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Ask the economists: is the yawning trade deficit a problem?

Australia’s trade deficit is getting bigger by the month, partly due to the ever-strong dollar. Crikey intern Jemimah Clegg asks the economists whether we should be worried.

Australia’s trade deficit is the widest it has been in more than four years. According to the latest Australian Bureau of Statistics trade figures, the difference between imports and exports rose to $2.6 billion for the month of November last year.

The ABS report says the deficit rose by 9% or $197 million between October and November 2012. Many blame the high Australian dollar for the increasing trade deficit. We asked some of Australia’s leading economists if the yawning trade deficit is a problem, and what — if anything — can be done …

Chris Caton, chief economist at BT Financial, reckons it’s nothing to worry about —  we’ve known for a while the high Australian dollar has been putting pressure on exports and the gap will begin to close.

It would help if the exchange rate was lower, but that’s not something we can do anything about,” he said.

But Dr Frank Gelber, chief economist at BIS Shrapnel disagrees. “It’s been a problem as long as I can remember,” he said, describing the budget deficit as a contributing factor.

It’s not just the trade deficit; it’s the current account deficit. We need to address Australia’s competitiveness and rebuild markets. Our trade balance, both for goods and services, is going backwards — except for mining.”

Craig James, CommSec’s chief economist, says the trade deficit should begin to narrow in the next few months. But the high Australian dollar isn’t helping.

There may be a problem if the Aussie dollar remains high and prevents the trade accounts from adjusting,” he said. “What is supposed to happen is that the Aussie dollar falls to boost exports, restrain imports and bring trade back into balance. But it is not something requiring action by policy-makers. If the Aussie [dollar] remains high then the RBA may favour further rate cuts to assist business competitiveness.”

Professor John Quiggin from the University of Queensland’s School of Economics also points to declining coal and iron prices. “The fall in the price of iron ore has been reversed, but the decline in coal price is likely to be sustained for some time, and may be permanent,” he warned.

In these circumstances we would expect the Australian dollar to decline from its historically high levels, but this has not yet happened. The only policy action likely to have a significant effect is a more rapid reduction in interest rates.”

And Steve Keen, associate professor at the University of Western Sydney, says selling assets is feeding the problem. “Hence the ownership of resources in this country heads overseas, meaning that incomes here are more based on wages than wages plus profits, as they are in a well functioning capitalist economy.

That in turn means that funds that could be invested here are instead repatriated overseas, and investment decisions that do affect here are made overseas as well.”

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    Dulhunty Roger
    Posted Wednesday, 9 January 2013 at 3:23 pm | Permalink

    The other name for the “trade deficit” is the “capital account surplus”. It sounds much nicer!

    Our new “safe haven” status is driving the capital account surplus which brings with it the improved buying power of our currency and reducing interest rates.

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