Australia's trade deficit widened 52% in December as imports of capital goods climbed while the drought hit farm exports, implying trade cut a sizable chunk out of economic growth for the fourth quarter as a whole.
The deficit yawned out to A$1.34 billion (US$1.04 billion) in December, from a revised A$897 million in November, as imports rose 1.7% while exports fell 0.7%. "It's a long way above market expectations," said Stephen Walters, chief economist at JPMorgan. Median forecasts had been for a A$1.0 billion deficit.
"The composition of the number is not particularly encouraging either with imports up and exports down at a time when Australia is supposed to be delivering on this relatively solid global economic growth that we've seen," he added.
The Australian dollar dipped slightly to 77.20 U.S. cents in the wake of the numbers, but stocks stayed firm and bonds showed little reaction as the data did nothing to change the outlook for steady interest rates.
The drought looked to have taken a toll in December with rural exports down 4%. Meanwhile, imports of capital goods, such as heavy machinery and trucks, rose 6% perhaps boding well for business investment in the month.
Over the whole fourth quarter, the deficit more than doubled to A$3.55 billion on a seasonally adjusted balance of payments basis. Furthermore, when adjusted for inflation, imports looked to have jumped a hefty 7.3% in the quarter, and analysts suspected export volumes might have actually fallen.
That implied net exports -- exports minus imports -- took a slice out of gross domestic product (GDP) growth last quarter.
What A Drag
"Today's data suggests a significant net export subtraction from Q4 GDP growth, possibly more than 1 percentage point, leaving bottom-line GDP very low," said Scott Haslem, chief economist at UBS.
The GDP report for the fourth quarter is due on March 7. Growth in the third quarter was a sluggish 0.3%, as the drought took a heavy toll and business investment slowed, and analysts had been hoping for a stronger fourth quarter.
"The main implication of the trade data is that net exports look to have dragged on growth again," said Su-Lin Ong, senior economist at RBC Capital Markets. "Import volumes were up sharply, so it could be quite a substantial detraction from growth," she added. "It's another blow to expectations of a rotation to export-led growth."
Policy makers have been counting on a revival in export volumes to take the lead from consumption in driving the economy forward. Those hopes seemed to bear fruit in the third quarter as as net exports finally added to growth, breaking a near five-year run of negative outcomes.
A global boom in commodity prices has indeed boosted Australia's terms of trade -- what it gets for exports compared to what it pays for imports -- to record levels.
But export volumes have hardly risen at all in the past couple of years as miners and resource companies struggled with supply bottlenecks. Many analysts still assume the massive investment in mining and energy of recent years will eventually show up in rising volumes, but progress has been glacial.
"Waiting for this rotation to exports is like waiting for Godot," said RBC's Ong. "We're starting to wonder if it'll ever happen."