Cost of Success to the Australian Economy

Australia's current account deficit has grown to more than 7 per cent of the economy for the first time in half a century, as the nation racks up foreign debt to pay for consumers' hunger for imports.

All this means our dollar will fall in the coming months. But hey, so will the US dollar which faces many of the same pressures. The main difference being that the Australian Government has a huge surplus this time around. Unhappily for the US government they have a huge deficit.

The Australian trade deficit in the last three months of 2004 totalled an estimated 7.1 per cent of gross domestic product, far larger than that which prompted the warning by the then prime minister, Paul Keating, in 1986 of Australia becoming a "banana republic".

And if not for very favourable trade prices, the deficit would have been far higher than $15.2 billion.

The shortfall is one item in a trifecta of economic and political headaches for the Government.
This morning the Reserve Bank is expected to announce one the most controversial interest rate rises in at least a decade. If economists and commentators are right, official rates will rise by a quarter of a percentage point at 9.30am, pushing the standard mortgage rate to 7.3 per cent.

Two hours later, the Bureau of Statistics is expected to confirm the economy grew by just 2 per cent or less last year - about half its trend rate over the past decade - and might have barely grown at all in the quarter to December.

"In the modern period the Reserve Bank has never raised interest rates when growth has slowed this much," said Kieran Davies, an economist with ABN Amro. The Reserve Bank argues that rate rises are necessary to head off possible wage rises and inflation, which could flow from the tightening jobs market.

Yesterday's figures also showed foreign debt grew by $83.4 billion to $691 billion, or more than 2 times the level at March 1996.

The combination of a current account blow-out, rising foreign debt, higher rates and slower growth will damage the economic reputation of the Government, which came to power in 1996 after campaigning against Labor's foreign debt record and was returned in last year's election on a promise to keep interest rates low.

"Our economy is in a much stronger position than it was back in the days of Paul Keating," the Treasurer, Peter Costello, said yesterday. "But I don't underestimate the significance of these figures - we need to lift exports."

The shadow treasurer, Wayne Swan, said the current account deficit - the gap between what the nation exports and earns from overseas and what it imports and pays to foreigners - could prompt international lenders to raise the cost of lending to Australians, or stop lending altogether.

"It could have responded [with economic reform]; it chose instead to spend $66 billion on its own political prospects," he said.

The "income" deficit on interest and profits rose 10 per cent to $8.2 billion, while the trade deficit rose 3 per cent to $6.9 billion. Rising debt and global interest rates caused interest payments to foreigners to rise 22.2 per cent in the year, to more than $4000 for each Australian.

The Bureau of Statistics confirmed the current account deficit had not been higher since it spiked when wool prices collapsed after the Korean War. Its figures show the deficit hit 6.3 per cent of GDP in March 1990 and 6.2 per cent in June 1986.

In May 1986, Mr Keating said Australia needed to climb out of an "international hole" caused by a gaping trade deficit and foreign debt, which was growing by $12 billion a year. The dollar fell 10 per cent in following weeks.

Yesterday the dollar dropped about half a cent to US78.77 cents at 5pm but remained close to its highest level for 20 years.

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