Australia | Jan 10 2007
By Chris Shaw
Australia has been a clear beneficiary of higher commodity prices in terms of improving the country’s trade deficit, which in November almost halved to $0.8bn for the month compared to an adjusted $1.5bn in October, thanks to a 3% fall in imports and a 1% increase in exports. This continued the trend of lower trade deficits through 2006, but current conditions suggest further improvement will be difficult to achieve.
Commonwealth Bank (CBA) notes part of the decline in imports can be attributed to lower fuel prices, but adjusting for this the data is indicative of a still solid economy and is suggestive of ongoing strength in imports.
For the month rural exports were actually slightly stronger thanks to higher meat exports, ANZ Banking Group noting this is not unusual in the early stages of a drought as farmers adjust to the conditions. In CBA’s view the export picture over the next few months is not as promising though as the drought is yet to really impact on rural export volumes and previous droughts suggest these could decline by as much as 20%.
Despite this it cautions against taking such an outcome too negatively, as mining exports are three to four times larger than rural exports and should continue to strengthen as investment continues in the sector. This investment has not yet shown up in higher volumes, but the bank expects this to correct itself in coming months.
ANZ takes a slightly different view, expecting the trade deficit to widen thanks to a combination of the drought and the appreciation of the exchange rate, which Stephen Koukoulas of TD Securities suggests could test US$0.85 in coming months. As ANZ points out, this would be a negative for manufacturing and service exports, while making imports more attractive for households.