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How is Australia's Balance of Payments Doing?
The Balance of Payments (BOP) is a report that summarizes the transactions that transpired between Australia and the rest of the world. It is a reporting system that contains consolidated accounts where many other financial reports can be broken down and derived. This is generated quarterly by the Australian Bureau of Statistics (ABS).
Contents of BOP
The report tracks 3 main transaction types: (1) transactions involving services, goods, and income, (2) financial transactions that transpired between Australia and foreign countries, and (3) special entries involving one-sided transactions.
The items on the report are divided into 2 groups: the current account and the financial and capital accounts.
- Current Account
The largest component listed under the current account group are those based on the import and export of goods. The other components include services, income, and current transfers. Income and payment transactions that refer to the money paid to Australia by foreign countries and the payments made by Australia to foreign entities are also counted under this group. The same goes for money transfers that involve gifts, pensions, and foreign aids sent and received by Australia.
- Financial Account and Capital Account
The capital account contains details of the assets migrants bring into the country. On the other hand, the financial account contains records of financial transactions involving bonds, stocks, and property purchases.
The way the ABS publishes Australia's BOP changed in 1997 to make it consistent with international standards. The reason behind this shift is to make the country's statistics easier to compare with the rest of the world.
The financial and capital accounts used to be grouped together prior to the 1997 format change. Only the current account and the capital account can be seen on the report. This was revised with the addition of the financial account. The items that used to be recorded under the capital account group can now be found under the financial account column. The new capital account now mainly describes capital transfers, including the assets that migrants bring into the country.
Since this is a balance statement which utilizes the double-entry bookkeeping system used by accountants, the surplus/deficit found under the current account should be counterbalanced by the surplus/deficit on the combined financial and capital accounts.
In reality, though, there will be discrepancies because of inaccurate measurements of some of the items listed on the record. This is resolved by including a balancing item which is described outside of the 3 accounts mentioned.
What does this all mean? How does it relate to the country's financial status?
The balance found on the current account defines the difference between the country's overall savings and its level of investment.
If the balance is on a surplus, this means the country's saving is greater than the national investment. In this situation, Australia becomes a fund provider to other countries. On the other hand, a balance deficit states that the country has lesser savings than the national investment and becomes a recipient of investment funds from other countries.
Recent Conditions
Historically, Australia's current account has been in a deficit most of the time since the 1960s. The economy as a whole has invested more in public infrastructure and business improvement compared to what it saves each year from running the government, households, and businesses. Almost every year is a deficit with less than 10 intermittent years when the country experienced a surplus. The country has almost always needed the aid of foreign investments to maintain the balance.
For a more comprehensive report, you can read the report published by the Department of Foreign Affairs and Trade which details the changes that happened with the country's exportation trend for the last 50 years.
According to the government's report, Australia's current account deficit thinned down to $10.469 billion during the first quarter of 2018. The country's deficit is slowly shrinking. With the exception of a spike in 2016, the country seems to be recovering from the financial crisis the world felt last 2008. The trend can be interpreted as Australia importing less from other countries compared to what it's exporting to them.
What caused this improvement? The 2009 global financial crisis changed the way people spend their money. People want to feel more secure in case something similar happens in the future.
Households have been observed to be stashing a larger portion of their income and spending less on things outside their necessities. The impact of this situation was greatest during the years immediately following the crisis. Nowadays, people are spending more but are still saving a good portion for emergency situations.
Another thing that caused this decrease in the country's deficit is the little action businesses have taken with regards to improvement and investment. They've also reduced the dividends they pay out in order to retain as much of their profits as they can.
The balance of payment and current account status can be used to assess the competitiveness of import and export levels of a country. Australia's BOP and current account deficit shows signs of economic strength and stability. The deficit is due to long-term capital investments and not caused by heavy borrowing. Experts suggest, though, that the country has yet to wait a few years more for the deficit to establish to the level it had more than a couple of decades ago.
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Mail:james@financialadvisor.com.au
Awarded top 50 Financial Planner
Credited as a top 50 financial planner as announced by The Australian Financial Review's Smart Investor magazine in 2010
#23 in Wealth Professional Top 50 Financial Planners
James Gerrard has been named one of Australia's top 50 financial advisers by Wealth Professional in 2012.
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Voted as being one of the top 10 financial planners in Sydney by online guide - Top 10 Financial Planner in 2013
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