Australia trade deficit widest since early 2008

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SummaryDeficit on goods and services grew to A$2.1 bn in October, from A$1.4 bn the month before.

Australia's trade deficit yawned out to its widest in four-and-a-half years in October as imports rebounded while exports stayed flat, highlighting the pain a declining terms of trade is inflicting on the resource-rich nation.

Thursday's figures from the Australian Bureau of Statistics showed the deficit on goods and services grew to A$2.1 billion ($2.2 billion) in October, from A$1.4 billion the month before.

That was the 11th straight month of deficits and the largest shortfall since March 2008, another reminder of the hole that lower prices for key exports such as iron ore and coal have knocked in national income.

"At present the slowdown in the Chinese economy is depressing commodity prices and while volumes of coal and iron ore exports remain strong it is unlikely that trade surpluses will be back on the agenda till mid next year," said Savanth Sebastian, an economist at CommSec.

"Looking forward, the lower terms of trade will ensure the Reserve Bank can afford to boost household activity and as such further rate cuts cannot be ruled out."

The need to offset the drag from trade is a major reason the Reserve Bank of Australia (RBA) cut interest rates a quarter point this week to 3 percent, matching the record lows set during the global financial crisis.

Indeed, investors suspect rates will have to fall further yet given the strength of the local currency and the Labor government's commitment to budget belt tightening.

Interbank futures <0#YIB:> imply rates around 2.5 per cent by mid-year while swap rates show a 54 percent probability of an easing at the RBA's next policy meeting in February.

Australia's exports of goods and services edged up a bare 0.4 per cent in October at A$24.4 billion, with a drop in coal earnings offsetting a bounce in iron ore and farm exports.

On the bright side, iron ore volumes picked up after a drop in September and exports to China were up 4 per cent on October last year and the highest in four months at A$6.3 billion.

On the other side of the trade ledger, imports climbed 3 per cent to A$26.5 billion, led by purchases of capital goods for major mining projects.

Filling int he export gap

Prices for iron ore, Australia's single biggest export, have bounced to around $118 a tonne from the deep lows under $90 touched back in September, but remain well below the $140-$150 levels held early in the year. Prices for coal, the second

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