In December last year and in February this year, Australia looks like it ran small current account surpluses. And for the first quarter of 2017 as a whole , the current account might be a surprise in more than 40 years.
It has been due to a recovery in commodity prices and a subdued domestic economy that have provided necessary conditions for a stark improvement in Australia’s external accounts over the past year. Typically a surge in commodity prices makes it way through to the broader economy. But with mining companies not embarking on hiring and investment surge, and more importantly the federal government not being in a position to turn higher commodity-related revenues into income tax cuts, strength in commodity prices is not flowing through into greater consumer spending, more jobs and higher wages. This combination of a soft domestic economy and a booming export sector has driven a rapid improvement in the current account.
What are the implications of a Current Account Surplus?
- Without a Current Account Deficit to fund anymore, having higher interest rates than the rest of the world should end up meaning a stronger currency
- Too strong a dollar would put pressure on sectors such as tourism and other non-mining sectors, ultimately leading to slower economic growth