Scary Numbers

[937]

Bank blitz sets foreign debt up to beat GDP

Tim Colebatch

December 6, 2006

AUSTRALIA'S gross foreign debt is on track to overtake the nation's gross domestic product after swelling by $134 billion in the past year, Bureau of Statistics figures revealed.

The ABS announced a welcome fall in the current account deficit in the September quarter to $12.1 billion, pushing it under 5 per cent of GDP for the first time in 3½ years.

A rare slump in import volumes cut the quarterly trade deficit from $3.3 billion in June to $1.2 billion in September. But half this fall was offset by another surge in net income payments to foreign investors, as interest and dividend payments jumped sharply.

Australia's net foreign debt shot up to $522 billion at the end of September, and the gross foreign debt to $868 billion. Both have doubled since 2000, as foreign bonds have replaced domestic deposits as the chief source of banks' funds.

After climbing 66 per cent in five years, import volumes fell 1 per cent, allowing net exports to add to output for the first time since 2001.

Oil imports plunged 12 per cent as oil prices peaked, and imports of machinery and capital goods generally fell 6 per cent as business investment shrank.

But while the ABS estimated that the growth in net exports would add 0.4 per cent to September quarter GDP, ANZ estimated that this would simply offset the fall in domestic activity, delivering zero growth for the quarter.

ANZ estimates that with household consumption subdued, housing investment flat and business investment falling, today's national accounts will show no growth in the September quarter and just 1.5 per cent growth in the past year.

A Reuters survey found other forecasters more optimistic, on average predicting growth of 0.4 per cent for the quarter and 2 per cent for the year.

But economists said the trade deficit was the result of falling imports rather than strong export growth, with export volumes up just 0.7 per cent for the quarter and 6 per cent for the year. The trade deficit doubled in October as imports rebounded.

But Westpac economists predicted the boom in mining investment over recent years pointed to rising export volumes ahead, even factoring in a sharp fall in rural exports.

The Australian Bureau of Agricultural and Resource Economics estimated that the drought had slashed this year's wheat crop by 61 per cent to just 9.7 million tonnes, the lowest since 1994. Barley production recorded a similar fall.

Victoria had the worst fall, with production of wheat and barley falling to a quarter of last year's levels. To make things worse, farmers had gone to the expense of sowing a near-record 2.74 million hectares to crops, only to recoup miserable yields.

The bureau's figures show that while the trade picture has brightened, the net income flow overseas continues to rise at a giddy rate. In the past year, the quarterly interest bill on the nation's foreign debt has soared by $2 billion, or 43 per cent, as banks borrowed heavily overseas into rising interest rates to meet the demand for loans.

In the 12 months to September, the bureau says Australia's gross foreign debt shot up from $734 billion to $868 billion — or from 80 per cent of GDP to 89 per cent.

Edited 05/12/06 09:56 PM by 937

[RAPHOON]

Kind of makes a mokery of the current monetary policy being applied.

Rising interest rates have killed retail demand which doesn't necessarily lead to import drops. Rather it kills consumer and investment confidence, which further impacts on GDP.

The country needs fiscal policy encouraging the development of import replacing industries which can eventually turn into exporters.

To put it simply, it doesn't do Australia any good to dig it out of the ground and sell it, only to to buy it back as a finished product 1000 times the cost...

[XR06T]

in laymans terms does this indicate that we are heading for a recession?

[Blonk]

Yeh,

What the Fin said!!!!!!!!!!