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Australia Exports, Profits Reap Resource Bonanza

Australia's current account deficit shrank by a third last quarter thanks to booming resource exports, though trade still proved a slight drag on economic growth.

The surge in resource prices also helped boost company profits beyond all expectations last quarter, lifting wages and tax receipts. Yet firms added to inventories at a slower pace, so implying a larger-than-expected drag on economic growth.

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CNBC.com
Austrailia, Austrailian Flag

"The improvement in the current account deficit was good news, as was a jump in profits and sales," said Brian Redican, a senior economist at Macquarie. "Unfortunately, the drag from inventories means there's a downside risk to economic growth in the quarter," he added.

Second-quarter gross domestic product figures are due on Wednesday. Analysts had looked for a subdued rise of around 0.4 percent, with weakness in consumption and housing offsetting strength in business investment and exports.

The mixed bag of numbers did nothing to change expectations that the Reserve Bank of Australia (RBA) would cut its key cash rate by 25 basis points to 7.0 percent at its monthly policy meeting on Tuesday, the first easing in seven years.

Australia's current account deficit narrowed 36 percent to A$12.77 billion ($10.9 billion) in the second quarter, the lowest reading in two years.

The turnaround was all in the trade balance, which swung to a surplus of A$559 million from a deficit of A$7.87 billion in the first quarter. Coal exports alone climbed 95 percent, while shipments of iron ore rose 29 percent as insatiable demand from China and India led to huge price increases.

Yet because much of the trade improvement was due to prices, rather than volumes, net trade was thought to have subtracted about 0.1 percentage points from GDP last quarter, when analysts had looked for a contribution of 0.2 percentage points.

Profit Bonanza

Still, the jump in resource prices led to a bumper quarter for the mining industry, where profits climbed 40.5 percent. That helped lift overall gross operating profits by 14.5 percent, well above the 2.8 percent increase expected by analysts.

Sales and wages also showed healthy increases, pointing to continued strength in incomes across the economy, even if consumption was taking a breather.

"The surge in company profits highlights that the economy is hardly on its knees, even with domestic demand having softened," said Stephen Walters, chief economist at JPMorgan. "We expect a rate cut tomorrow, but a statement from the RBA that indicates that a series of cuts extending well into 2009 is far from a done deal," he added.

The central bank will announce its rate decision at 2:30 p.m. in a brief statement. Also arguing for caution on rates was a private measure of Australian inflation which showed price pressures remained broad-based in August.

The TD Securities-Melbourne Institute monthly inflation gauge rose 0.1 percent in August, after a 0.4 percent increase in July. However, once a pullback in petrol prices was excluded, the gauge was up a record 0.6 percent in August.

"Inflation pressures remain elevated despite the clear slowing in the economy," said Joshua Williamson, a senior economist at TD Securities.

"The RBA is still likely to endorse less restrictive policy but expectations of further rate cuts may come under question given the persistence of price pressures," he argued. "We now seriously doubt the scope for more than two or three 25 basis point rate cuts."