14,871 13,147 11,922
Balance on Services 223 185 190 138 93 58 58
Raw Material Exports* (NSA) 6,404 7,077 6,681 6,556 6,544 5,475 3,908
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