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Australia Trade Deficit Narrows on Mineral Exports

Australia's trade deficit narrowed by more than expected in March as mineral exports rebounded from supply disruptions, while a coming price bonanza could mean a long-awaited return to surpluses is not far away.

Tuesday's report from the government showed the deficit shrank to A$2.74 billion (US$2.6 billion) in March, down from A$3.26 billion in February and under forecasts of A$2.9 billion.

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Exports rose 4.4 percent, with metal ore shipments bouncing 16 percent and coal 23 percent as mines resumed full production. Imports rose 1.3 percent, driven mainly by machinery and cars.

"We got the expected rebound in exports after that weather distortion last month," said Su-Lin Ong, a senior economist at RBC Capital Markets.

The data helped keep the Australian dollar firm at two-week highs of 94.82 U.S. cents, though investors were far more focused on a monthly policy meeting of the Reserve Bank of Australia (RBA). The decision will be announced at 2:30 p.m..

The central bank is widely expected to keep interest rates steady at a 12-year high of 7.25 percent as it counts on past substantial tightening to cool the red-hot economy.

Recent data has shown domestic demand is indeed buckling under the pressure of higher rates and rising living costs. The trade deficit would also be a drag on gross domestic product (GDP) in the first quarter as a whole.

"It's consistent with a very large deterioration in the current account deficit and a pretty sizeable net export detraction from growth of around 0.7 percentage points," said RBC's Ong. "So GDP is shaping up on the soft side."

The End Of Deficits

Still, analysts suspect Australia's trade deficit could soon be a thing of the past thanks to the insatiable appetite for its resource exports from China, India and the rest of Asia.

Red-hot demand coupled with tight supplies are expected to see contract prices for coking coal jump around 200 percent for this financial year, while steaming coal is seen up around 125 percent and iron ore perhaps as much as 85 percent.

Since coal and iron ore are Australia's two biggest export earners, such huge price increases promise a bonanza for the country's terms of trade -- what it gets for exports compared to what it pays for imports.

The RBA recently doubled its forecast to a 15 percent rise in the terms of trade this year, on top of a 40 percent increase over the previous five years.

"The price increases we're seeing mean the worst of the deficits is past and we should be able to celebrate a surplus sometime this year," said Brian Redican, a senior economist at Macquarie. "It's also a massive boost to GDP."

Indeed, estimates of the potential windfall keep rising.

National Australia Bank thinks the price increases will add A$54 billion to Australia's export earnings in the year ahead. Such an outcome would effectively wipe out the country's perennial trade deficit and represent a boost of 4.9 percent of gross domestic product (GDP).

However, such good fortune will complicate the RBA's task as is strives to restrain inflation without hiking so far that it tips the economy into recession.

"This trade boost will only serve to highlight the tensions between a domestic economy that is being slowed by tight monetary policy and a commodity export sector where prices not only remain elevated but are being stepped up in a material way," said David de Garis, a senior economist at nabCapital.