Improvement in Australia's current account balance likely to be sustained, says ANZ Research

The improvement in the current account balance seen over the past 12 months is likely to be broadly sustained. The country risk profile of Australia will improve in a sustained fashion, with potential implications for whether S&P Ratings acts on the negative outlook on the AAA rating. 

Given the lift in both commodity prices and the volume of commodity exports this might be seen as a statement of the obvious. But it is worth recalling that the commodity price surge in the 2000s did not translate into an improved external balance. Indeed, by the end of 2007 the current account deficit had increased to more than 7 percent of GDP, ANZ Research reported.

The primary cause of this large external deficit was the surge in household spending and mining investment that was prompted by the strong lift in income flowing from the terms of trade boom. In turn this led to rapid growth in imports.

"If we are wrong, we think it will most likely be because households reduce their saving rate more quickly than we expect, perhaps encouraged to do so by strong house price inflation. We think, however, that the experience of the global financial crisis (GFC) and already high debt levels will see households reluctant to continually reduce their saving rate," the report said.