The last time Australia recorded a current account surplus was in 1975. Australia already has a record high trade surplus of $19.7 billion but has remained a net borrower (with a current account deficit) for four and a half decades.

The Commonwealth Bank has released a research note asserting the current account was probably in a surplus. With such a high trade surplus, a typical net income deficit of $16 billion would not cancel it out.

The bank has credited high export prices for commodities, particularly iron ore as well as weak import growth.

The iron ore spot price (62 per cent fine ore) is up 43 per cent in 12 months. The majority of iron ore small caps have responded over the same time period.

Code Name Price Market Cap 1 Year % Return
FEX FENIX RESOURCES LTD 0.066 $18.4M 56
MGX MOUNT GIBSON IRON LTD 0.755 $825.0M 48
BCI BCI MINERALS LTD 0.185 $73.6M 31
MGT MAGNETITE MINES LTD 0.004 $3.2M -56

But iron ore is not the only commodity. In recent years the infant formula industry has risen and the vast majority of production is intended for export – particularly to China.

 

But, is a surplus a good thing and will it last?

In an era of mercantilist populism, it would seem unsustainable and politically tough to claim we should not be producing more than we import.

But even if we maintain trade surpluses, the bank predicts any run of current account surpluses to be short term only, and that this is not a bad thing.

“These deficits reflect a shortfall of domestic savings relative to domestic investment,” chief economist Michael Blythe said.

“The shortfall reflects high investment rather than low savings.

“By running current account deficits we have been able to sustain a higher investment rate than we could fund ourselves, economic growth rates and living standards have been higher than otherwise as a result.”

The note also pointed out surpluses are not common outside extreme events such as depressions and wars, which cut imports and boost export prices.

Yet a surplus was not entirely a bad thing. By definition savings were ahead of investment, so higher interest rates weren’t a necessity. It also meant Australia had a lower risk premium as we could finance projects ourselves and were unexposed to financial crises overseas.

Our current account deficit represents a shortfall between domestic savings and domestic investment – requiring borrowing from the rest of the world.

The Morrison government’s surplus (projected to be 0.5 per cent of GDP in 2020/21) counted as part of savings and would be the key driver in pushing savings above investments.