Our fearless authorities, of course, forecast that export volumes will rise and import volumes will fall in the year ahead. But this is the same forecast as made last year and the year before and the year before. Each time it has been wrong. Now a stopped clock is right twice a day, so eventually the official forecasts will prove right. But we have little confidence that they are on the money now.
The fact is that the trade deficit will remain large if export volumes are not now sharply increased and import volumes reduced through a slowdown in domestic demand growth. Unfortunately, export volumes face strict limitations from port, rail capacity and weather and almost all the domestic indicators of demand are recording confidence and strength out into the future. We can’t see the desired slowdown in imports at current exchange rates and interest rates.
What is even more alarming is that rising overseas interest rates will add significantly to Australians’ interest bill on foreign borrowings. Net overseas debt is now around 50 per cent of GDP, well above the forecast levels that so worried Paul Keating in 1986. As global interest rates rise, our international debt service obligations will increase. A 200 basis point rate increase will – in a reasonably short time – raise our debt service payments by 1 per cent of GDP. If this were to combine with stationary or falling terms of trade and static export volumes, Australia’s current account would be in crisis. A deficit of 7 per cent of GDP would appear only too plausible.
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We say to the RBA Board: “A current-account black hole is a real possibility, far beyond the recent deficits of 5-6 per cent of GDP, which could well lead to a sharply weaker currency and a consequent sharp rise in forecast inflation. You will then have to increase interest rates in circumstances that you did not plan, at a time when markets will be fearing a credit crunch. This may not occur if you do something about it now. But if you let the situation drift, who knows? You will have only yourselves to blame.”
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