The Components of External Stability

Explain the components of external stability in the Australian economy with reference to recent trends in these components

External stability is one of the Australian government’s economic policy and it involves the size of Australia’s CAD and the sustainability of the level of foreign debt and equity. It ensures that Australia is able to service its foreign liabilities and aims to stabilise any dramatic movements of the Australian dollar.

Australia’s Current Account Deficit:

Historically Australia has recorded persistent current account deficits and these factors are both cyclical and structural. The CAD moves in a cyclical manner, mostly following the fluctuations in the balance of goods and services and thus, Australia is not sufficient to finance import expenditure. Additionally, Australia’s large net primary income deficit is a major structural factor influencing Australia’s CAD. Therefore, Australia needs to draw funds by equity and debt borrowings from overseas to finance Australia’s growing successive CAD.

The current account deficit as a percentage of GDP is a key measure of how sustainable the current account deficit is over time. Since the 1980s, our CAD has averaged –4.5% of Australia’s GDP while world growth has averaged 3% per annum. The CAD is considered unsustainable if it exceeds the growth rate of the economy.

As of the 1970s Australia had a very low CAD and it was seen to be a trivial issue for it averaged 1.1%. However in successive years over the 1980s and 1990s, Australia’s CAD is viewed as problems of trade which caused a lack of export competitiveness and heavy reliance on imports. During this period, the CAD was in a range of around 3 to 6% of GDP. Economists regard the CAD as a result of a savings and investment gap, rather than a trade gap. It is the caused by high levels of direct investment in Australia that allow for higher economic growth and exports in the longer term. The current account grew in nominal dollar terms from...