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Latest trade figures: SMSF update


It can be difficult for SMSF investors to gauge economic conditions when there’s disparity in the fundamentals. Here, we look behind the numbers and what they mean for investors.



GDP figures surprised on the upside this month, but balance of trade numbers fell below expectations.

The GDP growth rate for January, year-on-year, was 2.4%, which was a substantial improvement on the forecast figure of 2.0%.
 
However, balance of trade numbers for January didn’t meet expectations. A $1.3 billion surplus was recorded. But the forecast was for this number to hit $3.8 billion, on the back of strong commodity prices.

Exports were also down in January, with this figure retreating by 2.9%, while imports were up 3.7% for the month. Higher import numbers could flow through to stronger consumption numbers in the immediate term, a positive sign for the economy.

The drop in export figures can be attributed to lower coal exports and the more subdued coal price compared to other resources. Coal prices fell by 13.68% and 2.62% in December and January respectively. 

Lower than expected exports to China in January were another contributing factor to trade numbers; which accounted for about 43% of the total fall in exports. Chinese Lunar New Year was a reason for this because usually it falls in February and this month’s numbers reflect the drop in trade through the festive period.

Nevertheless it was somewhat surprising that the trade figures were below expectations in January, given commodity prices showed gains during the month. For instance, the iron ore price rose by 1.75% to US$80.82/tonne, following a 7.14% gain in December.

Overall, the Reserve Bank of Australia’s commodity price index rose by 43.6% over the year to January 2017, and the expectation is this rise will flow through to trade data over the next few months.

It is also worth noting that although the trade surplus was smaller than expected in January, the fact that trade figures are in positive territory bodes well for income growth in early 2017.

In terms of the outlook for the external sector, the strength of recent and expected near-term trade surpluses could lead to a current account surplus in the first half of 2017. Again, commodity prices will be a major factor, with further increases making a surplus more likely.

Looking ahead

The trade surplus is likely to help support the currency, as are strong commodity prices. But, should the US raise interest rates in March, which is looking increasingly likely, this would lift the US dollar and put downward pressure on the Australian dollar. This would help support trade numbers later in the year, because of the positive flow-through to exports.

In terms of other recent data, there was better than expected building approval numbers in January. This figure was up by 1.8%, while consensus had expected a drop of 0.5%. Still in construction, house approvals dropped by 2.2% in January and non-house approvals, for instance non-detached dwellings such as apartments, were up by 6.6%.
 
The continuous strength in building approvals over the past six months has been surprising, given already elevated levels of construction activity. We had been expecting approvals growth to be weaker by now.

Higher approvals activity is likely to lift housing construction activity, which is good for GDP growth and will have positive effects on other sectors of the economy. However already very elevated dwelling construction poses a risk for regions of the housing market to tip into oversupply.

Oversupply pressures could put downward pressure on dwelling prices, but there is a fine balance because of the flow-on effects to financial stability concerns given high levels of housing debt.
 
Overall, the trade surplus is expected to continue due to anticipated near-term strength in commodity prices, which means that the Australian dollar might remain resilient for some time, despite potential interest rate hikes by central bank the US Federal Reserve.

SMSF investors may consider these factors when assessing their asset allocation, approach to hedging currencies and exposure to overseas markets. While every fund’s approach will differ depending on its investment strategy, these are some variables to consider when forming investment views for the remainder of 2017.
 
About the author
Diana Mousina is an Economist within the Investment Strategy and Dynamic Markets team at AMP Capital. Diana’s responsibilities include providing economic and macro investment analysis and contributing to the performance of the dynamic markets fund.

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