Key Economic Indicators of Australia
Key Australian Economic Indicators
Economic Growth
GDP Growth Rate: 2.6%
Comparison: From last year to this year.
Inflation (CPI)
Inflation Rate: 3.8%
Unemployment Rate
Range: 3.9% to 4.1%
Comparison: From last year to this year.
Reserve Bank of Australia (RBA) Cash Rate
Current Rate: 3.85%
Current Account Deficit
Amount: $21.1 Billion
Terms of Trade
Value: 95.8
Trade Weighted Index
Approximate Value: ~60
Net Foreign Debt as a Percentage of GDP
Percentage: 107.6% of GDP
Debt Servicing Ratio
Ratio: 20.8%
Current Account Deficit as a Percentage of GDP
Percentage: 2.9%
Relative Sectoral Shares of Australian GDP
Percentage: 60%
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Learn about
Measurement of relative exchange rates
-To other individual currencies
-Trade Weighted Index
Factors affecting the demand for and supply of Australian dollars
Changes in exchange rates - appreciation // depreciation
Determination of exchange rates including fixed, flexible and managed rates
The influence of the Reserve Bank of Australia on exchange rates
The effects of fluctuations in exchange rates on the Australian economy
Success criteria
I can explain how the AUD is measured relative to another currency (e.g. AUD / USD)
I can interpret movements in bilateral exchange rates
I can describe what the TWI measures and why it is used.
I can compare bilateral exchange rates with the TWI and explain the difference
Introduction
The exchange rate is the price of Australia’s currency in terms of another country’s currency.
Exchange rates are necessary because exporting firms want to be paid in their own currency, which means importers need to convert their domestic currency into a foreign currency
Currency conversion occurs in the foreign exchange market (forex market) where the forces of supply and demand determines the prices of one country’s currency in terms of another (the exchange rate)
Changes in exchange rates affect the prices of goods and services produced in Australia relative to the prices of goods and services overseas
If A$ depreciates, tourists visiting Australia will need to change less foreign currency to pay for their meals and hotel rooms in Australia
Video notes
We want foreign liabilities to be in $A dollars
Apprecation
-Less confidence in other advanced economies
-Inflows -> Buying AUD -> Demand increase > Approx
The Australian dollar in the global economy
The Australian dollar is the world’s sixth most traded currency after the US dollar, European euro, Japanese yen, British pound and Chinese renminbi
The Australia dollar is used in 6.4% of all daily currency trade in foreign exchange markets
The Australian dollar and US dollar currency pair comprises 41% of total turnover in Australian forex market
Activity in Australia’s forex market has increased over time, but the value of the currency can still go through large upswings and downswings in any given year
Turnover from foreign exchange transactions averaged US $182 billion per day in Australia in October 2024.
Australia’s floating exchange rate system
In December 1983 Australia switched to a floating exchange rate system, meaning that the exchange rate was determined by free market forces (supply and demand of A$)
The diagram shows that market forces have determined the value of the A$ in terms of US$0.7 (A$ will buy US 80 cents)
The value of currency on the forex market changes regularly due to fluctuations in demand and supply.
Advantages of Australia’s floating exchange rate system
Under a floating exchange rate, the value of the currency will reflect the fundamentals of the Australian economy (economic growth, inflation, BOP outcome)
A floating exchange rate allows for changes in the BOP to be absorbed by the exchange rate (rising current account deficit will lead to a depreciation and a surplus would lead to an appreciation
A floating exchange rate would provide some insulation for the Australian economy from external financial shocks (A depreciation during an economic crisis would increase international competitiveness)
The floating exchange rate is used by all our major trading partners, allowing for greater global capital market integration and coordination of domestic monetary policies to contain inflation.
Trade Weighted Index (TWI)
While the default currency to compare the value of the A$ against is the US$, it can often lead to a misleading impression of trends influencing the A$ value
The Trade Weighted Index (TWI) is a measure of the value of the A$ against a basket of foreign currencies of major trading partners
These currencies are weighted according to their significance to Australia’s trade flows, with the currencies that are more prominent in Australia’s trade given a higher weighting so that they have a greater influence on the TWI
An important limitation of the TWI exchange rate measurement is that the weighting is only based on volumes of trade regardless of the currency in which the trade is invoiced
Around ⅔ of Australia’s exports and around half of imports are priced in US$, meaning that the A$/US$ exchange rate is far more important than the weight it receives in the TWI calculation
The total number of countries included in the TWI must cover at least 90% of Australia’s trade (from January 2026, 19 countries were included in the TWI)
During the last two decades, the relative significance of the exchange rates with the Japanese yen and the US$ have declined, while the exchange rate with the Chinese renminbi has become more important.
Factors affecting demand for Australian dollars
Success criteria
I can identify factors that increase or decrease demand for AUD (exports, investment inflows)
I can identify factors that increase of decrease supply of AUD
I can explain how these factors interact to influence the value of the AUD
I can use diagrams to show shifts in demand and supply for the AUD
Demand for the A$ is represented by all people who wish to buy $A which is affected by:
The size of financial flows into Australia from foreign investors who need to convert their currency into A$ to invest here.
The level of Australian interest rates relative to overseas interest rates, where relatively high Australian interest rates make Australia more attractive for foreign savings, increasing demand for the $A
The availability of investment opportunities in Australia, as if there are more opportunities for investors overseas to start new businesses or buy shares in existing businesses, the demand for A$ will increase
Expectations of future movements of the A$ where if foreign speculators expect the A$ to appreciate in the future, they may buy A$ in anticipation of making a profit in the future, increasing the demand for A$
The demand for Australia exports, since foreigners who buy Australia’s exports need to convert their currency into A$ to pay Australian exporters
Changes in commodity prices and terms of trade, where a rise in commodity prices and an improvement in the ToT are associated with an increase in the value of Australian exports, increasing the value of the A$
If Australian exporters are internationally competitive in world markets and Australia’s inflation rates are low relative to the rest of the world, demand for Australian exports will be high, increasing the value of the A$
Changes in global economic conditions mean that when the world economy is on an upturn, demand and price for Australia’s exports will rise and vice versa, increasing the value of the $A
Factors affecting supply for A$
Supply for the A$ is represented by all people who wish to sell $A which is affected by:
The size of financial flows out of Australia by foreign investors who need to purchase foreign currency to invest overseas
The level of Australian interest rates relative to overseas interest rates, where relatively low australian interest rates make Australia less attractive for foreign savings, decreasing demand for the A$ and increasing the supply of $A
The availability of investment opportunities overseas, as if there are more opportunities for investors to start new businesses or buy shares in existing businesses overseas rather than in Australia, the demand for A$ will decrease and the supply required to purchase overseas investments will increase
Expectations of future movements of the A$ where if foreign speculators expect the A$ to depreciate in the future, they may sell A$ to avoid making losses in the future, increasing the supply of A$
The demand in Australia for imports, since Australian importers who buy from overseas need to convert their A$ into foreign currencies to make import payments
The level of domestic income affects the level of imports, as rising incomes and employment will result in increased demand for import, increasing the supply of A$
If Australian exporters are internationally uncompetitive in world markets and Australia’s inflation rates are high relative to the rest of the world, demand for foreign imports will be high decreasing the value of $A as supply required to pay for imports will necessarily increase
Recent movements in the Australian dollar
The value of the A$ hit a high of US $1.10 between 2009-2011 due to three main factors:
Rising world commodity prices were sourced from the global economy, resulting in a strong demand for commodity exports
Australia’s favourable terms of trade supported the rise in the exchange rate as commodity export prices lifted the ToT
Sustained direct and portfolio investment into Australia by foreign investors reflected positive sentiment about Australia’s mining sector
In contrast, the A$ deprecated into a low US $0.65 from mid 2013 to mid 2020 due to three main factors:
Global economic growth slowed to 3%, with low commodity prices and lower growth in China
The Reserve Bank cut interest rates to a low of 0.25%, leading to an outflow of capital
The COVID-19 pandemic and government lockdown of the economy led to negative sentiment about Australia’s future economic performance.
In November 2020 the cash rate was lowered further by 15 basis points to 0.1%
More recently the war in Ukraine, resulted in many economies placing sanctions on Russia
Demand for Australian commodities, led to an appreciation in 2022.
The depreciation of the Australian dollar in 2023 coincided with lower iron ore and coal prices.
Feb 2026 the Australian dollar sits at US$0.7, in line with supportive domestic policy implications, relative exchange rates and global risk appetite.
Appreciation and depreciation of the A$
An increase in the demand for A$ (shift in demand curve to the right) will increase the price of A$ in terms of $US (apprciation of the A$)
Likewise, any decrease in supply of A$ (a shift in the supply curve to the left) would also cause an appreciation
A decrease in the demand for A$ (shift in the demand curve to the left) will decrease the price of A$ in terms of the $US (Depreciation of the A$)
Likewise, any increase in supply of A$ (a shift in the supply curve to the right) would also cause a depreciation
Fixed exchange rate system
Prior to November 1976, Australia had a fixed exchange rate system in which the A$ was pegged to the UK pound sterling
Under a fixed exchange rate system, the government or the RBA officially sets the exchange rate
The diagram shows the government or the RBA officially sets the exchange rate (not left up to the forces of supply and demand)
The diagram shows the government/RBA has set the value of the A$ at US80 cents, above the US70 cents that would apply if it was left up to market forces
The government can attempt to maintain a fixed exchange rate by either buying the excess supply of A$ when the fixed rate is higher than the market rate, or selling the A$ when the fixed rate is below the market rate
Thus, in order to intervene in the forex market under a fixed exchange rate system, the government would need reserves of foreign currency to purchase the excess supply of A$ if the fixed rate was set above the market rate
This could possibly lead to a complete collapse of trade in the currency if the RBA ever ran out of foreign currency under this system
The main advantage of the fixed exchange rate systems is that it provides certainty about the immediate short term value of the exchange rate, assisting exporters and importers in their decision making
However, the fixed exchange rate system does not allow a country to react to external structural changes such as a financial shock, as the exchange rate does not respond directly to such an event without government/RBA intervention
The managed flexible peg.
The managed flexible peg system operated in Australia from November 1976 to December 1983
Under this system, the RBA would “peg” the value of the A$ at 9am each day and that price would operate fully throughout that day
A flexible peg system provides more flexibility than the fully fixed exchange rate, but it can still allow the official rate to drift away from that which would exist under pure market forces
Reasons for Australia’s ER system
The floating or flexible exchange rate system
The Australian government floated the Australian dollar (AUD) on December 10th, 1983 for three main reasons: it was the most efficient exchange rate mechanism for determining the value of the currency; to expose the Australian economy to international competitive market pressures; and to pursue a more independent and effective monetary policy (to contain inflation) in a deregulated financial environment
The demand for a country’s currency is a derived demand. It is derived from the foreign demand for that country’s goods, services and assets and the need for foreigners to convert foreign currency into the domestic medium of exchange. The demand for AUDs is therefore derived from the demand for Australian goods, services and assets by foreigners, whereas the supply of AUDs is derived from the domestic or Australian demand for foreign goods, services and assets.
RBA intervention in the forex market
Dirtying the float (Direct intervention)
When the RBA feels that a large short-term change in the exchange rate will be harmful in the domestic economy (affecting export/import prices and inflation), it may decide to intervene in the forex market in order to stabilize the A$
To curb a rapid depreciation of the currency, the RBA will buy A$, putting upward pressure on the exchange rate.
To prevent a rapid appreciation, the RBA will sell the A$
Example: During the GFC in 2008 when the A$ lost one-third of it’s value against the US$, the RBA purchased $3.3 billion of A$ to moderate its depreciation
The RBA’s ability to intervene through buying A$ is limited by the size of its foreign currency holdings
The sum total of RBA’s foreign currency reserves is not even equal to one day’s total transactions in the currency, limiting the RBA’s ability to stabilise the A$ through the forex market
Monetary policy decisions (indirect intervention)
If the RBA wants to curb a rapid depreciation, it may increase the demand for A$ by increasing interest rates
Higher interest rates will attract foreign currency, which must be converted into A$, increasing the demand for A$ and putting upward on the exchange rate
This policy however will generally only be effective for a limited time
The effects of a change in the exchange rate
Positive effects of a depreciation in the exchange rate
Australia’s exports becoming more price expensive, leading to an increase in exports and an improvement to the CAD
Imports will be more expensive, reducing import spending and improving CAD
Higher exports and lower imports can increase Australia’s growth rate
A depreciation increases the A$ value of foreign income earned on Australia’s investment abroad, resulting in an improvement in the net primary income component of the CAD
A depreciation will increase the value of foreign assets in A$ terms
Foreign investors will find it less expensive to invest in Australia, generally leading to greater financial inflows.
Australian consumers suffer reduced purchasing power (buying fewer overseas goods with same amount of A$)
A depreciation increases the servicing costs on Australia’s foreign debt and raise the overall A$ level of foreign debt
A depreciation will raise the price of overseas assets that are being purchased by Australian investors
Inflationary pressures in Australia will increase due to more expensive
Australia consumers enjoy increased purchasing power
An appreciation decreases the servicing costs on Australia’s foreign debt and reduces the overall A$ level of foreign debt
An appreciation will reduce the price of overseas assets that are being purchased by Australian investors
Inflationary pressures in Australia will decrease due to cheaper imports
Negative effects of an appreciation in the exchange rate
Australia’s exports become less price competitive, leading to a decrease in exports and a deterioration to the CAD
Imports will be less expensive, increasing import spending and worsening CAD
Higher imports and lower exports can reduce Australia’s growth rate
An appreciation reduces the A$ value of foreign income earned on Australian’s investment abroad, resulting in an deterioration in the net primary income component of the CAD
An appreciation will reduce the value of foreign assets in A$ terms
Foreign investors will find it more expensive to invest in Australia, generally leading to lower financial inflows
Exchange rates and the balance of payments
If countries have persistent current account deficits, they must finance their deficits with surpluses in the capital and financial account, leading to currency depreciation over time
A depreciation of the exchange rate raises the price competitiveness of exports, helping to contain a country’s CAD
Countries with persistent current account surpluses will offset their surpluses with deficits in the capital and financial account, causing an appreciation in their currency, reducing price competitiveness and helping contain the size of the CAS
J Curve
The theory of the J curve suggests that a country with an existing current account deficit that has a currency depreciation (at time ‘t’) will experience a decrease in its BOHGS in the short run as export prices fall and import prices rise, worsening the CAD. However, in the long run, the depreciation improves the country’s international competitiveness, allowing it to sell a greater volume of exports, leading to an improvement in the BOGS and a reduction in the CAD
Questions
Define the exchange rate
Describe the Trade Weighted Index (TWI) is calculated and explain why it is a better measure of the value of the Australian dollar than the US$/A$ exchange rate
Account for recent movements in the Australian dollar
Outline the possible impact of the following scenarios on the Australian dollar
4a) An increase in commodity prices and Australia’s terms of trade
4b) protectionist politics are imposed on Australian exports
4c) speculators believing that the Australia dollar will soon appreciate
4d) An increase in Australia's economic growth rate
4e) An increase in interest rates overseas
The balance of payments
The balance of payments summarises the economic transactions of an economy with the rest of the world and how resources flow between Australia and our trading partners
These transactions include exports and imports of goods, services and financial assets, along with transfer payments (like foreign aid)
All money that flows in is referred to as credit, all money that flows out is referred to as debt (Note: that it involves what country is being invested in)
Example: If Australia exports goods to New Zealand, the money we receive for these exports is an inflow, and thus a credit on the balance of payments. Conversely, if Australia imports goods from New Zealand, the money paid out for these imports is a debit.
Credit entries are considered positive transactions, while debit entries are negative
BOPS divide the transactions into two broad accounts:
The current account
The capital and financial account
In essence, the current account captures the net flow of money that results from Australia engaging in international trade, while the combined capital and financial accounts capture Australia’s net change in ownership of assets and liabilities
The current account.
The current account shows all transactions involving money received and money spent for exports and imports of goods, services, net primary income and net secondary income.
In effect, the current account covers external transactions that are not reversible in the sense that once commenced, these transactions cannot be undone.
Net goods
This refers to the difference between what Australia receives for its exports and pays out for its import of goods
Three possibilities
-Balance (Exports = Imports)
-Surplus (Exports > Imports)
-Deficit (Imports > Exports)
Net services
Refers to services that are bought and sold without people receiving a ‘good’ tourism and education
Services that Australia sells are an inflow of money and shown as credits, services Australia buy are an outflow of money and shown as debits
Net primary income
This refers to earnings on investments, such as interest paying on borrowing and dividends or profits earned as a return on other foreign investments, such as foreign-owned companies in Australia or foreign land ownership
When foreigners invest in Australia, income in the form of rent, profits, interest and dividends flow overseas and when Australia invest overseas, there is a flow of income back to Australia
Net secondary income
This refers to income transfers that are provided without a specific good or service being provided in return
This includes governmental transfers (foreign aid), personal transfers of migrants (pensions) and workers’ remittances of wages
Minor part of overall balance of payments
Current account
Balance on goods and services
The balance on goods and services is the amount that is derived by adding net goods and net services together
Balance on current account
Refers to BoGS plus net primary and secondary income
If total credits exceed total debits in the current account there is a current account surplus and if total debits exceed total credits,there is a current account deficit
Capital and financial account
The capital and financial account is concerned with financial assets and liabilities - the money flows that result from international borrowing, lending and purchases of assets such as shares and real estate for a period of one year.
In contrast to transactions in the current account, transactions in the capital and financial account are reversible, that is, borrowing can be paid back and assets can be sold again.
Capital account
The capital account consists of two main components
- Capital transfers - ‘Conditional’ foreign aid grants and debt forgiveness
- Acquisition/disposal of non-produced non-financial assets - Purchase or sale of intangible, non-financial assets, such as patents, copyrights, trademarks and franchises
-Financial account
The financial account records credits and debits for transactions associated with:
-Direct investment
-Portfolio investment
-Financial derivatives
-Other investment
-Changes in the value of Reserve Assets held by the Reverse Bank
The financial account records foreign investment in Australia and Australian investment abroad and is also broken into debt and equity.
-Financial assets are financial claims by Australian residents on non-residents, i.e. Australian investment aboard, e.g. an Australian bank lends money to a non-resident.
-Financial liabilities are financial claims on Australian residents by non-residents, e.g. an Australian company issues Euro Bonds which are held by non-residents
Financial account (5 types)
Direct investment: Investment, 10% equity
Portfolio investment: Investment, <10% equity
Financial instrument: A hedge for market financial risk in a form that can be traded or otherwise offset in the market
Other investment: A category that captures transactions not classified to direct investment, portfolio investment, financial derivatives or reserve assets. Trade credits, loans, currency and deposits.
Reserve assets: Foreign financial assets available to and controlled by the Reserve Bank of Australia, for meeting the balance of payments needs.
Net errors and emissions
Net errors and omissions include statistical errors and adjustments in calculations by the ABS, and allow a surplus (or deficit) in the capital and financial account balance to exactly offset a deficit in the current account balance
The capital and financial account is calculated as:
-Capital account + direct investment + portfolio investment + other investment + reserve assets+ financial derivatives
The balance of payments is calculated as:
Current account + capital and financial account + net errors and omissions = 0
Links between key balance of payments categories
The key link between the current account and the capital and financial account is that they must add up to zero, hence the ‘balance’ in balance of payments
Therefore an increase in the current account deficit (CAD) will result in a rise in the capital and financial account surplus and vice versa.
The supply and demand of the Australian dollar is also critical in ensuring there is a balance with the balance of payments
The strongest link between the current account and the capital and financial account can be seen on the net primary income part of the current account
Any foreign financial flow that comes into Australia (credit on the financial account) must earn some kind of return for its owner, and these earnings are a debit recorded on the primary income category of the current account
Financial inflows can create debits on the primary income category of the current account in two ways:
International borrowing (foreign debts) will require regular interest payments( servicing costs), which are recorded as debits on the net primary income part of the current account
Foreign investment will require returns on the equity investment in the form of rent, dividends or profits, which are recorded as debits on the net primary income part of the current account
Over a period of time, a high level of capital and financial account surpluses will result in a widening CAD because of the servicing costs associated with increased foreign liabilities
In extreme cases this may lead to a ‘debt trap’ scenario, where an economy borrows from overseas merely to pay the interest-servicing costs on its existing foreign debt.
Australia’s current account
Australia usually has a deficit in the current account of the balance of payments. It moved into a positive position in 2019-20 onwards (surplus) until June 2024, when it moved back into deficit figures. 0.8% of GDP
It moved back into a CAD in 2023-24 due to a fall in export income from slower world growth, a smaller goods surplus and a larger net services deficit, due to higher interest rates
Australia’s goods and services balance has been in surplus since 2016-17, mainly because of the strong mining exports
The net primary income deficit accounted for the majority of the current account deficit and represents the servicing costs of Australia’s net foreign liabilities
The net secondary income balance has recorded small deficits over the past decade
Australia’s capital and financial account
The capital account balance usually records small deficits
THe financial account balance is usually in surplus and represents the debt and equity borrowing to finance the current account deficit
The balance of the capital and financial account was usually in surplus to finance the current deficit between 2012-13 and 2018-19 but moved into deficit in 2019-20 as Australia recorded current account surpluses and exported capital to the rest of the world
The financial account was in surplus of $19.5b in 2023-24 as Australia recorded a CAD and imported capital.
Trends in Australia’s balance of payments
The balance of payments is an important indicator of the health of the economy and the ability of Australia to make good with its obligations to the rest of the world
The current account deficit (CAD) s the main focus of analysis of trends in the balance of payments as the size of the CAD reflects changes in both domestic and world economic growth
CAD tends to increase when world growth is weaker than domestic growth, leading to a decrease in exports relative to imports
Conversely, when world growth exceeds domestic growth, exports increase more than imports, leading to a reduction in the CAD
Australia’s CAD moves in cycles, reflecting a mix of short and longer-term domestic and external influences
During the 2010s, Australia’s current account balance improved markedly, driven by strong commodity prices and demand for Australia’s exports, such as strong Chinese demand for iron ore
Australia recorded a current account surplus in 2019-2020, largely due to China’s demand for iron ore (increasing our exports,) and reduced demand for imports such as overseas tourism due to the COVID-19 pandemic
Australia’s net primary income deficit also fell in 2020-2021 due to less overseas borrowing (caused by a reduction in overall levels of global foreign investment during the COVID-19 pandemic) and lower world interset rates)
Australia also recorded a deficit on the capital and financial account in 2020-21 as Australia engaged in increased debt and equity lending abroad.
Factors influencing the balance of goods and service
Cyclical factors
Movements in the exchange rate affect the internal competitiveness of Australia’s exports and the relative price of the goods and services Australia imports
A depreciation decreases the price of Australia’s exports, increasing the international competitiveness of Australia’s exports on world markets
It also increase the price of imports, therefore discouraging consumers from purchasing them, also improving the BOGs account
The greatest influence of Australia’s balance of payments has been changes in Australia’s TOTS (terms of trade)
The TOT shows the relationship between the prices Australia receives for its exports and prices it pays for its imports
Therefore, if export prices increase relative to improve prices, Australia’s ToT will improve and conversely, if import prices increase relative to export prices, ToT will decrease
An improvement in the ToT means that the same volume of exports can buy more imports, leading to an improvement on the BOGS and a decrease in the CAD
In the 2000s, Australia experienced the largest terms of trade boom in its history, primarily due to the global commodities boom during the same time
Australian exports received higher prices for their commodity exports, improving the BOGS, while the rise of China meant that low-cost manufactured goods were more available, reducing import prices and increasing Australia’s ToT
The level of domestic economic growth also influences the BOGS balance by affecting domestic demand for imports
An upturn in the domestic business cycle results in higher consumption and investment and therefore higher imports, worsening the BOGS
High growth in resource sector investment and household disposable income during the 2000s contributed to Australia’s poor BOGS performance during this period
Changes in the international business cycle impact on the BOGS by affecting the demand for Australia’s exports
A slowdown in global economic growth reduces growth in demand for Australia’s exports, worsening the BOGS
A key reason for Australia’s economic success is that our economy has been more closely integrated to faster-growing economies, allowing us to take advantage of their increased need for Australia’s commodities
Structural factors
Australia has a narrow export base, as Australia’s exports are heavily weighted towards bulk commodities such as minerals and agriculture, accounting for around two-thirds of Australia’s export earnings
By contrast, Australia lacks international competitiveness in manufacturing and tends to import expensive consumer and capital goods, resulting in import payments outstripping export payments, causing the BOGS to be in deficit
Australia has avoided the pitfalls of being dependent on a few key exports as the increased global demand for commodities since the beginning of the 21st century has allowed Australia to enjoy an extraordinary growth in export revenues, improving our ToT
However, the 2020s brings a new challenge for Australia, as other economies shift away from carbon-intensive fossil fuels, Australia will need to address its structural dependence on carbon-intensive exports such as coal and gas
In recent years there has also been an upturn in the prices for agricultural exports, reflecting growing food demand, rising incomes in the developing world and rising prices for agricultural inputs such as oil and fertilisers
2021 saw Australia;s agricultural outputs reaching record highs, driven by a bumper winter crop season due to large rainfall
Many economies argue that Australia would benefit by diversifying its export base towards high-growth sectors of global trade, including technologically advanced goods
Australia can also continue growing its service exports, given Australia’s close proximity to emerging economies in Asia
Australia’s services exports reached a peak of $97 billion in 2018-19, through the pandemic caused a fall in service exports to $61 billion in 2020-2021
The net primary income deficit is a reflection of Australia’s net servicing costs owed to overseas and can take the form of interest payments on foreign debt or dividend payments and profits on foreign equity
The net primary income account tends to record of between 2 and 3 per cent of GDP
The size of Australia’s interest repayments to overseas are affected by changes to the exchange rate
An appreciation in the exchange rate will mean debt held in foreign currencies will decrease in value, improving the net primary income deficit
A depreciation will increase the value of debt held in foreign currencies, increasing the value of Australia’s interest repayments
An increase in domestic and global interest rates will increase the interest that Australia pays on foreign debt, resulting in an increase to net primary income outflows
The decline in Australia and global interest rates to record-low levels in recent years has reduced the cost of debt servicing, contributions to the narrowing of the net primary income deficit over this period
The domestic business cycle is the most significant cyclical factor affecting the net primary income deficit through its influence on equity servicing costs (profits shared due to ownership of assets)
When the domestic economy experiences strong growth, domestic company profits rise, and these profits are redistributed to shareholders as investment, increasing dividend outflows and worsening the net primary income deficit
Since Australia’s mining is mostly owned by foreign companies, a high level of profits in the mining sector result in a significant dividend outflow from Australia
The main reason for Australia’s ongoing net primary deficit is an underlying structural characteristic of the Australian economy: the savings and investment gap
Australia is a relatively small economy with a historically low level of national savings, however it also requires high levels of capital investment for its economic growth, in particular for our resources industry
To combat low levels of domestic savings, Australian firms look to foreign sources of finance to fund their investment
However, this also results in an increase in foreign debt and equity, creating future servicing obligations in the form of interest repayments and dividends (recorded as outflows on the net primary income account) leading to the current account remaining in deficit despite Australia’s sustained trade surpluses.
The COVID-19 pandemic has led to household savings increasing dramatically as there have been fewer opportunities to spend and many also benefitted from COVID-19 economic support payments from the government
A high level of household savings has led to a reduction the net primary income deficit due to two main reasons
-The high level of savings can be used to service existing foreign liabilities
-The high level of savings can also facilitate increased Australian investment overseas from both business and individuals, through schemes such as superannuation
Consequences of a high CAD
The growth of foreign liabilities: over a period of time, a high CAD will contribute to an increased level of foreign liabilities, meaning that lenders may become more reluctant tot lend or invest in Australia
Increased servicing costs associated with high levels of foreign liabilities can result in foreign lenders demanding a “risk premium” on loans, forcing up interest rates.
Increased volatility for exchange rates - high CADs may undermine the confidence of overseas investors in Australia’s economy, reducing demand for the $A and resulting in a depreciation
Constraint on future economic growth - in the longer term, economies with a high CAD are forced to limit growth to the level at which CAD is sustainable (Balance of payments constraint)
Contradictory economic policy - if governments need to reduce a high CAD in the short term, they may implement tighter fiscal and monetary policies
A sudden loss of international investor confidence - countries with high CADs are more vulnerable to sudden shifts in investor sentiment
IMF
If the deficit reflects an excess of imports over exports. It may be indicative of competitiveness problems. But because the current account deficit also implies an excess of investment over savings. It could equally be pointing to a highly productive, growing economy.
If the deficit reflects low savings rather than high investment, it could be caused by reckless fiscal policy or a consumption binge. Or it could reflect perfectly sensible intertemporal trade, perhaps because of a temporary shock of shifting demographics.
The future of Australia’s Current account
Although Australia’s CAD has been high by comparison with other countries by several decades, concerns about its potential to disrupt the Australian economy have decreased in recent years, as Australia still experiences strong economic growth despite historically having a high CAD
While Australia’s natural resources wealth should see it experience stronger export growth in the future, in the longer term. Australia is vulnerable to adverse developments in the Chinese economy, a fall in commodity prices and rising global interest rates, affecting its ability to sustain its CAD in the future
Introduction
-Australia’s economy punches above its weight a despite being a country with a relatively small population, we are ranked the 13th largest economy in the world producing less than 2% of the Gross World Product
-Australia exports one-quarter of its domestic production and imports the equivalent of almost one-quarter of GDP
-Australia ranked tenth in the world in terms of quality of life, according to the United Nations Human Development Index, demonstrating that Australia has a very high level of economic development.
Trends in Australia’s trade patterns
-Australia has always been highly dependent on international trade to power its economic activity, especially as we need to trade in order to obtain new technology and goods that are not produced in Australia
-There is also high demand in overseas markets for Australia’s primary commodities, such as mineral and agricultural products, as well as our services such as tourism and education
The changing direction of trade
-The direction of Australia’s trade has changed over recent decades, with China becoming Australia’s dominant trading partner and the overall share of trade with Japan, the UK and Europe declining within the last decade
-For a large proportion of Australia’s trading history, the UK represented our largest trading partner, mostly owing to our historical ties as a former colony of Britain
-However, once the UK joined the EU in 1973, Australia faced restriction on the goods it could export to the UK, forcing it to look for other trading partners within asia
-Between the 1960s and 1990s, Japan represented our largest export market, primarily due to Japan’s demand for production inputs such as mineral and energy products to sustain its rapid period of economic growth during this period
-As Japan’s economy slowly by the early 2000s, China has become Australia’s largest trading partner since 2007
-In 2024, China accounted for one third of Australia’s annual export earnings from trade, with annual exports to China exceeding $200 billion.
-The 2020s are seeing new shifts in the direction of Australia’s trade towards other rapidly growing economies with exports to South Korea, India, Taiwan, Indonesia, Vietnam and the Philippines all growing at an annual rate of over 10%
-Australia imports a substantial amount of capital goods and consumer items from advanced economies in Europe and the United States
-China and ASEAN are also large sources of imports, reflecting Australia’s demand for manufactured imports, with China being our largest source of imports since 2016.
-Due to Australia’s vast natural resources, Australia focuses on exporting commodities such as agricultural products (wheat, wool, beef) and minerals (coal, iron ore, gold), with both these commodities combined accounting for two thirds of Australia’s export earning
-However, Australia has been less competitive in manufacturing and has continued to rely on importing large quantities of capital goods and manufactured consumer goods. There has been a decline of agricultural exports as a proportion of Australia’s trade over recent decades largely due to large fluctuations in world policies of other countries. Furthermore, the prevalence of recent natural disasters have reduced output and productivity. Manufactured goods make up only a small share of exports and has been declining from the 1990s due to increased competition from Asian countries (China)
-Australia does not compete well in the manufacture of high-volume, low-cost products but rather sophisticated, niche-market-manufactured goods
-In 2020-21, Australia experienced a 35% decline in the export service industries largely due to the COVID-19 pandemic and closure of international borders as well as recessions in the global and Australian economies.
-Imports of services also fell 45% in 2019-20 as few Australians travelled overseas due to border closures
-In 2021-22 total imports were valued at $459bn, with consumer goods showing the most increase and in 2023-24 they were valued at $526 billion
Australia’s import trends
-Over the past 40 years, the share of capital goods imports has remained largely unchanged at around 20% of imports, while part-finished intermediate goods imports have fallen and consumer goods imports have increased
-These changes can be explained by the shift away from large-scale manufacturing in Australia, especially with the gradual reduction of tariffs and local content rules
The future of Australian trade
-THere has been debate among economists about how sustainable Australia’s dependence on commodity exports can be, with some economists arguing that the rapid growth of China, India and other developing economies will mean that Australia will have a market for its commodities in the medium to long term
-However, other economists argue that Australia being too reliant on commodity exports and one major export market (China) is not sustainable, especially given past tensions between Chinese and Australian governments.
-There are also specific risks in Australia’s reliance on global demand for coal, which is likely to fall as demand continues to shift to energy sources with lower carbon emissions
-Australia must utilize its factor endowment of clean, green energy sources such as renewable hydrogen, as well as our endowment of green metals and critical minerals processing
-In the future, Australia should continue to diversify its exports towards goods and services demanded by the middle-class consumers across Asia
-Service exports hold the greatest potential for growth and Australia is primed to take advantage, as we have a highly skilled workforce, nearly three-quarters of which is employed in services industries such as education services, financial services, insurance and tourism
Trends in Australia's financial flows
-The rate of Australia’s financial flows has doubled in the past decade and has been rising rapidly since the 1980s, as international businesses have bought Australian assets and invested in Australian businesses, and as Australian companies have increased their overseas investment
-This has largely been a result of deregulation of financial markets, the floating of the Australian dollar in 1983 and technological changes making it easier to shift finance between countries
-The rate of portfolio investment into Australia through loans and share purchases has been significantly faster than the growth in longer-term foreign direct investment
-The main sources of foreign investment in Australia are from the USA, Britain, Japan, China and Singapore.
-Much of the growth in foreign direct and portfolio investment in Australia between 2004 and 2008 was due to the mining boom, allowing Australia to benefit from transfers of technology, creation of new employment opportunities and increased access to export markets
-Australian investment overseas grew at an average of 7.3% over the five years to the end of 2025 and the level of portfolio investment is significantly higher than the level of direct investment. The value of our investment in Asian economies almost doubled in the previous decade. Financial flows have grown faster than trade flows.
-Australian investment abroad has grown because of the riisng offshore interest of major Australian companies like Rio-Tinto, BHP-Biliton, AMP and Australian banks such as CBA, Westpac, NAB and ANZ. Australian large superannuation companies have also increasingly pursued overseas investment opportunities
-THese companies invest abroad to secure new export markets, diversify their activities and minimise tax
-There has been a historical imbalance between investment in Australia and Australian investment overseas, with Australia having always been a net capital importer, with the level of foreign investment in Australia consistently remaining above the level of Australian investment abroad, $5 trillion in 2025.
-This reflects the historically low level of domestic savings within Australia, and Australia therefore needing to rely on financial flows from overseas to make up for the shortfall.
-These flows have not been one-way. In 2025, Australia has invested 87% as much overseas ($4.4 trillion)