Australia’s export performance in 2014-15
22 Dec 2015
- Australian Economy
- International Trade
As the year draws to a close, this post takes a look at Australia’s export performance over the 2014-15 financial year (FY2015) – a more in-depth, end-of-year sequel (of sorts) to my post earlier this year which took a look at the 2014 calendar year outcomes.
Starting with the external environment, Australian exports and exporters have had to cope with three major headwinds over the course of 2014-15.
First, there was a further decline in the rate of economic growth in Australia’s largest export market: according to the official data, the annual rate of Chinese GDP growth had slowed to seven per cent by the second quarter of 2015. And annual growth has since dropped again, to 6.9 per cent, in the third quarter.
Second, world trade growth has continued to fail to gain any significant momentum over the past year, prompting both the IMF and the WTO to once more downgrade their trade forecasts. According to the latest monthly figures, world trade growth is currently on track to turn in its weakest performance since the crisis year of 2009.
The third headwind was the continued decline in commodity prices. For example, in the case of Australia’s leading export, after ending 2013-14 at US$92.74/t, the price of iron ore had slumped to US$62.29/t by the end of 2014-15. It has since kept falling, sliding to US$46.16/t as of end November 2015 and to around US$40/t at the time of writing.
Some good news is that a weaker Australian dollar has served as an important offset to these global headwinds, as the currency has continued to depreciate against both the US dollar (down about 18 per cent over the course of 2014-15) and on a trade-weighted basis (down about eleven per cent over the same period). The dollar continued to weaken over most of the remainder of 2015 before showing some signs of stabilising as the year drew to a close and markets fixated on the US Fed’s first rate increase since 2006. Importantly, that decline in the nominal exchange rate has delivered a parallel fall in the real exchange, providing a boost to Australia’s relative international competitiveness .
So how did this changing environment influence Australia’s export story in 2014-15? Well, for a start, the share of total exports in GDP dipped slightly in FY2015, easing to just below 20 per cent of GDP, or more than two percentage points below the ratio as it stood at the start of the current century. Within that overall total, the ratio of goods exports to GDP slipped to a little less than 16 per cent, while the ratio of exports of services to GDP actually rose a bit relative to 2013-14, but still remained below four per cent.
That decline in the overall export share reflected a drop of almost four per cent in the value of total exports of goods and services in 2014-15, which were down to $318.7 billion (still the third highest total of the current century) from $331.2 billion in 2013-14.
By type of export, that $12.5 billion fall largely reflected an even larger drop in the value of exports of minerals and fuels (down by almost $23 billion in FY2015) that was only partially offset by increases in the value of exports of services (up $5.4 billion), food (up $3.2 billion) and manufactures (up $1.3 billion). In terms of growth rates rather than absolute values, while exports of minerals and fuels exports fell by nearly 14 per cent over the previous year, exports of services and of food each rose by around nine per cent.
The difference in performance between exports of goods and exports of services was reasonably stark: as already noted, in the case of goods exports, the story was mostly dominated by resources, where a significant increase in export volumes was not enough to compensate for an even sharper fall in prices. The net result was that the value of total goods exports (on a merchandise trade basis) fell by $18.3 billion in 2014-15 relative to the previous year, a drop of almost seven per cent.
The iron ore story was particularly important here, with the value of exports of iron ore falling by more than $20 billion, dropping from $74.7 billion in 2013-14 to $54.5 billion in 2014-15. Note, however, that at the same time the volume of iron ore exports actually increased, rising from 651Mt to 748Mt.
In contrast, in the case of services, strong volume growth was further supported by a positive contribution from prices. The combined effect meant that total exports of services were up by $5.4 billion (9.4 per cent) in value terms in FY2015, reaching $62.8 billion. As I’ve noted before, travel services are a critical component of Australia’s total service exports, accounting for 59 per cent of all service exports in 2014-15. They rose by $3.5 billion in FY2015, with education-related travel services (up $2.3 billion) and personal travel services excluding education (up $0.9 billion) key contributors to overall services growth.
By export market, the main story for total exports in 2014-15 was a drop in exports to China of more than $17 billion along with a more modest but still substantial fall of almost $4.5 billion in exports to Japan. In terms of growth rates, notable strong performances were exports of goods and services to India, the United States, the UAE and Vietnam which all demonstrated double-digit growth, with the United States overtaking Korea to become Australia’s third largest export market in FY2015.
The 16 per cent drop in the value of exports of goods and services to China was the first fall in export values to that market in a financial year since 1996-97 and mainly reflected the drop in iron ore exports described above which in turn drove a decline in the value of total goods exports to that market. In contrast, exports of services to China continued to grow quite strongly, rising by almost 18 per cent to $8.8 billion from $7.5 billion in 2013-14.
China continued to be Australia’s largest export market for both goods and services in 2014-15, although the difference in scale between the two export flows remains very substantial: despite their FY2015 fall, the value of goods exports to China was more than ten times as large as the value of service exports to the same market that year.
Stepping back from the year-on-year comparisons and instead looking at the change in export patterns over the past decade shows that – despite the major impact of the fall in commodity prices on the FY2015 outcome – the most noticeable change in the composition of Australia’s exports in 2014-15 relative to 2004-05 remains the rise in the share of exports of minerals and fuels and the consequent decline in the export shares of other categories, with the biggest proportional drop occurring in exports of manufactures.
In terms of changes in the pattern of Australia’s top ten exports (goods and services) over the past decade, notable features include the big increase in the value of iron ore exports, which even after the sharp decline in FY 2015 were still worth almost $50 billion more than they had been in FY2005, and the smaller but still significant increase in the value of exports of education-related travel services, which increased in value by about $13 billion over the same period. (Taken together, exports of total travel services were worth $37.3 billion in 2014-15, only just behind exports of coal ($37.9 billion).) Also noteworthy is the rise of exports of national gas up the rankings to fourth spot, even with much of the increase in volumes yet to come. Lastly, the overall increase in the concentration of exports is another feature of the comparison across the decade.
Moving from the composition to the direction of exports, and the same decade-style comparison yet again confirms the marked rise in the importance of China as an export destination for Australia despite the FY2015 fall, with ASEAN the only major export market to avoid a decline in its share over the same ten year period.
Finally, on a top ten market basis, the dominance of China is once more the standout feature. Otherwise the country composition of the top ten is little changed over the decade with most countries just shuffling places. The exception to this story is that Malaysia has replaced Thailand in the membership rankings.