Net exports to drag down growth as Australia’s current account surplus drops

Despite the recent spike in commodity prices, Australia’s current account surplus dropped to $7.5bn. A sharp fall in net primary income (the net earnings from overseas financial investments and work) was the main culprit, but export volumes also struggled, with the trade balance declining by $1bn. Weather disruption and the ongoing lockdowns in China, which are dampening construction and manufacturing activity, led to a 0.4 percent fall in non-rural goods.

Farm exports fell by 2 percent as a result of a sharp fall in cereals. The slow recovery in services exports (despite the re-opening of the international border) was also on show. Exports increased by just 2.3 percent (from a very low base), well behind the 6.8 percent increase in imports, widening the services deficit to $2.6bn.

In contrast to exports, goods imports recorded another strong rise, with the recovery in domestic demand driving gains across all three categories (consumer goods, capital equipment and intermediate inputs) and an 8.3 percent quarter-on-quarter (q/q) increase overall.

Overall, net exports will put a 1.7 percent point drag on GDP growth tomorrow, which will offset most of the gains in domestic demand. We expect GDP to expand by 0.5 percent or just under, q-q – down from 3.4 percent in the December quarter.

Today’s data also contains a first glimpse of the impact of rising fuel costs, with the cost of intermediate inputs (which captures fuels) up 6.2 percent on the quarter – further increases will come through in the June quarter data, as the full impact on contract prices feeds through.

Looking ahead, growth momentum will continue to be challenged by cost of living pressures and rising interest rates, which will put a drag on household spending. Capital expenditure and construction activity are also being challenged by rising costs and supply chain delays, and the export environment is not expected to improve significantly in the near term (particularly for services).

The current stagflationary environment of heightened inflation and slower growth is creating significant challenges for the RBA. While further rate rises will materialise in the near-term, KPMG expects the pace to moderate in 2023 as the economic headwinds take some of the heat out of the economy.

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