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Australia’s Balance of Trade, the Funky Four and the ASX All Ordinaries.

November 6th, 2009 · Greg Atkinson · 3 Comments

Have you noticed of late how the Australian stock market is just not listening to the Reserve Bank’s Glenn Stevens? No matter how optimistic the RBA Governor sounds the ASX All Ords refuses to surge past 5000, so what is happening? Are investors wrong about the state of the Australian economy and simply not picking up on the positive economic indicators the RBA is apparently seeing?

I am on the record as saying the RBA raised rates too early this year (and raised them too far in 2008) and so obviously I think their outlook for 2010 is far too optimistic. It seems most stock market investors feel the same way because despite the rally since March, all we have really experienced is the market climbing back from being extremely oversold. In other words the market has rallied because it was too low, not because investors think 2010 will be a great year for the Australian economy.

Rather than look at any charts or get bogged down in analysing data in detail, let’s step back and take in the big picture view. As we all know the markets started falling from late 2007 and then took a plunge in late September 2008 when Lehman Brothers went under. In response to the economic crsisis that swept the globe our “wise” economic leaders and government heads decided to spend, spend, spend in order to prop up demand.

Not surprisingly when you toss hundreds of billions of dollars at stimulating economies across the globe, demand is supported somewhat. But remember global economic activity despite all the money slushing around is still well below that seen in 2007/2008.

Oil production has been cut and yet prices struggle to get over $80 USD a barrel (even with a weaker USD), the Baltic Dry Index (BDI) has not climb back up to levels anywhere near the “good times” of 2008 and just about everywhere you care to look demand is soft. (gold being a notable exception)

The other day Australia’s balance of trade data for September was released by the ABS (Australian Bureau of Statistics) and I have included the overall summary provided by the ABS below.


  • The trend estimate of the balance on goods and services was a deficit of $1,851m in September 2009, an increase of $239m (15%) on a revised deficit in August 2009.
  • In seasonally adjusted terms, the balance on goods and services was a deficit of $1,849m in September 2009, an increase of $198m (12%) on a revised deficit in August 2009.

(Source: ABS – International Trade in Goods and Services, Australia)

There are of course a lot more facts and figures included in the ABS release but the undeniable truth is that our trade deficit is widening. Imports are up somewhat as are exports in dollars terms, but they are still well below 2007/2008 levels.

But alas Adam Carr in an article published on the Business Spectator website exclaimed:

“So all in all, today’s data shows our economy on a healthy path – exports strong, consumers and business spending. The widening of the deficit isn’t so much a problem in this environment, the key take are the positive growth implications.”

What exactly is this guy drinking?

Is it is healthy that our imports are being propped up by Government debt and our exports are being supported because of low prices and Chinese stockpiling? Are these positive trends?

Perhaps it is just me, but I don’t see anything particularly positive in a widening trade deficit, burgeoning government debt and rising interest rates. Do you?

If an economist was the lookout reporting to the bridge that the Titanic had hit an iceberg I suspect the report would be something like this:

“Captain we have a gaping hole in the side of the ship, we are taking on water but we are still moving ahead at 3 knots so our forward momentum remains positive!”

But never fear, the economic Funky Four (Rudd, Swan, Stevens & Henry) will help us all understand how the economy is tracking and clarify the outlook for next year…won’t they?

Well actually no, they seem to have split formation now and are trying to avoid the flak. Rudd is too busy sorting out border protection issues to worry about the economy, Swanny is sounding grim but happy he has a ten year tax plan (actually he copied his homework from Ken Henry), Stevo from the RBA is raising rates and is fighting the inflation genie alone, while comrade Henry is finishing his plan to ensure the “rich” are taxed so wealth can be distributed.

I wonder why Glenn Stevens the only one of the Funky Four worried about inflation? Could it be that what Glenn and the RBA are really worried about is that they and the Government might have stimulated the housing market a touch too much? Is the RBA mainly focused now on cooling the growth in Australian home prices?

Why isn’t Swanny also fighting the inflation genie by the way? Can someone ask Swanny where the genie is and if the genie is in the bottle, out of the bottle, dead or just AWOL?

Frankly I don’t see too many business leaders talking about 2010 as being a year of strong growth. Most are talking about modest gains on the back of very poor results in 2009 and you will hear many CEO’s expressing the view that 2010 will be another challenging year for the Australian businesses.

The news from my part of the world here in Japan is that many Japanese companies are still in cost cutting mode although some do see business picking up slowly. But Toyota is dropping out of F1 racing to save money, Japan Airlines (JAL) will have to undergo some painful restructuring to curb losses and the Japanese Government is set to slash spending. This doesn’t sound like a return to boom times just yet.

My view of the situation is (and has been for a while) that we have seen the worst of this nasty financial crisis but as I have also said on many occasions this does not mean we are about to see the global economy race back up to pre-crisis levels. I expect there to be a slow adjustment to the new global economic situation where U.S demand remains weak, demand from Asia gradually increases and everybody else adjusts accordingly.

This means many companies (and nations) will still struggle in 2010 and perhaps even in 2011. If companies struggle this means less tax revenue for governments, which in turn means that they need to borrow more if they want keep stoking GDP with government spending programmes. Alternatively the G-20 nations will need to start winding back spending as soon as they can and thus some demand will be taken out of the global economy.

Let’s also not forget that the Chinese central government has been fuelling its domestic economy not because they want to help the global economy so much, but largely because tens of millions of unemployed factory workers would present a risk to their hold on power and national stability.

But at some point they will have to ease back on their economic stimulus spending as well and I doubt if the Chinese domestic economy will be ready to take up all the slack. In short I see a period of reduced Chinese economic growth emerging in the years ahead. This may not be exactly something the Funky Four have factored in their plans.

As for the All Ordinaries/ASX 200 we have already seen this drop around 5% over the last few weeks via a correction I said was on the way a while back. (although as usual my timing was out) I don’t see the recent correction as being a sign that stocks will trend lower from now on, but rather a case of stocks falling a touch due to investors taking some profits. All quite normally really.

But as I have said many, many times, the logical bottom of the stock market in this downturn cycle is around 4800- 5000 and so I don’t expect we are going to rally much past this point until we see signs that the Australian economy is truly back into a growth cycle again, and I doubt we will see these signs this year.

3 responses so far ↓

  • 1 Greg Atkinson // Nov 7, 2009 at 9:20 am

    Anon..would that be enough to get me a beer?

  • 2 Ralph // Nov 16, 2009 at 12:24 pm

    Nice post, Greg. By and large, I agree. I suspect that the ASX is not going through 5,000 because, well because the economy is not that strong. I think all of the factors you mentioned are very significant.

    My take on it all is that there is so much government stimulus washing around the world, it’s difficult to know how much real demand there is. And I don’t think we’ll really have an answer to that until the stimulus packages start to wear off a little bit more. But then again, I think governments around the world are worried that there isn’t that much underlying demand. Hence the near universal calls to ‘keep the stimulus going to support jobs’ or whatever it is Swannie likes to say. So I think the political spin on it all is actually hindering at the moment. Time for governments to step back a bit and see if the bike will stay upright without the training wheels.

    It’s interesting that the RBA is raising rates and I suspect that you’re right in that it is about keeping the housing bubble somewhat in check. But I also think that Stevo wanted to send a message to Kevvie and Swannie that they’d probably spent enough and to think about pulling up a little.

  • 3 Greg Atkinson // Nov 16, 2009 at 1:54 pm

    Hi Ralph and thanks for the feedback. I agree with your observation that all the economic stimulus money sloshing about makes it hard to work out if the global economy is actually recovering or just reacting to governments around the world spending so much.

    Without a doubt all the economic stimulus washing around muddies the water and I reckon you are right in saying that we won’t have a clear idea where the global economy is heading until governments ease up on the spending.

    But when will that happen I wonder? I guess in Australia the money will keep flowing until Rudd gets a second term, in the UK the government there needs to toss money about to try and avoid being wiped out at the next election and in the U.S. I reckon President Obama can’t do anything too drastic with the mid term elections coming up. China also seems keen to keep spending while here in sunny Japan the government is talking about easing up on the stimulus measures but will they?

    So I guess 2010 in general looks like another year of spending and debt as far as G20 economies are concerned.

    As for the RBA and interest rates, I think you may be right in saying that Glenn Stevens was also trying to send a message to Rudd & Swan about government spending. But will Kevvy and Swanny even understand the message?

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