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?
- Current Account Surplus December 2016, February 2017 and Likely Surplus for March quarter 2017 due to higher commodity prices, also increasing trend of Australians investing more overseas than overseas investing in Australia on the Portfolio investment account relieving negative on Net Primary Income Section.
- Unusual Situation of higher commodity prices not feeding into increased investment or more jobs in the mining sector as most infrastructure has already been built that is producing export commodities. Therefore, this positive balance of BOGs is not necessarily driving growth in the economy.
- 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
- Comparison of Interest rates with rest of world will also depend on other countries changes to interest rates including America’s slight increase in their rates.