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Australia Home Approvals Up, Economy Still Soft

Reuters
Monday, 2 Jun 2008 | 11:36 PM ET

Approvals to build new homes in Australia showed unexpected strength in April, but analysts cautioned that much of the improvement was in the volatile apartment sector and housing remained in the doldrums.

Indeed, other figures out on Tuesday showed Australia's current account deficit widened to A$19.49 billion (US$18.6 billion) in the first quarter with a disappointing trade performance proving a sizable drag on economic growth.

Home Construction
Photo by: stngls
Home Construction

The data comes as the Reserve Bank of Australia (RBA) holds a monthly policy meeting and should not challenge its view that domestic demand will slow enough to restrain inflation in the long run and thus help dodge another hike in interest rates.

"It all just confirms that the economy slowed early in the year and that softness is continuing," said Su-Lin Ong, a senior economist at RBC Capital Markets. "That should please the RBA and, while they have to be still concerned about inflation, should keep them on hold for now."

The market seems to agree, with bill futures showing almost no chance of a rise in the 7.25 percent cash rate at Tuesday's policy meeting. The decision will be announced at 2:30 p.m. local time with a brief statement.

The Australian dollar nudged higher after the building data, which showed approvals to build new homes jumped 7.8 percent in April when the market had been primed for a 0.5 percent fall.

Yet the rise was driven by a 17.5 percent bounce in multi-unit approvals, which even then failed to make up for a 27 percent decline in the previous four months.

Like many analysts, Steven Milch, head of economic research at St. George Bank, played down the strength. "We know it's a volatile series and the trend is still negative," he said. "High interest rates still mean builders aren't doing a lot of activity."

Barely Growing

Analysts still expect figures on gross domestic product (GDP), due on Wednesday, will show the economy barely grew in the first quarter of the year as high interest rates and surging living costs crunched household consumption.

Forecasts have been for growth of around 0.3 percent in the quarter, the slowest in three years. Annual growth should slow to around 2.9 percent, from 3.9 percent the previous quarter.

The economy was getting some help from the government which spent more than expected in the first quarter. Public spending rose 1.5 percent to an inflation adjusted A$58.24 billion, adding around 0.3 percentage points to GDP growth in the quarter.

That would help balance the drag from trade, which looked to have taken 0.7 percentage points off economic growth.

While Australia's resource exports have seen big price increases, supply bottlenecks mean volumes have not kept pace and strong domestic demand has been sucking in imports.

Still, the trade deficit should narrow markedly this year thanks to huge price increases in contract deals for iron ore and coal, Australia's two biggest export earners.

Analysts estimate these could be worth over A$45 billion to Australia's export earnings in a single year, potentially wiping out its trade deficit. However, Australia will still have a substantial deficit on income flows, like interest and dividend payments, as foreigners hold large amounts of private debt as well as major stakes in companies like BHP Billiton and Rio Tinto.