External Stability

Australia's Recent Performance

As we analyse Australia’s external stability using three different measures, you will need to be familiar with the trends in all three.

The Current Account Deficit

The cyclical nature of the current account deficit is clearly seen in the graph below. The fluctuation between -3% of GDP and -6% of GDP is evident. During the cycle, the CAD peaked at -6.1% of GDP in 2006/07. This corresponded with a strong Australian dollar, and a period of increasing domestic demand. As this demand was not being met by existing domestic supplies, demand for imports increased and the CAD grew quickly. The AUD was appreciating, which increased demand for imports (as they became less expensive) and therefore the balance on current account increased.

The CAD/GDP ratio for the Australian economy

By 2005, the Australian economy was operating with a significant trade imbalance. Despite strong demand for our exports from a growing Chinese economy, the current account deficit, as discussed above, increased to -6.1% of GDP - by far the "worst" result recorded for the period. Although there was some improvement seen during 2008, many commentators remain concerned that the Australian economy has been unable to show significant improvement in this area despite the ongoing boom in commodity prices. The Rudd government was particularly critical of the former government's ability to manage our external stability during their final years in power.

The Australian Dollar

The trend in the Australian dollar has been very important to the overall performance of the Australian economy during the last 10 years. As the domestic economy has come to rely heavily on the external sector, the importance of variations in the Australian dollar has increased. It is important to note that whilst the Australian dollar depreciated against the USD in the late 1990s, at the same time our TWI was relatively stable. This is because of strength in the USD, and simultaneous weakness in the Asian currencies.

The trade weighted index and the US dollar exchange rate

The graph reveals that the steady decline in the AUD against the USD was halted in 2001. At this point investment in the United States declined, and the USD fell as a result. This change started the positive trend in the AUD, however it does appear to have peaked for now. Expected instability in the US economy in 2009 will once again result in changes in the value of the Australian dollar against that currency.

Net Foreign Debt

Australia’s NFD has increased dramatically during the last 10 years. However, it is important to note that our GDP has also increased during this period. As a result, our NFD as a percentage of GDP has increased at a much slower rate. (NFD has tripled during this period, while as a percentage of GDP it has "only" doubled.)

Australian net foreign debt

As has been noted previously, it is also important to realise that Australia’s NFD is predominantly owed by financial institutions (in excess of 70%). Other businesses account for over 20%, and the government debt represents less than 10% of the total. In fact, government debt as a percentage of NFD declined significantly between 1996 and 2007.

It is also worth noting that when Australia's Net Foreign Debt exceeded $400 billion for the first time in 2004, it was the cause of much concern amongst the nation's media. Just two years later, the figure topped $500 billion (it had taken four years to increase from $300 billion to $400 billion). Two years after that the figure exceeded $600 billion. Despite this, the national concern over the level of debt seems to have abated to a certain extent.

Current Page: Australia's Recent Performance