|
May 21, 2007
I read that Dr John Edwards, the chief economist of HSBC bank, has prepared a paper for the Committee for Economic Development of Australia on Australia's export growth and foreign debt. It says that export growth has slowed between 2001 to 2006, whilst over the last decade foreign debt has blow out from $193 billion to about $540 billion now. That is not a good scenario given the resources boom.
Since the paper---Export Weakness, Investment Strength: The changing pattern of Australia's integration into the global economy----is not online we need to rely on the media. According to Kenneth Davidson in The Age Edwards argues that :
.... if Australia wants to stabilise net foreign liabilities at 100 per cent of GDP, it must permanently limit the current account deficit to a maximum of 5 per cent of GDP, and it must do so by running a trade surplus of 1 per cent of GDP. This doesn't look too much of an ask, but given that in recent years Australia has been running a trade deficit of 3 per cent of GDP, Edwards points out: "The move to a surplus of 1 per cent of GDP means that exports have to increase by 4 per cent of GDP or imports cut by 4 per cent of GDP, or some mix of the two."
Australia is running a current account deficit that is forecast to rise from $58 billion in 2006-07 to $66 billion in 2007-08, or 6 per cent of gross domestic product according to the budget papers. Australia's accumulated foreign debt is now well over 50 per cent of GDP.The implication is that the additional debt has to be serviced by Australia.
Does this mean the eventual fall in relative living standards? Perhaps. Since Australia has rarely been able to run a permanent trade surplus, i tis going to be difficult to achieve this.
Yet none of the two major political parties are concerned about this state of affairs. The key issue---will additional investment generate the foreign exchange through increased experts to service the debt liability-- is rarely raised by them or by the media. In an earlier op ed in The Age Kenneth Davidson argues that if commodity prices slipped back to around their long-term average, Australia's current account deficit would be likely to blow out to about 8 to 10 per cent of GDP, depending on how long it would take to adjust domestic demand in order to cut imports of goods and services. Yet the 2007 budget papers remain upbeat about economic prospects both nationally and internationally in the year ahead, despite Australia's growing external imbalance.
Edwards points out that "about half the increased investment in the last decade has been in the construction of houses". Unfortunately, there is only a tenuous link between the quality and cost of the housing stock, and a nation's capacity to export and thus service debt. On the other hand, Edward's argues that part of the offshore borrowing must have been used to sustain the existing capital stock, household consumption and house building ie., it is the household sector that is helping to run the big deficits and building debt.
|
The foreign debt bubble is the big fat elephant in the room that neither Howard nor Rudd wish to talk about. The interest paid on this debt (outflows) of course adds to the current account deficit. For now things are ok, however if interest rates increase and/or commodity prices fall then this growing debt bubble may cause a crisis of confidence in the Australian economy.