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
During the last five years, the CAD peaked at -5.9% 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.
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, expanded to -5.9% of GDP - by far the "worst" result recorded for the period. Although there was some improvement seen during 2008/09, this was largely due to decreased spending on imports during that period, rather than an enhanced ability to generate exports. 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 five years. As the domestic economy has come to rely heavily on the external sector, the importance of variations in the Australian dollar has increased.
In general, the Australian dollar has appreciated against the US dollar during this period. While there was a brief decline during 2008/09, by the beginning of 2010 the Australian dollar was once again worth more than US$0.90. Recent articles have suggested that the US dollar's status as the global currency is in jeopardy, and this has resulted in a severe decline in the value of that currency. On the other hand, the Australian dollar has been lifted by increasing demand for our exports from emerging markets such as China and India.
Net Foreign Debt
Australia’s NFD has increased dramatically during the last five 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.
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 interesting to note that although there was a small increase in net foreign debt during 2009, as a percentage of GDP our debt declined. From a mathematical perspective, this suggests that our GDP was increasing a faster rate than our external liabilities. It is also true that many people in the Australian economy took advantage of lower interest rates and government handouts, and chose to repay some debt during this period. In March 2009 the federal government made special payments of $900 to most taxpayers, and many people used this to reduce credit card debt. This helped to slow the growth in net foreign debt at that time.
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.
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