From a growth perspective, I hope that the recent decline in exports simply reflects a drawback following a particularly strong March quarter.
Chinese exports declined by 5. 7 per cent in May, which might simply reflect monthly volatility, but with Chinese authorities looking to ease excess capacity, exports might be a little softer than we have become accustomed to.
Combined with soft household and government spending and an expected fall in business investment, we cannot discount the possibility that the economy contracted during the June quarter.
Export values are likely to come under further pressure in June, with the Reserve Bank of Australia’s commodity price index falling a further 2. 8 per cent in Australia dollar terms in the month.
Needless to say, if the Chinese economy does sour, our trade balance will deteriorate further and the Australian economy will be left with few thriving sectors, limited monetary stimulus available and a federal government more intent on reducing spending than supporting growth.
These two sectors, in addition to exports, represent the rebalancing of the Australian economy, a process that has not been running smoothly in recent months.
The recent decline has been driven by exports of goods, with service exports actually increasing modestly in May.
Exports to China rose by just 1. 4 per cent over the year to May and now accounts for about 35 per cent of all merchandise exports.
Exports to Japan and Korea have declined by 6. 7 per cent and 14. 4 per cent respectively over the year to May.
Iron ore, Australia’s biggest commodity export, rose by $319m in May, but this was offset by falls in coal, gas and gold exports.
Net exports, the main driver of growth during the March quarter, have taken a turn for the worse during April and May.
The value of exports fell by 4. 6 per cent in May to be 0. 6 per cent higher over the year.
Nevertheless, the recent decline in export values has been sharper than was widely expected and for now appears to be sharper than the recent decline in commodity prices.
This was the fifth consecutive decline in the series, with commodity prices falling by a total of 12. 3 per cent over that period.
This suggests that net exports will contract from real GDP growth in the June quarter.
Read more here: Business Spectator