Surplus betrays investment stall

This opinion article by Business Council chief economist Adam Boyton was published in the Financial Review on Wednesday 28 August 2019.

One of the last of the 1980s economic bugbears looks likely to bite the dust – at least temporarily.

The current account deficit should be replaced with a current account surplus when the next set of balance of payments data are released in early September.

Like many of the reversals in the Australian economy since the 1980s, a current account surplus comes off the back of good and bad news. The good news is the coming budget surplus. The bad news is the weakness in business investment.

There is also the odd myth – in this case that compulsory superannuation will deliver this coming current account surplus. It won’t.

Current account positions can be calculated two ways. One way is to look at how much an economy saves versus how much it invests. The other way is from the perspective of trade.

If an economy is investing more than it is saving, then that gap needs to be made up by funds from overseas – a current account deficit in other words. If an economy saves more than it invests, then it has a current account surplus.

Taking this one step further is to look at saving and investment by sector. Households, businesses and governments. Adding those up tells us what the economy saves and invests overall.

Taking that approach tells us that what’s really driving the economy toward a current account surplus is the improvement in the federal budget, the surge in commodity prices through to July and the weakness in business investment.

When the budget comes back into surplus, it means the government is saving.

Turning to commodity prices, some of the increase has made its way to the federal government through higher company tax receipts.

The increase in commodity prices will also be reflected in company profits data, although as has been the case for some time that is largely confined to the mining sector. Non-mining sector profits have been largely flat over the past year.

The combination of commodity prices boosting profits in part of the economy and a weak level of business investment across the entire economy means that the gap between what businesses invest versus what they save is smaller than is typically the case.

That’s actually a bad thing – as a nation, we’d be much better off with stronger investment, even if it meant a current account deficit.

After all, it is investment that is the biggest driver of productivity growth and hence higher real incomes.

That’s a point the Treasurer made earlier this week in a speech on productivity.

But while businesses are looking to invest, concerns about the global economy and Australia’s relative competitiveness are holding that back.

So, where does that leave us? We have a budget coming back into surplus, high commodity prices and a low level of business investment. The budget coming back to surplus is good, the lack of business investment is anything but.

What about households? The household saving rate fell consistently from the 1980s until the mid-2000s. It then shot up during the GFC, stayed there for some years and has since been trending lower. Australian households are saving, but not as much as they were.

From that perspective, it’s hard to see where superannuation has played much of a role recently in driving us toward a current account surplus.

We can also think about Australia’s likely current account surplus from the trade perspective. That is, our trade balance plus what we pay foreigners on their investments in Australia versus what we earn on our investments overseas.

If superannuation was pushing us toward a current account surplus, then presumably our earnings on investments overseas would be catching up and overtaking the payments we make to foreigners on their investments here. While there are lots of moving parts, the gap between these two (what’s called the net income deficit) has remained around 3 per cent of GDP for some time.

Instead what’s pushing us towards a current account surplus is record monthly trade surpluses.

But that’s another good and bad news combination.

The good news is high commodity prices have pushed exports through the roof. The bad news is that a soft domestic economy means we aren’t pulling in that many imports (including capital goods for investment).

Like many of the reversals in the Australian economy compared with the 1980s, a coming current account surplus comes with good and bad news. The good news is the coming budget surplus. The bad news is the lowest level of business investment as a share of GDP in 25 years.