Australia Current Account Deficit Widens, Rate Cut Near

Rob Griffith

Australia's current account deficit widened last quarter as falling commodity prices sapped export earnings while cutbacks in government spending dragged on economic growth, reinforcing the case for a cut in interest rates later on Tuesday.

The local dollar eased a touch after the Australian Bureau of Statistics reported the deficit widened to A$14.9 billion ($15.5 billion) in the third quarter, from A$12.4 billion the previous quarter.

That was the biggest deficit in over two years but in line with market forecasts. Fortunately export volumes still managed to outpace imports and so add 0.1 percentage points to economic growth in the quarter.

However, other data showed government penny-pinching was a bigger drag on the economy in the quarter than many had thought. All of which added to pressure on the Reserve Bank of Australia (RBA) to rev up the economy and safeguard the country's enviable track record of 21 years without recession.

Markets are wagering a cut is almost a done deal with swap rates implying a 93 percent probability of an easing at the central bank's monthly policy meeting. The RBA will announce its decision at 0330 GMT.

If the cash rate is trimmed a quarter point to 3 percent as expected, that will match the record lows touched during the dark days of the global financial crisis in early 2009.

A Reuters poll of 23 analysts taken on Friday found no less than 16 expected a cut.

A key concern for the RBA has been a pullback in Australia's terms of trade, or the ratio of export to import prices. That has hit company profits and led miners to pare back on their more ambitious investment plans.

As a result, the country's long-running boom in mining investment is now likely to peak earlier than expected, around the middle of next year, and at a lower level.

The local dollar has also stayed high even as export prices slid, threatening currency-sensitive sectors such as manufacturing and tourism.

Recognising the risks, the RBA is trying to stimulate other sectors of the economy, and particularly home building, to fill any hole left when mining spending finally comes off the boil.

Consumer Caution, Fiscal Tightening

So far though, rate cuts have had only a limited impact on consumers, with retail sales disappointingly flat in October and demand for credit the lowest in decades.

The housing market has also been less than stellar. The Statistics Bureau on Tuesday reported approvals to build new homes slid 7.6 percent in October, so reversing much of September's hefty 9.5 percent increase.

Also arguing for easier monetary policy was a tightening in the government's purse strings, with the ruling Labor Party committed to returning the budget to surplus in 2013, years before most other rich nations.

Data out Tuesday showed government spending fell by 2.0 percent in the third quarter, largely due to a big drop in defense investment. That was a steeper fall than many analysts had expected and could take around half a percentage point from economic growth in the quarter.

Figures for gross domestic product (GDP) are due on Wednesday and were expected to show moderate growth of around 0.6 percent in the third quarter.

Such a result would see growth for the year slow to a still-respectable 3.2 percent, from 3.7 percent, though the balance of risks seems biased to the downside going into next year.

Analysts estimate that fiscal tightening alone could shave between 0.75 and 1.5 percentage points off GDP growth in the year to end June 2013.