Australia's trade gap shocks experts

SYDNEY - Australia's current account deficit widened by a surprisingly large 6 per cent last quarter to A$14.45 billion ($16.34 billion), meaning trade was an even bigger drag on economic growth than first feared.

In contrast, other data released yesterday showed Government spending and investment rebounded by a total 2.4 per cent to A$48.99 billion last quarter, so adding to economic growth.

Yet the impact of Australia's poor trade performance dominated, taking a hefty 0.5 percentage point out of the quarter's economic growth. Gross domestic product figures are due today.

"We're surprised by the deficit. It was a lot larger than we expected it would be. Our external accounts are in very poor condition," said Adam Carr, an economist at St George Bank.

"The end result for us would be a downward revision to our GDP forecast. We are looking at 0.6 per cent for the quarter."

A Reuters poll following the data found the median forecast for growth in October-December had been shaved to 0.7 per cent from an initial estimate of 0.8 per cent.

While the current account deficit often generates much hand wringing in the media, the country has had little trouble actually funding it, as evidenced by historically low yields on Australian long-term debt and a stable dollar.

Thus, while the currency briefly dipped immediately after the figures, it soon steadied above 73.70USc. Bond futures showed scant reaction as the data did nothing to change the outlook for steady official interest rates.

The deterioration in Australia's current account was again driven by the net income deficit, which widened 8 per cent to a record A$9.96 billion.

The net income balance measures flows such as dividend and interest payments. Since Australia is a net debtor country and foreigners own large slices of its biggest companies, such as BHP Billiton , the country has a perennial income deficit.

Lately, it has been a victim of its own success in that a big chunk of the profit windfall from the commodity boom is going offshore. Higher interest rates abroad also mean Australians have to pay more to service their A$472 billion of net foreign debt.

"The net income deficit is a gaping wound which just keeps the deficit stuck up around 6 per cent of GDP," said Brian Redican, senior economist at Macquarie Bank.

"Exports were also disappointing as the gains were mostly in prices rather than volumes," he added.

Australia also imports more than it exports, particularly capital equipment for investment, leading to a A$4.37 billion deficit on the goods and services account for the quarter.

While the price of many of Australia's resource exports have surged in the past three years, export volumes have hardly grown, disappointing economists and policy makers alike.

Treasurer Peter Costello yesterday cited a boom in business investment and a recovery in farm output as reasons to expect a narrowing in the deficit this year.

The upbeat outlook for business investment was reinforced by figures on private sector credit for January, released yesterday.

Business borrowing climbed 1.4 per cent in the month, to be up a hefty 16.3 per cent on the year.

"We are quite happy with the fact that business credit growth is still the strongest, so the capex story still holds up," said Jarrod Kerr, an economist at JPMorgan.

"That is a big part of our call this year, that business investment is going to drive growth in 2006, and it is really going to help our view that there is going to be a net export rebound," he added.

- REUTERS