Australia Trade Deficit Widens as Imports Bulge

Australia's trade deficit ballooned 41 percent in January as strong domestic demand sucked in imports while bad weather and supply bottlenecks crimped export growth.

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The deficit on goods and services widened to A$2.72 billion in January (US$2.5 billion), the second highest on record. Imports jumped 5.4 percent, partly due to a 16 percent rise in the
country's fuel bill, while exports rose 1.7 percent.

"The trade figures showed very strong import growth," said John Peters, a senior economist at Commonwealth Bank. "That shows that domestic demand is still far too high to make the Reserve Bank comfortable about the inflation outlook."

The Reserve Bank of Australia (RBA) raised interest rates to a 12-year high of 7.25 percent this week as it sought to sap some of that domestic demand, which was growing at a rapid 5.7 percent in the year to the fourth quarter of 2007.

Other data on Thursday suggested the central bank's rate campaign might be having some affect on the housing market.

Approvals to build new homes rose just 1.9 percent in January, well below the 5 percent increase expected and recovering only a little of December's steep 11.3 percent drop.

"Most of us were looking for a much bigger rebound in home approvals," said Stephen Roberts, director of research at Lehman Brothers. "The trend in home building approvals is starting to
decline, suggesting that part of the economy is quite susceptible to high interest rates."

Combined with soft retail sales figures for January and weakness in consumer and business surveys, that could point to a slowdown in domestic spending this quarter, he added.

"This is welcome news for the RBA," said Roberts, who suspects another rate rise will not be needed.

Financial markets have priced out any chance of another rate hike in April and see only a one-in-three chance of a move to 7.5 percent in May. The Australian dollar dipped slightly after
Thursday's figures, while bond futures pared early losses.

Counting On Commodities

Some slowdown in domestic spending would certainly help restrain the country's trade balance, which has been in deficit for 73 months in a row.

Imports stood at A$21.74 billion in January, with imports of consumption goods rising 3 percent in the month, while exports amounted to A$19.02 billion.

The strength of the Australian dollar, which is near 24-highs on the U.S. dollar, has made imports cheaper for Australians while making the country's manufactured exports more expensive for offshore consumers.

Bad weather and supply bottlenecks also hurt exports of coal in January, though analysts noted exports of metal ores and minerals enjoyed a 10 percent bounce in the month.

Indeed, there is good reason to think that earnings from commodity exports will improve markedly this year.

A combustible mix of strong demand from China and India and tight global supplies could see coal prices double when contract negotiations conclude in April, while iron ore is seen rising
more than 60 percent.

Export volumes are also expected to improve as new resource projects come on stream while recent rains have greatly boosted the outlook for the nation's grain crops.

As a result, the government's resource bureau this week forecast export earnings from commodities should jump a huge A$30 billion in the year to June 2009.

Such a rise would effectively wipe out Australia's perennial trade deficit, while also lifting profits, investment and wages at a time when the economy is already running at full tilt.

"Bulk commodity price gains will do much to lift export values toward mid-year while a slowing domestic economy should ease import growth," said Adam Carr, a senior economist at UBS.
"Overall, we expect the deficit to narrow sharply over the year."