Australia Trade Deficit Shrinks, Exports to China Rise

Iron ore being transported in Western Australia
John W Banagan | Photographer's Choice | Getty Images

Australia's trade deficit shrank by more than expected in December as the resource-rich nation shipped more iron ore to China, underpinning both mining profits and economic growth.

Australia's trade deficit on goods and services narrowed to just A$427 million ($445 million) in December from A$2.79 billion the month before. That was the smallest deficit in 10 months and almost half that forecast by analysts.

(Read More: Australia's Port Hedland Ships 25% More Iron Ore to China in December)

Other data from the Australian Bureau of Statistics on Tuesday showed prices for detached houses in the country's major cities rose 1.6 percent last quarter, the biggest increase in more than two years.

Car dealers also started the year well with new vehicle sales up over 11 percent on January 2012, while huge gains for commercial vehicles pointed to solid business investment.

All of which should be welcomed by the Reserve Bank of Australia (RBA) as it holds its monthly policy meeting on Tuesday. After cuts in October and December, the central bank is expected to hold rates at a record-matching low of 3 percent.

The RBA has cut rates in part to help revive activity in the moribund housing market, particularly for construction. So far, home building has not reacted nearly as strongly as during past easing cycles, though some pick-up in home prices could help remedy that.

Markets suspect rates might still ease further given softness in parts of the domestic economy, especially those exposed to foreign competition and the high local dollar.

Yet improving economic data from China and the United States and a major rally in global share markets seems to have lessened the urgency for a move right now.

Swap rates imply just a 20 percent probability of a cut this week, while interbank futures are priced for an easing to 2.75 percent by May.

Indeed, Tuesday's trade figures showed Australian exports to China were the third highest on record in December at an unadjusted A$7.1 billion. Shipments of iron ore to China rose over 20 percent by volume, which should support gross domestic product growth.

Overall, exports rose 3 percent in December to A$25.4 billion, with metal ores alone up A$747 million.

Imports fell a sharp 6 percent to A$25.8 billion, led by a 19 percent drop in capital goods which had been very strong as firms brought in heavy machinery for mines and liquefied natural gas projects.